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Gazprom plays LNG catch-up

The Russian gas heavyweight is looking to close the gap with competitor Novatek

Russia’s state-controlled Gazprom is banking on a new export project on the Baltic Sea to establish itself as a major LNG player and claw back its deficit to private competitor Novatek in the fast-growing global market. 

And it has taken the next step in realising its vision by striking a deal with Germany’s Linde to collaborate on liquefaction technology design. 

Gazprom was once seen as the undisputed frontrunner in Russian LNG. Following the launch of its 11mn t/yr Sakhalin-2 LNG export terminal in 2009, it drew up plans for several more projects across Russia. But the company later ceded its position to Novatek, which began commissioning its 17.4mn t/yr Yamal LNG plant in the Arctic in late 2017. While Gazprom’s efforts to advance other projects since Sakhalin-2’s start-up have floundered, Novatek has already begun building its second export plant, the 19.8mn t/yr Arctic LNG-2. 

In late March, Gazprom sanctioned its own second project, a RUB700bn ($11bn) gas processing and liquefaction complex in the Baltic port of Ust-Luga. The plant, which will deliver 13mn t/yr at full capacity, may represent Gazprom’s last opportunity to position itself as a key LNG supplier to Europe. 

To realise its ambitions, Gazprom needs a partner with greater expertise and technology in liquefaction. Unlike Novatek, it has not developed its own LNG capability. The state company relied on partner Shell to carry the Sakhalin-2 project forward, but the major opted out of Baltic LNG after Gazprom altered its scope to include processing as well as liquefaction facilities.

Instead it has turned to Linde, a company whose reputation in LNG suffered considerably from its hand in developing Norway’s Snoehvit LNG terminal. Launched in 2007, the plant was beset for years with unexpected shutdowns, with some blaming its design. The plant employed a unique liquefaction technology known as Mixed Fluid Cascade (MFC), developed jointly by Linde and Norway’s Equinor. Linde still markets this technology today, with Novatek notably opting to use it at Arctic LNG-2.

Gazprom and Linde signed a contract in early October to set up a joint venture for developing design and engineering plans for processing and liquefaction facilities—an obvious nod to Gazprom’s Baltic LNG project. Under the deal, Linde would also help commission and operate these facilities. 

Strategic shift

Gazprom’s renewed focus on LNG is in part a reaction to changes in the European gas market. The company for years has supplied piped gas to meet around a third of Europe’s gas needs, but its market share has been threatened by rising LNG imports. Gazprom’s sales to the continent fell this year for the first time since 2014, as a global supply surge and moderating Asian demand growth left a much greater volume of LNG looking for a home.

Gazprom sees increasing its own LNG portfolio as a logical response to this threat to its business model. Besides largescale export projects, the firm is also looking to move into LNG bunkering – a sector tipped for fast growth owing to new IMO restrictions on marine fuels sulphur content arriving in 2020.

In St Petersburg in early October, Gazprom’s head of directorate Kirill Neuymin outlined a plan to build up to three small-scale LNG plants in Russia. They would primarily serve as bases for bunkering services.

Gazprom has fallen behind Novatek in this area as well, the latter having launched a 660,000t/yr bunkering plant on the Baltic Sea earlier this year. If realised, these trio of projects, would establish Gazprom as the market leader in Russia.

But its first plant, the 1.5mn t/yr Portovaya LNG, also on the Baltic Sea, is running behind schedule. Neuymin acknowledged that it would not be operational until 2020 – two years later than initially anticipated. Linde’s MFC technology is being deployed here as well.

Gazprom aims to build a second 1.5mn t/yr plant in Vladivostok, in the Russian Far East, that will offer “a significant part” of its capacity to bunkering, Neuymin said. A feasibility study has been undertaken, though Gazprom is yet to say when it intends to reach FID. The firm had earlier targeted a larger 5mn m/yr plant in Vladivostok—a plan that now appears to have been dropped. Lastly, Gazprom will decide “hopefully soon” on a 0.5-1.5mn t/yr bunkering facility on the Black Sea.

“Portovaya LNG coming into operation certainly fits with the industry trend,” says Ian Simm of Edinburgh-based consultancy Gneiss Energy. “The LNG bunkering market is gaining traction as demand grows and the expectation is that LNG demand for bunkering will continue to rise.”

New LNG bunkering projects have been announced in Asia, the Americas and Europe, as shippers take steps to align with the 2020 IMO rules cutting sulphur content to 0.5pc compared to a previous 3.5pc limit. While many vessel owners are responding by switching to compliant low-sulphur fuel oil (LSFO) or are continuing to use high-sulphur fuel oil (HSFO) with scrubbers.

“LNG offers significant upside over LSFO in terms of consumption—as much as 25pc—and in terms of cost at 10-15pc,” says Simm.

“That said, LNG bunkering is unlikely to account for much more than 10pc of marine fuels in the next decade, in part because of the required fit-out of existing vessels.” Given, though, that LNG occupies a share of only 0.3pc, that would still represent explosive demand growth in the shipping sector. 

Source: Petroleum Economist
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