Russia’s ambitious LNG plans have so far based on two producing assets – the Gazprom-operated Sakhalin LNG and the NOVATEK-operated Yamal LNG. The addition of Yamal LNG into its portfolio has helped to boost its clout (growing from 4% of global LNG trade to 8% currently) yet the actual numbers of assets and exports taking place remains still a far cry from what Russia’s energy authorities had envisaged. Luckily for Moscow, climate change and the warming of Arctic seas in particular might come in very handy for Russian exporters – this year will most probably the Northern Sea Route’s (NSR) best year in terms of transported volumes and the length of the navigation season. Amongst all of this, Russia has delivered its first LNG cargo to Japan via the NSR.

Premises

Let’s start first with the dry statistics. July 23 the LNG tanker Vladimir Rusanov arrived to Ohgishima LNG Terminal and offloaded its cargo. It was the first Japan-bound delivery this year but not the first ever, since Yamal LNG was commissioned there were 2 already. Also, it was not the first cargo that waded through the Northern Sea Route this year – before it two cargoes aboard Yamalmax Arc7 vessels Christophe de Margerie and Vladimir Voronin took the same route and discharged in Jiangsu and Tianjin, respectively. Those were the cargoes that broke serious records – previously no Yamalmax could sail along the Northern Sea Route in May as the usual navigation season started up in July and ended in November-December of the same year. So what makes this delivery so special?

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Murmansk, the geographical starting point of the NSR is 7 300 nautical miles away from Yokohama, whilst the wintertime route around the Atlantic shore of Europe and via the Suez Canal is 12 500 nautical miles. With an average sailing speed of 5-13 nautical knots, an average LNG carrier should be on average 65-66% quicker to reach its Asia Pacific destination if it is to use the Northern Sea Route. Evidently, the NSR can only be used in specific months when icing conditions allow for navigation – this has routinely taken place between July and November/December (peak season is August to October). The warm spring and summer of 2020 have thawed the usually thick ice cover; therefore this year’s navigation season has started in late May already. Related: Why Fracking Activity Hasn’t Increased As Oil Prices Recovered

Graph 1. Yamal LNG Exports by Country in 2017-2020 (million tons LNG).

Source: Thomson Reuters.

Significance

The politicization of the Northern Sea Route coincided with a palpable increase in delivered volumes – if in 2014 the annual tally stood at a mere 4 million tons, last year was already at 31.5 million tons. Ever since the first commercial voyage along the NSR in 2009, Russia has been pushing forward with boosting all kinds of shipping via the NSR, administered by the state-controlled Northern Sea Route Administration, however only hydrocarbons seem to be picking up. Russia’s nuclear holding Rosatom is the operator of the Northern Sea Route, overseeing an ambitious program of ice-breaker shipbuilding that would ideally ensure year-long navigation even at the eastern parts of the Arctic Ocean by 2030. Yamal LNG’s vessel fleet is Arc7 ice-class so NOVATEK essentially relies on itself in terms of shipping. Related: Investors Are Looking To China To Find The Next Tesla

NOVATEK, which still has a tacit objective not to mingle with Gazprom’s traditional outlet markets, has long been voicing its intent to ramp up exports to Japan. Despite China findings its appetite for Yamal LNG volumes, the project’s cargoes are still predominantly moving to Atlantic Europe, be it the Netherlands, Belgium, France or the United Kingdom. Looking at this year’s Jan-July preliminary numbers, 84% of Yamal LNG cargoes went to Europe, 1% up year-on-year. This will be an uphill battle to fight as of the more than 500 cargoes that loaded in Sabetta since December 2017, only 4 went to Japan. Cognizant of the premia it might generate on the Japanese market as well as of the sheer size of Japan’s LNG import needs, remaining the world’s largest importer, NOVATEK wants its place under the Japanese sun.

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Prospects

The Northern Sea Route has allowed Yamal LNG equity holders to speed up deliveries compared to the conventional (circumnavigational) route. The abovementioned voyage of Vladimir Rusanov, from Sabetta to the Higashi-Ohgishima LNG terminal, took 25 days whilst previous deliveries along the same route were at last 40 days in duration. The same is true with regards to China-bound deliveries, with some July-loading tankers delivering their load in record 16 days (along the Sabetta-Jiangsu Rudong LNG terminal route), a feat noteworthy enough because carriers did not move this quick during previous NSR navigation seasons. This being said, two LNG cargoes a year to Japan are still a drop in the bucket considering the overall amount of cargoes that Japan is taking on a daily or monthly basis (a monthly average of 100-120 cargoes, i.e. 3-4 per day).

What is much more intriguing are future prospects for Russia sending more and more gas to Japan. First, the consortium of Mitsui and JOGMEC has taken a 10-percent stake in Arctic LNG 2, with the first 3 trains coming onstream in 2023. This will inevitably create a steady stream of LNG cargoes from the Yamal and Gydan peninsula to Japan and there might even be more. NOVATEK’s next step after Arctic LNG 2 will most probably be Arctic LNG 1, its capacity assumed to be 19.8mtpa across the liquefaction trains which might similarly see Japanese investment. Last but not least Japan has already declared its interest in participating in the Kamchatka transshipment terminal (to which Arc7 tankers would bring the goods for further transportation aboard conventional tankers). All of this combined creates a powerful narrative that insinuates the following – the baby steps that we are seeing right now are a harbinger of much bigger things to come.

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By Viktor Katona for Oilprice.com

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