ECONOMY
Russian LNG: Winning Battles but Losing the War
August 9, 2024
Mikhail Krutikhin
Oil and gas market expert
Oil and gas expert Mikhail Krutikhin looks at the serious challenges created by Western sanctions for transporting Russian LNG and explains why the Kremlin’s plans to boost LNG exports to 100 million tons per year by 2030 will not materialize.
The original text in Russian was published in the Moscow Times and republished here with the author’s permission
In the first five months of the year, Russia outpaced the US in terms of growth of liquefied natural gas exports, with a 3.8% year-over-year increase versus a 0.2% decrease, respectively.
In the first five months of the year, Russia outpaced the US in terms of growth of liquefied natural gas exports, with a 3.8% year-over-year increase versus a 0.2% decrease, respectively.
The Northern Sea Route (blue), which cuts the alternative route from the Far East to Europe through the Suez Canal (red) down from 23,000 km to around 14,000 km. Source: Wiki Commons
Export successes
The US is still ahead in volume terms, however, having exported 35.41 million tons in that time frame versus Russia’s 14.47 million tons, but growth is growth. In addition, with the start of the Northern Sea Route’s summer navigation period, Russia can deliver liquefied natural gas (LNG) along a shortened route to the Asia-Pacific, where prices are higher than on the Atlantic. This year’s first ice-class LNG carrier left the port of Sabetta on June 22 bound for Asia.
Meanwhile, the second production line of the Arctic LNG 2 project has been completed and will be towed from Murmansk to the Gulf of Ob and installed next to the already installed first line.
In addition, The Barents Observer has reported that a shadow fleet of four ice-class LNG carriers is sailing toward US-sanctioned Arctic LNG 2. The vessels were reportedly built in South Korea and are now owned by a firm registered in the UAE, which is using them in defiance of sanctions.
US President Joe Biden also seemingly gave a boost to Russian LNG when, in January of this year, he imposed a moratorium on the issuance of new LNG export licenses in the US. The move was explicitly called a “gift to Vladimir Putin” in the US press.
However, the backdrop of these “successes” for the Kremlin is sobering.
The US is still ahead in volume terms, however, having exported 35.41 million tons in that time frame versus Russia’s 14.47 million tons, but growth is growth. In addition, with the start of the Northern Sea Route’s summer navigation period, Russia can deliver liquefied natural gas (LNG) along a shortened route to the Asia-Pacific, where prices are higher than on the Atlantic. This year’s first ice-class LNG carrier left the port of Sabetta on June 22 bound for Asia.
Meanwhile, the second production line of the Arctic LNG 2 project has been completed and will be towed from Murmansk to the Gulf of Ob and installed next to the already installed first line.
In addition, The Barents Observer has reported that a shadow fleet of four ice-class LNG carriers is sailing toward US-sanctioned Arctic LNG 2. The vessels were reportedly built in South Korea and are now owned by a firm registered in the UAE, which is using them in defiance of sanctions.
US President Joe Biden also seemingly gave a boost to Russian LNG when, in January of this year, he imposed a moratorium on the issuance of new LNG export licenses in the US. The move was explicitly called a “gift to Vladimir Putin” in the US press.
However, the backdrop of these “successes” for the Kremlin is sobering.
“Since November 2023, the Russian LNG industry has taken several heavy blows from both the Americans and the Europeans, from which it is unlikely to recover in the coming years, if not decades.”
The impact of sanctions
The two Arctic LNG 2 lines in the Gulf of Ob could supply more than 13 million tons of LNG for export each year, yet there is no way to transport the production, with such vessels seemingly impossible to secure.
To export the gas, the project, at full capacity, requires 21 ice-class tankers. Seven were ordered to begin with, but the South Korean shipyards that were supposed to build them (some completely, some for assembly at the Zvezda shipyard in Russia’s Far East) refused amid US sanctions against Russia.
Attempts to put together a “shadow fleet” to transport Russian gas, judging by the resolute demeanor of Washington, look likely to fail. These ships will be targets for restrictions and thus unable to do their job.
The two Arctic LNG 2 lines in the Gulf of Ob could supply more than 13 million tons of LNG for export each year, yet there is no way to transport the production, with such vessels seemingly impossible to secure.
To export the gas, the project, at full capacity, requires 21 ice-class tankers. Seven were ordered to begin with, but the South Korean shipyards that were supposed to build them (some completely, some for assembly at the Zvezda shipyard in Russia’s Far East) refused amid US sanctions against Russia.
Attempts to put together a “shadow fleet” to transport Russian gas, judging by the resolute demeanor of Washington, look likely to fail. These ships will be targets for restrictions and thus unable to do their job.
An LNG tanker. Source: Wiki Commons
With LNG exports from the plant thwarted, the Arctic LNG 2 stakeholders – Russia’s Novatek,France’s TotalEnergies, China’s CNPC and CNOOC, and a consortium of Japan’s Mitsui and JOGMEC — were forced to declare force majeure, absolving themselves of their contractual obligations.
Having realized that there would be no third production line at Arctic LNG 2 and that the first two would be unable to operate, Novatek decided to use the third train being built for a new project in Murmansk Region. However, these plans also seem to be falling through.
Novatek had ordered LNG modules from China, and the first two lines of Arctic LNG 2 received them, despite long-standing doubts on the part of Chinese manufacturers and transport companies about whether they would come under sanctions. However, the modules for the next line – either at Arctic LNG 2 or the planned Murmansk plant – hit a snag.
Having realized that there would be no third production line at Arctic LNG 2 and that the first two would be unable to operate, Novatek decided to use the third train being built for a new project in Murmansk Region. However, these plans also seem to be falling through.
Novatek had ordered LNG modules from China, and the first two lines of Arctic LNG 2 received them, despite long-standing doubts on the part of Chinese manufacturers and transport companies about whether they would come under sanctions. However, the modules for the next line – either at Arctic LNG 2 or the planned Murmansk plant – hit a snag.
“The ship with the LNG modules, which was approaching Murmansk in early July, turned around and sailed back to China.”
The manufacturer of components for Russian LNG plants was sanctioned by Washington and forced to renounce cooperation with Russia. Other Chinese firms also began to stay away from such projects.
Inevitable financial hit
Novatek’s plans to commission the first two lines at Arctic LNG 2 and build other LNG plants should be seen as untenable.
Following the sanctions imposed in November 2023, the Americans warned of penalties for the involvement of foreign companies in yet-to-start projects like Arctic LNG 1, Arctic LNG 3, the Obsky Gas Chemical Complex and Murmansk LNG, as well as Gazprom’s Ust-Luga LNG project and another in Yakutia (it is still just an idea).
The plant where LNG production lines are assembled in Murmansk has been sanctioned, as well as LNG transshipment bases in Murmansk and Kamchatka. The Europeans, who continue to receive significant volumes of LNG from Russia, supported the Americans with their fourteenth package of sanctions, banning transshipment of Russian LNG through the ports of EU countries.
This means that exporters at the existing Yamal project will be forced to use ice-class tankers to transport LNG all the way to buyers in Asia and Africa, instead of transferring the gas to conventional ships in Europe, which reduces the project’s commercial viability.
Overall, Russia’s widely publicized plans to ramp up LNG exports to 100 million tons per year by 2030 are destined to fail. In the face of sanctions, new projects now look unfeasible – the war unleashed by Putin against Ukraine has curbed international cooperation with them. Meanwhile, a surplus in the global LNG market, widely expected next year, suggests that the world will do just fine without Russian supplies.
Inevitable financial hit
Novatek’s plans to commission the first two lines at Arctic LNG 2 and build other LNG plants should be seen as untenable.
Following the sanctions imposed in November 2023, the Americans warned of penalties for the involvement of foreign companies in yet-to-start projects like Arctic LNG 1, Arctic LNG 3, the Obsky Gas Chemical Complex and Murmansk LNG, as well as Gazprom’s Ust-Luga LNG project and another in Yakutia (it is still just an idea).
The plant where LNG production lines are assembled in Murmansk has been sanctioned, as well as LNG transshipment bases in Murmansk and Kamchatka. The Europeans, who continue to receive significant volumes of LNG from Russia, supported the Americans with their fourteenth package of sanctions, banning transshipment of Russian LNG through the ports of EU countries.
This means that exporters at the existing Yamal project will be forced to use ice-class tankers to transport LNG all the way to buyers in Asia and Africa, instead of transferring the gas to conventional ships in Europe, which reduces the project’s commercial viability.
Overall, Russia’s widely publicized plans to ramp up LNG exports to 100 million tons per year by 2030 are destined to fail. In the face of sanctions, new projects now look unfeasible – the war unleashed by Putin against Ukraine has curbed international cooperation with them. Meanwhile, a surplus in the global LNG market, widely expected next year, suggests that the world will do just fine without Russian supplies.
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