Sanctions begin to impact Russia’s oil profits and Arctic LNG

Russia’s Arctic LNG 2 project is beginning to suffer the direct impact of US sanctions, but penalties on the construction of ice-class LNG tankers may prove to be the most significant export barrier as Russia looks east after losing its principal gas market in Europe.

Russia’s Novatek delivered force majeure notices after new US sanctions

Russia’s Novatek, the controlling stakeholder and primary offtaker of Arctic LNG 2, delivered force majeure notices to entities that had signed contracts with Novatek’s trading arm for Arctic LNG 2 volumes from Novatek’s portion of the equity offtake, according to Reuters, which cited industry insiders.

The notices were issued after the US imposed restrictions on Arctic LNG 2, which is scheduled to start production by early 2024.

The purchasers include China’s Shenergy Group and Zheijang Energy, which signed contracts for 1.6 million tons per year of Arctic LNG 2 volumes from Novatek’s trading portfolio in early 2022, according to Energy Intelligence.

Arctic LNG 2 expected to start exports in January

Arctic LNG 2 was expected to begin commercial exports from the first 6.6 million-ton/year train in January 2024. However, delays are possible owing to US sanctions imposed on Novatek’s transshipment terminals in Murmansk and Kamchatka and the project operator.

The first train is now operational and has produced the initial drop of LNG. The second and third trains are now under construction, with completion dates set for late 2024 and 2026, respectively.

Foreign shareholders of Arctic LNG 2 would likely seek exemptions, according to analysts, because the US designation of the project operator and associated transshipment terminals in Murmansk and Kamchatka made equity participation and direct long-term contract offtakes from the plant toxic for them.

Exemptions are considered yet to be in contradiction to the primary objective of the sanctions—to restrict Russia’s future energy revenue by hindering the 19.8 million ton/year project.

China National Petroleum Corp. and China National Offshore Oil Corp. each hold 10% equity-offtake stakes in Arctic LNG 2, which means they have long-term offtake commitments for almost 2 million tons per year.

Lack of ice-class vessels to fulfill contracts

According to industry experts, while Novatek may have declared force majeure over deliveries of Arctic LNG 2 volumes from its portfolio due to sanctions, the primary explanation could be a lack of ice-class vessels to fulfill the contracted volumes.

Some contracts may have indicated that shipments begin in early 2024, and Novatek recognizes that there may be delays, according to Energy Intelligence.

Arctic LNG 2 is still waiting for the first of 21 Arc7 ice-class tankers ordered in Russia and South Korea. The Zvezda shipyard in Russia has nearly finished 3 tankers, but the project needs 6-7 tankers to fully offload LNG from the first train.

There are serious doubts about Zvezda’s ability to build the remaining 12 tankers because the Samsung Heavy Industries yard in South Korea, which performs extensive work on each tanker before transferring it to Zvezda for completion, has halted work under Russian contracts due to EU sanctions imposed in 2022 on the Russian naval construction industry.

Oil sanctions against Russia force India to look for alternatives

Reuters reports that payment concerns have delayed the supply of Russian crude oil, notably Sokol crude oil, to the Indian Oil Corporation.

This caused India’s largest oil refinery to use its reserves and purchase extra oil from the Middle East, according to reports. IOC is the only state-owned refinery that has signed an agreement with the Russian oil corporation Rosneft to purchase several Russian oil grades, including Sokol.

Western sanctions are preventing Russia from selling oil to India

Following the government’s recommendation against utilizing the Chinese yuan, Indian state-owned oil refineries undertake oil trade transactions with Russia in UAE dirhams. Due to a lack of other options, private refineries continue to use yuan.

Payments for Sokol crude oil were complex because Sakhalin-1 LLC, a business participating in the transactions, was unable to open an account with a UAE bank to accept dirham payments.

IOC was due to receive six cargoes of Sokol from late November to late December, according to shipment statistics. NS Century, a business sanctioned by the US in November, is responsible for some of these deliveries.

At the end of November, reports emerged that the Indian channel, which has been one of the most profitable Russian oil trade routes since the enactment of Western sanctions, is facing significant challenges due to non-dollar payment issues.

Bloomberg also reported recently that, due to new US sanctions, around five million barrels of Russian Sokol crude were stalled on their route to Indian refineries.

Halting Russia’s oil profits is key to stopping Putin’s war

As Russia begins to feel the full impact of Western sanctions on its economy and oil industry, the West must ensure that no sanctions evasion scheme based on the shadow fleet can succeed.

Russian financing for its war effort in Ukraine will be exhausted, and the war will come to an end only if the West completely imposes and enforces economic sanctions.

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