Feature: Russia, Ukraine and LNG carriers

Energy crises brought about by geopolitical events raise immediate fears about fuel supply security at the buyer’s end of the supply chain and the detrimental economic impact at the seller’s end. While hopes may be high that the principals behind the conflict resolve their differences quickly, the pragmatists lose no time in determining how best to line up alternative sources of fuel to fill any gaps.

The tensions between Russia and Ukraine that have been ratcheting up since the Kremlin annexed the Crimea in March 2014 have been taken to an entirely different level since the downing of Malaysian Airways flight MA17 over the eastern Ukraine on 17 July. Although nothing is known for sure, allegations are rife that the airliner was shot down by suspected pro-Kremlin separatist rebels in eastern Ukraine using surface-to-air missiles and launchers provided by Russia.

The apparent reluctance of Russia to lend their support for a full investigation of the air accident and to pursue the perpetrators, as well as concerns that Moscow is stepping up its intervention in Ukraine, have prompted the US and Europe to put aside their differences and agree sharply escalated and joint economic sanctions against Russia. The package of measures targets Russia’s financial, energy and military sectors.

Brussels does make the proviso that the latest round of sanctions should not affect current energy supplies and that the measures should be reversible. However, they would delay major new energy projects such as the South Stream pipeline to bring Russian gas into Europe along a southern route and the Yamal LNG project in the Russian Arctic, the go-ahead for which was recently agreed.

The decision by the US and Europe to press ahead with these punitive measures on a united front raises key questions, not least of which is, will the sanctions work? Following on, will Europe be able to get by if Russian pipeline exports of gas are halted, and what will happen if the prestigious Yamal LNG scheme does not proceed?

The country currently has one LNG export project in operation. This is the two-train Sakhalin 2 plant on Sakhalin Island in the Russian Far East which exports LNG to customers in nearby Japan, Korea and China at a rate of 10 million tonnes per annum (mta).

Yamal LNG is an entirely different proposition, and not just in terms of scale. The USD 27 billion project calls for the construction of three trains with an aggregate capacity of 16.5 mta, with output from the first train scheduled to reach the market by 2017. Sales contracts have been agreed for the bulk of the production.

Yamal is extending the LNG industry’s technology envelope in a major way and Russia had been anxious to bask in the accolades that will attend project realisation. Because the waters around the Sabetta terminal will be ice-covered for all but a few summer months, a fleet of 16 icebreaking LNG carriers as well as 10 further LNG shuttle tankers are needed to service the scheme. The first 10 of the icebreaking LNGCs, which each cost USD 315 million, have recently been ordered at the Daewoo yard in Korea. They are the industry’s first icebreaking LNG carriers.

The Sabetta plant and the newbuilding vessels are being constructed according to a tight timetable to ensure the contracted completion dates are achieved. The ice cover restricts the time that plant and equipment can be delivered to Sabetta, so much of the fabrication work is being completed in modular fashion in more hospitable locations. This means that the delivery of the fabricated units and their hook-up at the site must be carefully coordinated within the short timeframes available.

Looking at the bigger picture, Russia is the world’s largest exporter of natural gas and second largest exporter of oil. Together the two fuels account for almost 60% of the country’s export earnings. Gazprom, the state gas company, supplies 30% of Europe’s gas, via pipeline, and one-half of these deliveries transit Ukraine. Gazprom has issued scarcely veiled threats that its gas exports to Europe will be affected if sanctions are expanded.

Ukraine itself is heavily reliant on Russian pipeline gas and these shipments are likely to be the first to be curtailed if the dispute escalates. In such a scenario Europe, with a key source of its own gas supplies in jeopardy, would feel obliged to assist neighbouring Ukraine and try to find some additional supplies of gas which it could despatch eastwards.

In one sense some of the pressure on Europe has been eased in recent years due to the reduced demand for gas. The region’s long-running economic recession has taken the bottom out of the gas market.

The downturn in European gas demand coincided with the earthquake and tsunami in Japan in March 2011. Overnight, with the shutdown of all its nuclear reactors, Japan’s need for imported LNG jumped by 17 mta and the price of gas in Asia skyrocketed. European utilities were content to let the cargoes that had been earmarked for them sail on long voyages east to Japan where they fetched much higher spot market prices. The LNG seller and ship owner camps have been particularly happy places in recent years.

In 2013, all nine European countries that import LNG suffered declines in the volumes purchased. European LNG imports fell to an aggregate 33.9 million tonnes, 28.5% down on the previous year. The performance continued a trend because in 2012 European LNG purchases had slumped 27% compared to 2011, when 65 million tonnes of LNG was shipped to Europe.

Returning to Russia, a quick look at that country’s own struggling economy, with its heavy reliance on energy exports, would seem to indicate that a quick resolution of the current set-to with the West is in the country’s best interest. Oil and gas output is faltering and access to western capital and technology is needed if the next tranche of oil and gas fields, in more remote, less hospitable locations, is to be exploited.

The confrontation has highlighted the extent to which Europe is reliant on imported energy. As indicated, there will be scope for one source of imported energy – LNG – to be stepped up in the years ahead, as the myriad of new liquefaction plants now under construction and in the final planning stages come on stream. Europe already has ample LNG receiving terminal capacity in place.

The recently announced proposals for LNG export terminals in eastern Canada and the latest additions to the list of 25-plus US LNG export schemes may have sounded like pie in the sky just a few months ago. Now, in the aftermath of the loss of flight MA17, there are bound to be a number of European gas utilities paying much closer attention to such offerings.

Over the longer term Europe’s energy planners, both at national and regional level, should no doubt be working on some coordinated plans that incorporate major commitments to nuclear power, shale gas and renewables, along with the associated distribution infrastructure.

In the meantime LNG stands poised to step into any breaches which may be caused by interruptions in the supply of Russian pipeline gas. The ability of LNG to ride to the rescue will be greatly enhanced from 2015 onwards when the next wave of Worldscale LNG production plants begins coming on stream.

Editor’s Note: Mike Corkhill is a technical journalist and consultant specialising in oil, gas and chemical transport, including tanker shipping and chemical logistics. A qualified Naval Architect, he has written books on LNG, LPG, chemical and product tankers and is currently the Editor of LNG World Shipping.
Source: BIMCO