What is Arctic LNG 2?

• The first wave of sanctions in 2014 were targeted generally at restricting Western financing for Russian entities, but specifically targeted major Russian financial institutions and companies, including Novatek. This was a complication for Novatek, which was trying to put together the financing scheme for its Yamal LNG project at the time, but managed to secure a $12bn loan from China in 2016. It also signed a strategic partnership agreement with the China National Petroleum Corporation on cooperation on the next-in-line Arctic LNG 2 project. The sectoral sanctions did not prevent Novatek from obtaining the necessary equipment and technologies for its LNG projects.
• However, a greater wave of sanctions since February 2022 has had a profoundly negative impact on Russia’s LNG plans. Russian operators of the prospective LNG projects intended to maximize efficiency by relying on the best equipment and technologies available in international markets. The resulting complexity of the value chain makes LNG particularly vulnerable to sanctions. A ban on Western liquefaction technology and equipment supplies was included in the fifth package of European sanctions against Russia on April 8, 2022. Crucially, its scope included the supplies under effective contracts signed before February 26, 2022, for which Russian imports had already made payments. European companies involved in the Russian LNG projects duly terminated their operations and exited the country, reporting substantial financial losses as a result. Unsurprisingly, Chinese partners reiterated their commitment, allowing the existing Russian large-scale LNG plants under Russian operatorship (Yamal LNG and Sakhalin LNG) to continue operations for over two years under sanctions.
• Yet the comprehensive ban on the export of LNG technology to Russia increased the level of uncertainty over the future of Russia’s LNG program. The Russian authorities and LNG project developers insisted they would proceed with their existing plans regardless of Western pressure. Accordingly, Novatek successfully developed its own medium- and later large-scale liquefaction technology, launching its first liquefaction train at the end of 2023 – only a year behind schedule – albeit running at 50% capacity. The second train is at an advanced stage of readiness and could, in theory, be launched in early 2025.

But in October 2024, Bloomberg reported that Novatek had halted production in its sole active LNG train, with no plans to restart operations until summer 2025, as a result of the tightening sanctions regime, which crucially included vessels intended to transport the gas[1]. Without the custom-built ships that Novatek needs to break through the frozen parts of the Arctic Ocean, it’s impossible to export any gas. Moreover, Moscow has struggled to find buyers for its LNG, forcing it to store the gas in a huge container vessel in the Arctic Sea. This is because, while it has been very successful at skirting sanctions on other liquid exports (namely, crude oil and refined products) by using a “shadow fleet” of oil tankers, the pool of LNG tankers is relatively small, making them easy to identify, follow, and subsequently sanction. As Tom Marzec-Manser, head of gas analytics at Independent Commodity Intelligence Services, explains:

There’s a whole fleet of cargo vessels that are sitting in shipyards in Asia, which are specifically designed to flow through the Arctic seas. They’re called “ice-class” vessels, and they’ve not been able to sell them to Novatek because of these sanctions. What Novatek then did was to say, “Right, what we’re going to try and do is buy really old LNG vessels, which aren’t designed for the Arctic waters, but we can at least shuttle them backwards and forwards during the summer months”. But then the US has sanctioned those vessels, as well.

It’s a game of cat and mouse, and as we see, new vessels which are owned by unknown Middle Eastern entities entering Russian waters, it’s only then that you can properly join the dots to say, well, this is clearly being used to service some of these [LNG] projects, and it’s only then that the sanctions come in.