The Russian Arctic Liquefied Natural Gas 2 (Arctic LNG 2) project has encountered significant obstacles. According to a report from Russia's "Businessman Newspaper" on December 25, foreign shareholders, including Total Energies, China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC), have declared force majeure due to U.S. sanctions. They have suspended their participation in the Arctic LNG 2 project and relinquished their responsibilities for financing and purchase contracts.
This development could lead to the Arctic LNG 2 project losing its long-term contracts for LNG exports, forcing Russia's Novatek company to independently fund the project and potentially sell natural gas on the spot market.
In response to inquiries, CNOOC stated they had no unpublished information to release, CNPC representatives claimed they were unaware of the situation, and Total Energies did not respond.
In November of this year, the U.S. Treasury Department imposed sanctions on Russia's Arctic LNG 2 as part of a series of restrictive measures against individuals and entities related to the Russia-Ukraine conflict. The U.S. State Department stated that the sanctions aim to "limit Russia's future energy production and export capabilities."
The Arctic LNG 2 project, located on Russia's Gydan Peninsula in the Arctic, is Novatek's second major LNG project following the Yamal LNG project. It involves the development and production of the Utrenneye gas field and the construction and operation of three LNG production lines, each with a capacity of 6.6 million tons per year, totaling 19.8 million tons of LNG and 1.6 million tons of stable condensate annually.
Russia had set a goal to increase its share of the global LNG market from 8% to 20% by 2030, with this project seen as a key factor in achieving that target. In 2022, Russia's total LNG exports were about 33 million tons, accounting for approximately 8% of the global LNG trade volume.
Originally, the first production line of the Arctic LNG 2 project was scheduled to start initial production by the end of 2023 and reach design capacity in the first quarter of 2024. The remaining two lines were expected to come online in 2024 and 2025, respectively. However, due to the Russia-Ukraine conflict and U.S. sanctions, the production start date has been affected.
Jinlian Creation's natural gas analyst Wang Yafei told Interface News that the international LNG market is expected to have a relatively loose supply and demand balance in the next two years, so the suspension of the Arctic LNG 2 project will have limited impact on the market.
Jinlian Creation predicts that the global LNG import trade volume will be about 407 million tons in 2023, with an export trade volume of about 411 million tons, exceeding the total import requirements of all countries.
In 2024, the global LNG supply increase is likely to exceed the demand increase. Economic recovery may boost industrial gas demand, but the increase in renewable energy power generation levels in Europe, Japan, and South Korea is expected to suppress gas power demand, leading to limited global LNG demand growth for the entire year.
Aside from the 19.8 million tons per year production from Arctic 2, other countries are expected to bring online a total of five production lines with a combined capacity of 32.38 million tons per year.
Wang Yafei noted that the suspension of financing and purchase contracts by foreign shareholders affects long-term contracts signed with the Arctic LNG 2 project. However, Arctic LNG 2 can still sell on the spot market, meaning the overall supply volume will not change significantly.
Novatek is Russia's largest LNG producer and the controlling shareholder of Arctic LNG 2, holding 60% of the project's shares. Total Energies, CNPC, CNOOC, and a consortium comprising Japan's Mitsui and Jogmec each hold 10% of the shares.
The head of Novatek's overseas LNG sales stated in an interview with CCTV that the supply contracts for the Arctic LNG 2 project have been signed, with 80% of the LNG production to be supplied to the Asia-Pacific market.
According to incomplete statistics from Interface News, three Chinese energy companies have signed purchase and sale contracts with Novatek for the Arctic LNG 2 project, totaling 66 million tons.
Among them, New Hope Group (600803.SH) purchases 600,000 tons of LNG per year for 11 years; Zhejiang Energy Natural Gas Group Co., Ltd., a subsidiary of Zhejiang Provincial Energy Group, purchases up to 1 million tons of LNG per year for 15 years; and Shenergy Group purchases over 3 million tons per year for 15 years.
