Russian firm set to challenge the future of Australian LNG

8 January 2019

This article was written by Dr Elizabeth Buchanan and originally appeared in The Australian.

By 2020, Australia is set to be the world’s largest LNG net exporter. But this will not last as long as Canberra once thought, with Russian firm Novatek set to disrupt Australia’s LNG export dreams. 

Australian’s are lulled into a false sense of security by policymakers who consistently push the global LNG export power narrative. We all know it – the lucky country, rich in resources hook. Sure, we have vast LNG reserves and are situated in the world’s future economic powerhouse: the Asia-Pacific. Basic supply-demand dynamics would have us believe that Australia is well placed to profit from the windfalls of increasing LNG demand in our regional market – demand currently driven primarily by China, South Korea and Japan. Russia’s Novatek is set to challenge Australian LNG strategy by critically outpacing exports and undercutting Australia’s high LNG prices.

Now this is not a traditional tale of Russian foreign energy strategy, of Putin employing energy as a foreign policy weapon to punish unruly neighbours or hold overdependent customers hostage to exorbitant prices. Novatek is not a state-owned and operated firm, the Kremlin does not call all the shots. However, state owned firm Gazprom does hold just shy of a 10% share in Novatek. Novatek is the first non-state-owned firm to be granted resource exploration licenses in the offshore Russian Arctic, for a project dubbed Yamal LNG. The plant is a joint venture owned by Russia’s Novatek, China’s CNCP and The Silk Road Fund, along with France’s TOTAL.

Russia’s Novatek has not masked its export agenda – it is widely known in the commercial sector that Novatek’s business model is to become ‘the worlds cheapest LNG supplier.’ Novatek’s recently unveiled Yamal project - Arctic LNG-2 – is set to reduce production costs of Russian LNG by 30%. This is a significant security threat for Australia. Geographically, Novatek’s LNG plant sits within the ‘polar silk road’, otherwise known as the Arctic’s Northern Sea Route (NSR). As a result of climate change the region is seeing reduced ice thickness making much of the NSR easily transitable for LNG tankers season-round, and in summer navigable without the need for icebreaker support. Novatek’s Yamal plant is also well placed to avoid the increasing security challenges of the Suez and Malacca LNG transit corridors – which both are vulnerable to threats of piracy and slower delivery times due to shipping congestion. From a commercial standpoint, this all makes Russian LNG highly desirable to LNG importers in the Asia-Pacific. Even global energy heavyweights like Saudi Arabia see the long-term significance of Novatek’s Arctic LNG strategy. In 2017, Novatek and Saudi Aramco signed an agreement to collaborate on global LNG projects. Despite Western sanctions on Russia’s energy sector, it would appear Moscow is well and truly able to procure necessary finance when needed.

Novatek is offering a product that is cheaper, can be delivered quicker and has the potential to provide supply security to its customers well into the future. Herein lies the critical challenge to the future of Australian LNG export strategy. Russian LNG exports to the Asia-Pacific is set to be a brutal challenge to Australian LNG strategy. Economists may refute this reality - citing the long-term nature of existing supply contracts or the LNG supply glut the region will see in the near future. However, this misses the point.  Key LNG importers such as South Korea and Japan are not the target of Novatek’s export strategy. These markets are saturated, at least till the late-2020’s. Russian LNG will instead target China, India and ASEAN countries. And we can be sure that Russia will outcompete Australian LNG in these emerging and price-sensitive markets.

Australia well and truly underestimated the progress of Russian Arctic LNG and now must ask the question: can Canberra mitigate this Russian challenge to our prematurely assumed LNG footprint in the Asia-Pacific? Perhaps our policymakers start with a refresher course on energy security 101 – specifically the concept of demand security. Meanwhile, Russia’s Novatek will plough ahead in increasing its Asia-Pacific LNG customer base, diluting more and more of Australia’s market share.