NOVATEK, Siemens ink framework agreement on decarbonizing LNG production

Russian gas company NOVATEK and German engineering firm Siemens Energy signed a framework agreement on initiatives that will help decarbonize NOVATEK'S LNG activities.

The two companies announced a broad "strategic partnership and cooperation" agreement on 10 December. Future work will impact NOVATEK's assets in Russia's Arctic north, where decarbonization could have an outsized impact. The world's Arctic regions are especially sensitive to greenhouse gases (GHGs) and their effect on environmental conditions such as air temperature and melting permafrost.

"Our strategy to expand LNG production in the Arctic region is based on utilizing state-of-the-art technological solutions that meet or exceed stringent environmental requirements," said NOVATEK CEO Leonid Mikhelson, in reference to the sensitivities of Arctic hydrocarbon development.

NOVATEK is Russia's largest LNG producer, with the Yamal LNG facility in the Arctic producing nearly 20 million metric tons (MMtpa) of LNG in 2019, according to IHS Markit. NOVATEK's Arctic LNG 2 project reached final investment decision in September 2019, and it will have a similar capacity to Yamal LNG, at 19.8 MMtpa. Arctic LNG 2's projected startup is currently scheduled for 2024.

The firms' announcements were light on detail, instead suggesting that "strategies to be evaluated" could include lowering carbon intensity in power generation and LNG production, as well as starting to use hydrogen to produce LNG.

Hydrogen

Both companies specified one area of focus: building capacity to use "blue" and "green" hydrogen in producing electricity and LNG, rather than using natural gas as a direct feedstock to power each process.

Green hydrogen is generated from water-based electrolysis derived from renewables like wind and solar. Blue hydrogen is derived from natural gas and used in combination with carbon capture technologies, resulting in a lower carbon product.

At least one expert was skeptical the announcement will lead to meaningful decarbonization. "For now, it's purely a PR event, with no particular reduction in carbon footprint," said Maxim Nechaev, a director of consulting in IHS Markit's Russian and Caspian Energy (RACE) service.

Nechaev stressed that the early stage for hydrogen technologies in Russia—and its absence in remote industrial sites such as Yamal LNG on the eponymous peninsula—will hinder deeper carbon reduction.

"The only way they [the companies] can get hydrogen to the LNG plant location is to produce it right there," Nechaev said. "This, in turn, requires power, which is produced by natural gas burn in this remote area—there are no renewable energy generators there."

Nonetheless, the deal advances a years-long relationship between the companies. Siemens supplied four boil-off gas compressors and eight 62-MW gas turbines for Yamal LNG, and Siemens Energy (an independent company spun off from Siemens Group in April 2020) will provide six boil-off gas compressors and three feed gas booster compressors for Arctic LNG 2.

The latest NOVATEK-Siemens collaboration supports Russia's far larger ambition to cement its place as the "fourth pillar" of global LNG supply-after Qatar, the US, and Australia-by the 2030s. That folds into the Russian government's sweeping Energy Strategy to 2035, adopted in June.

The official strategy aims to grow Russian LNG production to between 80-140 MMtpa by 2035, a substantial ratcheting-up from 70-82 MMtpa, which figured in a draft version of the plan from October 2019.

Carbon footprint plan

NOVATEK has laid out its own plan for reducing its carbon footprint. By 2030, NOVATEK aims to have reduced its methane emissions by 4% from its 2019 level, which was 10.44 tons per million barrels of oil equivalent. The company has targeted a 5% reduction of GHGs from its LNG production, also compared with its 2019 total, or 0.263 tons of carbon dioxide equivalent per ton of LNG.

NOVATEK's environmental efforts reflect the current tone of climate-minded investors more than government policies, and are primarily a way of staying competitive with other international firms, said Anna Galtsova, a research director in IHS Markit's RACE practice.

"I don't think that Russian companies feel the pressure on environmental issues from the government," Galtsova said. "These companies want to be on the same road as global majors. They care much more about their investment community attitude rather than the Russian government."

From a social perspective, Russia's Arctic hydrocarbon developments has stirred controversy for decades. Since May, an oil spill at Norilsk, another Russian Arctic area, has provoked outcry from domestic and international environmental groups. The region's heavy oil and gas activity, crumbling infrastructure, and thawing permafrost have many observers worried that such incidents could become more frequent in the future.

The world's polar regions are especially sensitive to climate change. Arctic regions like those in Russia are warming between 2-2.5 times more quickly than the global average, according to scientific consensus. Mitigation of climate change is "of paramount importance" as the company seeks to reduce its carbon footprint in the Arctic ecosystem, NOVATEK's Mikhelson added.

Beyond LNG, Arctic activity stands at the heart of Russia's gas production plans. The bulk of reserves are found in the Arctic region of Yamal-Nenets, the site of 80% of gas production in Russia—and 15% of the global total, NOVATEK said.

Yamal-Nenets holds about one quarter of Russia's proven and probable, or 2P, reserves for oil and gas, making the region one of the world's "super basins," according to IHS Markit. Russia ranked as the 6th-largest emitting country for GHGs in 2019, IHS Markit data show.

Posted 23 December 2020 by William Fleeson, Senior research analyst for Executive Briefings, IHS Markit