Sanctions are sinking Russia’s flagship gas project

In 2021 piped fuel to Europe accounted for 69% of Russia’s 200bn cubic metres (bcm) of total gas exports. Because redirecting pipelines is hard, the future of Russia’s gas industry now hinges on its ability to produce much more gas in liquid form (LNG) and ship it to alternative buyers.

Arctic LNG 2 is vital to that mission. The project, comprising three “trains” projected to liquefy 27 bcm a year, is big in itself. It also pioneers Arctic-proof technologies—such as floating concrete platforms as big as eight football fields—and installation techniques that can be deployed on a large scale. (Its parts are pre-assembled 2,000km away before being clicked together, Lego-style, in Siberia.) It is therefore the prototype for many more potential Russian LNG terminals, says Tatiana Mitrova, formerly of the Russian Academy of Science. Russia aims to produce 100m tonnes of LNG a year—equivalent to 142 bcm when regassed—by 2030.

To prevent this, Western countries have tried to deprive Arctic LNG 2 of key technology, tankers and clients. In May 2022 the EU banned the provision of Western tech to the plant (America blacklisted the project 18 months later). However, Novatek, the Russian firm running the project, had already received much of the Western equipment needed to build the first two trains. It lacked 16 American-made turbines to power the trains, but managed to re-engineer the platforms so they could work with Chinese turbines instead. Using various obfuscation techniques, such as renaming and repainting vessels carrying its freight, one Chinese firm, Wison Energy, has reportedly continued to supply Novatek. Train 1 started production in January. Train 2 is expected to launch in early 2025, only a few months behind schedule.

Novatek has had more trouble getting ships. To be able to export outside the summer months, Arctic LNG 2 relies on tankers, called Arc7s, that can cut through ice. Before the war in Ukraine, Novatek had ordered six such vessels from Hanwha Ocean, a South Korean shipyard, and 15 from Zvezda, a Russian one. Three of the former are already built, but sanctions have prevented payment for the vessels. In February Hanwha tried to sell those tankers to a Dubai-based affiliate of Novatek, but the transaction was aborted when America found out. The three other foreign-built Arc7s, owned by a Japanese firm, also cannot be chartered for Arctic LNG 2 because of sanctions. Meanwhile, only two of the Russian-made ones are nearing completion because Western suppliers stopped producing key parts for them after sanctions were imposed. Their delivery date has been repeatedly pushed back.

In the absence of Arc7s, Novatek has gathered a “dark fleet” of old, conventional tankers that can at least pick up cargo during the summer. Ana Subasic of Kpler, a data firm, estimates that such ships, owned through shifty companies in India and the Gulf, currently number around a dozen. Eight loaded some LNG at Arctic LNG 2 between August and October.

These shadow tankers hide their tracks by tampering with their transponders, but satellite images make it possible to trace their true voyage. America has systematically blacklisted such ships and their operators as they have approached Arctic LNG 2 (the latest sanctions came in late October). That has spooked potential buyers—Novatek’s third and biggest headache. Half the tankers previously loaded with Arctic LNG have put their cargo into storage along the Russian coast. The other four are loitering in Asian waters, waiting for buyers to emerge. India has said it does not want to be one of them. Chinese importers, too, have so far been reluctant, despite being offered discounts of around 40%. That may change—or not. One gas trader notes that all China’s LNG firms also buy gas from America or rely on dollar funding, making them vulnerable to sanctions.

Sanctions on Arctic LNG are stricter than those targeting Russia’s oil exports, which do not stop non-Western buyers purchasing the stuff. They are also easier to enforce: the global fleet of LNG tankers is much smaller than the oil-carrying one, and it can dock at only a few specialised ports. That makes transgressions easier to spot, notes Anne-Sophie Corbeau of Columbia University. And punishing them comes at a smaller cost: from 2025 onwards, lots of new LNG is expected to come from outside Russia, notably America, which should keep global prices down. Sanctions on Arctic LNG are working largely because America wants them to work. How long that lasts depends on the geopolitical whims of its next president.

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