EP14: The health of the Russian LNG sanctions
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Summary: In this episode we explain the challenges facing Russia in exporting liquefied natural gas (LNG) due to international sanctions. These sanctions have targeted Russian LNG vessels, particularly ice-class tankers crucial for transporting LNG from Arctic regions. The sanctions also make it difficult for Russia to find buyers and insurance for its LNG. While Russia has the ability to produce LNG, the lack of suitable shipping vessels and the low price of LNG in Asia make it hard for them to profit from their exports. This situation has resulted in stranded LNG tankers with unsold cargoes. Questions to consider as you read/listen: What are the primary obstacles Russia faces in maintaining its LNG exports following international sanctions? How do the current price differences between different LNG suppliers and crude oil impact Russia's ability to sell LNG? What is the future of Russia's LNG industry, considering the sanctions, workforce shortages, and global LNG market dynamics?

Long format:  The health of the Russian LNG sanctions  Yes LNG requires by its first letter for it to be liquid. To do so,it requires for it to be at about -260° Fahrenheit (-162 C) for shipping and storage. The volume of natural gas in its liquid state is about 600 times smaller than its volume in its gaseous state. There is around a 6% loss along the way on the ship due to “boil-off gas" (BOG) where a small portion of the LNG evaporates into vapor because of heat gain from the surrounding environment, resulting in a loss of natural gas during shipping; this loss is typically around 0.1-0.15% of the total cargo per day depending on the ship's design and insulation quality. Generally simplified in the industry to not more than 6% of total.   Turning natural gas into a liquid is technical and requires quite a bit of energy. But it is actually well within even the capabilities of the native Russian intelligencia (which has been in decline for decades) and they do have that capability. Recall, Russia was the fourth largest LNG global exporter pre-ban. It has been in the LNG game so to speak for a while comparatively. Yamal LNG has arguably been the most successful LNG project in the world during the last decade. But the continued fears of conscription into the war in Ukraine is undoubtedly exerting pressure on this workforce.   Where the difficulty in LNG and the kink in the proverbial hose is actually in the shipping not the liquidation. (As an aside, regasification-that is turning it safely from liquid back into gas without large loss-is a lot less technical and takes tremendously less energy to accomplish).   And in particular the inventory of ice class LNG vessels. LNG vessels are very very unique.   To drive home this point, as of February 2024, the global liquefied natural gas (LNG) carrier fleet had 701 active vessels. This includes 47 operational FSRUs and 10 FSUs.   Russia doesn’t only need access to these unique beasts but also access to a subset where are ice class LNG. Why? Well these Russian LNGs are in areas that are ice except for a few weeks/months out of the year.   A fleet of 15 Arc7 ice-class tankers are being built to transport liquified natural gas from Russia's Arctic LNG 2 project. The tankers are being built at the Zvezda Shipbuilding Complex and are scheduled for delivery between 2023 and 2025. To date, my best information is that at most less than a handful work.   The 14th EU Sanctions package really went over the kink in the hose: the ships. It also specifically named and included both Arctic LNG 2 and Murmansk LNG and made crystal clear it is prohibited to purchase, import or transfer of LNG classified under CN code 2711 11 00 originating in or exported from Russia, through LNG terminals in the EU that are not connected to the interconnected natural gas system (key is “not connected to the interconnected natural gas system” part). The former facility being the one that India announced it would not use. The 14th package really focused on making sure non Russian LNG vessels and non Russian ice class LNGs are not available. The insurance and reinsurance in particular is their means beyond just simply banning the ships. Similar as what was tried with Russian crude. Russia has bought, borrowed and stolen a ghost fleet of largely uninsured crude tanks but good luck trying that with the unique beasts that are LNG vessels and wow good luck with ice class LNG vessels. When there’s an inventory of something less than 10k crude oil tankers, one can do that. But when the inventory is 700 or so or max 15, that strategy is hard   By all reports there has been a total flight of high-end skilled labor and intellectuals in the Russian crude sector. The primary mover is fears over being drafted for the war in Ukraine.  Further, there has been a massive reduction in graduation rate in the sector. In 2022, 816,000 students graduated from energy-related university programs, which is a 13% decrease from 2018.  There have been moments when both crude oil tankers and very recently LNG tankers have been adrift at sea with no ports or destinations.  Just four days ago was this nugget of a headline: http://gasprocessingnews.com/news/2024/10/four-tankers-still-at-sea-with-unsold-cargoes-from-russias-arctic-lng-2/)  Here’s a historical one on crude tankers afloat with no port.   https://markets.businessinsider.com/news/commodities/russian-oil-trade-crude-tanker-india-moscow-price-cap-sanctions-2024-2#:~:text=More%20Russian%20oil%20ships%20have,to%20go%20amid%20sanctions%20pressure&text=A%20growing%20number%20of%20Russian,least%20a%20week%2C%20Bloomberg%20reported)   So can they produce more? Maybe. Possibly. Can they drill more? Probably. If they do will it help their bottom line? Probably not. A tanker adrift with no customer is a financial nightmare.   Sources:   https://www.seattletimes.com/business/russias-war-mobilization-starves-its-oil-industry-of-workers/#:~:text=Most%20Read%20Business%20Stories&text=To%20widen%20the%20circle%20of,as%20possible%2C%E2%80%9D%20he%20said)   https://www.cnbctv18.com/energy/russia-faces-shortage-of-oil-and-gas-industry-workers-amid-mobilisation-of-economy-for-war-19407018.htm#:~:text=Key%20Industry&text=Last%20year's%20oil%2Dproduction%20drilling,Live%20on%2Dthe%2Dgo!)   https://www.whitecase.com/insight-alert/14th-eu-sanctions-package-targets-russian-lng-and-political-donations-expands-import#:~:text=Restrictions%20on%20Russian%20LNG&text=The%20restrictions%20do%20not%20apply,concluded%20before%2025%20June%202024.&text=It%20is%20prohibited%20to%20purchase,the%20execution%20of%20such%20contracts.&text=It%20is%20prohibited%20to%20sell,the%20execution%20of%20such%20contracts)   https://www.reuters.com/world/india/india-will-not-buy-russias-sanctioned-arctic-lng-2-project-oil-secretary-says-2024-09-27/)   https://www.econnectenergy.com/articles/how-does-regasification-of-lng-work)   https://www.sciencedirect.com/science/article/abs/pii/S1364032118306828)   https://pubs.acs.org/doi/10.1021/ie801975q#:~:text=Due%20to%20its%20cryogenic%20nature,over%20a%2021%2Dday%20voyage)   https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/11/Russian-LNG-Becoming-a-Global-Force-NG-154.pdf)   https://www.arctictoday.com/in-desperate-need-for-more-arctic-tankers-novatek-sends-200-of-its-engineers-to-shipyard-2/)   https://safety4sea.com/world-lng-report-2024/#:~:text=With%20the%20delivery%20of%2032,operational%20FSRUs%20and%2010%20FSUs)   https://www.highnorthnews.com/en/russian-shipyard-deliver-critically-needed-arc7-lng-carriers-arctic-lng-2)   https://www.ship-technology.com/projects/arc7-ice-class-lng-tanker/#:~:text=and%20R&D%20companies-,View%20all,also%20signed%20contracts%20with%20VEB)   Just to amplify my point (and if I dare say @patreoner’s point) as to crude.    The Crude Oil Urals Spot price today is 66.44. WTI is currently trading at 72.32 as I type at 0722 Eastern Time. Very large delta there.    Now to my point as to LGN. Perhaps @patreoner is right it’s about, but my thesis is the same: price.    The price for India whether it be ADNOC, Deepak Fertilisers and Petrochemicals-Equinor deal, Qatar, or Russia does not have anywhere near that type of delta. The price for LGN in Asia is pretty low now historically, just like Henry Hub is in the US.    India's primary suppliers of LNG include:   Qatar: India's largest supplier for five years, with 10.92 MT of shipments in 2023   United States: India's second largest supplier in 2023   United Arab Emirates: Supplied 2.85 MT of LNG in 2023   The price of LNG in Asia has been relatively low, averaging $35 per million Btu in 2022. In 2023, the price fell to $14, and then to around $11 earlier in 2024. It is hovering now in the band of $10-12. So it’s low.    Why upset the LNG apple cart over a non-existent delta?   Sources: https://www.thehindubusinessline.com/economy/america-overtook-uae-as-indias-second-largest-lng-supplier-in-2023/article68463599.ece#:~:text=Evolving%20trade%20dynamics,has%20been%20declining%20since%202021).   https://asia.nikkei.com/Business/Energy/LNG-shipments-shift-to-India-Southeast-Asia-as-European-demand-sags)   https://www.investing.com/commodities/crude-oil-urals-spot-futures#)   https://www.investing.com/commodities/crude-oil-streaming-chart)   Get full access to GeopoliticsUnplugged Substack at geopoliticsunplugged.substack.com/subscribe)