Russia's Arctic LNG 2 suspends gas liquefaction amid sanctions, lack of tankers

(Reuters) - Novatek, Russia's largest producer of LNG, has suspended production at its Arctic LNG 2 project due to sanctions and a shortage of gas tankers, two sources familiar with the matter told Reuters on Tuesday.

The project had been hoping to start commercial deliveries in the first quarter of this year. But plans were complicated last year when it was included in Western sanctions over Russia's conflict in Ukraine, prompting foreign shareholders to freeze participation and Novatek to issue a force majeure.

The decision to suspend converting natural gas to LNG is a blow to Russia's goal to capture a fifth of the global LNG market by 2030-2035. It is currently the world's fourth-largest LNG producer with annual exports of 32.6 million metric tons.

Novatek, which started tentative LNG production at the first of the plant's planned three trains in December, did not reply to a request for comment.

"Train one will remain shut until at least the end of June," one of the sources told Reuters, adding that construction activities for the project were still ongoing.

The other two trains are due to be delivered to the site by sea in future from the port of Murmansk. The three trains are together targeted to produce 19.8 million metric tons per year of LNG and 1.6 million tons per year of stable gas condensate.

The sources said the main problem was a lack of specialist tankers capable of transporting LNG - which is cooled to minus 163 degrees Celsius (minus 261.4 Fahrenheit) - and cutting through thick sea ice.

Separately, the Vedomosti newspaper said on Tuesday that natural gas output at the project had fallen sharply to 83 million cubic metres (mcm) in February due to a delay in the start of LNG shipments.

The sources said production had been 425 mcm in December and 250 mcm in January.

TANKERS

Russia faces challenges in getting specialist gas tankers.

According to Novatek, 15 Arc7 ice-class tankers, able to cut through 2-meter-thick ice, will be built at Russia's Zvezda shipyard for Arctic LNG 2.

Six more Arc7 tankers were due to be built by Hanwha Ocean, formerly Daewoo Shipbuilding & Marine Engineering, including three for Russia's leading tanker group Sovcomflot and three for Japan's Mitsui O.S.K. Lines.

However, the three tankers ordered by Sovcomflot were cancelled due to the sanctions against Russia, Hanwha said last year in regulatory filings.

Ice-class tankers usually have double hulls - strengthened structures to withstand the pressure of ice - and reinforced propellers.

So far, only three suitable gas tankers have been built for Arctic LNG 2, according to public information: the Alexei Kosygin, Pyotr Stolypin and Sergei Witte vessels.

Russian Deputy Prime Minister Alexander Novak, responding to a question on when the first LNG cargo would be delivered from the project, said on Friday that "the company is dealing with the issues, corresponding talks are under way".

"Their main problem is with the tankers," he added.

Ronald Smith, a senior oil and gas analyst at Moscow-based BCS brokerage, said it was unclear when - or even if - the project could get the tankers.

"Novatek is very well managed and may find a work-around to get completed ships transferred to the project somehow in the near future, or those ships may remain stuck in shipyards for an extended period of time," he said.

Arctic LNG 2 is led by Novatek, which holds a 60% stake. The other shareholders are France's TotalEnergies TTEF.PA, China's CNPC and CNOOC, and Japan Arctic LNG - a consortium of Mitsui & Co, Ltd. 8031.T and JOGMEC - each holding a 10% stake.

Mitsui declined to comment and TotalEnergies referred comments to Novatek. The other shareholders were not immediately available to comment.

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