Why Would Russia Want to Develop the LNG Industry if Exporting Gas Leads to Nothing but Losses?
According to Novatek, Russia’s second-largest natural gas producer, the LNG volumes they sold in the first quarter of this year fell by 28.4% compared to the same period of 2019. The amount of natural gas traded on the global markets equals 2.45 billion cubic metres while the amount they produced - 3.1 million barrels o.e. (an increase of 2.1%). A mismatch between the two trends was mostly caused by the sharp drop in spot prices on European and Asian exchange markets. Current price levels are not enough to sustain the operating costs alone, not to speak of the transportation costs.
Let us take as examples Japan and Korea - a thousand cubic metres of LNG are sold in those countries for $75 now. Liquified gas is even cheaper on the European stock markets. For instance, the Title Transfer Facility (TTF), a trading point for natural gas in the Netherlands, offers a price of $55. That is about two and a half or even three times lower price than we had in the 'crisis time' of the third quarter of last year. Back then, gas prices slumped by 50% as a result of the biggest-ever increase in supply driven by the US and Qatar. This time the reason for the price decline is evident – the coronavirus pandemic has led to depression on the markets, causing the fall of demand on all kinds of energy sources.
As a consequence, many states have put on hold investment projects linked to the construction of new gas liquefaction facilities. Qatar Petroleum, in particular, has postponed approval of investments until - at least - July. And Cheniere Energy, one of the largest LNG producers in the US, has informed of possibly delaying the completion date of a third train at the Corpus Christi site, with the nominal production capacity of train three potentially reaching 9.5 million tons per year. Now bearing it in mind, would not it be a good idea for Novatek to put Arctic LNG 2 project on a pause?
According to the Rector of Saint-Petersburg Mining University, "The situation we are in is temporary. Once the coronavirus pandemic and its impact on the global economy are over, we will get back to the point where we were. The demand for hydrocarbons, along with the prices, will recover. Even more, unlike the oil and coal industries, the gas industry is on the rise, which is due to both the cost and environmental performance of natural gas. CO2 intensity of 1kWh of electricity generated from natural gas reaches 450 grams. To compare, hydroelectric power plant emits 10 g/kWh and coal plant 1000 g/kWh. Therefore liquified gas becomes, in a way, a win-win solution. It is supported both by those who advocate for green energy sources and those believing in hydrocarbons".
Global experts tend to agree. There is an upcoming production decline ahead, coupled with less investment in new projects. At the same time, we are likely to see demand growing, and next winter will be almost a hundred per cent colder. All combined, the trend will inevitably change.
Experts of Enverus, the energy industry's data provider, expect global gas production to have decreased by more than 170 million cubic metres per day by December 2020, as opposed to the last year's level. Experts from Data Analytics believe this will result in prices hitting $150 at the Henry Hub - a distribution hub in Louisiana, the US - already in the fourth quarter of the year. If taking into account that gas prices in America are traditionally higher than in Europe and Asia, there are high chances export sales of LNG become again viable by then.
In the mid-term, there is a possibility of market supply surpassing the demand by up to 100 million tons per year. This outcome is, however, unlikely unless the projected capacity becomes fully operational, which seems doubtful for now. If anything, only low-cost projects will be implemented in the coming years; the rest will be suspended until better days. This way, the market will see a supply shortage amounting to nearly 30 million tons.
As Vladimir Litvinenko explains, "The main growth driver for demand on LNG imports in Asia is a rapid increase in energy consumption. While in China energy demand can be - at least partially - ensured by domestic (over 160 billion cubic metres) and pipeline supplies (110 billion m3), countries in Southern and South-Eastern Asia will heavily depend on foreign supplies of liquefied gas, with their share potentially reaching almost 50% of consumption estimates. The EU will also be showing interest in LNG imports. One reason is that domestic gas production carried out at the Groningen field in the Netherlands has fallen sharply, resulting from difficult seismic conditions. As a comparison, 53.8 billion cubic metres were produced in 2013, but only 18.8 billion m3 in 2018. Moreover, two years later, gas production can be put to a final stop if locals succeed in persuading the government to do so. Same trends are taking place in the UK and Norway - production volumes keep declining, although less rapidly".
Analysts at Shell forecast that global consumption of liquefied gas will have increased from 60 to 80 per cent by 2040, thus reaching 800-900 billion cubic metres. And for Russia, as a country possessing the world's largest natural gas reserves, this whole situation is an opportunity to get their own slice of the cake.
Increasing its share on the market is a doable task, and the country has already introduced an extensive programme on the development of the LNG industry. As the programme suggests, the total production capacity should have reached 61 million tons by 2025 and 140 million tons by 2035, a figure comparable to the current sales volumes of Gazprom in the EU. The projected expansion will be ensured by forming three main growth centres, with one of them being in the Baltic region (focus on Europe), another one in the Far East (Asia) and the third one in the Arctic (Europe and Asia).
Implementation of such large-scale projects is undoubtedly a difficult task, especially if it is the Far North in question. Their realisation is hampered by high unit costs, harsh climatic conditions, and lack of the infrastructure. Thereby achieving progress requires maximum productivity - and most notably from the State - when making investment and management decisions.