EP42: Russia’s Arctic LNG 2 project suspends operations indefinitely

Summary:

In this episode, we discuss how the US led sanctions targeting Russia's Arctic LNG 2 project have significantly hindered its operations. The project, designed to boost Russia's global LNG market share, has faced challenges in securing buyers for its cargoes due to the sanctions, causing the project to temporarily halt production. The sanctions have also hampered construction of new trains and caused delays in equipment procurement, impacting the project's overall capacity. These difficulties underscore the broader challenges faced by Russian LNG projects under heightened sanctions, potentially reducing Russia's energy revenue and weakening its position in the global market.

Questions to consider as you read/listen:

1. How do the latest US sanctions impact Arctic LNG 2's operations and future prospects?
2. What are the broader implications of Arctic LNG 2's suspension for Russia's energy industry and global LNG markets?
3. To what extent do the US sanctions on Arctic LNG 2 achieve their strategic goals of limiting Russian energy revenue and global market share?

Long format:

The latest success of Russian LNG sanctions: Russia’s Arctic LNG 2 project suspends operations indefinitely

As any far of our podcast and website over at Geopolitics Unplugged will remember, we have extensively covered in Episode 19: Are Russian oil sanctions working (short answer no) at https://www.geopoliticsunplugged.com/audio/ep19-are-russian-crude-oil-sanctions-working/ and Episode 14: Are Russian LNG sanctions working? (Short answer yes) at https://www.geopoliticsunplugged.com/audio/episode-14-the-health-of-the-russian-lng-sanctions/ , we have been watching the effectiveness of the sanctions against Russia.

On Friday, October 25, 2024, we got a big indication that the LNG portion of the sanctions are working.

Russia's Arctic LNG 2 project, led by Novatek on the Gydan Peninsula, has halted its operations as U.S. sanctions make it increasingly difficult to find buyers for its cargoes. The project ceased production at its first liquefaction train (6.6 million tons per year) several weeks ago when storage tanks reached capacity, according to sources close to the project. As a result, it may be unable to resume production this winter. Compounding the issues, gas production feeding into the facility has decreased to minimal volumes, underscoring the project’s operational challenges under intensified sanctions pressure.

After suspending production temporarily earlier in the year due to an inability to export LNG, Arctic LNG 2 resumed production in August. However, tankers that received shipments became targets of new sanctions by the Biden administration, which aims to reduce the economic benefits Russia derives from LNG sales. While U.S. sanctions avoid penalizing existing Russian LNG export facilities, the Arctic LNG 2 project has faced specific targeting to limit its new production volumes, a part of the broader U.S. strategy to limit Russia’s energy revenue following the 2022 invasion of Ukraine. Since August, Arctic LNG 2 loaded eight LNG cargoes, yet none have reached an end buyer.

Technical issues have also disrupted operations. The facility's only active LNG train has been running at below 50% capacity due to malfunctions with a Baker Hughes LM9000 gas turbine, which has recently undergone repair. When reinstalled, the turbine should allow production at full capacity, though it remains uncertain whether Train 1 will restart given the ongoing storage limitations. Moreover, the project’s second train, slated to begin by year-end, may be delayed as storage tanks remain occupied. The second train, completed and stationed at the Arctic site, has not yet commenced operations due to the operational and logistical challenges posed by sanctions.

Sanctions have also hampered construction of Arctic LNG 2's third train, initially planned for completion in 2026 but now postponed to 2028 due to equipment procurement issues. However, recent indications suggest that delays may be mitigated as hundreds of contractors from China’s Penglai Jutal Offshore Engineering Heavy Industries are expected to arrive at Russia’s Novatek Murmansk LNG construction center in January 2025 to assist with Train 3’s assembly. Despite these efforts, the project’s full potential is limited by logistical barriers, as Arctic LNG 2 has yet to receive all 21 ice-class tankers originally ordered to support the project’s three-train scheme, reducing its capacity for winter shipping.

The project is 60% owned by Novatek, with stakes held by TotalEnergies (10%), China National Petroleum Corporation (10%), China National Offshore Oil Corporation (10%), and a Japanese consortium of Mitsui and Jogmec (10%). The facility was launched in December 2023 with high expectations to boost Russia’s global LNG market share from 8% to a targeted 20% by 2030. However, with Train 1 offline and no imminent restart, these ambitions are in jeopardy as sanctions complicate market access, tanker availability, and equipment procurement.

The US administration’s strategic focus on Arctic LNG 2 aims to pressure Russia’s revenue streams specifically from new LNG ventures while permitting ongoing operations at other Russian LNG projects, such as the Yamal and Portovaya, to maintain broader energy market stability. As of late October, several LNG-laden tankers from Arctic LNG 2 are anchored, awaiting destinations amid buyer hesitation due to fears of secondary sanctions. This scenario reflects the broader logistical and market challenges faced by Russian LNG projects under heightened sanctions, with Arctic LNG 2 particularly impacted.

Further fueling the effectiveness of the sanctions is that LNG prices globally are low.

Recall, oil and gas revenues have accounted for 30–50% of Russia's federal budget over the past decade. Sources:

https://www.bnnbloomberg.ca/investing/2024/10/25/russias-arctic-lng-2-plant-halts-amid-tightening-us-sanctions/https://oilprice.com/Latest-Energy-News/World-News/Russias-Arctic-LNG-2-Project-Put-on-Ice-With-No-Restart-Plans.html

https://www.energyintel.com/00000192-c449-d095-afde-c4ef15550000

https://www.bloomberg.com/news/articles/2024-10-25/russia-s-arctic-lng-2-plant-halts-amid-tightening-us-sanctions