Russia Changes LNG Strategy to Adapt to Sanctions

Novatek’s reported plans to build a new LNG plant at Murmansk in northwestern Russia reflect how Moscow is changing its gas export strategy to meet the new challenges forced on it by international sanctions due to its war in Ukraine.

The new 20.4 million metric ton Murmansk LNG plant, which according to the Kommersant newspaper has been discussed at a meeting chaired by Deputy Prime Minister in charge of energy Alexander Novak, fits into Moscow’s plans to develop new infrastructure for redirecting gas exports after the loss of the European market for its pipeline gas.

Moscow sees LNG as a key diversification option and seeks to export 100 million tons per year by 2030, up from 32.5 million tons in 2022.

Scheduled to start at the end of 2027, Murmansk LNG might cost less than projects on the Yamal and Gydan peninsulas in the Arctic, Novatek’s key LNG expansion region. It can also avoid some sanctions-driven problems.

The project can use electricity from the local Kola nuclear plant, meaning it doesn’t need to procure gas turbines for power generation like in the off-grid Arctic where the purchase of turbines is hindered by sanctions.

It should also have no need for ice-class Arc7 LNG tankers, which are crucial for Arctic projects, but which are expensive and difficult to order abroad or build in Russia due to sanctions.

However, it is not clear what liquefaction technology Novatek plans to use at Murmansk LNG’s three 6.8 million ton/yr trains. Novatek’s own Arctic Cascade Modified (ACM) technology is only suitable for 3 million ton/yr trains, while there is no other working technology for large trains in Russia. Novatek did not respond to Energy Intelligence's request for clarification.

New Direction

Murmansk LNG will receive feeder gas from the unified gas transmission system owned and operated by state-run Gazprom. The gas will most likely come from Gazprom’s Arctic fields, which used to supply Northwestern Europe via the now-defunct Nord Stream offshore pipeline and where Gazprom is now understood to have reduced production due to the lack of alternative sales markets.

Gazprom will likely seek export-netback prices for the feeder gas, and it is not clear whether it is ready to finance the construction of a 1,300 kilometer gas pipeline to connect Murmansk LNG to the gas grid unless it can secure greater participation in the scheme.

Gazprom and Novatek have long competed for the Kremlin’s backing for their gas monetization plans, with Novatek pushing for LNG expansion and Gazprom prioritizing pipeline gas exports and — more recently — petrochemicals.

But in the new reality of sanctions and the divorce with the West, the Kremlin might want the two companies to more actively join efforts to diversify Russia’s gas exports to new markets. They are expected to begin their first big LNG partnership when Novatek finalizes the purchase of a 27.5% minus one share stake, which was previously held by Shell, in the Gazprom-controlled 11 million-plus ton/yr Sakhalin-2 project in Russia’s Far East.

Arctic Shift

With gas coming to Murmansk LNG from Gazprom’s fields, Novatek can save its own resources on the Yamal and Gydan peninsulas for other future projects. However, it might have to postpone the proposed 20 million ton/yr Arctic LNG 1 scheme due to Murmansk LNG.

Both projects are planned to consist of three trains on concrete gravity-based structures (GBS) built at the Novatek Murmansk yard. But the yard only has two docks for GBS construction, which are now building the second and third trains of the Arctic LNG 2 project. The first train is ready and the second is expected in 2024 after which the yard will start building the first train of Murmansk LNG, according to Kommersant. Murmansk LNG is expected to launch the first two trains at the end of 2027 and the third at the end of 2029.

If the plan materializes and other projects are not delayed, Novatek will have around 68 million tons/yr of its own capacity in 2030. Some 46 million tons/yr would be on Yamal and Gydan, comprising 20 million-plus tons/yr at operational Yamal LNG, 19.8 million tons/yr at Arctic LNG 2 scheduled to launch the first train at the end of this year and 6 million tons/yr at two-train Obsky LNG where Novatek might take a final investment decision this year and start production in 2026-27. Novatek also has the non-Arctic 600,000 ton/yr Cryogas Vysotsk facility in northwestern Russia.

The Arctic capacity will be below Novatek’s target level of 57 million-70 million tons/yr by 2030. Slower Arctic expansion would reduce its contribution to Russia’s plans to increase cargo transportation via the Northern Sea Route (NSR), where Novatek’s projects have been seen as key drivers. From Yamal, LNG can now go directly to Asia, Novatek’s key target market, via the NSR, although not year-round at this stage. LNG also goes westward, including to Europe and to Asia via the Suez Canal.

From Murmansk, LNG will likely only go westward, making deliveries to Asia longer and more costly, while Europe’s readiness to buy more Russian LNG in 2027 is a big uncertainty, both because of geopolitical tensions that might persist depending on the war in Ukraine and the expected oversupply on the market due to Qatar’s planned LNG capacity expansion.

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Russian LNG Projects