Novatek will be allowed to operate foreign LNG Carriers on the Northern Sea Route

The Russian natural gas company won an exemption from the ban on carrying oil and gas on foreign-flagged tankers, which could have seriously harmed its Arctic LNG 2 project.

Natural gas company Novatek was granted an exemption from a new law banning foreign-flagged oil and gas carriers from the Northern Sea Route. The ban would have been detrimental to Novatek’s $20 billion Arctic LNG 2 project.

Under a new decree, Novatek and its shipping partners are allowed to operate or charter foreign vessels to transport LNG from the port of Sabetta to transshipment hubs or ports outside the NSR. The government removed 26 tankers currently under long-term contracts from the ban and granted permission for them to sail until the end of 2044. In order to accommodate additional vessels on a short-term basis, which are of crucial importance to Novatek during the summer months, the decree also allows for additional foreign-flagged LNG carriers if they are chartered for at least six months until December 31, 2021.

The now-granted exemption provides much needed assurances about the logistical feasibility of the Arctic LNG 2 project. With this hurdle cleared, external investors, including Saudi Arabia’s national petroleum company, Saudi Aramco, may be more easily persuaded to become partners in the project.

The exception will also alleviate ongoing logistical challenges faced by Novatek, where increases of production ahead of schedule coincided with shortages of LNG carriers. This necessitated a complex transshipment operation off the coast of Northern Norway between December 2018 — May 2019. A ban on foreign vessels would have further complicated Novatek’s calculations.

Controversial ban was discussed since 2017

Discussions to implement a ban on foreign oil and gas vessels on the Northern Sea Route and to nationalize the transport of oil and gas resources began in the Fall of 2017. The measure was aimed at jumpstarting Russia’s domestic shipbuilding sector, specifically the Zvezda shipyard, which is projected to construct some of the second batch of Arc7 LNG carriers required by Novatek to transport LNG from its new Arctic LNG 2 project. The first order of 15 vessels were constructed by South Korean shipyard Daewoo Heavy Industries.

At the time Putin declared that “this step will allow us to boost the volumes of marine shipments, it will strengthen the position of national shipping companies and create additional opportunities for renewal of the fleet.”

At the end of 2017 a bill was introduced in the Russian parliament with the aim to amend the Merchant Shipping Code requiring vessels loaded with oil, LNG, gas condensate, or coal to fly the Russian flag for any new transport contracts after February 1, 2018.

Novatek’s shipping agreements were signed before this deadline and thus this exception already accommodated the original 15 Arc7 vessels under contract by Novatek to transport LNG from its Yamal LNG. However, it did not apply to additional vessels needed in the future as the Arctic LNG 2 facility is projected to come online in 2022-2023.

Novatek opposed the ban from beginning

Already during the Fall of 2018 it became clear that the proposed ban would severely curtail the oil and gas industry’s efforts along the NSR. Thus, Russia’s Deputy Prime Minister Dmitry Kozak confirmed in October 2018 that Novatek was asked to voice its requirements and timeline. “I gave an instruction yesterday to work on this issue. So that Novatek itself can express how long it needs and what schedule should be formed. Because today it is absolutely clear that this ban cannot be implemented from January 1, 2019.” Nonetheless, the amendment to the Merchant Shipping Code came into effect on December 31, 2018.

Novatek’s CEO Leonid Mikhelson had been an outspoken critic of the ban since its inception. He explained the company’s opposition in an interview last year. “Novatek refused to take part in discussing amendments to the Code. This idea is destructive at its root. I will stress it once again – we need a law aimed specifically at supporting the Russian shipbuilding industry. […] We have signed an agreement with a Russian shipyard for Russian shipowners to place orders at. Isn’t it enough?”

Industry experts also raised questions about the feasibility of the ban. “This measure not only violates the concluded contracts of freight, but destroys the entire transportation system and jeopardizes the project as a whole,” said Mikhail Grigoriev, Director of Gecon, and oil industry consultancy firm.

Novatek entered into negotiations against the ban from a position of strength as it accounted for half of the cargo volume on the route in 2018 and its success will be instrumental in meeting President Putin’s mandated goal of 80 millions tons of cargo by 2024 — nearly half of which will come from the company’s LNG projects.

Russia dependent on foreign financing and know-how

The softening of the ban is also indicative of Russia’s dependence on foreign financing and technical expertise to push ahead its Arctic projects. Novatek’s Yamal LNG project was in part financed by France’s Total and by Chinese loans. Similarly, up to 50 percent of Arctic LNG 2 will be financed by foreign entities, such as potentially Saudi Aramco.

The inability of Russia’s shipbuilding sector to construct the required fleet of specialized Arc7 LNG carriers also resulted in a softening of ice-class requirements on the NSR. Following a change in regulation Arc4 LNG carriers, which are more easy to come by, or even conventional LNG carriers without any ice protection, will be allowed on the NSR between Murmansk and Sabetta.

Additional crude oil and coal projects along the route, including Gazprom’s Novy Port, also located on the Yamal Peninsula, and the Prirazlomnaya offshore platform in the Pechora Sea, as well as VostokCoal’s development on the Taymyr peninsula also rely on foreign-flagged vessels. Thus additional exemptions to the ban will be likely in the future.