Russia’s challenges in the LNG sector (I): Expansion of production and export

The loss of the European market for Russia cannot be fully replaced in the short to medium term and will therefore lead to financial losses in the coming years. To compensate for this, Moscow wants to massively expand exports of liquefied natural gas by 2030. According to experts, this requires extensive investments in the expansion of the LNG sector and in technological development.

An analysis by Alexander Men

The severe sanctions imposed by the USA and other western states against Russia are undoubtedly among the greatest challenges for the Russian economy at the moment. The country’s raw materials sector in particular has been struggling with countless trade and economic restrictions for more than a year now. The vast majority of Western measures are clearly aimed at the oil industry, which plays a key role in Russian resource exports.

How the West destroyed ties with Russia - and cut itself off from cheap energy


How the West destroyed ties with Russia – and cut itself off from cheap energy

But the comparatively less important gas sector has also recently come under pressure. In view of the sanctions, this area has also been confronted with the loss of the two Nord Stream pipelines, which were destroyed after an attack last September and are likely to be out of action for a long time. As a result, Russian gas supplies to Europe, and with them the revenues that are so important for the gas industry, fell significantly.

The Russian Energy Minister and Deputy Prime Minister Alexander Nowak stated in his annual report for 2022 that Russian exports to the European Union fell by 45 percent or 98 billion cubic meters last year and that total annual exports therefore fell by a quarter to 184 billion cubic meters. Although the forecasts for this year are not necessarily better, which is why exporters in Russia fear being stuck on their gas.

Expansion of the LNG sector

This is definitely not a good prospect, especially as the loss of much of the European market, which generally brought Russia most of its gas trading revenues, cannot be fully replaced in the short to medium term and could therefore result in financial losses in the coming years. One option to improve the situation is a massive expansion of liquefied natural gas (LNG) exports, which accounted for just 15 percent of total Russian gas supplies in 2021. However, this requires extensive investments in the expansion of this sector, according to experts.

The Russian LNG sector is in fact still relatively underdeveloped, but in the current situation it reveals enormous growth opportunities and could therefore be of central importance for the long-term development of the Russian gas industry. According to Rossat, the Russian Federal Service for State Statistics, production of liquefied natural gas in Russia increased by eight percent in 2022 to a record nearly 32 million tons.

Looking at the potential of their LNG sector, the Russians aim to increase annual production to 100 million tons of liquefied gas by 2030, equivalent to about 140 billion cubic meters of pipeline gas. This would enable them not only to significantly increase existing deliveries to Europe, but also to open up new and urgently needed sales markets. In perspective, Russia could oust Australia, which exported a total of 87 million tons of LNG in 2022, from the position of the world’s largest LNG exporter.

Oil, gas and coal: Russia's balance sheet for 2022 and plans for the future


Oil, gas and coal: Russia’s balance sheet for 2022 and plans for the future

In order to achieve this ambitious goal, both the existing projects for the production of LNG must be expanded and new projects must be implemented. As Minister Nowak emphasized in this regard, the Ministry of Energy is working on the technological development of the sector and is also planning to build a total of 18 new gas liquefaction plants in the country. The “implementation and partial financing of four projects for the construction of LNG plants” is already being tackled. The corresponding resources should also be made available for the other projects.

Experts point to the problem that Russia has only been able to build small plants so far, but larger plants are needed to expand LNG production. These have so far been built with the help of foreign companies, which have ceased operations in the country as a result of Russian military intervention in Ukraine and Western sanctions. Therefore, the corresponding technologies and specialists are said to be missing to ensure production in the future.

In addition, Russia currently does not have a sufficient number of LNG tankers and therefore not yet sufficient transport capacity to increase exports. The construction of such ships in Russia is problematic because of the sanctions, because the know-how of foreign producers is now lacking and their own technology is not yet mature.

Substitute for western technology

A key aspect for the implementation of the Russian plans is the process or technology of gas liquefaction, which is both technologically complex and expensive. Because the gas is converted from its original state into a liquid form at temperatures of minus 160 degrees Celsius in order to reduce its volume by around 600 times. This makes it possible to store very large quantities of this liquefied energy carrier and transport it worldwide by LNG tanker.

Russia, which until now has actually concentrated almost exclusively on the expansion of its pipeline network and not on LNG production, has always relied on the technology or equipment of the mostly Western companies for liquefaction, which ended their cooperation with the Russians due to the sanctions. So if the Russian LNG industry wants to remain competitive and strong in growth, it needs to secure its own technology and equipment, preferably as soon as possible.

Seymour Hersh on Nord Stream: "Scholz played the game – and has been tight ever since"

Seymour Hersh on Nord Stream: “Scholz played the game – and has been tight ever since”

Experts are already pointing out that the development of domestic technology for LNG production is one of the top priorities of the Russian government’s work. While there is said to be no certified replacement for Western technology yet, the Russians are still working desperately to solve this problem.

Like the newspaper The Japan Times writes about this, the Russian energy company Novatek has a technology for liquefying gas with the so-called “Arctic Cascade Method”, which is basically already being used in a liquefaction plant in Russia’s largest LNG plant on the Yamal Peninsula in the north of the country. In a recent report by the company, this system is said to have been confirmed in terms of its reliability and high energy efficiency, but Novatek allegedly encountered problems after the system was commissioned in 2021.

In addition, Novatek owns a promising mega-project for the production of liquefied gas in northern Russia, “Project Arctic LNG 2”, which is still under construction Japan Times also relies on Arctic Cascade technology. However, the true potential of this technology can only be recognized when full production is ramped up and all plants remain in operation long enough to demonstrate the reliable functioning of the new technology and thus its effectiveness.

The start-up of the first liquefaction plant is scheduled for the end of 2023 and the work for this should be almost complete. The other two are scheduled to go into operation in 2024 and 2026, respectively. However, there could be problems with the full commissioning of the plant, the newspaper said, after three Western companies went out of business and were replaced by Russian firms.

more on the subject – Planned closure of the Druzhba pipeline: Hungary demands explanation from the EU Commission

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