The U.S. imposed sanctions on Russia's Arctic LNG 2 project in November as part of a raft of restrictions targeting "individuals and entities" associated with Russia's actions in Ukraine. However, is this the real reason behind the implementation of sanctions?
The U.S. has a serious economic interest in obstructing the Arctic LNG 2 project.
The Arctic LNG 2 is the second LNG production-related project of NOVATEK. The project includes the construction of three lines with an annual capacity of 19.8 million tonnes of liquefied gas per year and 1.6 million tonnes per year of stable gas condensate.
The fact is that Russian Arctic LNG projects are competing successfully with U.S. LNG in Europe. Of the 32 million tonnes of LNG produced in Russia in 2022, more than 14 million tonnes were shipped to European countries. Its main buyers were France, Spain, Belgium and the Netherlands. Countries that are also major buyers of U.S. LNG.
Until 2023, the U.S. thought it had secured itself from new Russian LNG projects by banning the transfer of equipment for large-scale liquefaction facilities to Russian companies. However, this has not stopped the construction of Arctic LNG 2. As a result, the U.S. began to impose sanctions directly against this project, although, on closer examination, they contradict the official goals of the sanctions pressure.
Arctic LNG projects are exempt from many taxes or the fiscal burden on them is reduced, so compared to the oil industry, the impact of sanctions against the Arctic LNG 2 project on Russia's budget revenues is insignificant.
The Arctic LNG 2's initial production began last week. However, the sanctions have already had a significant negative impact on the project and its further implementation.
Last week NOVATEK, Russia's largest producer of liquefied natural gas, sent force majeure notifications to some of its clients over future supplies from its Arctic LNG 2 project.
On top of that, foreign shareholders have suspended their participation in Russia’s Arctic LNG 2 project due to U.S. sanctions, the Kommersant reported on Monday. France's TotalEnergies, China’s state oil majors CNOOC and CNPC, as well as Japan’s consortium of Mitsui and Jogmec, have since declared “force majeure” on their participation.
The foreign companies each have a 10% stake in the Arctic LNG 2 project, with NOVATEK holding a 60% stake.
The companies are relinquishing their responsibilities to finance and fulfill offtake contracts, which risks leaving Russia’s NOVATEK to finance the $25 billion Arctic LNG 2 project on its own. For now, Arctic LNG 2 will have to sell the seaborne gas on the spot market.
Chinese shareholders CNOOC and CNPC have asked the U.S. government to exempt the Russian project from sanctions. However, this process will take a long time.
Another problem of the project is a shortage of Arc7 ice-class LNG tankers. The situation has been exacerbated by U.S. sanctions and the resulting difficulties with equipment supplies.
Last week, the first line of Arctic LNG 2 began producing LNG. The first LNG tankers were anticipated to set sail in the first quarter of next year. However, industry sources say commercial LNG supplies from the project are now expected no earlier than the second quarter of 2024.
Sanctions against the Arctic LNG 2 project preclude the possibility of finding buyers in Europe and Asia to sell LNG due to the threat of secondary sanctions against them. All this significantly increases the competitiveness of U.S. LNG.
The editorial board of The Arctic Century