Supply From Russia’s Arctic LNG 2 Project Halted by US Sanctions

(Bloomberg) — The start of supply from Russia's newest liquefied natural gas project will be delayed after the company declared a force majeure on shipments in the wake of US sanctions. European gas prices rose on the news.

Russia's Novatek PJSC, which leads the Arctic LNG 2 project, sent force majeure notices to some of the facility's buyers, said people familiar with the matter who declined to be named as details are private. Sanctions that the US imposed on the project in November are making it impossible to make shipments for the time being, they said.

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Force majeure is a legal clause that allows companies to suspend deliveries due to factors beyond their control. The development adds to supply risks elsewhere in the market, as ships have rerouted away from the Red Sea in recent days due to attacks on vessels there.

While the outlook for Arctic LNG 2 had already been clouded due to the US measures, the move presents significant challenges for the project — and could curb extra LNG supply for the global market this winter. Novatek had planned to start production from first of three trains by the end of the year with an aim for the first cargoes from the facility in early 2024. 

The force majeure “does not necessarily mean that no LNG will be exported from Arctic LNG 2, only that external factors are likely to prevent Novatek from fulfilling all of its contractual obligations,” Energy Aspects Ltd. analyst Jake Horslen said in a research note.

Exports from the project will depend on Novatek's ability to deliver Arctic LNG 2 volumes under existing term contracts or in spot deals “with the limited pool of potential buyers willing to ignore US sanctions,” he added. Shipping will be a limiting factor, Horslen wrote.

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European gas prices surged as much as 8.3% before settling 2% higher at €34.20 a megawatt-hour. Novatek shares reversed earlier gains in Moscow, falling as much as 4.8% and heading for the lowest close since July.

Global Supplies

Arctic LNG 2 is critical for Russia's ambition to more than triple its LNG production by the end of the decade. The plant is also set to make up a large portion of the LNG supply expected to come online in 2024, said Talon Custer, an analyst at Bloomberg Intelligence. 

“If the project is significantly delayed or it does not ship cargoes next year, this would severely limit global LNG supply growth — down to about 2.5% versus the 3.5% that we projected,” he said. “Lower-than-anticipated supply growth could boost prices and amplify volatility.”

Novatek holds a 60% stake in the project. France's TotalEnergies SE, China's CNPC and Cnooc, and a consortium of Japanese trading house Mitsui & Co. and Jogmec hold the remainder. 

Novatek didn't respond to a request for comment. Mitsui declined to comment on the matter due to confidentiality reasons. TotalEnergies wasn't immediately available to comment. 

—With assistance from Shoko Oda, Francois de Beaupuy and Elena Mazneva.

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