[Premium] Pipelines or LNG? Both are Needed: Novatek
The first cargo to leave the Yamal LNG project might have ended up in the US, but a senior executive at Novatek, the main shareholder in the project, is keen to pour cold water on what he termed "hysteria about Russian gas going to Boston." He told delegates at the European Gas Conference in Vienna January 31 that gas needed to be depoliticised: "We need to work together."
Novatek had to rearrange its long-term project financing for Yamal LNG when the US and the European Union applied a range of sanctions on Russian companies and individuals in the wake of the crisis in Ukraine. In the event, Chinese and Russian entities supplied the money. This week, the US released a list of 210 Putin allies including Novatek CEO Leonid Mikhelson, though said they face no fresh sanctions.
Novatek is now working on another LNG export project, the 18.8mn mt/yr Arctic-2 LNG project, which expects to take final investment decision early next year assuming it finished front-end engineering and design this year. It will use proprietory Novatek technology, which can squeeze 6.6mn mt/yr from each train, rather than the expected 6.1mn mt/yr.
Novatek is also working on pre-front end engineering and design for the Kamchatka transhipment storage facility, which will be able to handle as much as 20mn mt/yr. CFO Mark Gyetvay said on the sidelines of the conference that Novatek is in talks with third parties about taking shares in the project. The company is also looking at using the Northern Sea route all year round, by using icebreakers. That would mean it could always choose between Asia and Europe, rather than having to ship cargoes westwards in winter.
Russia and LNG
There have been many papers and articles published about Europe's high and rising dependency on Russian gas, and how the arrival of US LNG will tip the balance slightly once the capacity ramps up – however the low cost of Russian gas and its capacity in the pipelines, coupled with the high prices that Asian buyers are prepared to pay for very large volumes, means that Europe's LNG import capacity has been barely used for the last couple of years while Russia has achieved record export volumes for its piped gas.
Those that have taken LNG have also been those most vocal in their opposition to Russian gas: namely Poland and Lithuania. But so far the wave of LNG has been absorbed at relatively high prices and very little landing in Europe.
Last year, by contrast, Russia exported a record amount of gas to Europe outside the former Soviet Union and Turkey: Alexander Medvedev told the conference January 30 that exports were at a historical record last year, at 192.2bn Russian m³, up 8% on the year before, while regasification capacity was under-used. Gas for power generation was a big part of that, up 6.2% year on year. This year has seen a slight dip, down 3% on the same first few weeks of January 2017, but still up 8% on January 2016, he said.
This has stretched Russia's export capacity, which Gazprom's second Nord Stream line (NS2) is intended to solve. NS2 however has faced severe opposition from eastern Europe, Poland and Ukraine in particular, and a decision over its routing is due from Denmark. The European Commission is seeking to open that line, and others, to third parties. However only Gazprom may export gas from Russia.
Medvedev said the EC's initiatives to complicate NS2, such as the planned amendments to the Gas Directive, were "emotionally driven." He said less Russian gas would mean a less efficient European economy: "Anti-Russian attacks cannot cut gas bills."
He said the market realities showed that natural gas was a natural part of Europe's energy mix, and removing gas was a mistake: it would make Europe vulnerable to external supply shocks and "nobody can afford these risks."
European Commission wants gas
Surprising a number of delegates, a senior European Commission executive also spoke both of the importance of gas to Europe and the need to work with Russia along with other external suppliers. The director of the EC's internal energy market division, Klaus-Dieter Borchardt, said he understood the concerns of "our most important external suppliers" and also said that gas was not a bridging fuel.
He said he thought the idea of total electrification of energy was "profoundly wrong" and impossible with the present infrastructure. "Can we turn a blind eye to gas infrastructure, on which we are spending billions of euros?" he asked. "Gas cannot, should not be a bridge fuel: it has its own role to play and the gas and power grids can and should work together... An electricity-only world is fine for others, but not for us," he said.
Gas however in this context means the growing use of renewable gas and power to gas, as technology develops and prices fall. Borchardt said that in an ideal world the benefits of the market would be shared upstream with external suppliers, but he said this was only theoretical.
The European gas industry is preparing for a new gas market model, that takes into account the coupling of gas in transport, in heating and also renewables, which were hardly mentioned in the last gas market model, according to one source.