Novatek shares tumble after reports of force majeure delivery problems from Arctic LNG-2 in 2024

Russia’s biggest LNG producer Novatek warned customers that it would not be able to meet all its delivery obligations in 2024 due to a force majeure caused by sanctions imposed on the development of its Arctic LNG-2 project by the US, Bloomberg reports.

The Arctic LNG-2 project involves the construction of three gas liquefaction lines with a total capacity of 19.8mn tonnes per year (tpy) based on the Utrenneye field on the Gydan Peninsula. The first line was planned to be launched before the end of this year, with shipments to begin in the first quarter of next year. Through the project Russia wanted to triple its LNG capacity by the end of the decade.

Novatek has 60% of Arctic LNG-2. Other participants – French TotalEnergies, China's CNPC and CNOOC, as well as the Japanese consortium of Mitsui and JOGMEC – each own 10%.

Why is it important

Novatek’s Arctic gas projects had  remained a bright spot for almost two years against the backdrop of the EU’s refusal of Gazprom’s pipeline gas, but this is gradually coming to an end.

The EU still imports 50% of Russian LNG but is preparing to eliminate this dependence. Unlike the US, the EU has not yet imposed any sanctions on liquefied gas imports. As a result, the EU remains the destination for 50% of Russian LNG exports. From December 2022 to October 2023, half of Russian LNG exports, worth €8.3bn, were directed to the EU market.

In the past year, Russia became the second largest supplier of LNG to the European Union after the United States, which purchased more than half of all Russian LNG exports. In January-July European countries spent almost €5.3bn on it, in Spain the share of Russian LNG exceeded a quarter and in Belgium, a third.

Moreover, Novatek successfully used European ports for gas transhipment (more than 20% of supplies) so as not to distract its icebreaking tankers.

Russian LNG was included in the recently adopted twelfth package of European sanctions, albeit with a delay of a year. The Arctic LNG-2 project itself was included in the US SDN sanctions list in November; that is causing the current problems.

Shares of Novatek fell in price by almost 3.5% on December 21 on the Moscow Exchange and the price of LNG on Europe’s markets briefly jumped 8% after Reuters reported that Novatek had notified some customers about possible difficulties with supplies from the Arctic LNG-2 project in 2024 due to force majeure.

Notifications were received by the Chinese Shenergy Group and Zheijang Energy, as well as Spain's Repsol, as well as others. Novatek did not comment on the report. Repsol, which entered into a non-binding agreement for 1mn tpy of LNG from Arctic LNG-2 back in 2019, said it had not received any notice of force majeure.

The force majeure reflects the fact that Novatek will now not be able to fulfil all contractual obligations due to sanctions, but does not mean a complete halt to the project, reports The Bell. Buyers insensitive to US sanctions will be able to purchase LNG on the spot, and in this case supplies will be limited by Novatek’s own tanker fleet.

“If the start of supply is delayed significantly or does not occur at all in 2024, global LNG supply will grow by 2.5% rather than 3.5%,” said Bloomberg analyst Talon Custer. “This could increase prices and volatility in the market.”

Russia secured the top position among gas suppliers to Spain in June 2023 thanks to LNG shipments. Both Spain and Belgium have LNG terminals and large regasification facilities. The surge in LNG deliveries to Spain is a substantial shift from the previous year when Russia held the fourth position in gas supplies to the country, following the United States, Algeria and Nigeria.

Data provided by the Spanish energy company Enagas reveals that Russia secured the third position in LNG supplies to Spain for the year 2023. Spain imported a total of 67,209 GWh of LNG from Russia between January and November 2023. This volume represents a significant increase of 39% compared with the 48,406 GWh imported during the same period in 2022.

Throughout 2023 Russia stood as the third-largest supplier of gas to Spain, trailing behind Algeria and the United States. In November 2023 alone, Spain received 6,439 GWh of LNG from Russia, marking a rise from the 5,953 GWh received in November 2022.