Western sanctions may be taking a toll on Russia’s hydrocarbons sector, with a confirmed shortage of access to suitable LNG carriers and Reuters reporting the Arctic LNG 2 project is suspending production
Novatek, Russia’s largest producer of LNG, has reportedly suspended production at its Arctic LNG 2 project. The company began tentative production in December 2023 at the first of the plant’s planned three trains.
Among the issues causing delays include US sanctions – imposed since Russia began its war in Ukraine – some of which have taken aim at Arctic LNG.
At an event in 2023, US Assistant Secretary for Energy Resources Geoffrey Pyatt said, "We have also been clear in terms of our determination to use our sanctions regime to reduce Russia’s capacity for future energy. For instance, you saw recently our announcement of sanctions against the Arctic LNG 2 project. That reflects how determined we are to make sure Putin is not able to continue to use his energy resources in the future as a source of the revenue that he uses to pursue this awful and illegal war."
LNG consultancy Howe Robinson Partners also reports there is a shortage of suitable LNG carriers able to load at the facility.
Novatek had hoped to start commercial deliveries from Arctic LNG 2 in the first quarter of 2024, but plans were complicated last year when the facility was included in western sanctions along with a list of associated entities.
As a country, Russia is currently the world’s fourth-largest LNG producer with annual exports of 32.6M tonnes, but it is still some way off the United States which remains the top exporter of LNG to the global market.
The three trains at Arctic LNG 2 are expected to produce 19.8M tonnes per year (mta) of LNG and 1.6 mta of stable gas condensate. Russia aims to capture a fifth of the global LNG market by 2030-2035.
And despite the imposition of sanctions, satellite intelligence shows that Novatek’s Arctic 2 project is live. The facility is still expected to load cargoes as planned in 2024, even though Novatek has had to send force majeure notices to some customers.
Challenges procuring LNG carriers
Fifteen Arc7 ice-class tankers were to be built at Zvezda, with six more due from South Korea’s Hanwha Ocean (formerly Daewoo Shipbuilding & Marine Engineering). The Hanwha contract includes three for Sovcomflot and three for Japan’s Mitsui OSK, but Hanwha regulatory filings show the Sovcomflot tankers have been cancelled.
Russia has successfully circumvented sanctions before and it is expected that Novatek might eventually find a work-around to get ships transferred to the project. Nevertheless challenges remain.
So far, only three suitable gas tankers have been built for Arctic LNG 2: Alexei Kosygin, Pyotr Stolypin and Sergei Witte were all built at Zvezda. And these ships represent some of Zvezda’s first attempts at constructing LNG carriers.
Newcomers to the LNG carrier segment have faced issues in the past. South Korean and Chinese yards lead the market in the construction of such vessels but even a premier yard like Hudong-Zhonghua, the first Chinese yard to build an LNG carrier, encountered delays in its first few contracts.
The first Chinese-built LNG carrier for a non-Chinese owner only arrived six years ago when Hudong-Zhonghua delivered Papua to Japan’s Mitsui OSK Lines.
Zvezda has originally sought French LNG containment specialist GTT to use the company’s Mark III tech on its Arc7 ice-breaking LNG carriers. However, GTT ceased activities in Russia in January 2023 following a round of EU sanctions.
Other foreign stakeholders have frozen their participation in Arctic LNG and prompted Novatek to issue a force majeure to some of its customers which include western commodity trader Gunvor.
Even so, Train one began production in December 2023, but Reuters quoted an unnamed source saying, “Train one will remain shut until at least the end of June."
However, construction activities for the project are still ongoing. The other two trains are due to be delivered to the site by sea in future from the port of Murmansk.
Novatek holds a 60% stake in Arctic LNG 2 but other shareholders include France’s TotalEnergies, China’s CNOOC and CNPC and Japan Arctic LNG (a consortium of Mitsui & Co, Ltd JOGMEC) where each holds a 10% stake.
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