War Leaves Russian LNG Ambitions in Tatters

Russia’s economic and political isolation will hit its plans to become the world's fourth-largest LNG exporter. Western sanctions imposed over its invasion of Ukraine have yet to target liquefaction technology. But financing problems and the mass exodus of foreign players will likely dash Kremlin hopes of exporting 80 million-140 million tons per year of LNG by 2035, up from around 30 million tons/yr today.

Pullout

Exxon Mobil and Shell are pulling out of the Sakhalin-1 and Sakhalin-2 projects, which planned to boost capacity in Russia's Far East.

The country's biggest foreign LNG partner, TotalEnergies, will hang on to its stakes in LNG export champion Novatek, and Novatek's Yamal LNG and Arctic LNG 2 projects unless further sanctions force it out. But it won't boost spending, despite securing rights to buy 10%-15% of future Novatek projects.

Novatek aims to produce up to 70 million tons/yr in the Arctic by 2030, up from 19.6 million tons in 2021. Western replacements could include China, but the region is strategic for Russia, making overreliance potentially risky. Chinese companies already own 29.9% of Yamal LNG and 20% of Arctic LNG 2.

Russia could turn to Middle East and Asian partners including India. But key importers Japan and South Korea tend to share the West's view of Russia’s toxicity, with Japanese shareholders in Sakhalin-1, Sakhalin-2 and Arctic LNG 2 under pressure to quit.

Technology and Finance

Russia will have to accelerate development of its own large-scale liquefaction technology. Novatek has licenses for 12 6.6 million ton/yr trains from Germany’s Linde, three for Arctic LNG 2. It's unclear what happens if technology providers and contractors are forced to leave Russia.

Novatek installed its own Arctic Cascade technology at Yamal LNG's 900,000 ton/yr fourth train, but there have been problems since the May 2021 launch. Failure to scale up the technology prompted last year's cancellation of Obsky LNG. The project has since re-emerged as a 6.6 million ton/yr, single-train plant using the same gravity-based structure model and Linde technology as Arctic LNG 2.

There will be no European money for Russian projects unless the situation changes dramatically. Even before the invasion, France refused to lend for the $21 billion Arctic LNG 2 over concerns about fossil fuel investment in the environmentally sensitive Arctic. Italy did approve loans, but these have now reportedly been frozen.

Financing may also be limited by sanctions against the Russian central bank, development corporation VEB.RF and key state-controlled banks, including Sberbank, Gazprombank and Otkritiye, which with VEB.RF agreed to lend €4.5 billion ($4.9 billion) to Arctic LNG 2.

State-run Gazprom may have problems funding gas processing and petrochemicals projects, including a 13 million ton/yr LNG plant forming part of the Ust-Luga processing complex, although record-high gas prices are for now bolstering its finances. Washington last week banned US entities from lending to Gazprom for more than 14 days.

Delivery Problems

Russian plants are already struggling to deliver cargoes to countries that have condemned the invasion. Lithuania has stopped taking cargoes from Novatek’s Cryogas Vysotsk (Vysotsk LNG), while the UK closed its ports to Russian vessels on Feb. 28, affecting Yamal LNG shipments.

The UK ban covers tankers flagged, registered, owned, controlled, chartered or operated by any person connected with Russia. Although most Yamal vessels are owned and operated by non-Russian third parties and don't fly the Russian flag, all are under long-term charter to Novatek. Fedor Litke had to divert to Zeebrugge in Belgium and Christophe de Margerie to Gate in the Netherlands.

Spain has proposed a similar ban, but an LNG analyst at a European major reckons an EU-wide blockade won't happen. A European ban would likely complicate deliveries to term buyers including Total and Spain's Naturgy. Alternative shipments to Asia would be hampered by closure of the Northern Sea Route because of ice. Vessels would have to sail through the Mediterranean, Suez Canal and Indian Ocean, bumping up shipping costs.