Russia’s LNG future looking brighter as projects gain pace

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Years of unrealised ambition to become a major player in global LNG production appear to be coming to an end for Russia. The past twelve months – and especially recent weeks – have seen a number of developments which strongly indicate that Russia could be a major LNG producer by the end of the decade, though Gazprom’s involvement will be less than the company would like. Playing a crucial role will be President Vladimir Putin’s decision, towards the end of last year, to liberalise LNG exports – though only under very specific circumstances, for now.

The most dramatic development was the news, a week before Christmas, that the shareholders in Yamal LNG – Novatek, Russia’s largest independent gas producer, and the French energy major Total – had reached final investment decision (FID) on the 16.5 mtpa, $27 billion dollar project (pictured above). Initially, Novatek had an 80% stake in the project while Total had 20%; they have just been joined by China National Petroleum Corporation (CNPC), which has taken a 20% stake from Novatek.

Also significant have been announcements by Gazprom that it has awarded the front-end engineering design (FEED) contact for its proposed liquefaction project at Vladivostok and a statement in early January that a third train is being actively pursued at Sakhalin Energy, Russia’s only operational large-scale liquefaction project. The project partners there are Gazprom, Shell, Mitsui and Mitsubishi. Gazprom has also been making progress with a proposal to construct a project near Leningrad, though that is still in the early stages.

Yet another significant development in 2013, and another project not involving Gazprom, was the announcement by Rosneft and ExxonMobil that they intend to proceed with LNG development at Sakhalin 1.

If all these projects were to come to fruition, Russia’s LNG production capacity would rise from 10 mtpa today to more than 55 mtpa – enough to put it in the top league of LNG producers, along with Australia, Qatar and the United States.

A blistering pace of development...: Of the many interesting aspects of the Yamal LNG project, two stand out as particularly fascinating: the ambitious timetable to bring the project on stream by 2017, and the new ships that are being developed to transport LNG year-round through Arctic waters.

There are precedents for large-scale LNG trains having been completed within three years, for example in Qatar, but never before has this been achieved in Arctic conditions. According to Novatek, work on commissioning the first of the three trains will begin in 2016 so that commercial operation can begin in 2017.

The project will also require development of the Tambeyskoye gas condensate field, construction of transport infrastructure, including a sea-port and an international airport at Sabetta, and up to 16 ice-class LNG carriers.

. . . and ice breaking tankers: Novatek and Total considered two options for the LNG carriers: the use of LNG carriers with specially-reinforced hulls, to be assisted by separate ice-breakers; and a combined “ice-breaker plus LNG carrier”, which would save the cost of the ice-breaker escorts. They have chosen the second option and are working on a design of new ice-class LNG carriers that will be “drastically different from the carriers employed thus far”.

Yamal LNG ice breaker vessel

Only ice-breakers can reach the Yamal peninsula during winter months. Total and Novatek took inspiration from them to order the first ice-class LNG carriers, ships capable of reaching the site year-round. (Source: Total)

These ships – to be built to an ice class of ARC-7 (a scale that goes up to 9) – will have sloping sterns. When breaking their way through ice they will travel backwards, their sloped sterns edging them onto the surface of the ice, causing it to break up. Propellors at the base of the hull will then break up the ice into small chunks.

Total claims these ships will be capable of crossing glacial waters at -40°C, through ice as much as two metres thick. Each carrier will have capacity of 170,000 cubic metres of LNG and will be three times as powerful as today’s equivalent ships. Construction will start in 2016.

Despite having reached FID only weeks ago, the project partners have made very substantial progress. The engineering, procurement and construction (EPC) contract has been awarded to Technip and Chiyoda. Orders have been placed for long-lead items – such as cryogenic heat exchangers, gas turbines and liquefaction compressors. Eight production wells have been drilled. And there are over 3,000 workers on site.

The project does not lack credibility. Novatek may be new to LNG, but Total is one of the world’s most experienced LNG project operators and Technip and Chiyoda are top-tier EPC contractors. Last and certainly not least, 70% of the expected LNG output has already been sold under long-term oil-linked price contracts, mostly to Asia but also to Europe. Map of Yamal LNG ice class carriers with asian and european shipping routes

During summer, the ice-class LNG carriers will take the northern route to supply Asia. During the rest of the year, they will sail west, to ports in Europe, which will be either final destinations or stopovers en route to other markets, such as South America. (Source: Total)

WorleyParsons wins Vladivostok FEED: Another major development was December’s news that a Gazprom subsidiary, VNIPIgazdobycha, had awarded the FEED contract for the 10 mtpa Vladisvostok LNG project to Australia’s WorleyParsons. The development forms part of the Russian government’s strategy to substantially expand the eastern portion of the country’s unified gas supply system .

The $70 million contract covers FEED for two 5 mtpa trains, along with supporting utilities and infrastructure, including loading terminal topsides. The work is to be completed towards the end of 2014.

The precise status of the project remains less than clear however, because of semantics around the phrase “final investment decision”. Gazprom said in February 2013 that it had reached FID on the project, but this does not appear to mean FID as it is understood by western companies. FID usually comes after FEED rather than the other way around. Indeed, FID is generally subject to the cost estimates that are a key deliverable of the FEED process.

By Alex Forbes

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