Sino-Russian Arctic energy cooperation – a case study of Yamal LNG project

Anquan Feng
Sino-Russian Arctic energy cooperation – a case study of Yamal LNG project - View in English
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Anquan Feng1
1 Heilongjiang Academy of Social Sciences

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Аннотация:
Objective. This paper analyzes the existing problems and development prospects of energy cooperation between Russia and China in the Arctic region. Research methods. This paper uses international economics and regional economic analysis. Research contents. This paper introduces the policy changes of natural gas development in the Russian Arctic region, the development course of Yamal LNG project, analyzes the problems existing in the energy cooperation between Russia and Russia in the Arctic region, and makes a prediction on the prospect of the energy cooperation between China and Russia in the Arctic region. Conclusion. As the China-Russia Yamal LNG project cooperation has achieved success, realized the economic interests of the two countries, and promoted multilateral cooperation, there are great prospects for the future development of China-Russia Arctic energy cooperation.

Ключевые слова:

Yamal LNG project, Arctic energy cooperation, Arctic energy development

JEL-классификация: F13, F15, Q35, Q37

Цитировать публикацию:
Anquan Feng Sino-Russian Arctic energy cooperation – a case study of Yamal LNG project // Креативная экономика. – 2021. – Том 15. – № 7. – С. 3079-3090. – doi: 10.18334/ce.15.7.112398

Anquan, Feng (2021) Sino-Russian Arctic energy cooperation – a case study of Yamal LNG project. Creative Economy, 15(7), 3079-3090. doi: 10.18334/ce.15.7.112398

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Introduction

In this paper, the Russian Arctic energy development policy was systematically sorted out and analyzed, the Yamal LNG project was summarized, and the development trend of Sino-Russian Arctic energy cooperation was forecasted. The innovation of this paper is that the Sino-Russian Arctic energy cooperation is discussed under the background of international economic cooperation and regional economic cooperation, and the research methods of international economics, regional economy and international relations are used to conduct a comprehensive study on the Sino-Russian Arctic energy cooperation. The author believes that there are broad prospects for China-Russia Arctic energy cooperation, but there are many problems. They are as follows: first, the Russia's weak Arctic infrastructure; second, the environmental protection; third, the mining technology; fourth, the development funds; fifth, the development cost.

Although Russia is a major producer and exporter of natural gas, its LNG (Liquefied Natural Gas) exports started late and only began in February 2009 after Sakhalin-2 project received technical assistance from Japan. The International energy price has been rising constantly since the 2008 financial crisis, peaking at more than $140 a barrel, and even it has fallen slightly since then, it has remained around $100 [1, p. 28–32] (Hu Liling, 2018, p. 28–32). If such a price level is maintained, arctic gas development will bring profits for businesses. Russian government has decided to increase energy development in the Arctic so as to promote economic development in the Arctic and Russia.

Initially, the Russian government hoped that the state-owned enterprises would develop the Yamal LNG project. Gazprom, Rosneft, Novatek, Exxon Mobil, Total and other international oil giants have signed agreements for the development of natural gas on the Yamal Peninsula, including the Yamal LNG project, the Universitetskaya-1 project and the Shtokmanovsky project. The crisis in Ukraine in 2014 led to economic sanctions against Russia by The United States and Europe, and under pressure from the United States, some European and American energy companies had to withdraw from the Russian energy market, leaving projects such as Yamal LNG in trouble. In addition, international crude oil prices dropped sharply in the wake of the Ukraine crisis, from $105 a barrel in 2014 to $40 in 2016, making the prospect for energy development in the Arctic less optimistic, so Gazprom, Rosneft and foreign companies reconsidered their plans to be part of the Arctic energy development projects. Finally, Novatek, a private Russian gas company, won the right to develop the project. In the beginning, Novatek held 60% of the stock, Total in France holding 20 percent and China National Petroleum Corporation (CNPC) 20 percent. Afterwards, Novatek sold a 9.9 percent stake to China Silk Road Fund, holding 50.1 per cent eventually [2, p. 72–75] (Cui Mo, 2019, p. 72–75).

European and American sanctions have affected the construction of the Yayamar LNG project, but they have not affected its pre-sale scale in any way. According to Evgeny Kot, head of the Yamal LNG project, in March 2016, long-term purchase contracts lasting from 2020 to 2025 have been signed with the countries concerned, with pre-sale accounting for approximately 96% of total production, of which 86% will be sold to the Asia-Pacific region.

In 2013, the Russian government reformed oil and natural gas management, stopping Gazprom's monopoly on LNG development and exports, allowing private companies to enter the LGN market, and offered plenty of preferential policies to companies entering the Arctic for energy development, which motivated private companies to participate in natural gas exports.

Russia adjusted its energy policy mainly for the following reasons.

First, the EU has long been Russia's largest energy exporter, with more than 60% of its energy exports to EU countries. Since Russia put an end to its natural gas exports to Ukraine in 2006, EU countries have adjusted their energy strategies, by reducing their dependence on Russian energy and expanding their import channels in order to promote their own energy security.

Secondly, since the U.S. shale gas revolution in 2009, the U.S. has gradually converted to an energy exporter from a major energy importer, and in recent years the U.S. has become the largest LNG exporter actively expanding the European Union market.

Thirdly, since the 2014 crisis in Ukraine, Europe and the United States economic sanctions against Russia have constantly increased both in finance and technology, causing oil prices to fall and the ruble to depreciate sharply. The main financial sanction was that Russian energy companies were prohibited from financing in the European and American markets, with its financing chains cut off. Technically, the sanction is mainly about prohibiting European and American enterprises from providing Russia with polar energy development equipment and deep-sea drilling technology and equipment. The lack of financial and technical equipment support from European and American countries has greatly delayed the energy development in Russia. In response, Russia is looking for new partners across the globe, and only China can financially and technically help Russia through the difficulties excluding European countries and the United States, which to a certain extent, promotes the Sino-Russian energy cooperation in the Arctic.

Fourthly, the Asia-Pacific region is gradually becoming the world's new economic center, and its energy consumption is also increasing with the rapid development of the region's economy. China, as the world's largest energy importer, its energy demand is still rising steadily with the development of China's economy. However, China's current energy consumption structure is still not reasonable, with coal as the major energy. In order to change this situation, the import of oil and natural gas is bound to increase. Therefore, it is in the long-term interests of China and Russia to strengthen cooperation in the field of energy.

China-Russia Yamal LNG Project Cooperation

The Yamal LNG gas source is the Nantambe gas field located in the southern part of the Yamal Peninsula, which was discovered in 1974 with a storage capacity of 1.256 trillion cubic meters and is one of the largest oil and gas fields in Siberia [3, p. 54–65] (Liu Kun, Liu Xiaoqi, Wang Jing, 2018, p. 54–65). Three cooling plant production lines, with an annual natural gas production of 5.5 million tons, have been built in the port of Sabetta, northeast of the Yamal Peninsula, and will produce 16.5 million tons per year when fully put into operation [4, p. 37–40] (Liu Guizhou, 2019, p. 37–40). The first production line was completed in October 2017 and was put into production in December of the same year. A second production line will be put into production in July 2018 and a third production line will be put into production in December 2018. After all three production lines were put into operation, Nevatec decided to use Russian technology to increase the construction of a production line with an annual production capacity of 900,000 tons. After the installation of the four production lines in the Yamal project, its annual production of LNG accounting for 17.4 million tons [5, p. 6–9] (Zeng yan, 2018, p. 6–9).

The successful operation of the Yamal project has encouraged Nevatec which decides to build a second LNG plant, the Arctic LNG 2 project in the Arctic, and which have been approved by the Russian government. The Arctic LNG 2 project is located on the Gyda Peninsula, northeast of the Yamal-Nenets Autonomous Region – Nenets Autonomous Region, neighboring Cara Des Cara in the north, on the east of the Yamal Peninsula. Ob Bay separates from the Yamal Peninsula on the Gyda Peninsula, with the Yamal LNG project facing the Arctic 2 project across Ob Bay. The Arctic LNG 2 project was chosen to be built on the Gyda Peninsula primarily to reduce development costs by utilizing the infrastructure of the port of Sabetta and Sabetta airports.

Arctic LNG 2 plans to build three production lines, each with an annual production capacity of 6.6 million tons and an annual total production capacity of 19.8 million tons. At present, the equity certification has been basically completed. Nevatec Company is holding 60%; France's Total Company is holding 10%; PetroChina is holding 10%; and China National Offshore Oil Company is holding 10%. In addition, 10 per cent of the shares have been reserved for the expansion of shares [6, p. 42–46] (Han Xuequang, 2020, p. 42–46).

The Yamal LNG project consists of oil and gas exploration, production line construction as well as the transportation of oil and gas. This is a very large project, with a clear division of labor between China and Russia. The general contractor for the Yamal project is Japan's Nikko Corporation, Chiyoda Corporation and France's Desinib. Chinese companies are subcontractors, consisting of China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and Baosteel Group, which are responsible for construction and part of the material supply.

Effects of China-Russia Arctic Energy Cooperation

Via energy cooperation in the Arctic region, China and Russia have enhanced mutual trust, reduced mutual suspicion and accelerated energy cooperation between the two countries. The scope of China-Russia energy cooperation in the Arctic region has been widening, and the level of cooperation has been higher and the scale of cooperation has been larger. Chinese companies are involved in every process of the industrial chain of the Yamal LNG project from top to bottom. The deepening of energy cooperation between the two countries in the Arctic region has laid a solid foundation for the overall energy cooperation between the two countries to reach a new level.

In the Interest of the Economy of Both Countries. Energy cooperation in the Arctic region has brought great economic and social benefits to China and Russia. For Russia, China-Russia energy cooperation in the Arctic region has not only received financial support from China, but also technical and human support. In the construction of the Yamal project, hundreds of Chinese skilled workers worked on the front line, making a great contribution to the early completion of the Yamal LNG project. Russia has reduced its investment costs and investment risks owing to China's participation in Russia's Arctic energy development and gained economic benefits by selling its products to China in the trade process, thus further expanding investment and realizing a virtuous circle of energy development. For Russia, it spends less money but does big things. The Yamal LNG project has a total investment of $29 billion, of which $19 billion has been financed, and Novatek has built the world's largest LNG plant in the Arctic at less than a third of the total cost.

For China, China-Russia energy cooperation in the Arctic region can not only give priority to the purchase of products produced, expand energy import channels, ensure economic development of energy demand, but it also can improve energy supply security.

From the view of economic profit, with Chinese companies as the contractor, the total cost of the Yamal LNG project is $7.8 billion. The whole project consists of 142 modules tendered globally, of which Chinese enterprises won the bid for 85%, which are built in China and shipped to Russia [7].

Chinese companies have also got large orders in the transport process of the Yamal LNG project. China will build six LNG carriers and 14 LNG vessels for the Yamal LNG project under a $8.5 billion contract [8, p. 36–37] (LU RUqian, 2018, p. 36–37).

In oil and gas exploration, China-Russia cooperation is also relatively close. The gas source of the Yamal LNG project is the South Tambeskoye oil gas field with four rigs to ensure the timely supply of natural gas raw materials, one of which is made in China. Polar drilling platform is high-tech integration, with Chinese manufacturing entering the Russian oil and gas drilling market, reflecting the overall strength of China's energy exploration and providing important experiences for the future energy cooperation with other countries in the Arctic region.

Energy Development in the Arctic Region Promoting Multilateral Cooperation. Although the Arctic is rich in oil and gas reserves, poor climatic conditions and infrastructure as well as remoteness from the consumer market make mining much more expensive than in traditional oil and gas-producing regions. In addition, energy development in the Arctic requires higher mining techniques, special mining equipment, and special means of transport and special requirements for environmental protection, which leads to high development costs. Energy development in the Arctic requires multi-country participation, which can spread costs and risks. The Yamal LNG project was completed by four national companies, Namely Russia, China, Japan and France, which adopted a model of multilateral cooperation. The Yamal LNG project is a good attempt to optimize the allocation of resources by various countries and it is the perfect combination of the advantages of the four countries, i.e. Russia's administrative resources, Japan, France's design level and management experience, China's capital advantages, manufacturing advantages, manpower advantages and shipping advantages, and so on.

Issues Facing Arctic Energy Cooperation between China and Russia

From the perspective of resource reserves and the development experience in the Arctic region, Russia has obvious advantages. In the view of future development trends, as the future economic growth pole, Russia will further intensify efforts to develop oil and gas resources in the Arctic region. However, Arctic development faces risks and problems that need to be analyzed and assessed in order to make the right decisions.

Weak Infrastructure in Russia's Arctic Region. In the process of energy exploration, exploitation, production and transportation, modern infrastructure is particularly important, but infrastructure construction in the Arctic is seriously inadequate. Most of Russia's Arctic coast has a dilapidated port infrastructure that cannot meet the demand for energy transshipment. In addition, the water depth of the ports along the route is shallow, and large transport vessels cannot be docked. What’s more, the eastern part of the North-East Arctic Seaway has shorter navigation time and more severe ice conditions, requiring more icebreakers and related facilities to ensure the transportation of oil and gas resources.

Environmental Protection Issues. The special geographical location and climatic conditions of the Arctic region make it ecologically fragile, and its ability to resist external environmental damage and self-healing of the environment is extremely low.

Human activity puts the greatest threat to the Arctic environment. In recent years, with the promotion of resources development in the Arctic region and the increasing number of Arctic sea transportation, the environmental damage caused by human activities to the Arctic region has increased significantly. Compared with conventional areas, the exploitation of natural resources in the Arctic, especially the exploration, exploitation and transportation of oil and gas resources, is easy to pose a threat to the environment of the Arctic region.

Technical Problems in Mining. Although some Russian oil and gas fields in the northern great continent are being exploited, oil and gas exploration on the Arctic continental shelf is slow and the current mining techniques are not mature enough. Polar deep-sea exploration technology has been in the hands of European and American enterprises, but after the European and American sanctions, European and American enterprises

Withdraw from joint exploration with Russia in the Arctic region, resulting in Russia's oil and gas exploration on the northern great shelf was forced to terminate.

Problems in Arctic Development Funding. Energy development in the Arctic requires huge sums of money and has a long cycle. The first is the lack of exploration funding. As resource extraction continues to advance, the production of some old mining areas is decreasing or even depleting, which requires continuous exploration operations to find new oil and gas resources in order to increase reserves.

At present, the oil and gas fields in the Arctic are mainly discovered during Soviet exploration. During the Soviet era, extensive geological exploration was carried out in the Arctic, and most of the oil and gas fields currently in production were discovered in the 1970s and 1980s. After the collapse of the Soviet Union, the Ministry of Geology was abolished and exploration scale declined significantly. Prior to 2002, the source of funding for exploration by Russian energy companies was mainly mineral resources reproduction tax, with a small number of exploration enterprises to bear. But in 2001 Russia carried out a tax reform, which established a new tax system for the use of natural resources. And in 2002 it began to levy mineral resources mining tax, abolishing mineral raw material base reproduction commission system [9, p. 15–19] (Guo Xiaoqiong, 2019, p. 15–19). After the implementation of the new tax system, regardless of the properties, location and difficulty of oil and gas fields, tax is levied according to the principle of collection, which greatly increased the cost of exploration of oil and gas enterprises, greatly reducing arctic exploration operations.

The Development Cost of the Arctic Region. Cost has been a major cause of slow energy development in Russia's Arctic region. At present, the cost of international natural gas extraction is $20-200 per thousand cubic meters per month, while the cost of developing natural gas on the Arctic continental shelf is as high as $140–430 per thousand cubic meters, far higher than the cost of mining in conventional areas [10, p. 54–58] (Cheng Chunhua, 2021, p. 54–58).

Conclusion

Due to different cultures, different ideas and different interests, China and Russia can not avoid differences in the process of Arctic cooperation and development, but we should consider the issue from the perspective of mutual benefit and win-win situation and seek common ground while preserving differences. For China, China-Russia energy cooperation in the Arctic region can not only give priority to the purchase of products produced, increase energy import channels, ensure economic development of energy demand; it can also improve energy supply security. In addition, the opening of the channel is of great significance to East Asian countries. It will not only reduce navigation time, but also significantly keep operating and flight costs down. For Russia, it will gain Chinese financial support, technical assistance and further development of China's energy market through energy development projects in the Arctic region, which is beneficial to the economic development of the Russian Arctic region.



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Источники:
1. Hu Liling Sino-Russian Arctic Oil and Gas Resources Development Cooperation for Perspective of the Silk on Ice // Siberian Studies. – 2018. – № 4. – p. 28-32.
2. Cui Mo Polar LNG - a new target for Russia's energy export // World Petroleum Industry. – 2019. – № 4. – p. 72-75.
3. Liu Kun, Liu Xiaoqi, Wang Jing Stadus and Prospect Russian LNG Industry // International Petroleum Economics. – 2018. – № 9. – p. 54-65.
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5. Zeng yan Yamal LNG project Goes into Full operation // Natural Gas and Oil. – 2018. – № 6. – p. 6-9.
6. Han Xuequang Outline of Russia’s Strategic Plan for Exploration of Development of Oil and Gas Resources in North Polar Continental Shelf // Petroleum Science and Technology. – 2020. – № 6. – p. 42-46.
7. 85% of the module construction of Yamal LNG project was contracted by Chinese companies. [Электронный ресурс]. URL: https://baijiahao.baidu.com/s?id=1614728302537963968&wfr=spider&for=pc (дата обращения: 11.06.2021).
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9. Guo Xiaoqiong Discussion on the Reform of Mineral Resources Mining Tax in Russia's Petroleum Sector // Journal of Eurasian Economy. – 2019. – № 1. – p. 15-19.
10. Cheng Chunhua New trends in Arctic energy development // International Petroleum Economics. – 2021. – № 5. – p. 54-58.