Following the Russian invasion of Ukraine on 24 February 2022, the UK, U.S. and EU were quick to impose economic sanctions on Russia. These sanctions have only increased in the intervening years, with an increasing number of Russian commodities the subject of restriction. However, until recently, Russian LNG was one area where sanctions took a “light touch” approach.
The U.S. and the UK moved quickly to prohibit the import of Russian LNG into their territories, but did not pass sanctions against the transportation of Russian LNG to other territories. Similarly, while the U.S. placed asset freeze sanctions on new Russian LNG projects such as the Arctic LNG 2 project, existing LNG infrastructure in Russia was not designated.
The unspoken policy reason behind this approach, was a deference to the EU’s reliance on Russian LNG imports. The EU did not prohibit the import of Russian LNG into its territories, and continues to import it in significant quantities. It has therefore not been possible for the U.S. or the UK to sanction these activities without disrupting the EU’s supply chain.
However, the EU’s 14th sanctions package against Russia signalled a change in direction. Adopted on 24 June 2024, the new LNG sanctions aimed at preventing EU facilities from transhipping Russian LNG to third countries, albeit continue to allow its import into the EU.
The EU’s 14th package appears to have allowed for a more aggressive enforcement approach to be pursued by the U.S. and the UK, and it is highly likely that discussions on these actions occurred with the EU before they were taken.
On 12 June 2024, the U.S. designated seven Russian entities, one Chinese shipyard and seven newbuild LNG tankers (which are still under construction). The OFAC press release accompanying the designations stated:
…[the] Treasury is targeting entities involved in three liquefied natural gas (LNG) projects that Russia hopes to bring online in the future: the Obsky LNG, Arctic LNG 1, and Arctic LNG 3 projects. Today’s action also includes designations of three entities involved in either construction of natural gas-related projects or manufacturing specialized equipment for LNG transportation, as well as the identification of seven under-construction LNG vessels.”
Similarly, the State Department said:
… the Department continues to sanction entities involved in the development of Russia’s future energy production and export capacity. Today, the Department is designating a PRC-based shipyard operator involved in the manufacture and shipment of highly specialized liquefied natural gas (LNG) modules designed specifically for Russia’s Arctic LNG 2 project. Furthermore, the Department is designating two companies involved in the development of a new LNG project in Murmansk, Russia, which is anticipated to leverage similar engineering, logistics, and LNG marketing as the Arctic LNG 2 project.”
These statements show a new focus on ancillary manufacturing and construction sectors which support Russia’s LNG industry. The U.S. designations included a number of Russian companies established to construct LNG infrastructure, but also the Chinese shipyard “Penglai Jutal Offshore Engineering Heavy Industries Co”, which was designated for constructing and shipping critical natural gas liquefaction technology to Russia.
As regards the UK, on 13 June 2024 OFSI designated a number of entities in the LNG business on the basis of “carrying on business in a sector of strategic significance to the Government of Russia, namely the Russian energy sector”, including Red Box Energy Services Pte Ltd, a shipping company, and LLC Novatek Murmansk.
The next focus may well be the so-called Russian “dark fleet”, long associated with the carriage of Russian oil but increasingly coming to the attention of regulators in relation to LNG. With increasing sanctions on Russian LNG, including sanctions designed to disrupt the construction of LNG tankers within Russia, it is likely that Russia may look to obtain LNG carriers on the second-hand market via opaque vehicles with unclear ownership. An extension of the sanctions already targeting the tanker dark fleet, would aim to limit the ability of sanctioned Russian prevent the circumvention of sanctions by use of a parallel fleet outside of western jurisdiction.
This very topic is also drawing increasing press scrutiny, with regular reports in the media of named vessels calling at Russian ports associated with LNG exports, including in high profile publications such as Bloomberg and the Financial Times.
As of yet, there have been no moves by U.S. or UK regulators to target non-Russian LNG tonnage with sanctions. However, if reports of a growing Russian dark LNG fleet are sustained, the LNG market could see similar sanctions to those now familiar to the oil market.
In the meantime, both U.S. and UK authorities have shown an increased willingness to exercise secondary sanctions jurisdiction in relation to Russian LNG over non-Russian entities such as Redbox, which does not possess a U.S. or U.S. nexus.
The LNG sanctions landscape is likely to change rapidly in the future. As always, precautions should be taken in contracts by including robust sanctions language which not only addresses current sanctions but also looks forward and anticipates possible changes in sanctions during the currency of the contract. As regards existing contracts, parties may find that changes in law in this area render the effectiveness or application of their sanctions clauses uncertain.
