Foreign shareholders have frozen participation in the Arctic LNG-2 project

According to Kommersant, foreign shareholders of the Arctic LNG-2 project – French TotalEnergies, Chinese CNPC and CNOOC and a consortium of Japanese Mitsui and JOGMEC – declared force majeure on participation in the project. This could lead to the fact that Arctic LNG-2 will lose long-term contracts for the export of LNG, and NOVATEK will independently finance the project. At the same time, Chinese and Japanese companies have asked the US authorities about the possibility of withdrawing LNG supplies from sanctions. For now, Arctic LNG-2 will be forced to sell gas on the spot market. This raises the question of the availability of ice-class tankers for LNG export. According to Kommersant, the Zvezda shipyard may again delay their delivery, but there is a chance that tankers will be received from foreign shipyards within 2024.

Foreign shareholders of Arctic LNG 2, due to US sanctions, declared force majeure under their agreements in the project, sources in the Russian government told Kommersant. This means that the shareholders of the LNG plant renounce their responsibilities for financing it and fulfilling offtake contracts for LNG.

We are talking about the French TotalEnergies, the Chinese CNPC and CNOOC, as well as the consortium of the Japanese Mitsui and JOGMEC. Each of them has 10% in Arctic LNG-2. NOVATEK itself owns 60%. Each shareholder has the right to receive LNG in an amount proportional to its share, that is, NOVATEK has 12 million tons per year, and foreign shareholders have 2 million tons. JOGMEC told Kommersant that they continue to analyze the impact of sanctions on Arctic LNG 2, CNOOC was unavailable for comment, and the other shareholders did not respond.

Products

Last week, Reuters reported that Novatek had sent force majeure notices to customers regarding LNG supplies from its portfolio.

In particular, Reuters wrote about force majeure under contracts with the Chinese companies Shenergy Group and Zheijang Energy, as well as the Spanish Repsol. The company also entered into long-term agreements for its portfolio with Gunvor, ENN and Glencore. NOVATEK itself received a notice of force majeure from the operator of the Arctic LNG-2 project at the end of November and transferred these force majeure to buyers, writes Poten & Partners.

After foreign shareholders refused LNG, Arctic LNG-2 will have to sell it on the spot: about 2.6 million tons from the first line alone.

But there is a chance that foreign shareholders will still be able to receive LNG: on December 22, Bloomberg wrote that CNOOC and CNPC will ask the US authorities to exempt contracts from sanctions. Poten & Partners writes that Japanese companies have also launched the same process, and it will take a long time.

Last week, the first line of Arctic LNG-2 began producing LNG. Commercial shipments were planned from the beginning of 2024, and the plant should reach its full capacity of 19.6 million tons by 2026. But the deadlines may shift, since the United States has included the project operator and its contractors in the SDN-list, which automatically cuts off buyers from Europe and Asia from purchasing LNG due to the threat of secondary sanctions against them.

Financing

Problems with financing may be no less serious. As Kommersant reported on June 26, the cost of Arctic LNG-2 has already increased by about 17%, to $25 billion due to the need to purchase additional equipment. The difference in cost, according to Kommersant’s interlocutors, was to be closed at the expense of the shareholders, but probably without the participation of TotalEnergies, which announced the cessation of investments in projects in the Russian Federation after the outbreak of hostilities in Ukraine. Now the burden of equity financing may fall entirely on NOVATEK.

After the refusal of foreign shareholders to take away LNG, the project had no functioning long-term contracts left, which could threaten a default on external financing in the amount of €9.5 billion. Of this amount, up to €2.5 billion had to be provided by Chinese banks, €4.5 billion by Russian banks Sberbank, Gazprombank, VEB.RF and Otkritie. At the end of 2022, the head of NOVATEK Leonid Mikhelson reported that Arctic LNG 2 managed to receive €6 billion in external financing. It is not yet known what amount of funds has been selected for the end of 2023.

Sergei Kondratiev from the Institute of Energy and Finance believes that NOVATEK will be able to continue to finance the project on its own, although it will be more expensive. “I don’t really believe that Chinese banks will talk about default. I think we don’t fully understand now how long-term the situation is with the redirection of cargo belonging to other shareholders, whether we are talking about the suspension or termination of long-term contracts,” he adds.

Fleet

One of the main problems of Arctic LNG-2 also remains the shortage of Arc7 class tankers. The situation was aggravated by US sanctions against floating storage facilities Koryak FSU in Murmansk and Saam FSU in Kamchatka, where transshipment from Arc7 tankers to conventional vessels was supposed to take place, which would allow optimizing the fleet of ice tankers.

NOVATEK initially planned to create a fleet of 21 Arc7 tankers for Arctic LNG-2: 15 of them should be built at the Zvezda shipyard, six at the South Korean shipyard Hanwha Ocean (formerly DSME). The shipowner of the last three was to be Sovcomflot, and the other three – the Japanese Mitsui OSK Lines.

DSME terminated the contract for the construction of tankers with Sovcomflot due to difficulties with payments. At SPIEF 2022, the head of NOVATEK, Leonid Mikhelson, said that the contract with Hanwha Ocean was being transferred to another owner, without specifying who exactly, and the tankers themselves continued to be built: “Everything is being built, the issue was with Sovcomflot.”

As Kommersant wrote on December 15, 2022, the Russian Zvezda shipyard delayed the delivery of the lead tanker Arc7 by at least a year – until March 2024. The shipyard reported in July that three tankers from the Arc7 line – Alexey Kosygin, Pyotr Stolypin and Sergey Witte – were launched. In June, Leonid Mikhelson said that Zvezda promised to deliver five gas carriers to the project in 2024, “we still have orders placed elsewhere, this year (2023.— “Kommersant”) we will get two or three tankers.”

Kommersant’s interlocutors among shipbuilders are confident that NOVATEK will not receive tankers from Zvezda until the end of 2024 due to difficulties with the supply of equipment. As for the Hanwha Ocean tankers, they indeed continue to be built, and, according to Kommersant’s sources, Arctic LNG-2 may receive them within 2024. Sovcomflot declined to comment on the timing of fleet replenishment for Arctic LNG-2.

It will not be possible to quickly order new ships from foreign shipyards, says Victor Katona from Kpler: Chinese shipyards are contracted until the end of 2025, South Korean ones until 2026. The only chance is to buy on the secondary market: “But the moment word spreads that NOVATEK is buying LNG tankers, their cost will double, as was the case with oil tankers and a large purchase program for Russian oil at the end of 2022.” According to the expert, as a last resort, it is possible to transfer Arc7 tankers operating for Yamal LNG, which is not subject to sanctions, to service Arctic LNG-2, attracting tankers from the market to export gas from the first project.

Tatiana Dyatel