As Russia strives to bolster its global liquefied natural gas (LNG) market share, its flagship project, Arctic LNG 2, faces significant setbacks due to US sanctions, according to industry analysts. The ambitious plan to triple LNG output and increase market share to 20% by 2035 is now under threat, as the geopolitical landscape complicates Russia’s energy export strategy.

Arctic LNG 2, controlled by Novatek, Russia’s largest LNG producer, has been hampered by delays, with insiders suggesting that commercial LNG supplies may not commence until the second quarter of 2024 or later, contrary to Novatek’s earlier assertion of a first-quarter launch. The project, with a capacity of 19.8 million tonnes per year, is crucial for Russia to offset the decline in pipeline gas exports to Europe, which saw a significant drop last year.

US sanctions, aimed at restricting Russia’s LNG exports, have already prompted Novatek to declare force majeure on supplies from Arctic LNG 2, signaling a potentially insurmountable obstacle for the project. Foreign shareholders have also suspended their involvement in the face of potential sanctions backlash, renouncing financial responsibilities and offtake contracts for the plant.

Jason Feer of LNG shipping and brokering firm Poten & Partners sees Novatek’s force majeure declaration as a “wake-up call” for future Russian LNG projects. The difficulty in advancing other projects stems from the reliance on foreign equipment and support, which sanctions make challenging to secure.

While Russia has successfully redirected oil exports away from Western Europe to China and India in response to previous sanctions, the constraints on LNG are more severe due to the limited number of tankers capable of transporting LNG and Russia’s restricted access to technology and finance.

Furthermore, the geopolitical chess game extends to China, where Russia’s attempts to increase gas sales have faced challenges, with protracted talks for the Power of Siberia 2 pipeline yet to yield a solid contract. The success of Arctic LNG 2 is crucial for Russia’s broader energy revenue goals, particularly as Gazprom’s pipeline gas exports to Europe have decreased.

Arctic LNG 2’s challenges also extend to technical complexities, such as the conversion of gas to a liquid at extremely low temperatures. The project relies on the expertise of foreign companies, but the departure of some Western firms with technical proficiency, notably the suspension of the contract between Gaztransport & Technigaz (GTT) and Russian shipbuilding company Zvezda, poses additional hurdles.

Sunny Xu, founder of LNG solution provider C-LNG, points out that while China has the capacity to build liquefaction modules, the lack of experience in designing and building advanced critical equipment raises efficiency concerns.

The project’s timeline for achieving its full capacity of 6.6 million tonnes in 2023 is also in doubt, with skepticism from industry experts. Sanctions have affected the construction of ice-breaking LNG carriers, and the cancellation of three tankers ordered by Sovcomflot further complicates logistics.

In the face of these challenges, Ronald Smith from BCS Global Markets brokerage suggests that Novatek may need additional years beyond the original timeline to acquire the necessary fleet of Arc7 tankers. The uncertainties surrounding Arctic LNG 2 underscore the intricate web of geopolitical, technical, and logistical challenges that Russia must navigate to realize its LNG export ambitions in the face of escalating sanctions.