TOKYO -- Russia has commenced shipments of liquefied natural gas from the Arctic as part of one of the world's largest LNG development projects, and it owes China a big "thank you."
The Yamal Peninsula LNG project in northwestern Siberia is a $27 billion endeavor. After the West enacted economic sanctions against Russia over its annexation of Crimea, it was China that stepped up to provide vital funding, acquiring a roughly 30% interest in return.
China clearly had its own growing appetite for energy resources in mind. But almost certainly, it also factored in future development opportunities and the use of the Northern sea route along the Russian Arctic.
"A fantastic sight," Russian President Vladimir Putin said on Dec.8, when asked what he thought of the airfield in the Yamalo-Nenets village of Sabetta, where the plant is situated. Putin said he was confident the next phases of the plant would proceed quickly.
"This is only the first stage of the project," he said. "I'm sure the second stage will also be launched ahead of schedule, as early as next year, and the third stage probably also, at the end of next year, or the beginning of 2019 at the latest."
Russia's second-largest natural gas producer, Novatek, owns 50.1% of the Yamal LNG project. France's Total and China National Petroleum Corp. each own 20%. The remaining 9.9% is held by the Silk Road Fund, which is a Chinese state-owned investment fund.
Once fully operational, Yamal LNG will have the capacity to produce 16.5 million tons of LNG a year, which is equivalent to about 20% of the yearly imports by Japan -- the world's largest LNG consumer. China's CNPC has the right to import 3 million tons each year for 20 years.
The Yamal LNG project hit a snag in 2014, when Russia annexed the Crimean Peninsula and the U.S. and European Union retaliated by enacting economic sanctions. The penalties made it difficult for Novatek to procure funds from Western financial institutions.
China offered a helping hand through the Silk Road Fund in 2015, providing 730 million euros ($859 million at the current rate) to Novatek. In a policy document released this past June, the Stockholm International Peace Research Institute concluded that China had become the main source of funds for Russia's Arctic Ocean development, bankrolling 60% of the Yamal LNG project when you consider credit lines extended by the Export-Import Bank of China and the China Development Bank.
There is no shortage of LNG in the global market. In fact, there is an oversupply and numerous sellers, from Qatar to Australia. So it is fair to ask why China was so eager to invest in the Arctic project.
One reason is that China wanted to boost its bargaining power, according to Daisuke Harada of the Japan Oil, Gas and Metals National Corp., or Jogmec.
Harada explained it this way: CNPC will begin importing natural gas from Russia's largest natural gas company, Gazprom, in 2019 via a pipeline across eastern Siberia. By teaming up with No. 2 Russian player Novatek, CNPC will be able to compare the costs of LNG and pipeline natural gas, weigh one against the other, and gain an edge in price negotiations.
Another probable reason: China is taking advantage of the West's sanctions against Russia to make inroads in the development of Arctic natural resources.
The Arctic is sitting on 1,670 trillion cu. feet of natural gas, accounting for 30% of global undiscovered gas resources, according to a 2008 estimate by the U.S. Geological Survey. Of all the countries that border the Arctic Ocean, it is Russia that lays claim to the largest area. And in addition to natural gas, there is also a real possibility that oil fields can be developed in the Russian Arctic.
The Northern sea route around Siberia is also of interest to a China that has been actively expanding its maritime presence, mainly in the South China Sea and Indian Ocean.
Travel to Asia from Yamal via the northern route requires 15 days, according to Total -- half the time needed for the route through the Suez Canal. The downside is the high cost of operating icebreaker tankers. By working with Novatek on the Yamal LNG project, CNPC can gain experience with transportation and more quickly determine the practicality of the route.
Global warming could make the route a lot more useful, Harada noted. The Arctic Ocean is closed by ice during the winter now, but higher temperatures could bring a day when the Northern sea route is open to navigation all year round.
China, Harada said, is looking at the Arctic as an addition to its Belt and Road economic development initiative, which stretches from Asia to Europe.
Putin said as much himself. "The Silk Road has reached the very north. We will merge it with the Northern sea route, and that will be just what is needed, and we'll make the Northern sea route a Silk one," the Russian leader told Chinese representatives.
Of course, while the lure of natural resources has put the Arctic Ocean in the spotlight, this is also an ocean across which the U.S. and Russia sit face to face. As in the Cold War, security issues will continue to loom large.