Russia’s energy ties to China have been discussed at length throughout our website – the construction of the 38 BCm per year Power of Siberia gas pipeline, seaborne sales of ESPO (of which China is the dominant buyer), recent cross-investment deals including Rosneft and many more. With the two as close as ever on geopolitical and energy-related issues, July 2018 brought about a new facet to their cooperation – trading in Yamal LNG cargoes. Two Yamal LNG tankers, Eduard Toll and Vladimir Rusanov, will reach China’s Jiangsu province July 19, the first supplies from Yamal to reach China directly. And there is more to come.
After Yamal LNG was commissioned on December 8, 2017, in the presence of President Putin and other high-ranking government officials, the first-train (nominal capacity 5.5 Mtpa) production of the project exceeded the Energy Ministry’s expectations. In the first five months of Yamal LNG 14 spot cargoes were expected to be supplied – in the end, the shareholders produced 21. Moreover, with already more than 40 cargoes having found their way to customers in Europe, Asia, America and Northern Africa, the project seems to be very conveniently positioned to surpass the expected annual number of cargoes (75). Despite such great progress, China featured only once in the past months with regard to Yamal LNG.
The first official Yamal LNG delivery to China took place this April, when the Pskov LNG carrier took the long route via the Suez Canal to deliver liquefied gas, a voyage of approximately 40 days. By making use of the Northern Sea Route, the navigation time of the Eduard Toll and Vladimir Rusanov vessels effectively halved. With it, transportation expenses have gone significantly down, since the Sabetta-Guangdong prime cost via the Northern Sea Route amounts to $64 per LNG ton, whereas via the Zeebrugge transshipment terminal in Belgium the cost increases to $91.5 per LNG ton. Interestingly, it took a mere 9 days for the 16-knot Arc7 LNG carriers to pass the ice-covered part of the route, without any sort of icebreaker assistance.
But why only now, one would ask? CNPC, the Chinese state-owned Oil and Gas Corporation owns 20% of the Yamal LNG project and has a contracted offtake volume of 3 million LNG tons per year. Moreover, China is the second-largest LNG market currently, having risen by a massive 50 percent in 2017 year-on-year to 38 million tons. Against the background of the Chinese government’s coal-to-gas conversion drive, China’s LNG imports will inevitably grow even further this year. Much of it is due to simple geography as the Northern Sea Route is generally navigable without icebreaker assistance only between June and November – this winter was even harsher than the average, therefore it took some time to thaw to a palatable level.
Hence, Yamal LNG exports in January-April were destined predominantly for Europe, most of them arriving in the Netherlands (Gate terminal in Rotterdam), the United Kingdom (Milford Haven) and France (Montoir). This need not necessarily mean that the above LNG volumes stayed in Europe, many were transshipped to Jordan and East of Suez, to India and South Korea. A similar pattern might unfold during the Winter of 2018-2019, when Yamal LNG carriers will take a short route to Europe (it takes 8 days for them to reach Rotterdam and 10 days to attain Montoir in Bretagne), from whereon the liquefied gas will be carried to wherever arbitrage opportunities might seem profitable. This summer’s LNG deliveries, however, will be very much under the banner of China.
There are many factors pointing towards it – when the two carriers arrive in a few days’ time, Russia’s Energy Minister A. Novak and NOVATEK CEO L. Mikhelson will be in Jiangsu for a solemn ceremony. CNPC, the importer of the LNG and majority owner of the Rudong LNG terminal, is the only Yamal LNG offtaker that has a specified delivery destination in its sales agreement, unlike Total or Gas Natural Fenosa. They, too, might be interested in seeing their allocated LNG volumes going to China, despite, what may seem as uneconomical, additional expenses. Russia’s Northern Sea Route is administered by the Northern Sea Route Administration (NSRA), which has divided the whole itinerary into 7 zones. When delivering LNG to Europe, carriers cross only one zone; when to China, they pass through and pay for all seven – a testament to the attractiveness of exports to the Asia-Pacific.
In the near future, NOVATEK is intent to implement an effective way of cutting transportation costs by an approximate 10 percent. By building a transshipment hub in the Avachinskiy Bay of Kamchatka, Arc7-class LNG carriers need not take all the way down to China, by moving the volumes to regular LNG tankers here the availability of the 15 icebreaking tankers increases and costs are driven down. A transshipment hub is all the more necessary as NOVATEK’s next project, the three-train 19.8 mtpa Arctic LNG-2 (as opposed to the 17.4 mtpa Yamal LNG), is thought to be even more Asia-focused than the first one. Arctic LNG-2 will not be an onshore terminal as Yamal LNG, in a game-changing move the shareholders are set to build a shallow-water gravity-based platform.
Since the separate trains will be assembled in Murmansk, avoiding the necessity to construct anything in permafrost, and only then towed towards the Gydan peninsula, NOVATEK expects a 30 percent drop in capital expenses. With improved economics, the temptation to conquer as much of China’s LNG market as possible is even greater – even in the winter, since gains in CAPEX greatly surpass any additional ice-breaking costs. Moreover, the Russian state could buttress NOVATEK’s China drive by lowering Northern Sea Route passage tariffs if necessary. As both Moscow and Beijing express their content with the impending LNG trade ramp-up, seems like a legitimate win-win situation.