(Yicai Global) Jan. 13 -- The Yamal Peninsula in the northwest of Russia's Siberian plains is home to the country's most abundant gas reservoir and Yamal LNG, the world's largest natural gas project.
The project, China's largest economic cooperation with Russia, will drive development of the energy industry and Russia's border towns while providing clean energy for China, optimizing its energy structure and reducing the severe air pollution in the country.
The project site, located in Russia's polar regions, is still under construction. Evgeniy Kot, the project's general manager, has seen three years of its construction and said that 70 percent of the project's engineering has been completed. "The first LNG production line will be put into operation by this time next year," he added.
Fighting the Cold
The world has recently increased its clean energy demands to reduce the effects of climate change, making the polar region an inevitable target for future energy development. The North Pole has 47 trillion cubic meters of recoverable reserves of gas, making up 30 percent of global unexplored gas reserves, a report by the United States Geological Survey shows.
Yamal Peninsula and the surrounding offshore areas are the main polar locations where Russia plans to extract natural gas. The Yamal LNG project is expected to achieve an annual output of 16.5 million tons of liquefied natural gas and one million tons of gas condensate, with a total value of USD27 billion.
Extensive gas reserves close to the earth's surface give a high-purity gas with almost no sulfuretted hydrogen. The region's climate means experts will need to exert serious effort in order to extract these resources.
The extremely cold weather has the project staff working alternately in two teams, said a worker on site. When one team is working, the other will rest and seek warmth. When wind speed reaches 10 meters per second or the temperature is lower than 40 degrees Celsius. Russian laws do not allow workers to work long-term in extreme temperatures, so staff are ordered to return home to rest after every 45-day stint.
The cold also poses a challenge for construction devices and materials. Mobile phones brought to the area quickly lose power or shut down completely after only 10 minutes' exposure to the cold.
Constructing a factory in such a special geological environment demands that construction workers overcome significant difficulties. The permafrost earth under the factory turns hard in winter and thaws slightly in summer, impacting the stability of the building's foundations. To solve this, 23,200 steel bars were installed in the foundations of the Yamal project's main building, preventing the frozen earth layer from deforming.
Food and resources are also scarce and must be shipped by sea or air. The long journey makes food costs prohibitive.
Such a large project requires vast funding and could not be funded by a single company or government. The Yamal project is a prime example of where multiple countries are required to cooperate and work together towards a unified goal. Russia, China and France have been working together on the Yamal project for many years.
The Yamal "Megaproject"
In early 2014, China National Petroleum Corporation signed a strategic cooperation agreement with Russia-based Novatek, in which the latter holds a 60 percent stake of the project, with CNPC and Total SA [NYSE:TOT] holding 20 percent each. The agreement formed the initial framework for the Yamal LNG project.
In December 2015, the Silk Road Fund of China signed an equity transfer agreement with Novatek, witnessed by China's Premier Li Keqiang and Russian Prime Minister Dmitry Medvedev. The agreement says the Silk Road Fund will buy 9.9 percent equity in the project from the majority shareholder Novatek, which will maintain a 50.1 percent stake. This triangular cooperation sees Russia leading construction, Total providing technology and support, with China offering funds and equipment.
Companies from other countries were also attracted to the project, including France's Technip [ENX:TEC], Japan's JGC Corporation [TYO:1963], China National Offshore Oil Corporation and South Korea's DSME [KRX:042660].
China's engagement in the Yamal project marks the country's first experience in the whole process of developing liquefied natural gas – from energy exploration to development, production, and the construction and operation of natural gas factories – said an insider at the CNPC's Russian branch. This sets the tone for future Chinese projects of a similar nature.
A New Center of Energy Supplies Serving China and Russia
As the largest Chinese-Russian economic cooperation, the project carries important weight in the internal reforms of both countries.
In Russia, the project acts as a pathfinder for the country's Arctic exploration. It plays multiple important roles in its development of Arctic waterways, Asia-Pacific market development and the revitalization of Russia's flagging economy.
As the Yamal project's main market encompasses the Asia-Pacific region, well-priced transportation is key. To save time and reduce costs, the project uses the Arctic Northeast Line waterway, which starts in Yamal and heads through the Arctic Ocean and down into east Asia across the Bering Strait.
To meet transport demand, the Yamal LNG has ordered 15 icebreaking LNG tankers, each capable of carrying 170,000 cubic meters of liquefied gas, allowing year-round delivery to international markets. In summer, ships take the northern route, but head west for the entire journey in winter, with the gas piped to an ordinary transport ship at the port of Zeebrugge, Belgium, then transported to its destination.
Despite the project's location, it still competes with other natural gas projects in the Asia-Pacific.
Low production costs mean the Yamal project can earn profits even when oil price expectations are negative. The cost of direct extraction in Yamal's South-Tambeyskoye gas condensate field is approximately USD0.5 per barrel of oil equivalent, which gives the project a competitive edge in international markets.
The cost advantages have prompted Russia's consolidation of the Western European natural gas market, development of new Asian gas markets, and act as a buffer to international oil and gas price fluctuations.
Stable operation of the Yamal LNG project will lead to a new economic artery connecting Russia and Asia through the northern route, driving the development of Russia's northern border regions.
The completion and operation of the project will add a new source of liquefied gas for China, and help it increase procurement flexibility. Ninety percent of the products sent from the Yamal project are under contract to be exported to Asia-Pacific countries for over 20 years, ensuring a consistent supply of liquefied gas to China.
The new 'Arctic gas' is also expected to optimize China's energy structure and ameliorate air pollution within the country.
In China's 13th Five-year Plan for energy development issued at the end of last year, the country advanced an ambitious plan for low-carbon transition in energy development. One of the plan's most important steps is to expand the use of natural gas, making it one of the main energy sources used in China.
Though natural gas from the North Pole can boost China's natural gas supply, the country's dependence on natural gas has continued to increase in recent years, arousing concerns and anxiety, said Li Yangzhe, deputy director of the National Energy Administration said at the China Grand Energy Transition Forum 2016. The degree of China's external dependence on the fuel must be controlled within a reasonable range, he added.