The U.S. Tightens The Screw Again On Russia’s Vital LNG Sector

The US Treasury and State departments ramped up the pressure on Russia's critical liquefied natural gas (LNG) sector again last week, the day before the 24 August commemoration day of Ukraine's Declaration of Independence in 1991. A slew of new sanctions were introduced targeting individuals, companies, projects, and trading and delivery mechanisms that are vital to Moscow's LNG operations. This aligns with comments earlier this year from the U.S. Assistant Secretary of State for Energy Resources Geoffrey Pyatt that: "We're going to keep tightening the screws [on Russia's major LNG sector projects such as Arctic LNG 2].  We're going to continue to designate a broad range of entities involved in development of other key energy projects, future energy projects as well, and associated infrastructure including the Vostok Oil Project, the Ust Luga LNG Terminal, and the Yakutia Gas Project."

One of the principal reasons for this focus of the U.S. and its allies on effectively destroying Russia's ship-borne LNG sector is that it now acts as a key source of revenue for the funding of the war against Ukraine, following the decline in pipelined gas and oil exports into Europe after Russia's invasion of the country on 24 February 2022. Russia earned nearly US$100 billion from natural gas and oil exports during the first 100 days of the war in Ukraine before U.S.-led sanctions against Russia began to take effect, as analysed in my latest book on the new global oil market order. Overall, revenues from the higher post-invasion oil and gas prices were much greater than the cost for Russia to continue to fight the war. However, as prices started to weaken further as sanctions increasingly hit Russia, its finances and ability to secure an outright military victory have been significantly reduced. The International Energy Agency (IEA) forecasts that Russia's share of internationally traded natural gas will fall from to about 15 percent by 2030, from around 30 percent in the year before it invaded Ukraine. Its revenue from natural gas sales is projected to drop to less than US$40 billion by 2030, from around US$100 billion in 2021. So desperate has the situation become for President Vladimir Putin that he risked arrest in December to visit Saudi Arabia's Mohammed bin Salman, and the UAE's Mohamed bin Zayed al Nahyan, to plead for greater cuts in OPEC oil production in order to push oil prices up to boost Russia's revenues from the sector. With natural gas and oil income still dramatically reduced, Russia has been increasingly relying on a rise in income from its LNG sector instead to fund its petro-war economy. On 22 November last year, Deputy Prime Minister Alexander Novak stated Russia intended its LNG market share to rise to 20 percent (at least 100 million tons per year) by 2030, from the current 8 percent (around 33 tons in 2023).

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Another major concern for the U.S. and its key allies is that it does not want Russia to regain the level of political and economic influence that it had over the 27 countries that constitute the European Union (E.U.). As at the end of 2021, according to IEA figures, the European Union imported an average of over 380 million cubic metres (mcm) per day of gas by pipeline from Russia, or around 140 billion cubic metres (bcm) for the year as a whole. As well as that, around 15 bcm was delivered in LNG form. The total 155 bcm imported from Russia accounted for around 45 percent of the E.U.'s gas imports in 2021 and almost 40 percent of its total gas consumption. Germany - the de facto leader of the E.U. - was reliant on Russian gas for around 30-40 percent its own commercial and domestic gas needs, depending on the time of year. The country was also at that time the recipient of the highest level of crude oil imports from Russia of any E.U. country - an average of 555,000 barrels per day (bpd), or 30 percent of its total oil imports at the end of 2021/beginning of 2022 - according to the IEA. The U.S. and U.K. believed that it was because of this reliance on cheap and abundant gas and oil from Russia that Germany and the E.U. had refrained from punishing Russia through serious sanctions for its invasion of Georgia in 2008 and its invasion and annexation of Ukraine's Crimea region in 2014, as also detailed in my latest book on the new global oil market order. The U.S. does not want Russia to be in any position to rebuild such an influence over these key member countries of the NATO security alliance or its equivalents in Asia.

This ties into the other main reason why the U.S. continues to target Russia's LNG business so aggressively, which is the increasing geopolitical importance of the energy source in the relationship between Russia and China. Since Russia invaded Ukraine in 2022, LNG has become the most important swing energy source in an increasingly insecure world. Unlike oil or gas that is transported through pipelines, LNG does not require years and vast expense in building out a complex infrastructure before it is ready to transport anywhere. Once gas has been converted to LNG, it can be shipped and moved anywhere within a matter of days and bought reliably either through short- or long-term contracts or immediately in the spot market. In the event of another major global conflict breaking out - as many expect to happen in and around Taiwan within the next three years - the importance of LNG will only increase further, as existing oil and gas land transportation routes from Russia to China are unlikely to remain functional for long. Beijing has been aware of the new status of LNG even before Russia invaded Ukraine, having pre-emptively signed multiple long-term contracts for supply of the gas with several countries beforehand, most notably the world's top exporter of LNG, Qatar, as also analysed in my latest book.

Russian President Vladimir Putin must also have understood how important LNG would become in the world's energy mix from before he ordered the invasion of Georgia in 2008 and the first invasion of Ukraine in 2014. Given the enormous emphasis he placed on Russia pushing ahead with its LNG projects before either of those actions, it may well be that he was expecting much more significant sanctions to be placed on his country's pipelined gas and oil flows at that point by the U.S. and Europe than actually happened. Such was Putin's determination to move ahead with Russia's Arctic LNG projects that various heavyweight Russian entities were inveigled around the time the U.S. imposed its very limited 2014 sanctions to finance key parts of them. 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 bankrolled the Arctic LNG 1 run by Novatek from the beginning with money from the state budget. It then supported it again when sanctions were introduced by selling bonds in Yamal LNG (the first part of the Arctic LNG programs), and then by providing another RUB150 billion of backstop funding from the National Welfare Fund. Russia's Arctic LNG sector is potentially huge, comprising 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. It could also offer an extremely quick transport route to China, as the Arctic ice continues to melt, and this is the spur for Russia's increasingly expeditious build-out of the Northern Sea Route (NSR), as detailed in full in my latest book on the new global oil market order. Everything connected to this Russian plan is also now being rigorously targeted under the U.S.'s focus on the country's LNG sector, as evidenced in these latest sanctions from Washington.

By Simon Watkins for Oilprice.com

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