From the editor: Sanctions on Russian LNG could see dark LNGC fleet emerge [Gas in Transition]

EU talks in mid-June on a 14th package of Russian sanctions failed to reach agreement. Measures relating to LNG – banning the re-export of Russian LNG from EU LNG terminals and placing sanctions on the Arctic LNG-2 and Murmansk LNG projects – do not appear to have been sticking points. It is thus likely these measures will be enacted once agreement can be found in other areas.

EU sanctions on Russian gas have not been tough to date, owing to Europe’s need for gas. The loss of the majority of Russian pipeline imports following Russia’s invasion of Ukraine in February 2022 engendered a huge spike in energy prices, a large reduction in gas usage and the breakneck deployment of new LNG import capacity. Now that Europe feels more secure – even though a cessation of Ukrainian gas transits looks likely at the end of this year – targeting Russian LNG has become more viable.

Russia is already looking at ways of circumventing the proposed sanctions and potentially harsher measures in the future, leading to concern that a dark fleet of LNG tankers will emerge, just as it has done in the oil market.

Arctic transport logistics

For Yamal and Arctic LNG-2, Russia’s main problem lies in transport logistics and the key encumbrance is the need for ice-class LNG Carriers (LNGCs). The problems surrounding Murmansk LNG are greater as project developer Novatek has yet to start construction and will have to overcome sanctions on equipment supply from the beginning. 

Arctic LNG-2 was designed to use new Arc7 vessels optimised for maximum speed through ice, rather than open water efficiency. Their role is to take LNG from the project to two transhipment points – Murmansk in the west and Kamchatka in the east. From these two points, conventional LNGCs would take the LNG onwards to their final destinations.

15 of the new Arc7 LNGCs were to be built at the Russian ship assembly yard at Zvezda, but only five hulls have been delivered by South Korea’s Samsung Heavy Industries, and it is likely that no more than two or three of the delivered hulls will become operable LNGCs this year, owing to the exit of GTT, which was providing the membrane containment systems, and General Electric, which was providing the propulsion systems.

In addition, South Korea’s Hanwha Ocean has built three Arc7s and Japan’s Mitsui OSK Lines is close to completing another three, all of which were intended for use by Arctic LNG-2. However, use of the vessels has been stymied by US sanctions and, as they can only be used for Arctic LNG 2, their sale to a third party as a means of evading sanctions would be obvious. 

The vessels thus appear stranded, although they could be deployed in stationary functions as floating storage or storage and regasification units.

Given the lack of new Arc7s, Novatek needs to optimise the use of its Yamal fleet, which would mean as many LNG deliveries as possible to the nearest available transhipment facilities, either LNG terminals or ship-to-ship (STS) transfer points. STS transfers are no easy option as they require a safe site, good weather, advanced technology and equipment and experienced personnel. 

If the EU bans transhipments from its LNG terminals, Yamal’s LNGCs would have to travel either all the way to the LNG’s final destination, to safe STS locations, or to more distant transhipment points, possibly North Africa. Either way, Yamal’s ice-class vessels would spend more time on the water for each journey, limiting both total exports, and the possibility of providing some capacity to Arctic LNG-2.

Northern Sea Route 

With sanctions on LNG exports looming to the west, Russia has prioritised use of the NSR to Asia, including the use of non-ice class LNGCs during the summer. According to High North News, Russia has already issued permits for six non-ice class LNGCs to use the route, as well as other non-ice class vessels such as container ships. The permits allow navigation of the NSR between July 1 and October 1.

Greater use of the NSR reflects both sanctions – Russian oil trade on the route has jumped, including the use of non-ice class tankers – and disruption to other major trade routes. These include threats to shipping in the Red Sea and off the Somalian coast, which affect the Suez Canal route, as well as congestion on the Panama Canal, as a result of a lack of rainfall reducing reservoir levels.

In May, Russia announced that year-round shipping of LNG from the Arctic to Asia would begin for the first time early next year, utilising Rosatom’s fleet of nuclear power ice-breakers. In September, the first LNG shipment from a non-Arctic LNG plant, Russia’s small Portovaya LNG facility, was made via the NSR to China on the Velikiy Novgorod, which has an Ice2 rating limiting its Arctic operations to light ice in the summer months. Russia is clearly bent on expanding trade along the NSR.

Dark fleet emergence?

If sanctions tighten on Russian LNG many LNGC operators are likely to avoid the trade, as has been the case with oil. Equally, there will be a minority willing to take the risk in return for high charter rates. 

It is likely that the emergence of a dark fleet of LNGCs would have similar characteristics to that of the dark oil fleet. Vessels will typically be old, fly flags of convenience, lack adequate insurance and have poor inspection records and obscured ownership.

There have been a number of sales of aged steam turbine powered-LNGCs in the last 24 months. Under different circumstances these vessels would have been prime candidates for scrappage. Who has bought them is generally not stated -- the only information revealed is often ‘sold to an Asian buyer’ or similar and the flag which they fly under is quickly changed. 

Given the surge in LNG trade post Russia’s invasion of Ukraine, LNGC availability has been low, particularly as most newbuild ships are destined for long-term charter agreements rather than the spot market. So, there has been an economic rationale for extending the operating life of these old, inefficient ships. 

But there is also a suspicion that these vessels could re-emerge as part of a fleet of dark LNGCs ready to serve Russian LNG production in the event of greater international restrictions on its LNG exports. 

The idea of the oldest LNGCs operating in the toughest conditions, along the NSR, even if only in summer, is a frightening one. Dark fleet operators’ insurance papers are effectively worthless. They use old vessels, the value of which is low in the event of a loss, but which can earn elevated profits in the event of success. The cost of accidents is borne by the countries in whose waters the accident happens. In the case of the NSR, this responsibility would most likely lie with Russia, which means little, as it is Russian oil and LNG trade that creates the risk in the first place.