Sanctions war: Russian LNG hunting

The Monocle magazine (No. 3 (1319), November 6-12, 2023) published a comment by Alexey Belogoryev, Research and Development Director at the Institute for Energy and Finance, on the causes and consequences of the US sanctions against the Arctic LNG 2 project.

Alexey Belogoryev comments:

— The US sanctions against Arctic LNG 2 LLC were expected. They fit into the long-term strategy of squeezing Russia out of the gas markets, especially from the European market. The situation is complicated by the fact that in the second half of the 2020s, the global LNG market faces a crisis of overproduction, that is, the creation of excess gas liquefaction capacity significantly exceeding demand. If we take all the projects announced to date with a commissioning period until 2030, then the surplus will be an incredible amount: about 400 million tons per year, which is equivalent to the current annual consumption of LNG in the world. This generates fierce competition, and many of the announced projects will never be built. But which ones and where, depends on the ongoing efforts for long-term contracting. NovaTEK has traditionally been successful in this field, including thanks to the model it initially chose — the distribution of produced LNG among the projects shareholders, be it Yamal LNG or Arctic LNG 2. It is this strong point that the United States is trying to hit.

— But surely the United States can impose secondary sanctions against foreign consortium members for exporting LNG produced at the project?

— There is a certain risk, but each company can assess it differently, especially since the refusal to execute contracts for the purchase of LNG threatens them with multibillion-dollar fines. We have already seen this on the example of the German SEFE (former Gazprom Germania), which continues to fulfill the contract for the supply of LNG from the Yamal LNG plant, despite the unequivocally negative position of the German authorities.

— Can sanctions disrupt the implementation of the Arctic LNG 2 project?

— In general, sanctions cannot be called painless. They will not stop the construction of the plant and will not directly interfere with the supply of LNG from this project to the markets of Russia-friendly countries. But they may require shareholders to change the supply chain using intermediary companies or lead to the rejection of individual shareholders from the concluded contracts. But even if this does not happen, sanctions will create logistical problems.

— How likely is the introduction of an EU embargo on the Russian LNG import, which has been discussed in Europe for a long time?

— The European Commission and the governments of a number of European countries in 2022-2023 have repeatedly stated their desire to stop importing Russian LNG as quickly as possible. In particular, a ban on unloading tankers with Russian LNG at European regasification terminals is being considered. Given the projected balance of gas in the EU market, the EU countries will have the opportunity to refuse to import Russian LNG as early as 2026, what potentially deprives both large- and medium-tonnage LNG plants under construction and operating in Russia, the most attractive sales market (from the point of view of supply logistics). This creates, in particular, additional problems of providing Russian LNG exports with reliable transport capacities due to a sharp increase in the average shoulder of transportation to alternative markets.

With the redirection of supplies from Europe to alternative markets, the time of cargo delivery will increase two to three times, and in winter along the Northern Sea Route in the eastern direction - up to four to five times. This will dramatically reduce the average annual efficiency of the tanker fleet and means the need for its significant expansion (even taking into account the creation of transshipment terminals in Kamchatka and the Murmansk region). New Russian plants, including Arctic LNG 2, Ust-Luga LNG and NOVATEK's Murmansk LNG project, will obviously face similar problems.