Europe’s unprecedented push to sever all energy ties with Russia has left Moscow scrambling to re-orientate its vast oil, gas and coal exports to Asian markets. But achieving such a monumental feat would likely take years, not to mention tens of billions of dollars in new infrastructure, and Asian buyers may simply not have the appetite of the ability to absorb the extra supplies. Nevertheless, Russia finds itself in a race against time to redirect energy flows eastwards before taking too great a financial hit from Europe rejecting them.
On April 19 Russian President Vladimir Putin ordered his government to draw up plans by June 1 to switch Russia’s pipeline infrastructure from west to east and build the necessary new energy infrastructure.
Since it was set up in 1970s Russia’s existing infrastructure has always been heavily geared towards serving European markets and has long largely ignored delivery channels targeting Asia. The Soviet-era Druzhba pipeline and Russia’s north-west and Black Sea typically deliver around 5mn barrels per day of oil, condensate and other petroleum products, while only about 2mn bpd are shipped to markets in Asia.
Likewise, Russia’s pipelines sometimes send over 200bn cubic metres of gas to Europe, whereas China – the only other major market with a pipeline link to Russia – took only 10.5 bcm last year. And the Power of Siberia that carries that gas only came online in December 2019 after ten years of negotiations.
Russia’s two main LNG export terminals in the Arctic and in the Far East are also very new and can deliver an additional 38 bcm of gas on tankers to markets across the world, but mainly Asia. Sakhalin LNG production started in 2009 and the first train of the Yamal LNG plant went online in December 2017.
In percentage terms, Europe typically accounts for around 60% of Russia’s oil and oil product exports and 70% of its gas exports. Delivering oil and gas to Asia has very much been a recent development and remains small compared to Russia’s main business: selling hydrocarbons to Europe.
With the permanent loss of the European markets now a very real possibility that may happen in the next year, Russia is rapidly refocusing on building up what eastward-orientated pipeline infrastructure it has.
Russia delivers its crude oil to Asian markets via the Eastern Pacific-Siberian Ocean (ESPO) pipeline, which has a capacity of 80mn tonnes per year (tpy), or 1.6mn bpd. ESPO consists of a main pipeline that runs to the Far Eastern port of Kozmino, where oil can be loaded onto tankers for export across the Asia-Pacific, and a spur that runs into China. However, this pipeline is already working at full capacity, so any expansion of this would mean building a new pipeline.
The other main option for crude deliveries to China is through Kazakhstan, via the 400,000 bpd Atasu-Alashankou pipeline. Atasu-Alashankou was originally built to handle Kazakh oil, but since those shipments have fallen significantly in recent years, currently amounting to only 20,000 bpd, the pipeline has been repurposed for transiting Russian supplies.
Employing tankers is another immediate and cheap option, as utilising the existing ports would not require any new investment. Among the tanker projects, Russia can dispatch some of its crude directly to Asian markets on tankers, including the 240,000 bpd Sakhalin-1 project in the Far East and the 160,000 bpd Novoportovskoye field in the Arctic. Russia’s only other option for oil and oil product supplies to eastern markets is by rail, which is relatively uneconomic, but was used in the past by Yukos to sell oil to China two decades ago.
The advantage of both ESPO and the Kazakh route is that they can be used to send oil not only from Russia’s newly developed fields in Eastern Siberia but also from fields in Western Siberia that until now have primarily served European markets. But there are clear infrastructure bottlenecks that would have to be overcome. For years, ESPO has usually operated at close to its full capacity, despite successive expansions.
ESPO could be expanded again to handle extra deliveries to Asian markets, along with the pipelines that feed it. But this would bear a significant cost and could take years to implement. After all, it took a decade for Russia to expand ESPO from the initial 600,000 bpd capacity it had when it was opened in 2009 to 1.16mn bpd,at a cost of over RUB100bn ($1.2bn).
Russia could also send extra oil and oil products to Asia via railway, although capacity has already been strained due to the pandemic, and Europe’s impending coal ban has not helped matters. It could also deliver more oil from its Baltic and Black Sea ports, without having to invest in extra capacity. But sanctions have made it difficult for Russian companies to hire tankers – international tanking companies would be easy to target with secondary sanctions and close this option off to Russia – and the situation could get worse if these sanctions are tightened.
Some 70% of Russia’s gas exports go to Europe and as almost all of this flows through fixed pipelines, changing the direction of gas flows to new markets is a major headache. Russia will find it even harder to divert its gas supplies to Asian markets.
Russia only established a pipeline connection with China in late 2019: the 38 bcm per year Power of Siberia, which delivers gas produced at the Chayandinskoye field, and in a few years it will handle supplies from the nearby Kovyktinskoye field as well, both of which are located in Eastern Siberia. With Power of Siberia currently sending only 10.5 bcm per year of gas to China, Russia will be able to ramp up supplies by a further 27.5 bcm per year over the coming few years – nowhere near the 155 bcm that Russia sent to Europe in 2021.
Russia also struck a second, 10 bcm per year gas deal with China in February, for deliveries from fields off Sakhalin Island that will flow via a new border crossing in the Far East. The contractual amount is set to be reached in the mid- to late-2020s.
However, apart from Novatek’s 23 bcm Yamal LNG plant, there is currently no way for gas from Russia’s vast fields in Western Siberia that currently satisfy European demand to reach Asian markets. And the infrastructure necessary to achieve this would be colossal in scale.
Russia faces two main options for redirecting its gas exports eastwards, and both present significant challenges. First, it could accelerate the development of LNG exports, building new liquefaction plants in the Arctic and linking them to fields that previously served Europe. However, there are huge question marks about Russia’s ability to achieve this.
Russia’s largest gas supplier Gazprom has been trying to develop a second LNG terminal to complement the Sakhalin-2 plant in the Far East for years, without success. Novatek has enjoyed better success. But it will now struggle to implement new projects as financing has dried up in the wake of sanctions, and its French partner TotalEnergies has said it will not commit to any further investments in Russia.
Novatek’s second plant, Arctic LNG-2, was due online in 2023. But with the exit of several financiers, its fate is also up in the air. Sanctions also bar Western companies from supplying equipment and technology for LNG plants in Russia, and Russia largely cannot develop these things itself.
Russia embarked on a localisation drive after relations with the West collapsed in 2014, aimed at making its oil and gas industry more sanctions-proof by developing local manufacturing. But the results have been largely disappointing. Novatek won praise for developing its own liquefaction technology, Arctic Cascade. But after trialling the technology at Yamal LNG, Novatek CEO Leonid Mikhelson lamented in September last year that “it works, but it is bad.” He blamed Russian manufacturers for poor workmanship, noting that the company had brought claims against almost all the suppliers involved.
The second option for Russia is building thousands of kilometres of pipelines to transport its vast Western Siberian gas reserves to China. Russia has already been working on the construction of such a project for several years. Power of Siberia 2 would deliver up to 50 bcm per year of gas produced on the Yamal Peninsula in the Russian Arctic to China via Mongolia – a third of what Russia currently exports to Europe and the same capacity as the now iced Nord Stream 2 gas pipeline from Yamal to Germany. But while current market conditions are highly favourable, Moscow and Beijing are yet to clinch a gas supply deal to support the pipeline’s construction, and negotiations could take some time. After all, it took the two sides over a decade to agree a contract to underpin the first Power of Siberia.
And there are limits to how much gas China will really want to take from Russia. The largest energy consumer in the world, China has long pursued a policy of import diversification. It avoids relying on any one supplier for too great a share of its energy, and it has several other options for extra gas, including Turkmenistan and various LNG exporters, including Australia.
The bottom line is if Europe bans the import of all Russian oil and gas the Kremlin has a very serious problem indeed. It would have to rely on unreliable tankers and trains to start with, as the first new pipelines would only come online in the next five years, with the larger capacity pipelines like the Power of Siberia 2 taking yet another five years or more to appear.
In the meantime, that would force Russia to shut down many oilfields and lower output by several millions of barrels a day, according to International Energy Agency (IEA) estimates, and once turned off many of those marginal fields would be extremely difficult to restart.
Europe is in a similar bind, as it will also take time to redesign energy supplies to cut Russia out of the loop, but it appears from EU plans that this could be done inside the next two years. The race is one as both sides press forward to change the basic make-up of their energy infrastructure as fast as possible. And on balance it looks like it is Russia who has the disadvantage.