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Russia Will Fight to Protect Its Key Weapon in the Global Energy Race

At the core of Russia’s hydrocarbon-centric geopolitical strategies for the future are its huge Arctic oil and gas reserves. And while global tensions stay high in the aftermath of 2022’s invasion of Ukraine and the ongoing Israel-Hamas War, the key emergency energy source remains liquefied natural gas (LNG). LNG requires much less infrastructure to be delivered than oil or gas sent through pipelines, so it is generally cheaper overall for sellers to develop and to expand their market share. Given this, it is also quicker and cheaper to increase or decrease delivery amounts at very short notice, as and when buyers require. In short, after massive Russian oil and gas supplies were sanctioned following the 24 February 2022 invasion of Ukraine, LNG firmly became the world’s key swing energy supply. When Russia was contemplating its first invasion of Ukraine in 2014, during which it annexed Crimea, it knew that the global importance of LNG would increase dramatically as a result, so it began to seriously expand its LNG capabilities.

China knew the same as well – because Russia told it what its broad military plans were, according to several senior sources in the U.S. and European energy security complexes exclusively spoken to by over the years. This is why China locked in huge LNG deals with Russia and later Qatar from that point, and doubled down on these deals from a year before Russia’s second invasion of Ukraine in 2022, as fully analysed in my new book on the new global oil market order. It is little surprise, then, that Russia stated just over a week ago that it would do everything it could to scupper new U.S. sanctions imposed on its Arctic LNG 2 project as part of a raft of restrictions targeting individuals and entities associated with Russia's war effort in Ukraine.

The overall aim of the U.S. in dealing with Russia’s far-reaching ambitions in this key emergency source of global energy is to destroy them, according to a senior legal source connected to the U.S.’s Russia sanctions program exclusively spoken to by last week. “Russia has huge [gas] resources in the Arctic, which could make it one of the leading LNG suppliers in the world pretty quickly, and we do not want it creating a dependency on it for these supplies as it did with gas and oil in Europe before [the] Ukraine [invasion],” he said. “[Russian President Vladimir] Putin sets great store by this, and so do we,” he added. Indeed, a sign long ago of how seriously Putin takes the expansion of Russia’s LNG capabilities came with the original Yamal LNG project (effectively ‘Arctic LNG 1’) – the first major attempt to capitalise on its vast oil and gas reserves in the Arctic, as also analysed in my new book.

The Russian Arctic sector comprises over 35,700 billion cubic metres of natural gas and over 2,300 million metric tons of oil and condensate, the majority of which are in the Yamal and Gydan peninsulas, lying on the south side of the Kara Sea. According to comments by Putin, the next few years will witness a dramatic expansion in the extraction of these Arctic resources, and a corollary build-out of the Northern Sea Route (NSR) – the coastal route of which crosses the Kara Sea - as the primary transport route to monetise these resources in the global oil and gas markets, especially to China.

Given this context, Putin additionally saw the Yamal LNG project at the time of its development as vital to Russian interests for three key reasons, according to Moscow-based analysts spoken to exclusively by at the time. First, there was the physical expansion of Russian entities into the Arctic region, clearly marking the country’s claim to all the resources that the entire area has to offer. Second, for a long time Putin had thought that Russia’s status as an energy superpower – and especially a gas one - had not been reflected in its standing in the lucrative LNG sector. And third, LNG was even then a key part of Russia’s ongoing plans to secure as much of the still fast-growing Asia segment of the gas market as possible to bolster its pipelined-gas plans. Such was the Kremlin’s determination to move ahead with its Arctic projects that various Russian entities were inveigled in and around the time when the U.S. imposed its 2014 sanctions to finance key parts of the Yamal LNG project. The Russian Direct Investment Fund, for example, established a joint investment fund with the state-run Japan Bank for International Cooperation with each contributing half of a total of about JPY100 billion (then US$890 million) to it.

The Russian government itself, having bankrolled Yamal LNG from the beginning with money from the state budget, supported it again when sanctions were introduced by selling bonds in Yamal LNG (the program began on 24 November 2015, with a RUB75 billion 15-year issue), and then provided it with another RUB150 billion (US$2.2 billion) of backstop funding from the National Welfare Fund.

One of Putin’s priorities in the build-out of Russia’s Arctic LNG projects – which began in earnest after sanctions were imposed after its 2014 invasion of Ukraine and annexation of Crimea – was to make the industry as ‘sanction-proof’ as possible, as also analysed in my new book on the new global oil market order. This meant Russian company Novatek – the key developer of Yamal LNG (and also the later Arctic LNG 2) - becoming as self-sufficient as possible in this regard. Novatek aimed to localise the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia, and it made great progress in realising this. As part of this objective, Novatek developed the ‘Arctic Cascade’ process for creating LNG.

This is based on a two-stage liquefaction process that capitalises on the colder ambient temperature in the Arctic climate to maximise energy efficiency during the liquefaction process and was the first patented liquefaction technology using equipment produced only by Russian manufacturers. The overall goal of Novatek, as the company stated more than once, was to localise the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia.

So, given its overall goal to stop Russia’s burgeoning LNG industry in its tracks, the U.S. is focusing its immediate efforts on Arctic LNG 2 (the successor project to Yamal LNG). And this is being done for three key reasons, according to the senior U.S. legal source. The first is that it is set to be the biggest of Russia’s LNG projects by a considerable margin. Arctic LNG 2 aims for three LNG trains (manufacturing facilities) of 6.6 million metric tonnes per annum (mmtpa) each, based around the gas resources of the Utrenneye field, which has at least 1,138 billion cubic metres of natural gas and 57 million tons of liquids in reserves.

The first train was successfully delivered in August on the western shore of the Gydan Peninsula in West Siberia. The second and third trains are expected online in 2024 and 2026, respectively. Second, despite Russian attempts to make ‘Arctic Cascade’ fully sanction-proof, there have been signs in the past that the lack of access to Western technology and parts can damage the process’ effectiveness, as also analysed in detail in my new book on the new global oil market order. And third, by trying out different types of sanctions on Russia’s flagship LNG project, the U.S. can work out which ones are most damaging, before it applies them to every other aspect of Russia’s LNG program.

By Simon Watkins for