More developments are underway in Russia’s energy sector that show how the country is still struggling to get more liquefied natural gas (LNG) projects funded amid U.S. sanctions as well as underscoring its growing bilateral relations with Riyadh. 

Anglo-Dutch oil major Royal Dutch Shell said on Wednesday that it had made a decision to exit Gazprom’s 10 million ton per annum (mtpa) LNG project slated to be built near the Baltic port of Ust-Luga in northwest Russia. Cederic Cremers, Shell Russia Chairman, said the company decided to withdraw from the project after Gazprom’s decision to change the development concept towards full integration of its LNG facility and gas processing plants. LNG is natural gas that is cooled to -260° Fahrenheit, the temperature at which natural gas becomes a liquid so it can be more easily and economically transported on ocean going carriers. Once it reaches its destination, it’s changed back to its original form.

The Shell decision is a setback for the Russian state-owned gas major since it will now have to secure funds from other energy companies. Gazprom will also have to turn to other players to acquire the technology that a tie-up with Shell on the project would have brought. Shell, for its part, became the largest corporate LNG producer after its $53 billion acquisition of UK-based gas giant BG Group in 2016. Shell's purchase of BG Group put the company behind only Irving, Texas-based Exxon Mobil on the list of largest publicly held energy companies by market capitalization.

Russia’s Saudi pivot strengthened 

Yet, in more positive news for Russia’s gas sector, just one day earlier news broke that OPEC’s de facto leader and the world’s largest oil exporter Saudi Arabia was still going long on Russian LNG. Leonid Mikhelson, CEO of Russian independent gas player Novatek, said on Tuesday he expected an investment decision on the company’s Arctic LNG 2 project with Saudi Arabia and others in the third quarter of this year. Arctic LNG 2 is a massive LNG gas project proposal that will be built on the Gydan Peninsula in Northern Siberia. With a production capacity of approximately 19.8 mtpa, the project would tap more than seven billion barrels of oil equivalent (boe) resources in Russia’s onshore Utrenneye gas and condensate field and compete as one of the world’s largest LNG facilities in terms of liquefaction capacity.

As far back as October Saudi Arabia said it was ready to invest $5 billion in Russia’s growing LNG sector and the Arctic LNG 2 project. Khalid al-Falih, Saudi Arabia’s Energy Minister, said earlier that the Kingdom was considering the possibility of becoming the second biggest investor in the Novatek-led project.

Saudi Arabia’s decision to invest heavily in Russia’s energy sector underscores the growing ties between the two oil production heavyweights and former adversaries. The major pivot in the decades’ long chilly relations between Riyadh and Moscow came in early 2017 when the two sides participated in the first OPEC+ oil production cut to drain a then multi-year supply overhang in global oil markets, and to seek to to put a floor under prices that had dropped from more than $100 per barrel in mid-2104 to dipping below the $30 per barrel price point in January 2016.  The OPEC+ group of producers includes OPEC’s 14 members as well as a number of major non-OPEC producers, including Russia, the world largest crude oil producer until it was bypassed last year by the U.S.

A second OPEC+ production cut was put in place at the start of the year that is largely responsible for currently drawing down global oil supplies as well as supporting prices for both global oil benchmark, London-traded Brent crude futures as well as U.S. oil benchmark, NYMEX-traded West Texas Intermediate (WTI) futures. This production cut as well as geopolitical factors, including U.S. sanctions on OPEC members Iran and Venezuela and ongoing fighting in OPEC-member Libya has pushed oil prices to five month highs.

Geopolitical ramifications 

Continued participation between Moscow and Riyadh over oil production as well as heavy Saudi investment in Russia’s storied gas sector will also carry over into geopolitical collusion between the two sides in the Middle East and elsewhere, even though currently they are on opposite sides in the ongoing civil war in Syria.

However, Saudi Arabia is playing a dangerous geopolitical game as it strengthens ties with Moscow, while managing its 70-year plus bilateral relations with Washington. The U.S. is the Kingdom’s largest military arms supplier. Additionally, the U.S. Navy largely safeguards the free movement of Saudi oil shipments not only through the volatile Strait of Hormuz, but globally. There may come a time in the not too distant future when Riyadh will be backed in a corner and forced to choose sides between Moscow and its hegemony pursuits in both Europe and the Middle East, and its relations with Washington.