Russia faces mighty obstacle in western LNG sanctions

By Chen Aizhu and Oksana Kobzeva

SINGAPORE/MOSCOW (Reuters) -U.S. sanctions pose a major obstacle to Russia’s plans to increase exports of seaborne liquefied natural gas (LNG) to offset the decline in pipeline gas exports to Europe, analysts said, as expectations mount of delays to a flagship project.

The world’s fourth largest LNG producer after the United States, Qatar and Australia, Russia has an ambition to increase its share of the global market to around a fifth from 8% now by tripling its output to more than 100 million metric tons by 2030-35.

But whereas Moscow has successfully diverted oil exports, once intended for western Europe, to China and India, in the face of sanctions, the impact of restrictions on LNG is more severe because of the relatively small number of tankers that can carry LNG and Russia’s lack of access to technology and finance.

Russia’s efforts to redirect gas sales to China, the world’s second-largest energy consumer after the United States, have so far had limited success as protracted talks to more than double current sales to the country via the proposed Power of Siberia 2 pipeline have yet to deliver a solid contract.

At the same time, Arctic LNG 2, which is controlled by Novatek, Russia’s largest LNG producer, faces delay, three industry sources said on condition of anonymity because of the sensitivity of the issue.

They said commercial LNG supplies from the project are expected no earlier than the second quarter of 2024 or later, whereas Novatek has said they would sail in the first quarter.

With three trains, Arctic LNG 2’s capacity is meant to be 19.8 million metric tons per year and 1.6 million tons per year of stable gas condensate.

That makes it central to Russia’s plans to boost energy revenues after state-owned Gazprom’s pipeline gas exports to Europe halved last year to just over 100 billion cubic metres (bcm).

The Kremlin relies on energy sales, which accounted for 57% of Russia’s total exporting revenues and 27% of gross domestic product in the last year.


U.S. sanctions, which Russia has said reflect Washington’s desire to eliminate rivals to its LNG, have already resulted in Novatek declaring force majeure on supplies from the project, industry sources told Reuters last week.

Fearing a backlash from the sanctions, foreign shareholders suspended participation in the project, renouncing their responsibilities for financing and for offtake contracts for the plant, the daily Kommersant reported on Monday.

Jason Feer of LNG shipping and brokering firm Poten & Partners said the declaration Russia could not meet contractual obligations was “a wake up call” for future Russian LNG projects.

“Train 1 was by far the most advanced of the projects so the force majeure there is a sign that it will be very difficult to move ahead with any other projects for the time being,” he said. “Russia also likely needs some foreign equipment and other support to complete other projects and sanctions make that difficult as well.”

Arctic LNG 2 is located on the Gydan peninsular, which stretches into the Kara Sea, north of Siberia.

Novatek, which set itself up as an alternative to Gazprom, has a 60% stake in the project. China’s state oil majors CNOOC Ltd and China National Petroleum Corp (CNPC) each have a 10% stake, as do France’s TotalEnergies and a consortium of Japan’s Mitsui and Co and JOGMEC.

Its issues include the technical challenge of converting gas to a liquid by cooling it to minus 162 Celsius (minus -259.6 Fahrenheit).

Sunny Xu, founder of Singapore-based small and medium-sized LNG solution provider C-LNG, said that China has the capacity to build liquefaction modules but lacks experience in designing and building since of advanced critical equipment needed – as does Russia, analysts say.

“Chinese companies may have their own solutions, but how efficient that will be? That’s a question mark,” Xu said.

Some of the Western companies, which possess technical expertise have left Russia over the conflict in Ukraine.

French engineering group Gaztransport & Technigaz (GTT) suspended in January its contract with Russian shipbuilding company Zvezda for 15 ice-breaking liquefied natural gas (LNG) carriers.

Feer said that it would be hard to replace GTT in LNG projects.

“There are a few other companies offering containment systems but GTT are the leading firm and I do not know if the other systems have been accepted by major charterers and owners,” he said.

He said he was sceptical the project’s first train could reach its capacity of 6.6 million tones to reach capacity this year, as Novatek has said it will.


The project also has the challenge of securing gas carriers.

Novatek has said 15 Arc7 ice-class tankers, able to cut through 2-metre thick ice, will be built at Russia’s Zvezda shipyard for Arctic LNG 2.

Six more Arc7 tankers were due to be built by Hanwha Ocean, formerly Daewoo Shipbuilding & Marine Engineering, including three ordered by Japan’s Mitsui O.S.K. Lines and three by Russia’s leading tanker group Sovcomflot.

But three tankers ordered by Sovcomflot were cancelled due to sanctions against Russia, Hanwha has said in regulatory filings.

Ronald Smith from Moscow-based BCS Global Markets brokerage, said that it is possible that the nearby and already operational Yamal LNG project might share some tankers with Arctic LNG 2.

“Over time, I expect Novatek to acquire the full, needed fleet of Arc7 tankers,” he said. “That might take a number of additional years beyond what the original timeline of Arctic LNG 2 envisioned, however.”

(Reporting by Chen Aizhu in Singapore and Oksana Kobzeva in Moscow; additional reporting by Marwa Rashad in London and Olesya Astakhova in Moscow; writing by Vladimir Soldatkin; editing by Barbara Lewis)