The European Union will refuse Russian LNG

Europe plans to ban LNG imports from Russia as early as 2024.
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The EU is discussing at the political level the introduction of sanctions against the import of liquefied natural gas from Russia - according to Swedish Foreign Minister Tobias Billström, restrictions may appear in the next sanctions package. The sanctions would, in theory, allow European importers to break long-term contracts without penalties. However, experts note that Russia is the second largest supplier of LNG to Europe after the United States, and abandoning such volumes will be difficult and economically costly. Lawyers also believe that breaking contracts will lead to massive arbitration proceedings.

A ban on the import of liquefied natural gas (LNG) into Europe from Russia may become one of the measures in the next, 14th package of EU sanctions. Swedish Foreign Minister Tobias Billström announced discussions about such a scenario on April 22. It is not yet clear when the 14th package of sanctions may be approved, and whether all EU countries will agree to a complete ban on the import of Russian LNG.

Russia is the second supplier of LNG to Europe after the United States. According to Kpler, supplies to EU markets in 2023 amounted to 16.4 million tons, with the largest consumers being Spain (5 million tons), Belgium (5 million tons) and France (3.6 million tons). Sweden itself purchases less than 0.1 million tons per year from the Cryogas-Vysotsk project to its Brunnsviksholme LNG terminal. In the first quarter of 2024, supplies of Russian LNG to the EU amounted to 4.6 million tons (17% of total LNG imports), with the bulk of purchases coming from Belgium, France and Spain, said Marcel Salikhov, President of the Institute of Energy and Finance.

The EU has already discussed a ban on imports of Russian LNG. To this end, in December, the EU Council and the European Parliament tentatively agreed to change the regulation so that EU countries would have the opportunity to prohibit the reservation of LNG terminal capacity for Russian gas supplies. However, these new restrictions were not in the nature of pan-European sanctions and would be adopted at the national level.

According to Marcel Salikhov, a potential ban on the import of Russian LNG will create serious problems for the European market, since Europe's dependence on LNG has increased significantly over the past two years.

At the same time, European importers rely primarily on the spot segment, rather than new long-term contracts with other suppliers, the expert notes. He considers the most likely scenario to be a redistribution of LNG flows: the EU will be forced to increase purchases from the USA, Qatar, and African projects, while Russia will replace these volumes on the market of South America and Asia. At the same time, sanctions will complicate the logistics of supplies to the Asian market in the winter, as difficulties may arise with the transshipment of Russian LNG in European ports, primarily in the Belgian Zeebrugge.

Anton Namenov, senior partner at Pen & Paper, suggests that the import ban will provide for transitional provisions similar to those applied to oil and petroleum products from the Russian Federation.

More lenient terms may be agreed upon for individual states for which Russian LNG is a critical source of energy. So, Mr. Namenov believes, some counterparties will have time to agree and gradually stop supplies. Otherwise, LNG buyers from the EU will have to refuse to fulfill the contract unilaterally, which can most often be done with reference to force majeure, which can be recognized as an import ban established at the EU level.

“But in practice, the application of force majeure will depend on the specific wording in the contract, as well as on the form of resolution of the dispute arising in connection with the refusal - a state court in the Russian Federation or the EU or international commercial arbitration,” the lawyer believes. Alternatively, in his opinion, the buyers' obligations under the contract may be terminated due to the objective impossibility of performance - for example, due to the fact that payments under contracts that contradict EU sanctions regulation will not be processed by banks and, accordingly, the buyer will not be able to pay delivery.