May 26, 2022
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Sanctions put Arctic LNG on hold

Sanctions put Arctic LNG on hold

Photo: Alexander Ryumin / TASS

The South Korean shipyard Daewoo Shipbuilding & Marine Engineering (DSME) terminated the contract for the construction of three LNG tankers commissioned by Sovcomflot for Novatek’s Arctic LNG-2 project.

According to Kommersant, the reason was the delay in payment under the contract by the shipping company due to sanctions restrictions. The shipyard was supposed to hand over the tankers in February, April and July 2023. The contract for their construction was signed in October 2020, its total cost was $872 million for three vessels. DSME built for Novatek the entire fleet for Yamal LNG — 15 Arc7 tankers.

Despite the fact that Novatek itself is not yet under sanctions, its head Leonid Mikhelson came under restrictions. The problem, however, is not this, but the lack of gas tankers and the ban on the supply of technologies for the construction of gas liquefaction plants.

Initially, it was planned to create a fleet of 21 Arc7 ice-class tankers for Arctic LNG-2: 15 of them should be built at the Zvezda shipyard in the Far East, and six at DSME. But in March, the EU imposed technological sanctions against Russian shipbuilding, banning the supply of almost the entire range of ship equipment. VEB fell under US sanctions. Russia, which is the shipowner and lessor of 15 LNG tankers being built at Zvezda.

In addition, as he told the Free Press leading analyst of the National Energy Security Fund, expert of the Financial University under the Government of Russia Igor Yushkov, no less problems arose with the construction on the Zvezda. The Russian shipyard has never produced such ships itself and was going to build them in close cooperation with another Korean shipyard, Samsung Heavy Industries (SHI). As a result, Novatek may be left without tankers for its new project.

However, according to Yushkov, if the issue with tankers can be solved, for example, by leasing, then the future of the Arctic LNG-2 itself is an even bigger problem. The media this week already wrote that at least five Chinese companies may curtail the production of modules for the Arctic LNG-2 due to sanctions against Russia. In fact, they worked with Western equipment, and now they simply have nothing to collect for Novatek. All this may lead to the fact that the Arctic LNG-2 may turn into a “long-term construction project” with unclear prospects for completion, since none of the experts undertake to name the deadlines for import substitution of prohibited technologies for LNG projects.

“The Europeans have banned the supply of such equipment to Russia, so it is not clear whether Novatek will have time to complete at least the first stage of the Arctic LNG-2,” says Igor Yushkov. – For the first stage, there are such chances if he managed to bring in all the necessary equipment.

The fact is that the equipment for the Arctic LNG-2 plant is purchased in the West and sent to China, where huge modules are assembled from it, eight modules for each platform. Then these huge “cubes” are delivered on ships along the Northern Sea Route to Belokamenka in the Murmansk region, where the Novatek shipyard is located. At this shipyard, huge reinforced concrete platforms are poured on which these modules are placed. One such assembled platform forms one line of the plant for 6.6 million tons per year. Further, these platforms were to be dragged to the Utrenny terminal, which is located on the Gydan Peninsula in the YaNAO, and installed there.

The first stage, that is, the first platform of the plant, was almost ready, and in August Novatek was going to deliver it to Gydan and install it. But now the company does not say anything about this, so we do not know if we managed to deliver all the necessary equipment.

But we can definitely say that the second and third stages of the plant have been put on hold, they will not be built yet. In the previous format, they had to be implemented on foreign equipment, and now there is not even a platform for the third stage.

As for the Chinese, it simply does not make sense for them to continue further cooperation, because equipment does not come to them. That is, they stopped assembling modules not because they refuse to do this, they simply have nothing to assemble. Novatek has said in the past that it uses equipment from Italian, French and German manufacturers. I think that now everyone is refusing supplies, because it is directly prohibited by sanctions, and no one wants to violate them.

SP: Do you have the same problems with tankers?

— The important point is that Novatek may not need such a number of gas carriers if it was supposed to produce 20 million LNG per year, and now, at best, it will be 6.6 million. But this does not negate the issue of their construction as such. Of course, Novatek would like them to be built by a South Korean shipyard. They have no difficulties, they build quickly, efficiently and without problems. Novatek placed an additional order of three tankers with them through Sovcomflot as a safety net, because another 15 LNG carriers have been ordered from Zvezda.

“SP”: – But given the above, wouldn’t these 15 tankers be enough?

— The question is whether they will be built. Zvezda has no experience in building such tankers. She receives sets of gas carriers from the same South Korea. In fact, this is a ready-made tanker, only without the bow. On Zvezda, this nose is only welded, that is, they are engaged in very little localization, one might say, with a screwdriver assembly. At least, the first gas carriers come in this configuration.

How many of these tankers managed to enter the “Zvezda”, while no one reports. Judging by media reports, at least two sets were delivered to Zvezda and not a single tanker was built in South Korea. In total, Novatek needs at least five LNG carriers for the first phase of Arctic LNG-2, but we don’t know if there are any. So there are still a lot of questions about this project.

“SP”: – What opportunities do we have for import substitution, that is, can we ourselves start by building these tankers?

– I repeat that Zvezda did not make gas carriers on its own. But they have experience in building conventional oil tankers, including ice-class ones. With technologies to keep the temperature low, there should also be no questions. So theoretically, we can make gas carriers ourselves, it will just be longer and more expensive. We will not be able to compete economically with South Korea and China, but this is no longer a matter of economics, but of providing the necessary courts in principle. Another thing is that we cannot build LNG plants on our own. This is the main difficulty.

As for tankers, I do not rule out that Novatek will now insist that other companies take over the order of gas carriers in South Korea. The refusal to build tankers occurred because Sovcomflot did not pay the Koreans for them. Sovcomflot did not pay because it is under sanctions and cannot transfer funds abroad.

Novatek will be interested in someone else getting these slots for three tankers. For example, Greek companies that own gas carriers for Yamal LNG. Chinese companies, which are not prohibited from buying tankers from South Korea, can also become owners. Then Novatek will be able to conclude a contract for the export of LNG from its plants with these foreign owners. But any company will need guarantees that they will return the investment invested in these tankers, which means guarantees that the plant will start up. However, so far, it seems to me, even Novatek itself does not know whether it will be possible to do this.

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