Saudi Arabia and Russia likely to invest in each other's energy projects

Saudi Arabia and Russia likely to invest in each other's energy projects

A close cooperation between Russia and Saudi Arabia, the world's top oil-producing nations and long-standing competitors, was hardly imaginable a few years ago. However, an oil-production cut agreement signed in December 2016 marked the beginning of thepolitical and economic rapprochement. At the moment, the two countries are considering participation in each other's LNG projects.

Moscow and Riyadh are looking into ways on how to invest into each country's key energy projects, reports Meanwhile, the relations between the two nations have been tense for the last three or four decades since Saudi Minister of Oil and Mineral Resources Ahmed Zaki Yamani decided to ramp up the country's crude output in 1985 after almost a decade of cutting production. The economy of the Soviet Union, which was heavily reliant on oil exports, deteriorated against the background of falling income, as well as the political scene did. Later, when the Saudi-led OPEC tried to implement output restrictions in 1999, Moscow promised to decrease its output by 7% but increased it instead.

In the 2000s, the two countries were vying for the top oil producer spot, and Russia managed to surpass the Saudis in 2009. However, the oil production cut deal signed at the end of 2016 reshaped the relationship. Without Russia's participation, the impact of the cut would be minimal, and Moscow could simply take over the market share ceded by the Saudis. But together (and in partnership with other oil-producing nations) Moscow and Riyadh reached an unprecedented 1,8 million barrel per day supply cut that allowed to curb a global oil glut.

The cooperation has gone beyond the oil scene: in February, Russian Novatek and Saudi Aramco signed an MoU on LNG projects. The details of the agreement remain undisclosed, but it is supposed that Saudis will invest in Russia's Yamal-Nenets Autonomous Okrug, home to Arctic LNG 2 project, which is a follow-up of Yamal LNG. Novatek has an initial agreement on the project with China National Petroleum Corporation and is looking for another major investor.

Arctic LNG 2 project is follow-up of Yamal LNG. Photo: Novatek

The investment should seem a relatively safe bet for the Saudis as the Russian government provides a light taxation regime for LNG projects (a 12-year extraction tax exemption and no export tax). Arctic LNG 2 is designed to be an offshore gravity-based platform instead of an onshore plant, thus, Novatek estimates its cost to be by 30% lower than that of Yamal LNG, while its nominal production capacity is higher (19,8 mtpa against 17,5 mtpa). The project should seem attractive to any major foreign investor, but it is especially interesting to Saudi Arabia as it paves the way for Russian investment in Saudi LNG projects.

Saudi Arabia's gas production can't meet the national demand, so the country still burns a sizeable amount of oil to generate electricity instead of exporting it. As Riyadh cannot export any gas from neighbouring Qatar due to political tensions, it needs other partners to help satisfy its gas needs. Several years ago, Saudi Aramco considered building an LNG terminal on the Red Sea coast, and Novatek's interest in such an endeavour is rather predictable. Overall, the ex-rivals now have a lot to lose in case of a conflict.

By Anna Litvina