TOKYO -- Japanese marine shipper Mitsui O.S.K. Lines is breaking new ground in the Arctic Circle by teaming up with one of Russia's largest natural gas producers to export the fuel through the icy seas rather than pipeline, in a venture that promises lower costs but also risks running afoul of American sanctions on Moscow.
In September, Russia's Novatek and MOL announced plans to have icebreaking LNG tankers transport the fuel along the Eurasian Arctic coastline to floating storage units that will assist transfers of the cargo to conventional tankers. The project is expected to cost as much as 160 billion yen ($1.47 billion) with operations to start by 2023.
A joint venture will be established and the Japan Bank for International Cooperation may offer financing The Japanese company will make the final decision on the investment next year, expecting to take a stake in the project of at least 30%.
Right now, the only way to transport LNG from the Arctic is by using icebreakers, which are notorious for poor fuel efficiency and high shipping costs.
To solve the problem, MOL and Novatek will construct floating storage units that will transfer LNG from icebreakers to conventional carriers. The terminals will be located at Kamchatka, in Russia's far east, and in Murmansk, in the northwest. This will minimize the use of the high-cost icebreakers.
The icebreakers will save fuel by traveling a short distance to fill up the floating units with LNG. Fuel-efficient ships will arrive to collect the LNG to transport to points of destination. The enterprise will reportedly save 10% on shipping costs.
For years, Russia has been supplying Europe with natural gas via pipelines. But because European nations have become concerned about their dependence on Russia, Moscow has turned its eyes eastward.
But since its pipelines do not run deep into its Asian region, Moscow was spurred to develop an alternate means to export the fuel, and with the world's leading LNG capacity, MOL was naturally a leading candidate for the job.
To MOL, the partnership with Novatek was a lifesaver. Competition from China and others forced it along with domestic peers Nippon Yusen and Kawasaki Kisen Kaisha to merge container shipping operations last year, cutting off a business that accounted for 40% of revenue.
Now LNG operations have become the company's pillar for growth. The business requires specialized expertise, and only a limited number of shipping companies have experience transporting cargo in the Arctic.
MOL "has a dominant lead compared to the Chinese," said Kazuya Hamazaki, the company's general manager for the LNG carrier division.
Its current fleet of roughly 90 LNG carriers is set to expand to 110 vessels by 2025. The Arctic project would earn MOL 100 billion yen in pretax profit under a 20-to-30-year contract.
The annual global demand for LNG will reach 450 million tons by 2030, according to Bloomberg New Energy Finance, an increase of 166 million tons from 2017. Over 80% of the growth in consumption will originate from Asia.
But fraught relations between Washington and Moscow could complicate the MOL-Novatek deal, especially U.S. sanctions on Russia, stemming from Moscow's annexation of Crimea in 2014. Russia's Yamal LNG project has faced difficulties in financing under the sanctions regime, for example. U.S. companies are also restricted from supplying Russia with technology for shale and deep-sea oil development.
Western companies, like Air Products and Chemicals in the U.S. or Germany's Linde, hold a virtual monopoly on LNG processing equipment. General Electric dominates LNG refrigeration compressors, a core piece of equipment in LNG plants. If sanctions are extended to these technologies, it could deal a blow to LNG production in Russia.
Novatek is making a mad dash to develop LNG processing technology on its own, wooing of corporate Japan could be part of this effort.