Will the War in Ukraine Impact Noble Gas Supplies?

A new LNG terminal might soon be constructed in the Port of Keelung

The invasion of Ukraine, a global supplier of noble gases needed for semiconductor production, has raised concerns about supply chain disruptions.

The impact of the Russian invasion of Ukraine on supply chains is hitting European countries the hardest, threatening to bring a winter of shortages and high energy prices. But the rest of the world – including Taiwan – is not immune to the effects of the war.  

For Taiwan, the critical question is not the supply of oil and natural gas as with Europe, but rather the continued stable availability of inputs needed by the semiconductor industry, the pillar of Taiwan’s economic prosperity.

One such key resource for semiconductor fabs is neon. A byproduct of steel manufacturing, neon is commercially viable only when produced and processed in enormous quantities – a volume that only a limited number of factories in the world can achieve. Before the invasion, Ukraine was responsible for 70% of the total global supply, and it produced most of the ultra-pure neon needed to make the excimer lasers that etch features onto semiconductor silicon wafers.

The destruction and closure of the huge Azovstal and Ilich iron and steel works in Ukraine’s besieged city of Mariupol, as well as the suspension of neon gas production at the Cryoin and Ingas plants in Odesa, has greatly reduced global supplies of the gas.

To make matters worse, Russia’s trade ministry in late May added inert gases to the list of restricted exports to “unfriendly countries.” Before the invasion, Russian exports of neon, krypton, and xenon – all used in the production of semiconductors – accounted for around 30% of global supply.

Taiwan had been on the “unfriendly” list since March, joined by Japan, Korea, and Singapore, all of which have followed the West’s lead on sanctions against Moscow. Taiwan’s Ministry of Foreign Affairs dismissed Taiwan’s inclusion on the list as “insignificant.” Indeed, the situation should not be a major challenge for Taiwan’s semiconductor industry, which provides 65% of the world’s chips and around 90% of advanced processors. Its chip makers reportedly began diversifying their noble gas sourcing around 2014, when Russia annexed Crimea.     

Semiconductor production depends on neon gas supply, of which Russia and Ukraine accounted for around 30% before the war.

Although the Taiwan semiconductor industry has been experiencing price hikes and supply chain bottlenecks in their procurement of noble bases, most economic analysts consider that these problems will not be long-term obstacles. For neon, in particular, industry experts say the existing disproportionate concentration of the gas in the two largest former Soviet states should not be too hard to overcome.

“Currently we have a situation where most of the world’s neon is coming from Ukraine and Russia,” says Rūta Karolytė, a postdoctoral researcher at the Department of Earth Sciences, University of Oxford. “Neon is extracted from air by fractional distillation, and this can be done anywhere. Technically it’s not a scientifically challenging process – more a question of scale.”

Large quantities of air are needed to extract neon because the gas is present in such minute concentrations (0.0018%) and can be separated out only by cooling air to temperatures of minus 246 degrees Celsius.

“The current global reliance on former USSR plants is just based on the fact that they developed these plants at scale for political reasons,” says Karolytė. “We may have some disruptions in the short-term until equivalent plants are developed elsewhere in the world.”

Karolytė cites new projects such as the establishment of a neon production facility by Korean steel giant POSCO, the world’s fourth largest steel company, at its Gwangyang complex. “My guess would be that high-tech industries that rely on neon are lobbying their respective governments for a solution,” she says.

With no plants of similar scale in Taiwan – the island’s largest steelmaker China Steel Corp. has an annual capacity of 16 million tons, compared to POSCO’s 420 million – Taiwan is unlikely to be able to replicate such efforts in the near future.

High volatility

Helium is the other crucial noble gas for the semiconductor industry, thanks to its high thermal conductivity, which makes it an ideal coolant for heat transfer. Global helium supplies have been disrupted by events unrelated to the war in Ukraine. Chief among these was a series of accidents at the Amur gas processing plant in Russia, close to the border with China. Before the Russian invasion, a third of the world’s helium came through Amur and the world’s largest helium hub at Vladivostok, which was launched by Russian majority-state-owned giant Gazprom in September 2021.

“To understand the impact, you need to understand what the market was before the war and what happened at Amur,” says Jeff Aldrich, co-chair of the Helium Committee for the American Association of Petroleum Geologists. “There are two helium plants there, and back in October 2021, they had tried to start up the second, and it caught fire. They shut down the plant, put out the fire, and repaired the damage, but January [2022] when they restarted the plant, it blew up, damaging the first plant as well.” 

The heavy economic sanctions that the U.S. and its allies have imposed on Russia have scuppered any chance to get the plant back online any time soon, says Aldrich. Both plants were being constructed under technical advice from French contractors, and all contracting work ceased after the Ukraine invasion. “As long as Russia maintains its political isolation and sanctions remain in place, it is highly doubtful that they will have the technology to rebuild Amur,” he says. 

Karolytė echoes this view. “I seriously doubt that by the time their capacity is developed, the global demand won’t be met by other suppliers,” she says. 

Another expert, Stefano Marani, CEO of Renergen, a South Africa-based helium and LNG producer, Marani and Aldrich both cite the suspension of operations at the U.S. National Helium Reserve in Texas as another blow. The reserve, administered by the U.S. Bureau of Land Management (BLM), has remained offline since late 2021 after the discovery of a leak.

“It’s unlikely Amur will operate before early 2026, possibly much later,” says Marani. He notes that the BLM, which represents around 15% of world supply, had a further setback when its operation in Kansas was put out of commission by a fire.

In addition, having emerged as one of the world’s biggest helium producers in recent years, Qatar has also suffered “unscheduled technical outages,” which Marani says have added significant strain to the global supply system.

Returning for a moment to Europe, there is also the issue of diverting potential helium supplies to alleviate energy shortages.

In October, following resolution of tensions over Spain’s support for moves toward autonomy in Western Sahara, Algeria’s state-owned hydrocarbon group Sonatrach reached agreement with Spanish energy provider Naturgy to resume natural gas supplies to meet Spain’s – and by extension Europe’s – increasingly urgent energy needs. But to do this, Algeria has ramped down LNG production, which is essential for the separation of helium.

“Natural gas is methane at room temperature,” Marani explains. “If you super-cool it to liquefaction point at -162 degrees Celsius, it becomes LNG. Helium is still gas at -162 degrees and becomes liquid at -269 degrees. So, the most effective way to get the helium is to make LNG. No LNG, no helium.”

Producing LNG is complicated and “very expensive, so you don’t do it if you have a pipeline available to send natural gas,” says Marani.

“Algeria can make LNG and ship it to other countries, or it can send natural gas through a pipeline to Spain. If it does that, it can’t make LNG and therefore can’t separate the helium.”

Besides its own supply issues, Taiwan is also paying attention to whether China is benefiting from exclusive access to Russia’s helium reserves. Most observers, however, are guarded about predicting any significant advantages for Beijing. 

“Earlier this year, China ceased most of its defensive cooperation with Russia,” notes Ivan Versytuk, editor of New Voice of Ukrainey. “In response, Russia restricted its noble gas supplies to the Chinese semiconductor sector.”

Versytuk adds that Chinese noble gas demand is likely to peak soon after the expected closure of a major “highly inefficient and corrupt” R&D program for developing new materials. “Chinese labs need too much of those gases just for theoretical R&D purposes. If you cut Chinese demand for noble gases, things will get better.”

Spreading risk

In the long term, most analysts believe Taiwan and East Asia must consider other options to hedge against future problems with noble gas supplies. These measures could involve new technologies and greener extraction processes.

“An alternative model is to explore for non-hydrocarbon gas – often primarily nitrogen – that can have up to 10% helium,” says Karolytė. “This approach is taken by various companies in Africa, North America, and Australia, and has the potential to come to the market sooner than the Russian plants.” 

Unfortunately, industry secrecy makes thoroughly analyzing the situation faced by noble gas importers difficult. A Bloomberg article from May 2022 noted the “significant pricing opacity” in the helium market – a result of a handful of specialist companies dominating the industry.

In Taiwan, the murkiness extends to details of sourcing. Powerhouse multinationals like TSMC and UMC are almost impossible to pin down, and even smaller companies, industry marketing firms, and research institutes are loath to offer insights on “sensitive” geopolitical issues.

“Understandably,” says one knowledgeable source, customers “don’t want to upset suppliers by providing even the most innocuous statement.”

Noble gases aside, Russia’s war on Ukraine has exacerbated the already considerable disruption to global energy supply chains that began with the COVID-19 pandemic. As net importers of energy, East Asian markets have inevitably been impacted. But analysts have played down fears of long-term adverse effects, noting that diversification of energy procurement already began after Moscow’s annexation of resource-rich Crimea in 2014.

Imports of Russian crude oil to Taiwan ended in 2016, and coal shipments stopped this year after the state-owned Taiwan Power Co. (Taipower) made a final payment under the existing deal. While Russia was Taiwan’s third-largest supplier of LNG in 2021, the volume accounted for only 10% of Taiwan’s consumption.

In March, Taiwan’s state-owned petroleum company CPC Corp. ended a five-year sale and purchase agreement with its Russian LNG supplier. Spot deals with smaller Russian firms are negligible and likely to be wound down.

Meanwhile, increasing Taiwan’s LNG capacity has been a key part of the government’s goal to phase out nuclear power by 2025. Construction of CPC’s LNG terminal in Taoyuan County was approved after a controversial referendum on its location in December 2021, and Taipower’s proposal for another terminal – Taiwan’s fourth – in the Port of Keelung is undergoing environmental impact assessment.