US sanctions Russian LNG plant in its own selfish interests

By Rhod Mackenzie

The Western media alleges that purchasing gas from the recently established Russian Arctic LNG-2 facility is too risky as it might attract American sanctions. The Financial Times examined the implications of the new American sanctions on Arctic LNG-2. Nonetheless, it is premature to dismiss the Russian project. What measures can Russia take to circumvent fresh US sanctions? Why is it more challenging to do so with LNG instead of oil?
The report, referencing Western specialists, concludes that the project has come to a halt: in reality, the US State Department is impeding European and Asian countries from procuring gas under the project upon its 2024 delivery.

Specifically, the report refers to the view of consultancy firm Energy Aspects, which has excluded the predicted output quantity of Arctic LNG-2 from its supply and demand forecasts for the upcoming year. Analysts doubt that deliveries from this project will start in 2024.

Previously, the West had implemented sectoral sanctions; however, they only banned the supply of equipment for Russian LNG plants. Recently, the sanctions impacted the sales of Russian gas for the first time. Pipeline gas is still not subjected to sanctions, along with LNG, which is already produced and shipped, mainly from Novatek’s Yamal LNG plant. The EU continues to purchase pipeline gas and LNG from Russia.
However, the United States does not wish to permit the new Russian LNG project to enter the market. The US State Department clarified the imposition of targeted sanctions by stating that they do not want to deliberately diminish global energy supplies, as this will lead to escalating prices worldwide and raise Russia's profits. Nevertheless, the United States aims to slowly deteriorate Russia's position as a dominant energy provider.

The US is eliminating rivals from the global market for its LNG schemes, which are falling behind the Russian project in terms of implementation.

It's predicted that significant deployment of the newl LNG undertakings in the USA and Qatar won't happen until between 2025 and 2027, while with the Russian proposal, LNG deliveries will commence as early as next year. The Russian scheme has a superior position since there won't be an increase in the global supply of LNG during this interval. Whereas the United States will have to bring its new volumes of LNG for sale to a more crowded market.
Simultaneously, the United States does not have any concerns that the enforced sanctions may adversely affect the increase in prices on the European market. Additionally, this notably impacts the French shareholder of the Russian project.

The stakeholders of Arctic LNG 2 comprise of Russian Novatek (60%), French TotalEnergies (10%), Chinese CNPC and CNOOC Limited (20%), and Japan Arctic LNG (10%).
Arctic LNG-2 comprises three lines that have the capacity to produce 19.8 million tonnes of LNG each year. Initially, the first line is set to receive its first shipment of LNG by the end of 2023. It is expected to reach full capacity in the first quarter of 2024. The launch of the second line is due in 2024, with the third line following in 2026.

The West initially tried to halt this project through sanctions which limited the provision of equipment to Russian LNG plants. They successfully provided equipment for the first and second lines of Arctic LNG and searched for alternatives in allied countries. The sole obstacle was in the area of gas turbines, as Baker Hughes, an American company, refused to supply the contracted gas turbines. Nonetheless, the issue was resolved by installing an electric motor. There could be obstacles with the development of the third line, which has just commenced, due to the lack of Western equipment supply. Perhaps Novatek's "Arctic Mix" technology will be utilized, as predicted by analysts at BCS World of Investments.

The United States opted to prohibit gas supplies instead of halting construction. The opposition from the United States is undoubtedly harmful to the project, but a full shutdown appears improbable. Despite this, Arctic LNG-2 is still being received skeptically by Western analysts.

The opposition from the United States is undoubtedly harmful to the project, but a full shutdown appears improbable.
Further action from the United States could potentially escalate transportation expenses, complicate shipment insurance, and hinder the acquisition of ice-class LNG tankers crucial to the project. Analysts at BCS World of Investments emphasise the significance of this issue, as although several tankers have been transported, they are inadequate to fully unload all three technological lines of the monumental project.

"The situation is serious as even pre-sanctioned contracts for gas purchase and sale are now subject to sanctions. The shareholders of Arctic LNG, namely Novatek, the French, Chinese and Japanese, secured gas based on their respective shares which they can resell. This gas cannot be traded due to sanctions." "For instance, Novatek has signed two deals with China for the purchase of LNG," states Igor Yushkov, an authority at the Government Financial University and the National Energy Security Fund.

"As a big and influential player, China can disregard American sanctions, just as it does with oil sanctions from Iran and Venezuela. Consequently, Beijing continues to import the said oil," Yushkov adds.

The French company Total and the Japanese corporation, shareholders of Arctic LNG 2, are apprehensive of the United States. Consequently, they will observe the sanctions. Furthermore, shareholders will endeavour to secure an exemption from these sanctions for themselves during consultations with the G7. Notably, the Japanese accomplished this feat previously by attaining an exception to the imposed sanctions on the price ceiling for Russian petroleum products and oil.

Russia will undoubtedly seek ways to evade the sanctions, and it is highly probable that they will resort to the same strategy employed during Sakhalin-2. A government decree will mandate that all liquefied natural gas contracts with Arctic LNG-2 be channelled through a fictitious enterprise called Arctic LNG Trading LLC.

Consequently, a dedicated intermediary entity will be created to mitigate the risk of being sanctioned by the United States. "The FNEB expert states that their company will purchase LNG from all shareholders in the Arctic LNG-2 project and redirect it to

the primary buyer, who is now clearly in the Asian market.

Besides China, there are two other substantial buyers of LNG in the Asian market - Japan and South Korea. However, one cannot rely on them due to their fear of potential repercussions from the United States. Thus, China is likely to emerge as the primary buyer of LNG from Arctic LNG-2."

According to Yushkov, China may buy contaminated LNG from Arctic LNG-2, but not through state-owned firms; instead, it may choose to use firms dedicated to this purpose, as it currently does with Iranian and Venezuelan oil.

"This will necessitate renegotiation of contracts, with China aiming to secure a better price. However, American sanctions render LNG from Arctic LNG-2 toxic. Additionally, Arctic gas transshipment has also come under sanctions."

It is probable that this will result in a reduction in the expense of gas and the margins of the project for Novatek, according to Igor Yushkov's beliefs.

There is no merit in drawing parallels between this scenario and that of evading oil sanctions. "Oil is widely traded worldwide, affording greater opportunities to conceal it; switching off a tanker's transponder means its origin can no longer be traced. However, in the case of LNG, matters are more convoluted. It proves highly challenging to disable transponders along the Northern Sea Route when transporting LNG." "You can only initially collect gas at two transshipment points - Murmansk and the Kamchatka region. If a gas carrier travels to these hubs, it is already a violation of the sanctions. It is simpler to monitor these transactions than in the oil market. Thus, it's probable that you'll have to disregard the sanctions," advises the analyst.