US Treasury, State target LNG shipping firms among Russia sanctions

US officials Aug. 23 announced a slew of new sanctions to ratchet up pressure on Russia and entities aiding its war against Ukraine, including measures extending efforts to disrupt the Kremlin's LNG trade.

The sanctions were announced a day before Ukraine's Aug. 24 independence day.

The US Treasury and State departments said they were targeting nearly 400 individuals and entities both in Russia and outside its borders in the fresh round of sanctions. Among entities listed are LNG tankers tied to the so-called "shadow fleet" of LNG tankers Russia has employed to avoid detection and evade sanctions already in place. The fleet refers to ships with opaque ownership and insurance documentation that manipulate or avoid GPS tracking systems designed to show LNG cargo transports and transactions.

The list of entities includes seven LNG carriers: the Palau-flagged Asya Energy, Everest Energy and Pioneer; and the Panama-flagged North Air, North Mountain, North Sky and North Way. The Pioneer and Asya Energy were recently acquired by Ocean Speedstar Solutions, based in India, with Ocean Speedstar also added to the sanctions list.

Trying to circumvent sanctions on Russia's revitalized Arctic LNG 2 project, "Russian companies have engaged in efforts to procure secondhand LNG tankers, predominantly through front companies in third country jurisdictions, to make up for a critical shortage of available tankers for the Arctic LNG 2 project," the State Department said in a statement.

Shadow fleet

Reports of a shadow fleet of Russian LNG tankers have emerged in recent weeks, with some market sources suggesting LNG carriers had called at the 19.8 million metric tons per year capacity Arctic LNG 2 facility, owned and operated by Novatek.

The newly sanctioned Pioneer and Asya Energy both were reported to have moored at the Arctic LNG 2 facility. It is unknown whether either vessel loaded LNG from the Arctic LNG 2 facility.

Novatek was not immediately available for comment when contacted by S&P Global Commodity Insights.

The Treasury Department added further sanctions on Novatek's China Holdings Co., which was set up in February and reportedly designed to market gas to prospective buyers in Asia.

"This is a cat-and-mouse game which will raise costs and boost discounts," said Rachel Ziemba, a senior advisor at Horizon Engage. "The sanctions are likely to leave these vessels out of commission, forcing them to do [ship to ship] transfers and for Novatek to rely on other vessels given that Chinese, Indian and other buyers will be reluctant to allow them into their ports."

However, Ellen Wald, president of Transversal Consulting, said the development of a shadow LNG market could prove more difficult to maintain than the shadow market for oil that has allowed sanctioned Iranian, Venezuelan and Russian crude to continue to reach global markets.

"LNG is trickier than oil to spoof or hide because ship to ship transfers are not possible the way they are with oil," Wald said. "Ship to ship transfers with oil often result in mixing oil of various origins so that the sanctioned oil is no longer traceable. This isn't possible with LNG so it will be easier to track sanctioned LNG to its destination and potentially impose fines/sanctions on the customers."

This effectively limits Russia's LNG customers to those who are willing to take the chance and have the facilities to regasify the LNG. Further complicating the effort is the much smaller pool of market participants in international LNG trade compared with oil. With LNG's Asian buying market dominated by state-owned entities and established players, that increases the portion of the pool who will not be willing to take on the risk.

"I do not doubt there are customers who are interested in lower-cost LNG from Russia and are willing to take their chances with US sanctions enforcement, which has a record of being spotty," Wald said. "In the end, it comes down to enforcement and how far the US is willing to go to enforce these sanctions, or if they are just for show."

LNG projects

Existing US sanctions on Russia have also sought to stall developments in Russian LNG, targeting key projects as Russia aims to bolster its LNG export capabilities. In April, the Kremlin stated it was targeting a 20% share of the global LNG market by 2030-2035.

However, sanction pressure from both the US and EU since the Russian invasion of Ukraine in February 2022 has threatened to derail Russia's access to demand centers, with the latest round of EU sanctions banning the transshipment of Russian LNG at European terminals.

The sanctions aim to impede development of LNG projects that Russia hopes to bring online, including the Obsky LNG, Arctic LNG 1, Arctic LNG 2 and Arctic LNG 3 projects, and a new project in development in the Murmansk region.

Fernando Ferreira, director of Rapidan Energy Group's geopolitical risk service, expressed immense skepticism that Russia could bring Arctic LNG 2 to operations.

"Washington has made it clear that it wants to kill the project, and the latest round of sanctions underlines that intent," he said. US sanctions under Executive Order 14024 have had a significant impact on the activities of targeted vessels, and most haven't operated since they were added to the Treasury's designated entities list."

Military industrial complex

"Russia has turned its economy into a tool in service of the Kremlin's military industrial complex," Deputy Treasury Secretary Wally Adeyemo said.

Adeyemo added the new batch of sanctions would seek to "disrupt Russia's military-industrial base supply chains," noting Treasury was also targeting numerous transnational networks involved in supporting Russia's war machine.

State said it was aware of Russian efforts to "facilitate sanctions evasion" through opening new overseas branches and subsidiaries of Russian financial institutions, warning foreign regulators and financial institutions to take caution in any dealings with said entities.

The latest sanctions follow a tranche of more than 300 sanctions issued on June 12, designed to impede the development of Russia's strategic energy projects, namely in LNG and oil.

Treasury said the fresh sanctions were consistent with President Joe Biden's comments at a meeting with G7 leaders in June, stating the US had a range of tools available to respond to the establishment of "new evasion channels."

"Today's action targets almost a dozen distinct networks, designating more than 100 individuals and entities across 16 jurisdictions, including the People's Republic of China, Switzerland, Turkiye, and the United Arab Emirates," Treasury added.

The news prompted a slight jump in European gas prices during afternoon exchanges on Aug. 23, with the Dutch TTF month-ahead price spiking to around Eur37.395/MWh at GMT 15:22, according to data from the Intercontinental Exchange.

Platts, part of Commodity Insights, assessed the Dutch TTF month-ahead price at Eur37.07/MWh on Aug. 23, up by 0.79% on the day.