[NGW Magazine] Russian LNG and Europe
The start of LNG deliveries from Russia's Yamal LNG plant has created new options for supplying Europe with Russian gas, weakening the emphasis on pipeline deliveries.
The commissioning of the Yamal LNG plant in December has led to tankers sailing west from the far northern Yamal peninsula. Russian businesses also have plans for producing LNG in Sakhalin, in the Far East. The plans for trading in LNG are not new, and Russian businessmen and the Kremlin had pondered them for a long time. Nevertheless there has been a renewed interest in LNG lately, caused by what could be dangerous developments for the Russian gas business.
Gas policy delivery has been quite important for Moscow. It has been not just one of the major sources of revenue – Russia has had little to sell to foreign markets besides gas, oil and weapons – but also a way to exert geopolitical control.
The “gas wars” with Ukraine and even with friendly Belarus – member of the “union state” – have been a permanent part of Russia’s relationship with these countries for more than a decade. Moscow’s approach to the gas issue changed as time progressed.
In the early 2000s, when Vladimir Putin was enjoying his first term as president, the Kremlin assumed that gas prices would rise indefinitely, along with the oil, to which they were contractually linked. The Kremlin also assumed that LNG would not be a problem, plainly because LNG could not compete with gas that came by pipeline. Moscow could be right, but these theories do not take account of the political implication of gas supply; or, to be precise, people in Moscow believed that they alone could use gas for political purposes.
It was not just gas that Moscow used to punish what it considered to be bad behaviour, of course. When Moscow had an issue with Georgia, it immediately discovered problems with Georgia’s alcohol and even its mineral water. When it had an issue with Belarus, Moscow discovered problems with Belarusian dairy products. Political considerations had been implicated in the economic decision. As a result, some Russian gas line projects could suffer.
Nord Stream 2: uncertain future
Nord Stream 2 was launched in view of bypassing Ukraine completely by 2019, when the present-day contract with Ukraine is set to expire. Germany was clearly interested in the project, and for legitimate reasons. First, Germany would be free from any disruption of the gas supply. Second, it would make Germany a hub from which gas would be distributed to the rest of Europe.
This would not only generate additional cash for Berlin, but also would increase Berlin’s geopolitical clout. The plans predictably led to strong resistance from Eastern Europe, which began to increase their reliance on LNG from non-Russian sources. This was the case with Poland and some Baltic states.
Moscow questioned the wisdom of these actions as the LNG would cost them more than Russian gas. Russian observers noted with an air of sarcasm that Poland had bought expensive American gas plainly because Warsaw is subservient to Washington and from this perspective, it is quite different from the residents of other European capitals.
Indeed, the absolute necessity of Russian gasline gas is understood well by those European states that are not seduced by the US’s empty promise to replace Russian pipeline gas with LNG and also are strong enough to resist Washington’s pressure.
Berlin, as Russian observers noted, is a good example, and German officials have rejected American demands to reject Russian gas and buy just American LNG. It was not surprising, Russian observers noted, that the relationship between Berlin and Washington became increasingly tense.
Russian observers also noted that LNG as a replacement for Russian pipeline gas is a complete failure: LNG is much more expensive than pipeline gas and for this very reason, LNG terminals in Europe are underused. LNG will not provide a viable alternative to Russian gasline gas. This is understood even by people in Kiev, who have started to receive American LNG.
Still, leaders of Eastern European countries who are ready to find alternatives to Russian gas say that reliance on Russia is politically dangerous and Russia could use gas as a way to blackmail East European/Baltic countries. Washington also supported their attitude for a variety of reasons. First, it was a way to increase pressure over Russia. Second, the arrangement could provide a market for American LNG. Consequently, they intensified the pressure to stop the construction of Nord Stream 2.
Moscow, of course, stated that they would fail, and Nord Stream 2 would be built. And Moscow might be right in the long run. Still, setbacks cannot be excluded. In addition, the Asian market for pipeline gas is weaker than it had been until recently.
Chinese dilemma
Russia has been engaged in negotiations with China for a long time. Still, China’s offers were not to Moscow’s liking and Moscow assumed that with the extensive European market, Russian could engage in negotiations with Beijing for the foreseeable future. But after the beginning of the European and American sanctions, Moscow immediately rediscovered the importance of Chinese routes, and clinched the deal to send gas to China through the Power of Siberia gas line.
At the same time, though, China’s interests in the Power of Siberia and other gas lines became less urgent, at least from the economic point of view. China even abandoned the additional gas line from Turkmenistan. China’s plans to buy some liquefied natural gas from the US increased Moscow’s worries, as they indicated that the Chinese market is not bottomless as they had believed, and American LNG could limit Russia’s access to the Chinese market.
In addition, while China will have flexibility in buying gas from different places, Russia would have no privileged position. And this is where LNG might provide Moscow with an alternative scenario.
LNG option
The development of the Yamal gas field and the start of building work on the LNG facilities started several years ago. The same could be said for the facilities in Sakhalin. But both were seen as sideshows, the main event being pipelines.
The Kremlin’s stress on pipelines could be seen in the fact that Moscow entertained the fantastic plan to send Russian gas to South Korea through North Korea. There were similar plans to send gas to Japan via a gas line. Yet now LNG has emerged as an important backup, in the case of problems with Nord Stream 2, or even Power of Siberia.
In the case of problems with Nord Stream 2, Russia could send gas to Europe, mostly to Germany, and still not depend on Ukraine and Eastern Europe. Moreover, LNG could be sent everywhere in Europe and beyond, regardless of sanctions. The Russian press noted that Russian LNG was even aimed at the US through intermediaries.
Russian observers pointed out that the interest in Russian LNG was caused by the unusually cold weather in the US: Russian mass media published an image of an alligator embedded in ice in one of the southern states. But there were other implications: the US claimed that it could be a steady supplier of gas to Europe regardless of anything, and as Russian observers implied, this is not the case. Deliveries of Russian gas to the US imply that in the present situation not even the US could be the cheapest source of gas in an emergency.
Consequently, the implication is clear: Europe must rely on Russia. The second implication is also clear: sanctions can be dodged and Russian LNG may be sent not just to Europe, but even to the US – the initiator of anti-Russian sanctions.
Europe is not the only market. If China falters, or Beijing decides to diversify its supply routes even more, LNG could be delivered to Japan, South Korea or other Asian countries. Some LNG could be sent to the Chinese market to compete with American LNG and one Russian observer noted that Russia sent 1,700 metric tons of LNG to China in 2017. Thus, selling LNG from Yamal or Sakhalin, is no longer a comparatively marginal enterprise, but has become one of the key elements in the Kremlin’s gas strategy.
Dmitri Shlapentokh