NOVATEK took a moment, while experts are expecting the company's economic diversification across the Asian markets. However, this will be costly and appropriate only for those willing to risk trading under sanctions.

Russia’s LNG exports reached an annual peak in October, growing nearly five per cent since early 2024. Yet, the sanctioned Arctic LNG 2 project ceased production at the end of the month due to difficulties in selling its output.

The Russian Arctic LNG 2 plant ceased output due to high stock levels and sales difficulties, as reported by Bloomberg on October 25. According to the report, eight batches of LNG shipped since August have not yet reached the buyer. In fact, none of the products manufactured at the new production facility, which commenced operations at the end of last year, have been delivered to customers.

The exact cause is unknown, no comments from NOVATEK have been received. Experts speculate this is not a matter of price – the company is likely willing to offer attractive discounts to clear inventory. The issue seems to be the lack of buyers willing to assume sanctions-related risks.

“Over 600,000 tons of gas produced by Arctic LNG 2 remains unsold, and it’s unlikely to be sold this year,” says Alexander Klimentyev, Vice President of the Scientific-Expert Council of the National LNG Association and member of the Russian Gas Society’s Expert Council. “Whether the plant continues operating will depend on NOVATEK’s ability to find buyers. The process is difficult, and even significant discounts aren’t effective – the fear of sanctions outweighs the lure of low-cost gas.”

Pavel Sarafannikov, President of the National LNG Association, hopes Arctic LNG 2 will resume operations “in the near future” once sales issues are resolved.

“One of the toughest challenges is logistics. A shortage of ice-class tankers prevents delivery of needed volumes, even if there are buyers in friendly countries. Due to sanctions, we’re forced to operate under the radar. Solving this requires additional ‘shadow’ fleet resources and collaboration with other foreign companies,” he explains.

Other Russian LNG plants operate as usual, with production growth observed across all facilities this year. Much of this is due to a low baseline in the first half of 2023, when extended maintenance took place at two major plants, Yamal LNG and Sakhalin-2.

“Europe continues purchasing Russian LNG through ‘shadow’ schemes – in Spain, for example, about 19% of total consumption is Russian gas. Russian LNG exports in October reached the year’s peak at 2.98 million tons, up more than 2% year-on-year,” notes Sarafannikov. However, LNG market prices have fallen by 15-25% compared to last year, depending on the country. “As a result, despite the increase in volume, Russia’s export revenues will likely be lower than in 2023, causing a slight revenue decline for companies,” forecasts Alexey Belogoryev, Director of Research at the Institute for Energy and Finance.

According to the National LNG Association, Russia exported 33 million tons of LNG abroad last year, with NOVATEK responsible for over two-thirds of this volume. International analysts report a more modest figure – 31 million tons. A slight production increase is expected this year, around 2.5-3 million tons, says Belogoryev.

“LNG production in Russia was expected to grow by 6-7 million tons, which would have happened if Arctic LNG 2 had been shipping normally since January-February, as planned. However, it only began shipments in September, and in limited volumes. It’s uncertain what lies ahead, as the summer navigation season along the Northern Sea Route is nearly over, and conventional gas carriers will soon be unusable. Ice-class tankers, which Arctic LNG 2 lacks, will be needed,” emphasizes the expert.

Global LNG production is about 400 million tons, supported by just 770 gas carriers. Building one vessel takes about five years, and international shipyards are overwhelmed with orders. South Korea produces 80% of the world’s gas carriers, while China accounts for the rest. Russia has only one shipyard, Zvezda, which has a backlog of orders, including 15 ice-class tankers for Arctic LNG 2. Currently, three are under construction and are expected to be delivered in 2025, with two slated for the first quarter, though their delivery remains uncertain.

The Russian Zvezda shipyard relies heavily on imported technologies, particularly from French engineering company GTT, a global leader. However, GTT ceased cooperation with Russia in 2023, completing only the first two vessels. The remaining 12 tankers haven’t even started construction due to a lack of technology.

“Currently, NOVATEK and Gazprom are making substantial efforts to develop domestic technologies, involving multiple research institutes to replace imported tanker production as quickly as possible. But this is a complex, high-tech process requiring extensive industry cooperation. It remains unclear when the volume of vessels ordered long ago will be delivered,” says Belogoryev.

Alexander Klimentyev concurs, noting that building a domestic LNG fleet is a long-term endeavour.

“Key technological solutions for gas carriers are missing – there are no storage systems or engines, and it’s unlikely anyone globally will help us develop them. Even completing the existing tankers poses a major challenge, and it’s certain we won’t be able to build new vessels in the next 7-10 years,” he asserts.

Russia has limited options for importing gas carriers – South Korean shipyards have declined cooperation, at least under current conditions, and Chinese companies, though heavily booked for years, lack sufficient technological expertise.

Today, approximately 30 vessels transport Russian LNG, most owned and operated by foreign companies from countries like Japan. Given the niche market, quickly assembling a “shadow” fleet, as done for oil, is impossible. New tankers are usually built for specific plants, and finding spare vessels is challenging.

For Arctic-class tankers, the situation is even more complicated – these vessels are built exclusively for Russia, as no other region faces similarly harsh ice conditions for LNG transport, Belogoryev points out. Thus, Russia’s shortage of this fleet type is expected to persist until at least 2030.

Many experts believe domestic producers’ challenges will continue to deepen. Europe may impose an embargo on Russian LNG, a possibility discussed in the EU with each new sanctions package.

“For now, Europe’s shrinking LNG supply blocks such initiatives, but that may change. In 2026, the EU could afford to introduce at least a partial ban, considering the market balance. Currently, 50 per cent of Russian LNG is still exported to the EU. Excluding Sakhalin-2, which supplies Northeast Asia exclusively, the dependency of other Russian plants on the European market is 75 per cent due to high demand, favourable prices, and the shortest transportation routes,” explains Belogoryev.

If this ban is enforced, it will primarily impact Yamal LNG and Cryogas Vysotsk plants, traditionally targeting the EU market. NOVATEK costs will inevitably rise, likely leading to temporary shipment reductions, Klimentyev believes.

In his opinion, Europe would be less affected by an embargo than Russia. Should the EU decide to forgo Russian gas, it could quickly secure new suppliers, whereas Russia would lose an essential market.

Sarafannikov is confident that if an embargo occurs, Russia could redirect the volumes to Asia, where energy demand is growing, especially in India.

“These should be the priority markets when planning new LNG plants. The focus should be on developing the Northern Sea Route, Arctic regions, Vladivostok, and Sakhalin to form robust LNG hubs,” suggests Sarafannikov. However, even if demand in Asia is quickly found, which is not guaranteed, transportation duration will triple.

“A journey from the Kara Sea to Northwest Europe takes around 10 days, while to India, it would take 30. Vessel turnover will drastically decrease, meaning roughly two and a half to three times more tankers will be required, compounding the current shortage. This worsening shortage of LNG carriers raises doubts about Russian companies’ preparedness,” emphasizes Belogoryev.

Could this situation prevent Russia from increasing its share in the global LNG market from the current seven per cent to the 20-30 per cent as supposed by the Ministry of Energy?

Belogoryev says that although no supply reductions are anticipated, demand will likely be found, primarily through discounts, as seen in the oil market. Higher transportation costs and reduced profitability are expected, but supplies will continue.

The main concern lies with new facilities. 

“The second phase of Arctic LNG, under construction, might be operational by 2025, though it is unclear why transport options are lacking. The third phase is uncertain, as some equipment remains undelivered, and long-term ice-class tanker shortages make development impractical,” says Belogoryev.

Clearly, sanctions on Russian projects could persist indefinitely. Russia must adapt to a new reality in the LNG market, where sanctioned gas trading must become feasible and profitable, Belogoryev adds.

Additionally, by 2026, the LNG market may face a surplus, with supply exceeding demand.

This means that new Russian plants will enter a more competitive market, giving consumers more choice. Whether they prefer sanctioned Russian LNG or new American and Qatari gas depends on two factors. First, how strongly the U.S. pressures buyers with secondary sanctions, as it is keen to edge out Russian LNG for its own facilities. Second, the discount level Russian suppliers will offer to stay competitive in such a market.

Source: Mash News.

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