It was to be a highly ambitious project on the frozen Gulf of Ob, in Russia’s far north, as a stepping stone in Moscow’s rising ambitions to become as much a powerhouse in LNG as it is in pipeline-delivered oil and gas.
When Russian President Vladimir Putin launched his war on Ukraine, the $21 billion project known as Arctic LNG 2 was underway with dozens of wells drilled, an airport built and most of the equipment ordered.
Now, though, EU sanctions banning the sale of gas liquefaction equipment to Russia have cast doubt on the giant complex. Analysts say the sanctions mean, at best, that only one of three planned Arctic LNG liquefaction facilities is likely to be completed anytime soon.
TotalEnergies, the main international backer of the project, has written off its $4.1 billion investment. “It’s hard to believe it can be built with sanctions,” Patrick Pouyanne, CEO of TotalEnergies, told analysts in late April.
Problems go beyond LNG
In the coming years, Russia will likely have to backtrack across a broad spectrum of energy. The future growth of its oil and gas exports – for decades the backbone of the country’s economy – is now highly uncertain. Shock waves spill over from Ukraine to nuclear power, with Finland recently blocking a deal for Russia to build a reactor estimated to be worth 7 billion euros ($7.4 billion).
“Russia is going to be a greatly diminished international player, there is no doubt about that,” said Matt Seiger, vice president and head of Russian energy and Caspian at S&P Global, a financial services company.
Russia will likely find markets for some of its oil and gas; In April, Putin said that while the country may lose traditional buyers, it will find more at home and abroad. But it may gradually lose influence in the industry, becoming shunned by former international partners such as major international oil companies.
Some analysts also say it is hard to see how Moscow can remain co-chair, with Saudi Arabia, of the organization of oil producers known as OPEC Plus. So far, though, Saudi officials and others Adhering to Russia with an eye to maintaining cohesion On the set for a far future date when the world is full of oil rather than worrying about a shortage.
LNG is an effective proxy for Russia’s energy ambitions. It’s growing fast, in large part because refrigerant can be transported around the world by ship, allowing a country like Russia, whose gas is now largely delivered by pipeline to increasingly hostile customers in Europe, to access any Market at a suitable station. Dealing with refrigerated gas is also a technical challenge.
LNG is still in its infancy in Russia, but Moscow aims to compete with world leaders: Qatar, Australia and the United States. It will benefit from its vast gas resources and relationships with Exxon Mobil and Shell as well as TotalEnergies, which owns 10 percent of Arctic LNG 2. All of them are major players in LNG. (LNG imports are growing about 7 percent annually.)
Those ambitions have now been shattered. Analysts at S&P Global now estimate that Russia will likely have half of the LNG capacity it was targeting by the end of the decade. The ExxonMobil liquefied gas project on Sakhalin Island, in Russia’s far east, has been put on hold, and Shell has said it will take out Russia’s first LNG facility, also on Sakhalin Island.
In the oil and gas sector, setbacks can be divided into two main categories. With global oil giants such as Shell, BP and Exxon Mobil announcing their intention to leave Russia, the Russian industry will lose access to advanced technologies and capital. For example, Russian gas giant Gazprom has worked with Shell to use chemical blends to boost oil recovery in a project called Salym, from which Shell is now graduating.
In the past, it was generally easy to take advantage of Russia’s vast fields, but after decades of pumping, the remaining oil would be more difficult to extract. “The longer Russia is kept out of the system, the higher the risk of a decline in production,” Oswald Clint, an analyst at Bernstein Research, wrote in a recent report.
But the more pressing concern is the fact that Russia has been forced to halt oil production due to sanctions and buyers’ reluctance to deal with Russian crude and oil products.
In one sign of such distress, the ExxonMobil-operated oil project on Sakhalin Island in Russia’s Far East did not ship any oil in April, according to Kpler, which tracks energy shipping. ExxonMobil has declared force majeure on Sakhalin, which means that it can no longer perform its obligations due to circumstances beyond the company’s control. Exxon said it was having difficulty “to comply with its obligations” and “conduct operations at the required level of international standards.”
Russia does not have a large oil storage system, so when it cannot export oil, it has to re-choke wells or shut them down completely. There is no place to put the oil. Russian oil production fell by 900,000 barrels per day, or 10 percent, in April compared to March. And the International Energy Agency, the Paris-based group, recently said that the amount of production decreased It could approach 3 million barrels a day later this year.
Indicating the possibility of more taps closing, analysts at Kayrros research firm said oil on tankers is increasing rapidly. This suggests that “Russia may once again find it more difficult to dispose of its oil,” they said.
Russia has had some success in finding buyers for oil that would otherwise have gone to Europe and the United States. Flows to India escalated. Victor Katona, an analyst at Kpler, said China, where energy consumption has fallen due to Covid lockdowns, appears to be ramping up its buying.
Russia also makes money thanks to high oil prices. Analysts at S&P Global estimate that Russia generated about $26 billion in natural gas sales to Europe from the start of the war in Ukraine on February 24 through the end of April, more than triple the same period a year ago. Of this total, about a quarter of it went directly to the government and almost half went to Gazprom, which has a gas monopoly. About $5 billion went to Asian and Western LNG investors. (Tax credits intended to encourage investment in LNG mean that refrigerated gas now produces little revenue for the Russian government.)
Analysts say it would be a mistake to underestimate the Russian oil industry. It was struggling when the Soviet Union collapsed in the early 1990s, but has returned to normal with the help of Western companies and has since absorbed techniques such as fracking and horizontal drilling. Despite sanctions imposed to punish Putin’s seizure of Crimea in 2014, Russia managed to increase production to its peak in 2019.
Russia’s Novatek, which is developing Arctic LNG 2, has deployed largely indigenous LNG technology in an earlier project with TotalEnergies called Yamal LNG but the process has run into problems and it remains unclear if it can operate on a full commercial scale. Novatek declined to comment.
“I wouldn’t say they’re finished as a petroleum power,” Mr. Clint, an analyst at Bernstein, said in an interview. “But they definitely demolished the arrangement for a good amount of time.”
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