History will describe Russia’s Ukraine war as tragic, brutal and unnecessary. In this context, it is useful to reflect on the views of the political scientist John Mearsheimer, who has been one of the most famous critics of American foreign policy since the end of the Cold War. He is a proponent of great-power politics — a school of realist international relations which assumes that in a self-interested attempt to preserve national security, states will pre-emptively act in anticipation of adversaries. For years, Mearsheimer has argued that the United States, in pushing to expand NATO eastward and establish friendly relations with Ukraine, has increased the likelihood of war between nuclear-armed powers and laid the groundwork for Vladimir Putin’s aggressive position toward Ukraine. Indeed, in 2014, after Russia annexed Crimea, Mearsheimer wrote that “the United States and its European allies share most of the responsibility for this crisis.”1
In a recent article published in The Economist, Mearsheimer argued that the war in Ukraine is the most dangerous international conflict since the Cuban missile crisis in 1962.2 He made clear that there is no question that Putin started the war and is responsible for how it is being waged. But he emphasized that the reason why Putin did so is another matter.
As Mearsheimer mentioned, there is now a serious threat of escalation beyond Ukraine, not to mention the danger of nuclear war. Nonetheless, the US and its allies are hoping to inflict a humiliating defeat on Putin and maybe even to trigger his removal from power. Why are the US and NATO taking such a confrontational stance rather than trying to find a solution to end the war as soon as possible?
The Struggle for LNG Dominance
In this essay, I will discuss the Ukraine war as a hidden war between the US and Russia over liquefied natural gas (LNG). After Russia’s 2014 annexation of the Crimean Peninsula, the US became alarmed by the successful LNG production from the Yamal Peninsula in Siberia in December 2017 by Novatek, Russia’s second-largest producer of natural gas. US authorities suddenly woke up to the massive potential of Russia’s Arctic onshore gas-based LNG revolution. Clearly, the rise of Russian LNG became a real threat to the US shale gas revolution. The success of Yamal LNG was the signal for the largescale Gydan LNG development on the Gydan Peninsula in northern Siberia. With a capacity of 20 million tonnes per year (mt/y) and at a competitive price, Gydan is eye-catching. The Russian government announced that the country’s LNG export capacity could reach up to 140 mt/y by 2035.3 On top of its pipeline gas dominance in Europe, Russia’s Arctic LNG was potentially a fatal blow to US LNG exports to Europe. This was too much for the US to accept.
As of 2021, Russia was the world’s third-largest oil producer and second-largest gas producer. According to the International Monetary Fund (IMF), Russia’s gross domestic product of US$1.71 trillion — the world’s 11th largest — is heavily dependent on energy resources, which account for 20 percent of the country’s GDP and 40 percent of its financial revenues. According to the Russian central bank, in 2021, the country’s total exports reached US$489.8 billion. Of that, crude oil accounted for US$110.2 billion, oil products for US$68.7 billion, pipeline natural gas for US$54.2 billion and liquefied natural gas for US$7.6 billion.4
The scale of Russia’s crude supply to the European market is significant. In 2021, Russian crude and condensate output reached 10.5 million barrels per day, making up 14 percent of the world’s total supply. Russia exported an estimated 4.7 million bpd of crude to countries around the world. China is the largest single importer of Russian crude (1.6 million bpd), but Russia exports even greater volumes to buyers in Europe (2.4 million bpd). In the same year, Russian refineries processed 5.6 million bpd of crude and exported 2.8 million bpd of oil products. In 2021, Russia exported 750,000 bpd of diesel to Europe, meeting 10 percent of demand.5
The gas dominance in Europe is even larger. Russia is second only to the US in natural gas production, and has the world’s largest gas reserves. It is the world’s largest gas exporter. In 2021, the country produced 762 billion cubic meters (bcm) of natural gas, and exported approximately 210 bcm via pipeline. The European Union imported an average of more than 380 million cubic meters per day of gas by pipeline from Russia, or around 140 bcm for the year as a whole. Around 15 bcm was delivered in the form of LNG, making a total of 155 bcm imported from Russia — around 45 percent of the EU’s gas imports in 2021 and almost 40 percent of its total gas consumption.6
Expensive US LNG
After the collapse of the former Soviet Union, Russia transformed itself into the leading oil, gas and coal supplier to the EU market. Before the February 2022 invasion of Ukraine, the EU’s dependence on Russia’s gas, oil and coal was 40 percent, 25 percent and 45 percent, respectively. In early 2022, Russia was covering 55 percent and 40 percent of Germany’s gas and oil imports, respectively.
For US LNG, with its uncompetitive price, the EU’s heavy dependence on Russia’s competitively priced pipeline gas was an insurmountable obstacle to penetrating the European gas market. The first target for the US was to block the Nord Stream pipeline with its 55 bcm per year supply capacity. Had Russia’s Nord Stream 1 and 2 with 110 bcm/y and Blue Stream (with 16 bcm/y) and Turkish Stream (with 31.5 bcm/y) operated at full capacity, the US would have continued to be sidelined from Europe’s gas market.
In retrospect, the Ukraine war offered the US a bonanza in terms of dismantling Russia’s dominant role in supplying energy to Europe. It is possible that the US was well aware of the opportunity that would arise should the possibility of Ukraine joining NATO provoke Russia into invading it. What is an indisputable fact is that US LNG had virtually no chance of challenging Russia’s dominant role in Europe’s gas market prior to the Ukraine war. History will say that the US became a very natural beneficiary of a very unfortunate war triggered by the Russian invasion but will not be generous enough to say that Russia had to take its own steps to stop Ukraine’s membership of NATO.
Pivot to China
The Ukraine war also will be a turning point in accelerating Russia’s own pivot to Asia. Gazprom’s initiative to promote the Irkutsk and Sakha area’s gas exports to northern China began in early 1997, and it took 17 years to strike the deal for the POS-1 pipeline from Siberia to China. Considering that Beijing had already constructed three large-scale trunk gas pipelines (with a capacity of 55 bcm/y) between three central Asian republics (Turkmenistan, Uzbekistan and Kazakhstan) and Xinjiang Province, the introduction of the POS-1, with a full capacity of 38 bcm/y by 2025, was an improvised product of strengthened Sino-Russian co-operation. Ironically, the Ukraine war is set to be the driving force for Moscow to accelerate development of the pipeline to a capacity of 50 bcm/y, even though it cannot be completely ruled out that the pipeline capacity will only reach 20-30 bcm/y. In other words, the Ukraine war laid a solid foundation for Moscow’s change in focus from the EU market to the Chinese market, despite some reluctance on Beijing’s part to allow Russia to become a swing supplier. The war in Ukraine will ensure that Gazprom will fast-track development of POS-2 via Mongolia to China. This will require President Xi Jinping to approve the Mongolian route, even though the National Development and Reform Commission, China’s economic planning agency, in 2002 blocked the export of gas from Kovykta to Hebei Province via Mongolia. The key point will not be whether but when the POS-2 breakthrough will be made.
It is worth noting that in 2021, China also became the largest LNG buyer in the world at 79 million tonnes per annum (mt/y), accounting for 20 percent of global demand. Unlike Japan and South Korea, which have no alternative gas supply options except LNG imports, China has three major supply options based on domestic gas production, LNG and pipeline gas imports. In 2021, the biggest LNG supplier to China was Australia with 29.7 mt, while imports from Qatar, Russia and the US accounted for only 9.2 mt, 4.7 mt and 9.0 mt, respectively. But this LNG supply structure will be fundamentally transformed because the EU has decided to maximize its LNG imports. Asian LNG buyers will have to compete with the EU for LNG supply in coming years. This changed environment will force China to reconsider its previous stance toward the POS-2 gas supply to northern China.
Beijing’s hesitation to allow Gazprom to become a swing supplier is likely to change, because the war in Ukraine has effectively wiped out the lucrative EU market for Gazprom. Ironically, the war is forcing Moscow to accelerate its development of POS-2. Because Russia can no longer maximize its position in negotiations over POS-2 prices, Moscow’s strategy will be to supply the maximum amount of pipeline gas to China as soon as possible. China holds all the cards in these negotiations. And like the first POS-1 pipeline, China will drive a hard bargain. Russia is likely to offer very attractive terms — if for no other reason than its own desperation. At the same time, China cannot abuse its market power in this instance, because it needs large-scale pipeline gas from Russia to tame the price of LNG imports.
Collapse of Russia’s Arctic LNG revolution
Before the Ukraine war, Russia’s Arctic LNG revolution was set to be the pride of its LNG expansion in coming decades. The Russian government was fully aware of the massive potential of its Arctic LNG. In December 2020, the Russian Ministry of Energy calculated the total cost of production and delivery of Yamal LNG to Asia at US$7.80 per million British Thermal Units (MMBtu).
If Russia’s Arctic LNG revolution materialized, the flow of the majority of the 60 mt/y LNG supply to the Asian market would have guaranteed easy penetration of China’s LNG market. As shown in the table above, for example, US West Coast LNG’s benchmark price is US$7.70/MMBtu, or US$1.50/MMBtu higher than Arctic LNG 2’s US$6.20/MMBtu. This price difference would be a massive obstacle for US LNG in China.
Since China began to import LNG in 2002, it has taken two decades for the country to become the largest LNG importer. According to a 2022 report by the International Group of Liquefied Natural Gas Importers, global LNG demand in 2021 was 372.3 mt. China became the biggest LNG importer with 79.3 mt, followed by Japan at 74.4 mt, South Korea 46.9 mt, India at 19.4 mt, Pakistan at 8.2 mt, Thailand at 6.6 mt and Bangladesh at 5.1 mt. These top seven Asian buyers imported 240 mt, accounting for 64.4 percent of global demand. Asia’s total was 272.5 mt, or 73.2 percent of world demand. Total LNG imports by 17 European countries was 75 mt — only a little over a quarter of Asia’s level of imports.
When Japan was the biggest LNG buyer, the burden of price set by LNG suppliers/sellers was not taken that seriously until the Fukushima disaster, which forced Japan to experience astronomical trade deficits during the 2012-2016 period. As China’s buying power has expanded, the consensus to adjust the LNG price based on the top three LNG buyers — Japan, South Korea and China — was made for the first time during the second half of the 2010s. This was the first Northeast Asian LNG consumers’ alliance. It is not clear whether another initiative to form a second alliance during the first half of the 2020s can be arranged. One thing is clear –China will refuse to be a naïve LNG price taker, but the collapse of Russia’s ambitious Arctic LNG revolution is very painful for China and other Asian LNG buyers.
Due to the global climate-change agenda and net-zero initiatives, the timeline for the role of fossil fuels is restricted up to 2050, even though both China and India are insisting the timeline be extended to 2060. As mentioned earlier, 2021 global LNG demand was 372 mt, of which 272 mt was from Asian demand.7 In terms of trading value, it is in the range of US$149 billion to US$186 billion if the benchmark price of US$8-US$10/MMBtu is applied. Shell is projecting the demand figure in 2040 will be 700 mt (worth US$280 billion to US$350 billion). Back-of-the-envelope calculations for the period up to 2050 confirm the astronomical scale of money flow. In the 2040s alone, it will be at least US$2.8 trillion to US$3.5 trillion, and that is why all the four major LNG suppliers — Qatar, Australia, the US and Russia — are aiming to develop more than 100 mt of production capacity by 2030.8 It is a massive fortune.
Russia’s Arctic LNG revolution is one of the biggest casualties of the tragic Ukraine war. The ambitious Arctic LNG 2’s first train may survive, but it is not an exaggeration to say that the war has delivered a fatal blow to its second and third trains, not to mention the Arctic LNG 1 and 3 projects. Now, significantly more than 50 mt/y of new production capacity under the Arctic LNG 2, 1, and 3 projects is being questioned. The other three top LNG producers will see no need to offer a competitively priced LNG supply for both Asian and EU buyers, because the war has introduced a very comfortable seller’s market, and ultimately Asian buyers will have to struggle to pay the additional premium.
Astronomical amounts of money are at stake in the battle for global LNG hegemony. The Ukraine war is hiding the real face of the global LNG sector’s brutal money battle. What are the main takeaways?
First, while Russia shouldn’t have invaded Ukraine, and it is paying a massive price for its critical mistake, it is hard to deny that actions by both the US and NATO over Ukraine’s possible NATO membership provoked Russia’s wrong decision.
Second, US LNG producers have become the biggest beneficiaries of this war as Russia’s pipeline gas and LNG supply to the EU was blocked. However, it does not necessarily mean US LNG will fill the vacuum. EU countries are seeking alternative pipeline gas supply options from Nigeria and Algeria to the EU market. The EU is wisely trying to diversify its gas supply options.
Third, the Ukraine war has deprived Russia of its longstanding dream of becoming a swing gas supplier between Europe and Asia. Ironically, against the wishes of the US, the EU and NATO, the war itself will force both Russia and China to strengthen their gas and oil co-operation, as long as the current leadership structure is not fundamentally affected. Asia’s other major oil and gas importer, India, has taken a neutral stance and is a reminder that many Asian countries are not part of the US and EU alliance against Russia. And like China, India is not hesitating to accept significantly discounted crude oil and gas from Russia.
Fourth, the US and EU’s unprecedented sanctions against Russia, together with the EU’s drastic decision to block Russian oil and gas supply completely, is delivering a fatal blow to Russia’s Arctic onshore gas-based LNG revolution, and consequently Russia’s pivot to Asia will be accelerated. If POS-2 supply to China materializes, this will be a good example of the pivot. However, Russia’s status in relation to China has been significantly compromised, and it remains to be seen what impact this will have on Sino-Russian oil and gas co-operation in the coming decades.
Fifth, in the short term, the US LNG export business is the biggest beneficiary because the war has opened the door wide. But in the long term, China will be the biggest beneficiary of this unnecessary war. As for other Asian LNG importers, they will simply be forced to pay higher LNG bills.
1 Isaac Chotiner, “Why John Mearsheimer blames the US for the crisis in Ukraine”, The New Yorker, March 1, 2022, www.newyorker.com/news/q-and-a/why-john-mearsheimer-blames-the-us-for-the-crisis-in-ukraine
2 “John Mearsheimer on why the West is principally responsible for the Ukrainian crisis”, The Economist, March 11, 2022, www.economist.com/by-invitation/2022/03/11/john-mearsheimer-on-why-the-west-is-principally-responsible-for-the-ukrainian-crisis
3 “Russia to increase LNG production to 140 mln tonnes per year by 2035, says Putin,” Tass, Sept. 30, 2021, www.tass.com/economy/1344185?
4 Vladimir Soldatkin, Darya Korsunskaya, Oksana Kobzeva and Elena Febrichnaya, “Factbox: Russia’s oil and gas revenue windfall,” Reuters, Jan. 21, 2022, www.reuters.com/markets/europe/russias-oil-gas-revenue-windfall-2022-01-21/
5 “Energy Factsheet: Why does Russian oil and gas matter?” International Energy Agency, March 21, 2022, www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter
6 “A 10-point plan to reduce the European Union’s reliance on Russian natural gas,” IEA Fuel Report, March 2022, www.iea.org/reports/a-10-point-plan-to-reduce-the-european-unions-reliance-on-russian-natural-gas
7 The seven Asian LNG importers (importing a minimum 5 mt/y) will be forced to pay at least US$360 billion more for the 240 mt of supply for the 20-year period if Arctic LNG 2’s US$6.20/MMBtu option is removed.
8 Russia aimed to produce 140 mt/y by 2035, meaning an additional 110mt/y capacity would have to be added in 13 years. With a price of US$6.00/MMBtu, the sales turnover for 10 years would be US$420 billion.