Russia's Arctic LNG 2 Forges Ahead Despite Sanction-Driven Shipbuilder Cancellations

(Bloomberg) Russia’s biggest liquefied natural gas producer began production at its Arctic LNG 2 project — despite US sanctions — in a move that could provide some relief to the tight global market for the fuel.

The first train of the Novatek PJSC-led Arctic LNG 2 project “has actually started operating,” Russia’s Deputy Prime Minister Alexander Novak said in an interview with state-run Rossiya 24 TV channel on Wednesday. “We’re expecting the first shipments from this project in the first quarter of next year.”

The facility, located on the Gydan peninsula above the Arctic Circle, is Novatek’s second large-scale project and is crucial for Russia’s goal to more than triple its LNG production to 100 million tons by the end of the decade.

US sanctions imposed on the project’s operator in November put that ambitious goal at risk. Novatek sent force majeure notices to some LNG buyers earlier this month. Foreign partners of the project declared force majeure on their participation in the venture as well, Kommersant newspaper reported earlier this week, citing unidentified people in the Russian government.

Novatek holds a 60% stake in the operator of the Arctic facility. TotalEnergies SE, China’s CNPC and Cnooc, and a consortium of Japanese trading house Mitsui & Co. and Jogmec each hold a 10% stake.

Exports from Arctic LNG 2 could add to the total pool of supply as the world — and Europe in particular — becomes increasingly dependent on the super-chilled fuel to meet its energy needs. Europe still imports significant amounts of Russian LNG, even though pipeline flows have largely ceased.

Arctic LNG 2 will have three production trains, with the ability to produce 19.8 million tons per year in total. The first is expected to reach its design capacity of 6.6 million tons in the first quarter of 2024, while the second and third production lines are expected to start in 2024 and 2026 respectively.

Shipping Constraints

The force majeure doesn’t necessarily mean that there will be no shipments from Arctic LNG 2, according to Energy Aspects Ltd.

Exports will depend on the extent to which Novatek or another Russian entity can deliver volumes from the project with the limited pool of potential buyers willing to ignore US sanctions, said Jake Horlsen, a senior LNG analyst at Energy Aspects in London. “Freight is therefore likely to be the limiting factor for Arctic LNG 2 exports,” he wrote in an emailed note last week.

There were 21 ice-class tankers ordered for the project, including six vessels at South Korea’s Hanwha Ocean, formerly known as Daewoo Shipbuilding & Marine Engineering, and 15 LNG carriers at Russia’s shipyard Zvezda. The latter delayed the completion of the first five vessels amid Western sanctions that banned some tanker equipment supplies to Russia. Novatek expects to receive those tankers in 2024 instead of 2023.

Three other ice-breaking LNG carriers built by Hanwha Ocean and chartered by Japan’s MOL were also scheduled for delivery in 2023, but it wasn’t clear whether Arctic LNG 2 received them. The remaining three vessels due to be built by Hanwha Ocean were ordered by Russia’s leading shipping company Sovcomflot, but the contract was terminated amid sanctions.

In June, Novatek Chief Executive Officer Leonid Mikhelson said the contract with Hanwha Ocean was being transferred to another owner. Tankers “are under construction, the issue was with Sovcomflot,” he said, according to a report in the Kommersant newspaper.