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Gazprom faces challenges for combined LNG/processing plant in Baltics

E. Gerden, Contributing Writer

Russia’s largest natural gas producer, Gazprom, aims to build a giant project on the Russian Baltic seaport of Ust-Luga. The plans include the construction of a combined LNG and gas processing plant. The project would be jointly implemented by Gazprom with domestic oil and gas producer JSC Rusgazdobycha, after Shell dropped out of the project. Direct management of the new plant would be carried out through a JV, which would also serve as the official operator of the project.

The complex is planned to process up to 45 Bm3y of wet natural gas and produce approximately 13 metric MMtpy of LNG, 4 metric MMtpy of ethane and more than 2.2 metric MMtpy of liquefied hydrocarbon gases. The combination of LNG and ethane production would reduce the cost and risk of the project while improving its economy. If completed, the facility would be the largest of its kind in Russia, overtaking Gazprom’s 42-Bm3y Amur processing plant in the Far East.

The first stage of the plant is planned for commissioning in 2023, while the second stage is slated to come online by the end of 2024. The preliminary design for the complex will be provided by Russian engineering firm NIPI NG Peton, while Germany’s Linde is expected to license some equipment and machinery for the plant.

Most of the produced ethane would be consumed by a gas chemical complex that would be built nearby. Methane not used in LNG production would be exported via the planned Nord Stream 2 gas pipeline, which will be tied to the complex. Feedstock would be supplied by Gazprom-operated natural gas fields in the Nadym-Pur-Tazovsky region of the Yamalo-Nenets Autonomous Okrug.

Project challenges. At present, planned investment in the project is estimated at RUB 750 B; however, according to statements by Alexey Miller, head of Gazprom, this cost estimate is likely not final. A high possibility exists that the total cost of the project will exceed RUB 900 B by the end of 2019.

Most of the funding for the project will be provided by Gazprom’s own investors. The remainder could come from the Russian government and some of the largest state-owned banks, including VTB Bank, Vnesheconombank and others. The initially planned investment of $20 B had envisioned separate plants for gas processing and LNG production.

Russian Deputy Finance Minister Andrei Ivanov said that a portion of the funds for the Ust-Luga project’s implementation may be provided from the reserves of the Russian National Welfare Fund, which is one of Russia’s largest sovereign wealth funds. The government considers the Ust-Luga project as one of the most important energy initiatives for the country over the next several years.

Aside from financing, another concern for the project operators is the production of low-calorific-value (LCV) fuel gas, which faces uncertain demand in the global market.

Another concern is the lack of technical expertise needed to carry out the project. International oil firm Royal Dutch Shell had originally shown interest in the Baltic plant, especially pertaining to supply of its DMR liquefaction technology; however, it has since abandoned its intention to participate in the project.

Shell will instead focus on its LNG JV project with Gazprom, Sakhalin 2. The plant was commissioned by the partners in 2009 and became the first LNG production facility in Russia. At present, the plant produces an estimated 9.6 metric MMtpy of LNG.

Shell’s decision to opt out of the Baltic project could impact the project’s success, both technologically and financially. Gazprom does not have the technology experience needed for the implementation of the project, and will require the assistance of foreign partners, as well as the Russian government. This could also lead to increases in cost beyond the envisaged $11 B.

Other challenges to the project are the continuation of Western sanctions. Russian companies do not have the expertise needed to build large-scale LNG plants on their own, and rely on foreign partners to supply technology. With many possible foreign partners excluded from providing technology and expertise, Russia is seeking help from countries that are friendlier to its regime.

According to Gazprom, implementation of the Baltic project would require a modernization of its existing gas pipeline system. Such a modernization would help organize gas supplies from Nadym and Urengoy in the Russian Artic to the country’s Baltic coast.

Gazprom would need to build additional connections to existing pipelines and upgrade a number of its compressor stations, since only of a few of the stations managed by the company have capabilities for separate gas pumping.

Russia’s export aims. Future LNG output of the Baltic plant would be exported from the Ust-Luga seaport to priority sales markets in the Atlantic region, the Middle East and South Asia. The startup of this new LNG production would allow the company to actively expand into foreign markets, including those in the EU. However, many analysts remain skeptical about this plan in light of the EU’s own attempts to diversify its LNG imports and relatively low prices for LNG in global markets.

Further growth of Russian LNG exports could be prevented by high transport costs. Nonetheless, the startup of the new complex would provide Gazprom and its partners with the opportunity to expand into the growing polyethylene market. Most of the polyethylene that would be produced by the Baltic plant would be exported to Western markets. At present, the EU polyethylene market is dominated by producers from Saudi Arabia and the US.

Demand for polyethylene in China is growing quickly; however, another of Gazprom’s projects—the Amur gas processing plant—is already planned to cater to China’s polyethylene market. The Amur plant, which will involve the participation of Russian petrochemical giant Sibur, will have a production capacity of approximately 1.5 metric MMtpy of polyethylene. GP

Eugene Gerden is an international contributing writer specializing in the global oil refining and gas industry. He has been published in a number of prominent industry publications.


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