Foreign shareholders suspend participation after US sanctions
Major foreign shareholders in Russia’s Arctic LNG 2 project, including French TotalEnergies, Japanese trading houses Mitsui & Co and Mitsubishi Corp, as well as Chinese state-owned firms CNPC and CNOOC, have announced the suspension of their participation in the $21 billion project.
The exodus came after the US imposed further sanctions on the project last week, prohibiting interactions with PAO Novatek, Russia’s largest independent natural gas producer and the initiator of Arctic LNG 2. Novatek owns a 90% stake in the project.
The sanctions have prompted Novatek to issue force majeure notices, declaring it cannot meet its delivery obligations under existing contracts due to circumstances beyond its control.
Background on Arctic LNG 2
The Arctic LNG 2 project is one of Russia’s largest liquefied natural gas (LNG) developments, located on the Gydan peninsula along Russia’s Northern Sea shipping route. It is designed to produce up to 19.8 million tonnes per annum of LNG through three production trains.
The $21 billion project brought together major international oil and gas companies as minority shareholders, with Novatek retaining majority ownership. The original shareholder agreement in 2019 gave foreign partners a combined 40% stake: TotalEnergies (10%), CNPC and CNOOC (10% each), Mitsui & Co and Mitsubishi Corp (10% together).
Arctic LNG 2 was crucial to Russia’s ambitions to ramp up LNG exports to supply growing Asian markets. But the project has faced repeated delays, first due to impact of Covid-19 and now due to Western sanctions on Russia over the war in Ukraine.
|Mitsui & Co (Japan)
|Mitsubishi Corp (Japan)
Impact of latest sanctions
The latest US sanctions directly target PAO Novatek over Arctic LNG 2. They prohibit US citizens and companies from engaging in any transactions related to the project. Crucially, the sanctions also restrict foreign companies working on Arctic LNG 2 from raising financing through US banks or investors.
Faced with these sanctions, Novatek declared force majeure, saying it cannot fulfill its supply contracts. The foreign shareholders also decided to freeze their participation to avoid sanctions penalties.
What partners said
TotalEnergies announced it was suspending all work on Arctic LNG 2 “in compliance with applicable international laws and regulations” but would continue operating the nearby Yamal LNG plant “as long as necessary personnel can be rotated safely.”
Meanwhile, Mitsui and Mitsubishi said they have instructed staff working on Arctic LNG 2 to “suspend their activities.” And China’s state-owned CNPC and CNOOC have reportedly asked to freeze their roles as shareholders.
Russia downplays moves
Russian authorities have downplayed the impact of the foreign withdrawals. The Kremlin said it is Novatek’s responsibility to comment on force majeure measures. Novatek CEO Leonid Mikhelson said the company will continue working on Arctic LNG 2 “in line with the current realities.”
However, analysts say building such a complex large-scale project without Western technology and know-how could prove extremely challenging for Russia. Attracting alternative funding and partners will also be difficult with US sanctions still in place.
Future of Arctic LNG 2 in doubt
With its key foreign partners suspending participation and facing force majeure constraints, the future of the Arctic LNG 2 project now looks uncertain. The withdrawals deal a major blow to Russia’s ambitions to be a global LNG supplier.
For now, construction at the Gydan Peninsula production site continues, with Russian modules and equipment being delivered. One liquefaction train is reportedly over 90% technically ready for launch. However, new natural gas pipelines linking the plant to feeder fields have been suspended.
Novatek still aims to produce and ship the first LNG cargoes in 2023. But without the expertise of TotalEnergies and Japanese partners, launching such world-scale Arctic facilities could be extremely tricky.
So while Russia is defiant about keeping Arctic LNG 2 alive, most experts believe that in its current configuration, the project is no longer viable in the face of US sanctions.
The effective withdrawal of foreign partners deals a further blow to Russia’s ability to advance energy projects and access overseas finance and know-how amid sanctions.
For LNG markets, it reduces Russia’s ability to meet growing demand, especially in Asia. Europe has largely weaned itself off Russian pipeline gas since the Ukraine invasion, but still depends on some Russian LNG cargoes. Supply disruptions could raise prices globally.
The fate of Arctic LNG 2 also signals that Moscow has limited options for keeping mega projects going without Western allies. This may affect Russia’s broader economic outlook in the long run.
In the nearer term, Novatek must tackle the fallout of force majeure declarations. Buyers with existing Arctic LNG 2 supply contracts could file legal claims over delivery failures, impacting Russia’s reputation as a reliable energy supplier.
So the tensions over Ukraine look set to inflict sustained damage on Russia’s energy industry and ambitions – even if Moscow continues defiant rhetoric over projects like Arctic LNG 2.
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