The Daily View: Demand is the opiate of the gasses

THE travails of Russia’s Arctic LNG2 project have been playing out as a microcosm of wider geopolitical battles.

Russia’s plans to dominate Arctic gas production have certainly been frustrated by sanctions. But thanks to China’s continued appetite to accept heavily discounted gas and Donald Trump’s reluctance to forgo the prospect of Chinese gas deals to come, half-hearted enforcement has kept the gas flowing this summer.

We’re now 16 voyages into a seasonal flurry of super-cooled gas trades from Russia’s frozen north to China’s Beihai LNG Terminal, which has established itself as the dedicated entry point for cheap Russian gas.

Ordinarily, ice would be freezing that trade by now, but an expensive ice-classed shuttle service to floating storage and a series of ship-to-ship transfers to less specialist tonnage will keep the gas taps on.

When there’s a 40% discount on offer, most things are possible, for the moment at least.

The UK’s recently announced ban on maritime services to Russian LNG is going to cause problems, not least for Japanese clients who are still reliant on UK insurance.

While it has not been a high-profile part of the sanctions conversation until now, more than 60% of Russian LNG exports have been covered by UK maritime insurance since the full-scale invasion of Ukraine, and a significant portion of Russian LNG carriers are still dependent.

That move, along with Europe’s accelerated timeline to wean itself of Russian gas, will require another expensive reshuffle and effectively leave the entire supply chain dependent on one ship not requiring repairs this winter.

This may sound like a success for Western sanctions until you realise all this is a minor snag in a much wider market shift that ultimately will not prevent Russian gas from finding customers.

The ongoing LNG supply growth wave can more than accommodate this future reshuffling of global flows, led by new US supply.

In 2027 onwards, unless there are significantly more targeted sanctions against Yamal LNG, its volumes will continue to be marketed, just not to the EU.

Beyond that though there are forces bigger than sanctions at play.

Planned Russian pipeline expansions, including a proposed 50bn cu m per year link, roughly equivalent to 60% of China’s 2025 seaborne LNG imports, could let cheaper pipeline gas displace seaborne LNG, especially spot cargoes, structurally cutting long-haul demand into Asia.

As Danish Ship Finance recently pointed out, coal’s persistence and faster-than-expected deployment of renewables plus storage add further headwinds. If gas-fired power fails to gain share, demand growth may struggle to absorb the third wave of LNG supply, leaving lower prices, rather than longer distances, as the primary balancing mechanism. Europe’s continued shift away from Russian pipeline gas provides a little offset, but China’s growing pipeline options are pulling in the opposite direction.

So, yes, sanctions are costing Russia and causing Putin some embarrassment in the Arctic. But while this will result in a minor reshuffling of the LNG trade and a redirecting of Russian volumes to Asia, ultimately the trade flows are more about demand and pricing than sanctions, and Russia knows it.

Richard Meade
Editor-in-chief, Lloyd’s List

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