Gazprom Struggles With Its Mega LNG Project in the Baltic Sea

On March 15, Russia’s leading business news outlet, Kommersant, revealed that Gazprom hit another obstacle in realizing its anticipated mega-project in the Baltic Sea—“Baltic LNG.” According to the article, the engineering, procurement and construction (EPC) contractor responsible for the investment has either been dismissed or resigned (Kommersant, March 15). This is not the first time that reports have surfaced about Baltic LNG’s troubles. Nonetheless, Russia seems determined to continue with the project, which should come as no surprise since the planned natural gas processing and liquefaction complex in Ust-Luga is expected to handle as much as 45 billion cubic meters (bcm) of gas per annum (Gazprom.com, accessed April 7).

Discussions and studies pertaining to Baltic LNG were initiated almost 20 years ago; and since then, the project has evolved multiple times. In its latest form, revealed back in 2019, the proposed Ust-Luga complex is to integrate a liquefaction plant with the gas processing facility. Therefore, the project would deliver not only LNG (13 million tons per annum) but also ethane (4 million tons per annum), liquefied petroleum gas (LPG—2.4 million tons per annum), and grid-to-go natural gas (19 bcm per annum) (Gazprom.com, March 19, 2019). The feedstock, namely ethane-containing gas, is to be supplied from Gazprom’s deposits in northern Siberia.

The project is obviously a huge expense—its total cost is estimated at $25–30 billion. And the funding issue is especially troublesome for the Russian side, which currently lacks foreign investors. Royal Dutch Shell effectively withdrew its commitment in 2019, opposing the decision to build an integrated gas processing complex instead of a liquefaction plant (TASS, June 24, 2019). Consequently, Baltic LNG is being pushed only by Gazprom itself and Russian company RusGazDobycha, owned by Artem Obolensky, who is a longtime partner of another oligarch close to the Kremlin, Arkady Rotenberg. Such a business configuration requires financial support from the Russian state, and this, in the current circumstances, may not be easily accessible. Already back in May 2020, Russian state development corporation VEB.RF announced that it would not provide money from the National Wealth Fund to support the Baltic gas project and declared that other solutions should be sought, not excluding bringing in foreign partners (RBC, May 25, 2020).

The lack of funding could also explain why Baltic LNG developers are now looking for a new EPC contractor. As Kommersant speculates, Russia might be eager to employ China National Chemical Engineering Construction Company Limited (CC7) as part of a larger deal aimed at attracting financing from Chinese banks (Kommersant, March 15). Gazprom declined to comment on the story. And yet it may be possible to verify this reporting in the nearest future. The new tender procedures for the Baltic LNG EPC contractor are already underway, and the opening date for bids has been set for April 12.

Clearly, even if the above-named issues continue to delay the project (officially, the first liquefaction plant train is to be put into operation by the end of 2023), Russia is still trying to move ahead with its realization. Despite the problems, Gazprom has secured the funding for preparatory works, including design studies and early construction work on the site. Moreover, on March 26, Baltic LNG investors signed an agreement of intent with the well-known chemical giant Linde Engineering (based in the United Kingdom) regarding engineering services, equipment supplies and the maintenance of the gas processing facility within the Ust-Luga complex (Gazprom.com, March 26). Thus, Baltic LNG is still expected to come to fruition. And this makes it crucial to take into consideration the possible impact of the project’s realization on regional gas markets. Indeed, these potential consequences are often overlooked while the debate focuses on the Nord Stream Two gas pipeline to Germany.

Baltic LNG’s success would mean more liquefaction capacity in the Baltic Sea for Russia than the total combined regasification capacities of the already-existing European import terminals in the region—the Świnoujście LNG terminal in Poland (eventually to reach 7.5 bcm per annum) and the “Independence” floating storage regasification unit (FSRU) terminal in Klaipeda, Lithuania (4 bcm per annum). Of course, such an outcome would not necessarily prompt Gazprom to suddenly start to flood the regional market with its own LNG. After all, the regasification services in Poland are fully booked until mid-2030, for instance. And yet, if this new LNG import terminal comes online, Russia might be able to offer the most competitive price, taking advantage of Ust-Luga’s unique location near St. Petersburg as well as the starting point of Nord Stream Two. Meanwhile, the only similarly large-scale liquefaction plant in Europe is Norway’s Hammerfest LNG, located in the Arctic.