Russia secures top spot in Europe LNG supply
Having dominated pipeline natural gas supplies to Europe for decades, it’s taken Russia less than a year to become one of the region’s biggest sources of tanker-borne fuel.
That’s thanks to Yamal LNG, which last December started chilling gas into liquid in harsh Arctic conditions – a rare case of a production plant starting ahead of schedule. While market forces explain why so much of Yamal’s supply is ending up in Europe, instead of its main intended markets in Asia, the development may strengthen calls that Russia is too dominant in European energy.
“It makes sense to go to Europe, the market is there for us,” Mark Gyetvay, chief financial officer of Novatek PJSC, the majority shareholder of Yamal LNG, said last week in an interview at the CWC World LNG Summit in Lisbon.
The $27bn Yamal LNG project is liquefying gas at all three of its planned production units, which were brought online within less than a year. The whole project was built seven months quicker than originally planned, with the third plant setting a world record for LNG train construction, according to partner China National Petroleum Corp
While the buyers of that fuel can ship it anywhere in the world, the plant’s output is increasingly staying in the region, driven by market signals. In November, Russia was the biggest single supplier of LNG to northwest Europe.
LNG from the plant travels where prices are highest and it’s the buyers of the fuel who decide where the tankers unload. Last winter and to some extent in the summer, Yamal cargoes were mainly transferred in Europe from specialised ice-breaking tankers onto cheaper-to-operate conventional vessels for further journeys to Asia, South America and even the US Those moves have slowed as Asian benchmarks slid since October.
The European Union gets about a third of its gas from Russia and has looked at LNG, including from the US, as a way to diversify its supplies. That comes as Moscow-based Gazprom PJSC delivers record volumes by pipelines and starts building the Nord Stream 2 link, which will double direct supplies to Germany.
“Russian gas is flooding Europe, both via pipeline exports and new supply from Novatek’s Yamal LNG project,” Leslie Palti-Guzman, president of New Yorkbased gas advisory Gas Vista LLC, said by e-mail. “With LNG demand sluggish in Asia, narrowing EU-Asia price spreads, and record-high tanker rates, Yamal LNG cargoes that would be re-exported to Asia under normal conditions will stay in Europe this winter.”
Europe, including Turkey, imported a record amount of LNG in November, according to Kpler SAS, which tracks commodity shipments.
“The perception of LNG dependency is lower, given that it can be sourced from the global market and doesn’t link the buyer to a particular supply route, like the Nord Stream 2 pipeline project would do,” Dumitru Dediu, an associate partner at McKinsey Energy Insights, said by telephone.
Novatek doesn’t rule out that more LNG will stay in Europe this winter due to the high cost of transporting cargoes via the Suez Canal while sea ice closes the Northern Sea Route for the season, Gyetvay said. The company may consider swapping arrangements for Asian delivery, he said.
“Eight years ago many people were saying ‘I don’t understand where Yamal is and I don’t understand how you are going to be able to ship from that location to market successfully,’” Gyetvay said. “Yamal is a tremendous success not only for Novatek, but for Russia, and now provides the country with a brand-new platform for LNG, the fastest-growing segment of the gas market.”
A gas flare, also known as a flare stack, burns at the Yamal LNG plant, operated by Novatek, in Sabetta, Russia (file). The $27bn Yamal LNG project is liquefying gas at all three of its planned production units, which were brought online within less than a year.