China comes under American attack on Russian LNG

The United States has continued its attack on Russian LNG projects. The fourth wave of sanctions affected Chinese companies and specialized vessels. The impact on China, as the third party involved in this story, is not accidental. Why is Washington punishing China and how will this affect the fate of Russian LNG?
The United States has expanded sanctions against Novatek's Russian LNG projects. First of all, they will affect the Arctic LNG 2 project. Five companies and 16 vessels were subject to new sanctions, including four unique vessels designed specifically for the transportation of large, heavy structures.

This is the fourth round of sanctions against Arctic LNG 2. In September 2023, companies that provide construction and engineering services for the project were sanctioned. In November 2023, the project operator was sanctioned. In February 2024, sanctions were introduced that put pressure on project logistics related to the construction of technological lines and Arc7 ice-class gas tankers for the project. The new package of sanctions limits support for the project from third parties. In particular, the Singaporean Red Box, which transported Chinese modules for the Arctic LNG 2 plant on its special reinforced ice-class Arc7 vessels – Audax and Pugnax – was included in the SDN list. Red Box delivered modules for Arctic LNG 2 at the end of February 2024, that is, after the introduction of US sanctions against this Russian project, the US State Department said.
These ships were constructed in 2016 with the specific purpose of transporting Chinese modules for Novatek projects, including along the Northern Sea Route with the objective of accelerating delivery times. The same company also delivered modules for the inaugural Russian Yamal LNG project.
Hong Kong's CFU Shipping and its heavy-duty vessels Hunter Star and Nan Feng Zhi Xing, which also delivered modules for the Russian LNG plant, were also sanctioned.

Furthermore, two Russian companies, ECO Shipping and Transstroy, were sanctioned for their involvement in the construction of infrastructure, including for Arctic LNG 2. Nine vessels belonging to ECO Shipping and three vessels belonging to Transstroy were also sanctioned.
The construction of Yamal LNG involved the delivery of equipment to China, the assembly of large modules in China, their transportation to Sabetta on the Yamal Peninsula, unloading, and the subsequent installation of the plant. Once the plant was connected to the gas fields, it began to function. The same process was followed for Arctic LNG 2. Some modules are likely still being manufactured in China, rather than Russia. These specialized ships deliver the ready-made modules to Belokamenka,” says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.

The first step in the construction of an LNG plant is the creation of reinforced concrete platforms, which we are able to manufacture in-house. These gravity-type platforms or bases are manufactured in Murmansk. The second step is the construction of modules for liquefied natural gas lines, which the Chinese are helping us with. China assembles the modules, delivers them to Murmansk, and then places them on a ready-made platform. Once the platform and module have been constructed, they are transported by sea to the Arctic installation site. Specially designed heavy-duty vessels are used for this purpose. The third element is the creation of pipeline sections, which we are strong in ourselves.
Yushkov recalls that initially they wanted to localise the production of modules in Russia. However, when the EU banned the supply of equipment to Russia for the construction of LNG plants in 2022, it became clear that it was more cost-effective to continue supplying the equipment to China and assembling ready-made modules there. Each train of Arctic LNG 2 requires 20 modules, and a total of three trains were planned. In general, this scheme should have been used for decades, that is, while Novatek would build its standard LNG plants one by one.

What will happen now?

It is most likely impossible to find a replacement for the banned vessels. However, they will continue to carry cargo for Russian Arctic projects, at least if Novatek continues to build LNG projects.

These ships were originally supposed to work with Russia. "It is possible that they will be re-registered in some way. It is unlikely that the Americans will remove these Chinese companies and ships from sanctions, even if they stop sanctioned activities," says Igor Yushkov.

"There is a reason why a new package of sanctions against third parties, in particular Chinese companies and courts, is being adopted right now." The recent visit of Antony Blinken (US Secretary of State) and Janet Yellen (US Secretary of the Treasury) to China has resulted in the United States openly requesting that China cease assisting Russia in circumventing sanctions and supporting its economy. Additionally, the United States has urged China to agree on the production of equipment for renewable energy. The latter request does not concern Russia. China is rapidly expanding its production of renewable energy equipment, driving out European and American competitors and creating an oversupply of such equipment, which is becoming cheaper. This is resulting in Western companies losing out economically and being outcompeted by Chinese companies. The introduction of new sanctions suggests that the United States has failed to impose its will on China.
The introduction of sanctions against Russian ships that transport ordinary cargo is not a cause for concern, as Russian owners operate solely within the Russian market, pay in rubles, and can re-register companies and rename ships if necessary. However, Western sanctions have created challenges for Russian LNG projects.
"Russian LNG projects are currently facing difficulties and incurring high costs. However, the legal issues are likely to be the least of their concerns," the interlocutor noted. The first stage of Arctic LNG 2 was launched on New Year's Eve, but no LNG was shipped. This has resulted in significant costs to the project. Firstly, there are no gas carriers, and even if gas carriers appear, there is also a second problem – to whom to sell the gas. Because the project shareholders, who were supposed to buy this gas, declared force majeure under their contracts.

Only China is in a position to purchase LNG from this project, which will allow it to secure the most favourable pricing. Chinese companies own 25% of the project and are hoping that when the plant starts shipping LNG, all products will be sold to China at competitive prices.
In general, all of Novatek’s new standard projects have been subject to criticism. The expert notes that new sanctions may be introduced in the future, potentially targeting the shipyard responsible for delivering the modules, or the companies that purchase equipment for these modules.
To date, all these sanctions have not affected Novatek’s “old” project, Yamal LNG. However, Yushkov is confident that it too may come under attack in the future, given that the United States does not require any Russian gas. "It is possible that the United States is awaiting the commissioning of new LNG plants, scheduled for 2026, before imposing sanctions on Yamal LNG," Yushkov suggests.

The suggestion that US sanctions against Arctic LNG projects are aimed at reducing the income of the Russian state is, in fact, pure hypocrisy. Furthermore, Novatek’s Arctic LNG projects do not contribute to the budget due to the temporary zeroing of taxes and the absence of an export duty on LNG in the Tax Code. Therefore, the budget is indifferent to the operation of these plants. The United States is simply preparing the sales market for its own new LNG plants, which are scheduled to begin operation in 2026.