EU avoids sanctions on Russian LNG again

In a new development, the European Union has taken the step of imposing sanctions on Russian gas. However, the EU has not yet taken the more severe action of banning Russian liquefied natural gas (LNG). Instead, the EU has introduced a separate measure allowing the purchase of Russian LNG. What has Europe banned in the new 14th package of sanctions?
The EU countries have approved a new 14th package of sanctions against Russia, including measures targeting LNG and the transportation of Russian oil.

Instead, the EU has introduced a ban on the transshipment of Russian LNG within the EU for the purpose of sending it to third countries. Both ship-to-ship and ship-to-shore transfers are prohibited. At the same time, a separate paragraph notes that the import of Russian LNG into the European Union itself is permitted. Furthermore, the EU has prohibited new investments and the provision of goods and services to ongoing LNG projects, including Arctic LNG 2 and Murmansk LNG.
The 14th package of sanctions also has an impact on the transportation of Russian oil. The EU is implementing targeted sanctions against 27 vessels from the "shadow fleet" that have been used to circumvent the price ceiling for oil and petroleum products established by the G7 countries and the EU. In a new development, the EU has imposed sanctions on specific tankers carrying Russian oil. These vessels are prohibited from accessing ports and providing services.

Following lengthy discussions, it has been determined that the EU is unlikely to impose sanctions on Russian LNG. With regard to sectoral sanctions, the EU has few remaining options, namely those relating to Russian nuclear and gas. In the case of LNG, however, a more measured and economically sound approach was taken.

Imposing a ban on the import of Russian LNG would result in a shortage of LNG on the domestic market, leading to price increases. Russia is the second largest supplier of LNG to the EU. In other words, the consequences would be self-inflicted.

As a result, prices for certain goods increased, but the EU provided an explanation that this would have a greater impact on Russia. However, this strategy is not applicable to LNG, as it would only impact the European Union, according to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.

Russia and its budget will not be adversely affected by the EU ban on the purchase of Russian LNG, as there is no export duty on LNG, according to the expert. Mr. Yushkov notes that even if the Yamal LNG project is closed, the Russian budget will still lose only a minimal amount, as the project is either exempt from paying income taxes and mineral extraction tax, or pays a preferential rate. A high-tech project is granted special conditions to facilitate its development.

Yushkov believes that a ban on transshipment of Russian LNG in European ports for third countries is an illogical and politically untenable decision.
The transportation of LNG from the Yamal LNG plant is now carried out by Arctic-class gas carriers, rather than by ordinary tankers. Only 15 of these gas carriers were constructed for the Russian Novatek project, which represents a limitation. In European ports, part of the LNG from Russia was shipped not for European consumers, but for transshipment of goods from an Arctic-class gas carrier to conventional tankers, which carried the goods further to Asian countries. From a service perspective, this was a more profitable approach, as it allowed gas carriers to return quickly to Yamal for a new batch of LNG.

While there are numerous regular tankers in operation, there are only 15 ice-class gas carriers with the capability of delivering LNG from Yamal.

As a result of the lifting of sanctions, the European market may now absorb the previously exported volumes of Russian LNG. From a political standpoint, this seems illogical. It appears that the proportion of Russian gas in the European market may actually increase. If prices remain at their current level, Europeans will pay a higher price for Russian LNG exports because they will purchase more. Mr. Yushkov believes that reducing gas prices is unlikely to be a viable option for European countries.
However, in practice, Russian LNG traders are likely to modify the logistics scheme. "Previously, LNG destined for Asia was transshipped in the waters of the Murmansk region, in the Norwegian waters and in European ports, for example, in the Belgian hub in Zeebrugge. However, all these operations will now be conducted in the waters of the Murmansk region, side by side, due to the prohibition of transshipment hubs by American sanctions," says Yushkov. Furthermore, the contract between the Russian Novatek and the Europeans to transship 8 million tons of LNG annually in the Belgian port of Zeebrugge is now impossible to fulfill. A special storage facility for LNG was even built in this port.

"The ban on re-export affects about 10% of Novatek’s exports from Yamal LNG."

However, the measure will only come into force in nine months, which gives Novatek time to prepare. In our opinion, such volumes can be redirected to the spot European market and alternative export configurations can be used, such as board-to-board transhipment or transshipment in the Murmansk region. "We believe that sanctions will not affect the total volume of exports, although part of the supplies to Asia may be redirected to Europe," says Sergei Kaufman, an analyst at Finam Financial Group.
I would be grateful if you could explain why Russian LNG from Yamal LNG is sent to Europe, including for transshipment, and not directly to China, India and other Asian countries. The primary reason is that the price of LNG in Europe and Asia is relatively similar. When prices are comparable, it is more cost-effective to deliver LNG to markets with shorter transportation distances, such as Europe. This is according to an expert from the FNEB. Secondly, the Northern Sea Route provides year-round transportation of LNG from Yamal in a westerly direction. However, due to the presence of ice in the region, this is not a viable option in an eastern direction. The optimal period for sending gas to the east is typically from June to the end of October, due to favourable ice conditions.

It is possible that the following scenario will play out: during the summer season, when navigation along the Northern Sea Route to the east is open, all volumes of LNG from Yamal will be directed eastward, and the contract for 3 million tons per year with China will be concluded. "For the remainder of the year, the remainder of the LNG is sent to Europe, as this is the more economically profitable option," states Yushkov.

It is of the utmost importance that the new EU sanctions include a separate clause explicitly stating that the supply of Russian LNG to Europe is not prohibited. This will facilitate the sale of LNG to our medium-tonnage plants, namely Portovaya LNG of Gazprom and Cryogas Vysotsky of Novatek in the Leningrad region. They were faced with the challenge of their products being perceived as toxic. The majority of Yamal LNG gas is sold by international traders, therefore it must be purchased directly from Port LNG and Cryogas Vysotsky, which are Russian companies. "Providing clear and transparent information that Russian LNG can be purchased will instil confidence in potential buyers of Russian medium-tonnage LNG," states Yushkov.
As for the ban on the supply of equipment for Russian LNG projects and the ban on investing in them, this is, in fact, a repetition of the sanctions that were introduced back in 2022.

“Sanctions to limit interaction with future LNG projects actually duplicate similar sanctions from the United States, so they will not have any additional effect. After the introduction of US sanctions against Arctic LNG-2, restrictions against other Novatek projects were only a matter of time. Everyone understood this, including the company’s management, and therefore projects were implemented with an eye on the inevitability of sanctions,” notes Sergei Kaufman.