Leonid Mikhelson and Gennady Timchenko emitted liquefied gas

The projects of their company Novatek, including the newest Arctic LNG-2, were left without gas carriers for years to come due to the war against Ukraine and US sanctions.
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Japanese transport company Mitsui O.S.K. Lines reported that, due to sanctions, it could not transfer three ice-class tankers to the Arctic LNG 2 project, in which it owns 10 percent. Two years earlier, the same fate befell Sovcomflot, with which the South Korean shipyard broke its contract. The first batch of liquefied natural gas (LNG) from Novatek's new project was planned to be shipped in February, however, apparently, this will not happen due to logistics problems. Experts believe that tanker famine is destined for other Russian LNG projects. Is it possible to overcome it?

The US Treasury included Arctic LNG 2 on the sanctions list in November 2023. In December, Novatek, which owns 60 percent of the project, declared force majeure on supplies to some of its LNG buyers. Foreign shareholders - the French company TotalEnergies, the Chinese CNPC and CNOOC and the consortium of the Japanese Mitsui and JOGMEC - also declared force majeure under their contracts in the project. However, as promised, the first line with a capacity of 6.6 million tons per year has already begun producing liquefied gas.

At the end of last year, Russian Deputy Prime Minister Alexander Novak said that shipment from it would occur in February 2024. However, at the beginning of the year it turned out that buyers, due to restrictive measures, are still refusing to accept cargo, there is no necessary transport, and Novatek will not use the fleet from its other project - Yamal LNG - Novatek.

According to the Kommersant newspaper, the first tanker intended for Arctic LNG 2 from the South Korean shipyard Hanwha Ocean (formerly DSME) still remains in Korea. According to the original plans, its delivery should have happened almost a year ago. As reported by gCaptain with reference to ship registers, the tanker Pyotr Kapitsa, which Hanwha Ocean built for Sovcomflot, acquired an owner in the person of New Transshipment FZE, a company registered in the UAE, in early February. It is assumed that it will be easier to buy this vessel through an Arab company.

However, the main legal conflict concerns the vessels that the Japanese Mitsui purchased from South Korea for Arctic LNG 2.

In February, its head Takeshi Hashimoto said that after American sanctions came into force, the company could not be a charterer of gas carriers and was looking for a way to sell them to an operator. According to him, the contract contains a condition that implies that if restrictive measures are introduced, Arctic LNG 2 can buy back the vessels. However, sanctions do not allow us to do this either. Mitsui is looking for options to resolve the problem from a legal point of view. Experts admit the possibility of a judicial outcome of the conflict.

  Novatek did not answer Octagon’s question about the possibility of filing a lawsuit. Partner at the law firm Orlova\Ermolenko, Alexander Ermolenko, believes that the precedent that has arisen in the sanctions conditions of recent years is far from the only one. In his opinion, it is not necessary to exclude a judicial scenario, however, any outcome of this kind of dispute will not lead to anything yet.

– When the guns speak, the laws are silent. From a legal point of view, you can sue in various courts. For example, Novatek can go to the Moscow Arbitration Court, get a court decision in its favor, where it will be written that Mitsui owes it ships, but the Russians still will not receive the ships. If you go to international courts, the situation is more complicated. The fact is that the sanctions regime is extraordinary. It does not repeal existing laws, but the problem of international law enforcement now is such that the regime of sanctions and counter-sanctions is, as it were, imposed on all this from above and distorts everything. However, nowhere is it said that the sanctions regime prevails over treaty obligations. There are both obligations and sanctions,” he explains in a conversation with the publication.

According to the lawyer, the agreement between the two companies must indicate jurisdiction.

Most often, such disputes are resolved by international arbitration institutions. The agreement also establishes the procedure for resolving disputes and the applicable law - according to the laws of which country the dispute will be resolved.

– The court must rely on the treaty and international rules. But the problem is that the sanctions regime is also heterogeneous and depends on the specific country. The Japanese are not as active as the Europeans because this is not really their history and they would just like to do business. But since their large corporations are embedded in international trade, they cannot afford this. Based on its current legal practice, I assume that Japan will take a wait-and-see approach,” continues Ermolenko.

The expert does not exclude the possibility that Novatek will decide to appeal to an international court, and this will make sense if the authority confirms the need to fulfill the agreement. Such a decision will be valid only on paper, but will be a definite help at the end of the hot phase - at least a truce between Russia and Ukraine.

The global fleet of LNG tankers includes about 650 vessels. The number of orders for them is constantly increasing. New Russian LNG projects, according to the Ministry of Industry and Trade, require 75 Arctic-class gas carriers. Arctic LNG 2 needs at least 15 gas carriers. The future Arctic LNG 1 and Arctic LNG 3 will require the construction of another 40 ships for Novatek. Gazprom's LNG plant in Ust-Luga will need about 20 tankers.

The Oil and Gas Industry magazine notes that “the problem of the lack of gas carriers is connected not so much with sanctions, but with the general lack of ships of this type in the world. Fleets for transporting LNG are owned mainly by companies that are also consumers of LNG. There are few shipyards specializing in the construction of gas carriers, and even those are filled with orders for years to come.” The lion's share of orders comes from South Korea and Japan.

Of the two dozen gas tankers, 15 for Arctic LNG 2 should be built by the Zvezda shipbuilding complex (operator Rosneft). Previously, it was planned that five of them, with a cargo capacity of 172.6 thousand cubic meters each, would be transferred in 2024.

Experts insist that this amount is not enough.

And the idea of creating a full-scale in-house production of large-capacity gas carriers that would combine the characteristics of icebreakers currently looks difficult to implement.

– There are no domestically developed and approved designs of gas carrier vessels to solve this problem. There are no Russian developed and tested liquefied natural gas cargo containment systems (LPG) for gas carrier projects. There is no free space in the shipyards for the construction of such ships. There is no production and competence of the manufacturer of marine LPG and the manufacturer of special materials for these LPG. There is no domestic experience in the construction of LPG and specialists trained to solve this problem,” Ruslan Krylov, head of LNG/LH2 projects at Baltmash, comments to Octagon.

  At the same time, Ruslan Krylov notes that Russia has its own developments in creating cryogenic thermal insulation systems for LPG in gas carriers. In particular, the St. Petersburg enterprise Baltmash has created an innovative development for LPG in gas carriers - the RB-2 membrane system. It is capable of solving the problem of transporting and storing liquefied natural gas on Arc7 ice-class gas tankers and could replace the French Mark III system used today, which is produced in Korea.

Let us note that the idea of building Russia’s own gas carriers arose even before the introduction of sanctions.

The project to create a large-capacity vessel for year-round transportation of liquefied gas along the Northern Sea Route is being carried out by Rosatom. Its estimated cost is 21 billion rubles. “All LNG gas carrier projects existing in the world are foreign. This means that now there is a need to develop a Russian project in which component equipment developed in Russia will be used,” stated Vladimir Aptekarev, director of shipbuilding and optimized floating power units at Atomenergomash (Rosatom’s mechanical engineering division) a year ago.

Aptekarev did not specify the time frame for the project. In his opinion, it will be possible to talk about the transition to the tanker construction stage only after the completion of the design and complex of development work. The only shipyard capable of building such a gas carrier is Zvezda, which was visited by Russian President Vladimir Putin last September.