West’s gambit: EU weighs up ban on Russian LNG, while US vows to ‘kill that project’

• Europe’s imports of Russian LNG increase 11.4% between 2021 and 2023, but calls for ban grow
• Measures also being prepared to prevent transshipment of Russian LNG volumes at EU terminals
• Novatek plans move away from European transshipment with Murmansk and Kamchatka facilities
• Possibility raised of Russia employing ‘dark fleet’ to export LNG, as US vows to ‘kill’ Arctic 2 project

While Europe has successfully shaken off its dependence on Russian pipeline gas imports, the same cannot be said for its reliance on Russian LNG: since the Ukraine invasion began, Europe’s imports of Russian LNG have increased, from 17.5 Bcm in 2021 to 19.5 Bcm in 2023. With the exception of the UK, European countries have been reluctant to impose any sort of ban on Russian LNG, but there is now increasing momentum to impose legislative restrictions.

In April, EU legislation was passed which will give member states tools to stop Russian LNG imports, should they choose to. Measures are also being prepared which will prevent transshipment of Russian LNG at European terminals. But how effective will such measures actually be? Efforts to restrict Russia’s oil exports have only had mixed success, and Russian sources are expressing optimism that they will find ways around any restrictions the EU can impose on LNG.

Some commentators are suggesting that the currently planned measures will actually lead to EU LNG imports from Russia increasing, rather than decreasing. Also, the likely start-up this year of at least the first train of the Arctic LNG 2 plant is going to put the issue of Russian LNG exports under increased scrutiny.

Under the carpet

When Russia’s pipeline imports to Europe were slashed following the invasion of Ukraine – they were down 56% year-on-year in 2023, to 28.3 Bcm, compared to 175-180 Bcm in 2018-19 – Europe turned increasingly to LNG to fill at least part of the gap. The facts that a significant part of Europe’s LNG imports (12% in 2022) were from Russia, and that high European prices were leading to an increase in these imports, enabling Russian LNG to hugely benefit from the crisis, were to an extent swept under the carpet.

Given the doubts over how Europe would cope with the massive reduction in gas supply, this increased reliance on Russian LNG was understandable, although the UK, which had been a significant importer in 2021 – Russia supplied it 2.35 mt – did pass measures to prevent Russian LNG being delivered to UK terminals. Recently, with Europe appearing to have successfully weathered the storm, the awkward fact that Russian LNG had benefited from the crisis prompted legislators to look at ways to put a dent in this lucrative revenue stream.

Most of Europe’s Russian LNG imports come from the 17.4 mtpa Yamal LNG plant which started up in 2017. Its logistical chain is unlike that of other LNG projects in that there are two export routes which the specialised Arc 7 tankers that are needed to load at Yamal LNG can take.

The first of these is direct to Asian markets via the Northern Sea Route (NSR), which has historically only been usable in the summer – although climate change is increasing the window of availability. The other route is west, either to supply European markets or to transfer on to conventional ships for delivery to other markets, for example to Asia in the times when the NSR is not usable.

In 2023, Yamal LNG exported some 19.8 mt, significantly above its nominal 17.4 mtpa capacity, with the two smaller Russian terminals in the Baltic – the 1.5 mtpa Portovaya and 0.9 mtpa Vysotsk LNG facilities – exporting another 2.1 mt. Only 32 out of Yamal LNG’s 244 cargoes took the NSR in 2023, with the remainder of Russian production from these plants coming west, nearly all being delivered to, or transshipped at, European terminals. Europe itself imported 15.6 mt of Russian LNG in 2023.

In addition to these imports, a further 3.9 mt was transshipped at European terminals to Asian destinations in 2023. The transshipment was all carried out at Zeebrugge in Belgium and Montoir in France. Both these terminals made investments to be able to carry out transshipment for Yamal LNG, with Zeebrugge constructing a new 180,000 cm tank specifically for the purpose, backed up by a long-term contract with Yamal LNG.

The GATE terminal in the Netherlands did carry out some transshipment operations prior to 2022, but, under pressure from the Dutch government, the terminal no longer receives Russian cargoes.

Ban calls grow

There have been mounting calls for some ban on European LNG imports from Russia, with the UK, Poland and the Baltic States having effectively already instituted such a ban – although none of these countries was particularly dependent on Russian LNG.

Belgium, France and Spain have been much more circumspect, with Spain – which in March received a quarter of its gas imports as Russian LNG – pointing out that concerted action is needed, and also that the existence of long-term contracts complicates the issue, with the prospect of Russian suppliers making huge arbitration claims if things are not handled properly.

Some steps were made in the direction of a ban with the promulgation last April of a European directive which would enable member states to temporarily restrict LNG supply from Russia, including the ability to restrict bidding for infrastructure capacity. But ACER, the EU agency for cooperation of energy regulators, seemed to play down the significance of this directive, given that long-term contracts are already in place.  

ACER also pointed out that in the REPowerEU plan, released soon after Russia invaded Ukraine, the EU aims to completely end its reliance on Russian fossil fuels by 2027, and proposed that the reduction of Russian LNG imports should be considered in gradual steps starting with spot imports. However, legislators do not seem to have tackled this issue so far.

Where there does seem to have been some movement is in agreement to include provisions on LNG in the EU’s 14th sanctions package, which is currently under discussion. These provisions will specifically target the transshipment of Russian LNG. The obvious difficulty with this – as some commentators have already pointed out – is that in the absence of an import ban the volumes that cannot be transshipped could simply stay in Europe, in which case the effect would be to increase Europe’s own reliance on Russian LNG, making it somewhat counter-productive. If that loophole can be plugged, the lack of European transshipment options could pose real issues for Yamal LNG, because transshipment at European terminals is built into the Yamal LNG model, and not only as an alternative to the NSR.

The project simply does not have enough Arc 7 vessels to enable it to ship its volumes beyond Europe, and certainly not to take all the output to Asia. Some of the offtake arrangements also have transshipment baked in.  The 2.9 mtpa contract originally with Gazprom Marketing and Trading, and now with Germany’s SEFE, is free on board (FOB) Zeebrugge after transshipment from Yamal LNG’s own ships, while the volumes that Novatek lifts from Yamal LNG are transshipped at Montoir to supply Novatek’s FOB onsale contracts with Shell, TotalEnergies and Gunvor.

‘Kill that project’

But Novatek was already planning to move away from European transshipment with its 19.8 mtpa Arctic LNG 2 (ALNG2) project, which is currently under construction – though considerably delayed by sanctions, and with doubt over how many of its three LNG trains can be completed.

When Novatek launched ALNG2, it used the experience of Yamal LNG to refine the transshipment logistics. The plan was to construct two purpose-built 360,000 cm capacity floating storage unites (FSUs): one near Murmansk, to the west, and one at Kamchatka to the east, which will carry out ship-to-ship transshipment for Atlantic basin and Asian markets respectively. This arrangement is intended to optimise the use of the Arc 7 fleet by reducing the distance the ships need to travel to the transshipment point.

The Murmansk facility, named Saam FSU, arrived on station in June 2023, with its sister ship the Koryak FSU arriving at Bechevinskaya Bay near Kamchatka a few weeks later.

These massive vessels are able to berth two ships at once, and technically would be able to take on all the current transshipment being carried out at European terminals in addition to the ALNG2 volumes, particularly as the latter seem unlikely to reach the planned 19.8 mtpa given the uncertainties over whether Train 3 can be completed.

But new rounds of US sanctions have included provisions aimed specifically at impacting Novatek’s ability to fully utilise its new transshipment hubs, and come on top of sanctions that seem likely to prevent ALNG2 using some of the new Arc 7 vessels constructed in South Korea. In deference to European countries which have existing long-term contracts, the US has steered clear of sanctioning Yamal LNG, but has been quite explicit in its aims in respect of ALNG2, with assistant secretary for energy resources Geoffrey Pyatt telling US congressmen in November last year that “our objective is to kill that project”.

The US sanctions have specifically proscribed Arctic Transshipment LLC, the company set up by Novatek to own and operate the two FSUs at Murmansk and Kamchatka. This makes it doubly difficult for western ship operators, at least, to use these facilities, and neither of the FSUs seem in fact to have yet been put into operation, despite having been in position for some months.

Russian optimism

But despite the aggressiveness of the US sanctions on ALNG2, and the increasing likelihood that the EU will impose at least some measures that will impact Yamal LNG, Russian sources continue to express optimism that they will find ways to work around any sanctions.

On 29 May, for example, a Russian foreign ministry official was quoted by the RIA news agency as saying that any restrictions imposed by Europe would backfire on their initiators. He went on to say that Russian companies had already managed to redirect energy supplies to new markets, including India and China, and that this experience would help them cope with any new restrictions.

Such statements are clear hints that Russia is considering using similar tactics to those it has employed to blunt the impact of oil sanctions. In response to the EU and UK ban on oil imports from Russia and the G7 oil price cap, Russia has had to seek new markets for its oil, and also has found ways around the cap by creating a so-called dark fleet.

The enforcement of the oil price cap relies on the leverage of western maritime services, particularly insurance and shipping. Companies in G7 countries and the EU are prohibited from providing services like insurance, trade finance, and maritime services for Russian oil shipments sold above the USD 60/barrel price cap. But Russia has accumulated a dark fleet of older tankers, owned through obscure channels and insured through countries which are not imposing sanctions, and through these is able to circumvent the price cap for a proportion of its oil sales.

There are now suggestions that Russia could adopt this approach in LNG, accumulating a similar dark fleet of older, probably steam turbine, LNG tankers, not in this case to avoid a price cap, but to enable it to get its LNG to more distant markets if western ship owners and operators will not allow their vessels to carry out transshipment in Russian waters. This possibility was mooted by shipowner Flex LNG on a conference call in May, and referring also to ship-to-ship transfers, a technique that Yamal LNG used to transship between Arc 7s and conventional ships before the Zeebrugge expansion was ready. At that time, the transshipment was carried out off northern Norway, but presumably now would have to be done in Russian waters. Without doubt, Russia will have other tricks up its sleeve, such as strengthening conventional tankers and using icebreaker support in order to augment the Arc 7 fleet.

Given that the EU has said that it will cease importing Russian energy from 2027, Russia is certain to be developing plans of its own to cut its reliance on Europe as a market and as transshipment point. This will no doubt provoke a corresponding response from the designers of sanctions, but it is clear that stifling Russia’s Arctic LNG exports entirely will be very difficult. - DJD