Latest Round of US and UK Sanctions Takes Aim at Russia’s Arctic LNG 2 Project

The US continues to follow through on its efforts to “kill” Russia’s Arctic LNG 2 energy project.

Following rounds of sanctions in September and November 2023, the US Department of the Treasury announced a host of new sanctions targeting a shipyard, specialized Arctic gas carriers, and a key assembly yard.

Novatek, the company behind the project, began producing liquefied natural gas (LNG) at its flagship project in December but has yet to make any shipments. 

The new US sanctions aim to restrict the company’s ability to procure Arctic LNG carriers already constructed by a South Korean shipyard and looks to further curtail Russia’s ability to build additional such vessels domestically by sanctioning the Zvezda shipyard.

The shipyard in Russia’s Far East has up to five Arctic icebreaking Arc7 LNG vessels under construction with two or three ships projected to enter into service at some point in 2024. It is unclear how the blocking measures against Zvezda will delay their service entry.

More importantly, the holding companies behind three vessels of the same type built by South Korean shipyard Hanwha Ocean have also been sanctioned. 

These measures will further restrict Hanwha’s ability to offload the vessels to new owners or transfer them to Novatek through the use of legal loopholes.

The shipyard has completed four vessels, all of which have undergone sea and gas trials and were projected to start servicing the Arctic LNG 2 project this year.

Sanctions delay first shipments

Novatek and Russian officials originally announced deliveries from the project to begin in January followed by comments suggesting initial shipments won’t occur until March. With the new sanctions further delays now appear likely.

Additional measures target Novatek’s Belokamenka construction yard where massive prefabricated modules arriving from shipyards across China are assembled onto floating platforms. 

The yard completed the first train, or production line, during summer 2023 and the floating platform also known as a gravity based system was subsequently towed to Arctic LNG 2’s location on Gydan peninsula in August 2023.

The second production line is nearing completion with the final three modules just days and weeks away from delivery aboard three specialized heavy load vessels. 

Two vessels, Red Box’s Audax and Pugnax, battled harsh Arctic ice conditions during their month-long voyage along the Northern Sea Route, each carrying one module the size of a football field. A third module took the long-way around through the Indian Ocean and around Cape of Good Hope.

Shipping operator Red Box has previously been in the media spotlight as highlighted by Le Monde last fall due to its possible skirting of international sanctions.

With the blocking measures against Belokamenka it is unclear if a delivery of the modules by Red Box would represent a direct violation of sanctions.

In an email to HNN the company’s CEO Philip Adkins stressed that “Red Box Energy Services has no contractual relationships with any party that is sanctioned under the current sanctions, including the most recent sanctions.”

He also said that the company had terminated all of their contracts relation to Novatek and Arctic LNG 2 and that it had no contractual relationships with the Belokamenka ship yard and that its vessels Audax and Pugnax were not delivering topside modules to Belokamenka. 

These statements seemingly contradict the fact that according to vessel tracking site MarineTraffic.com both vessels are expected to arrive in Murmansk, where Novatek's Belokamenka yard is located, in the next day or two. 

When asked if the vessels were carrying modules TMS-003 and TMS-004 Adkins did not want to clarify beyond saying that the vessels were carrying “steel structures” and were registered as such in export paperwork. 

The company's responses match those that Le Monde received during an investigation in October 2023, which concluded that "Red Box may have breached European regulations." 

UK, but no EU sanctions

Mirroring some of the US’ measures, the UK government also sanctioned the Arctic LNG 2 project and affiliated entities, including a number of Novatek directors.

Together the measures will continue to increase the obstacles Novatek needs to overcome to begin deliveries and find buyers for LNG from its project. 

However, thus far Chinese businesses have been a reliable partner for Novatek to replace western technology and continue construction of the project.

As long as China remains supportive of the facility it will be hard for the West to “kill the project” in its entirety – the stated goal by US officials. 

“The stakes are too high for Novatek and Russia to stop the projects, especially Arctic LNG2. We have seen how successful Russia has been in deflecting sanctions,” explains Hervé Baudu, Arctic shipping expert and Chief Professor of Maritime Education at the French Maritime Academy (ENSM).

The export of hydrocarbons accounts for 15 percent of Russia’s GDP, Baudu highlights. Combined with the rapidly growing global demand for LNG – expected to be 40 percent higher by 2040 – Russia will likely find willing buyers for its product despite international sanctions.

Baudu also points out that Japan has been a reliable buyer of Russian LNG and is unlikely to stop in the future.

“There is pressure from Japan, which is working with the USA to get around the US sanctions. Since 2011, Japan has depended on LNG for 70 percent of its energy needs.”

The EU has thus far shied away from placing direct sanctions against Arctic LNG 2, though it has placed limits on the transfer of liquefaction technology.

But these measures appear not enforced as several EU companies continued to provide services to Novatek despite sanctions, without facing official scrutiny.