Novatek Looks Forward to Saudi Deal [NGW Magazine]

In October, state giant Saudi Aramco expressed interest in spending $5bn on a 30% stake in Novatek’s Arctic LNG 2 project in Russia’s far north. This was due to various reasons, and many Western observers noted the considerable profits which the Saudi firm could make. But there was also a geopolitical angle to the talks.

For the Saudis, it was a way of signalling to Washington that it has a range of options for its investments and a number of geopolitical partners/friends elsewhere in the world. For Russia, it was an attempt to insulate itself against potential new Western sanctions while also showing its main Middle East ally, Iran, that it can change course and find other partners in the area if it needs to.

Saudi Arabia did not normally have much contact with Russia, nor was it enthusiastic about the government’s “multi-vectorist” flirtation in the Middle East. Riyadh, or at least Saudi public opinion, was also not excited by Moscow’s long war with the Wahhabi/jihadist North Caucasian resistance. The major irritant, however, was Moscow’s cosiness with Iran, Saudi Arabia’s mortal enemy. It is true that the relationship between Tehran and Moscow has not been stable. Still, Moscow has more in common with Tehran than it does with its enemy and it actively supports Tehran in the Syrian War. Russia’s increasingly warm relationship with Ankara was also not to Riyadh’s liking, because Turkey was seen as a competitor for dominance in the Middle East. Besides politics, there was also a purely economic consideration. Saudi Arabia’s economy is based on oil exports. And here, Russia is not just a competitor, but also a potential spoiler. Russia is not a member of Opec, and could, despite its earlier compliance with keeping prices high, raise oil production regardless of Opec’s agreements and exert downward pressure on prices. In addition, Saudi Arabia has been a faithful – at least up to now – geopolitical proxy for the US.

But at the same time, the relationship between Russia and the US has become increasingly acrimonious. All of this explains why Saudi Arabia might not have welcomed the prospect of co-operation with Russia, and quite recently Saudi officials noted that Moscow would not be able to play any visible role in the oil export business for some time to come. However, Donald Trump’s presidential victory and the US’ new foreign policy has provided a new twist in the Saudi relationship. To understand this, one must place Trump’s approach to Saudi Arabia in a broader context.

Trump and Saudi Arabia

From the very beginning of his tenure, Trump announced his “America first” policy. In a rather over-simplistic presentation of the creed, it boils down to the following premise: until his presidency, the US was generous, and for this reason, created a military defence umbrella over its allies. Not only did they not pay for this help; they also flooded the US market with their goods, and therefore were directly responsible for the US’s industrial weakness and continuous decline. From now on, the US approach will be more practical. Consequently, the US should directly transform its military power into cash. Trump approached Riyadh in the context of this philosophy. His first visit to the kingdom went well: the Saudis promised to spend $200bn on weapons. But he then said that the Saudi ruling dynasty would not survive even a few weeks without America’s direct support. So the Saudis would have to pay more, one way or another, to justify the US’ protection.

The case of the journalist Jamal Khashoggi provided additional complications for Saudi-US relations. A Saudi citizen, Khashoggi also had an American green card, lived in the US, and was a columnist for the influential liberal paper, Washington Post. His brutal murder inside the Saudi consulate in Turkey led to international condemnation. Washington was also compelled to respond to the events. All of this led to increasing tensions between Riyadh and Washington. While Washington proclaimed that the Saudi government would not survive long without the US on side, Riyadh also wanted to send a message to Washington that it has a place in which it could invest, and it does not necessarily regard Treasury bills and weapons as the only things on which it can spend its petrodollars. Riyadh also implicitly sent the message that the US was not the only power that could be a patron, and Russia is one of these alternatives.

Saudi interest in the Russian LNG project emerged as a potent symbol of a possible U-turn in Saudi policy. Indeed, there is a rumour that the Saudis could even allow Russia to create a military base on its territory. The close co-operation with the Saudis could provide additional funds for developing LNG projects, which could be used for back-up in case of gas line project problems. The co-operation with the Saudis would reduce the chance of Russian economic isolation. Finally, Moscow could show to Iran that it has alternative players in the Middle East.

Moscow and Saudis

For a long time, Moscow’s gas policy was based on the following assumptions: first and foremost, gas is the major source of energy for the future. That being so, Europe in general and Germany in particular have no option but to buy it in ever greater volumes. Second, piped gas is by definition the cheapest type of gas, and LNG cannot be a true alternative, because it is too expensive. And third, Nord Stream 2 (NS2) will be built regardless of all objections, and the US’s attempt to drive Russia from the European oil/gas market is fruitless.

None of these assumptions appears to be axiomatic. To start with, the crucial importance of gas as the major energy source in Europe is not set in stone. In Germany and other European countries, renewables have become increasingly important, and this raises doubts about the gas market in Europe being bottomless. Second, it is not clear that NS2 will even be built. It is true that Russia has already started to lay the pipes, and preparation for receiving the gas has been already started in Germany. Still, there is no 100% guarantee that the gas line will be built. The construction continues to be strongly opposed by east Europeans and the US, while Denmark could put a kink in it if it did not allow it to use its territorial waters, as Nord Stream 1 does.

But the most important problem is related to LNG. The Russian authorities and Russian gas companies have made many statements that Russian gas would be much cheaper for European customers. In this light, Poland’s desire to buy American LNG is the consequence of its historical distrust of Russia, even though it is more expensive than Russian pipeline gas. Still, the recent Polish-American agreement indicated that American gas could be much cheaper than Russian gas, or at least its price could be competitive. German chancellor Angela Merkel’s departure in the future could also create problems for Moscow’s plans.

All of this has led to Russia’s increasing interest in the development of its LNG projects on its Russia’s northern borders. Russian businesses here actively co-operated with the Russian government. Recently, the Kremlin announced that only Russian-flagged LNG ships could traverse the Russian Arctic Ocean. In addition, the Russian government promised to provide ice breakers, which would make it easy for LNG tankers to move along the Arctic Ocean. The development of Russian LNG’s potential faces problems, mostly owing to funding. Moreover, there is a fear that increasing American sanctions would complicate receiving money in dollars or other hard currencies. Russia and China have discussed using the yuan for some transactions, according to Novatek.

From this perspective also, the Saudi proposal was quite promising. Finally, reconnecting with the Saudis sends a message to other players in the Middle East and elsewhere. It shows that Moscow has many options and other players in the Middle East, such as Iran, should take this into consideration in their dealings with Russia.

Russian-Iranian relationship

Moscow is of course aware of the hostility between Tehran and Riyadh, which has continued up to the present and realizes that moving closer to Riyadh would displease Tehran. But Moscow’s relationship with Tehran is already complicated, and far from harmonious. The beginning of the crisis in Syria began a few years before with the crisis in Ukraine and Moscow’s annexation of Crimea. This led to a dramatic worsening of Russia’s relationship with the West, and especially the US. At the same time, the uprising in Syria threatened to topple Al-Assad’s regime, which would mean the end for the Russian ambition to have a Mediterranean naval base. At that point, Moscow decided to engage in a war in support of Assad and, consequently, the Iranian side. While doing its best to ensure Assad’s survival, Moscow is not against Syria’s partition, de facto if not de jure. At the same time, Moscow does not want to engage in a full-fledged war with Israel, the US and Turkey on behalf of Iran.

Some Iranian officials have complained that Russia has actually prevented Iran from delivering its gas to Europe. And in any case, Iran knows that Moscow has no intention of helping it to sell its oil after the introduction of American sanctions. Moscow implicitly sent the message to Iran that Tehran should not take Moscow’s benevolence for granted, and Moscow could well pivot in a different direction if Tehran were to create problems.

Indeed, Russian observers note that Russia has a working relationship with all powers in the region. All of this explains Moscow’s softening view of Saudi policies and readiness for broad economic and even geopolitical co-operation.

Russia’s willingness to co-operate with Saudis in a number of spheres could be seen in Moscow’s response to the journalist’s murder. While dealing with the events, Russian journalists placed it in broad geopolitical context. In their view, the US could not have any credibility in this judgment. Russian observers blasted the West for cynicism, but Putin appeared to leave the incident out of Russia’s relations with Saudi Arabia and as a matter of fact, the Saudis are engaged in various projects with Russia.

Russo-Saudi co-operation

The relationship between Saudi Arabia and Russia insofar as gas and oil are concerned has not always been harmonious. The attempt to find common interests could be traced back to 2016.

Collaboration between Russia and Saudi Arabia, once seen as impossible, now holds sway over much of the global oil market. Amid crisis talks two years ago as the oil market collapsed, the two countries took a decision to regulate global crude supplies, propping up the market.

In early October 2018 Novatek CEO Leonid Mikhelson engaged in negotiations with the Saudi energy minister, also a director of Saudi Aramco. The Russian and Saudi sides discussed Saudi Aramco’s investment in the Arctic LNG-2 project. The negotiations continued into late October. On October 23-25, the annual forum took place in Riyadh, sponsored by Crown Prince Mohammad bin Salman. There was also a Russian delegation, and its leader, Kirill Dmitriev, announced that Saudi Arabia is ready to invest $5bn in it.

Russian observers also noted that Saudi involvement in the project is important not just because of funding but also because the Saudis have technology that Russia itself cannot produce.

It was announced that not just Aramco, but also non-Saudi companies had also demonstrated an interest in the project. According to some reports, Saudi Aramco is ready to build a petrochemical plant in Russia. Aramco also signed an agreement with Gazprom about the creation of a “technology centre in St Petersburg.” Even if these plans yield no practical results, Saudi Arabia and Russia have at least tried to engage in a new round of economic and geopolitical flirting, while the international environment is in flux.