'LNG dark fleet' could emerge to transfer Russian gas amid sanctions: Flex LNG

Russia could be building an "LNG dark fleet" to transport natural gas cargoes in the face of Western sanctions, taking a page from its own playbook in shipping crude and petroleum products, shipowner Flex LNG said May 23.

While existing sanctions on shipping Russian LNG have been limited and focused mostly on restrictions on buyers, the US and UK have sanctioned Novatek's Arctic LNG 2 project with a total planned production capacity of 19.8 million mt/year. The EU is now mulling similar measures that could widen curbs to include re-exports of existing Russian LNG supply from its ports.

The project developers of Arctic LNG 2 were originally planning to build around 21 Arc7 icebreaking LNG carriers specialized to operate in icy conditions, but the 172,600-cu m vessels' construction has been hampered by sanctions and their fates were uncertain.

Arctic LNG 2, initially scheduled to be commissioned in phases between 2023 and 2026, has not been able to start LNG production due to the shortage of ice-breaking ships and could turn to existing tonnage to meet export requirements, Flex suggested in its quarterly report.

Currently, around 15 icebreaking LNG ships are serving Novatek's Yamal LNG project. A potential scenario is that those vessels would also be carrying cargoes from Arctic LNG 2 to non-icy waters for transshipment to conventional ships, which then sail to overseas buyers. This would lead to additional demand for LNG carriers, especially if the EU's proposed sanctions on Russian LNG also get approved.

As secondhand activity for old ships involving opaque firms has reportedly picked up, Flex CEO Oystein Kalleklev said in a conference call: "This could potentially be the start of our LNG dark fleet ... They will have to do more ship-to-ship transfers."

TradeWinds reported little-known companies based in Vietnam, China and the UAE were buying old tonnage recently, with some deals fetched at high prices.

"[They] may be soaking up some of the steam [turbine] tonnage that would otherwise be scrapped," Kalleklev said.

Sanctioned trades

The secondhand sales have been reported even as Russia accumulated a large number of oil tankers via shell companies or in coordination with opaque firms -- many of them based in other countries -- since its invasion of Ukraine in February 2022 to bypass the Western oil embargo and the G7 price cap, according to market participants and government officials, often calling them the "shadow," "gray" or "dark "fleet.

A joint study by S&P Global Commodity Insights and S&P Global Market Intelligence found that 591 tankers as of April were either confirmed by Western authorities to have violated sanctions or at high risk of breaching them, accounting for just over 10% of the global trading fleet.

"Russia is planning to do something similar to what we have seen on the oil and petroleum side," Kalleklev said.

The Oslo- and New York-listed company's warning comes as the EU is discussing its 14th package of sanctions against Moscow, which might include measures intended to restrict re-exports of Russian LNG that landed at EU ports to other markets. It is not clear whether such a measure would target ship-to-ship transfers, which could take place in international waters.

The EU saw its Russian gas and LNG purchases fall from 155 Bcm in 2021 to 80 Bcm in 2022 and to just 43 Bcm last year, according to European Commission data. But there won't be any EU-wide ban on Russian imports for now, as member states are to be allowed to decide on how to limit import levels individually.

Even if the EU was to reduce purchases of Russian LNG significantly, the cargoes would flow to "willing buyers" in Brazil, India, China and South Africa, resulting in longer sailing distances, Kalleklev said. Ton-mile demand could increase in this scenario.

Platts, part of Commodity Insights, assessed the charter rate for a Tri-Fuel Diesel Electric LNG carrier in the Atlantic at $36,500/d and two-stroke carrier rates at $47,500/d on May 23.