Exclusive-Russia's Novatek may scale back Arctic LNG 2, focus on Murmansk, sources say

MOSCOW - Russia's Novatek is being forced to scale back its huge Arctic LNG 2 project after Western sanctions curbed its access to ice-class tankers, and will focus instead on developing its project at the ice-free port of Murmansk, industry sources said.

Russia has been focusing on developing global sales of seaborne LNG to make up for a drop in pipeline gas exports to Europe, which have plummeted to post-Soviet lows amid a severe rift with the West over Ukraine.

The possible scaling back of the Arctic LNG 2 plant in the Gydan peninsular would complicate Moscow's goal to boost its share of the global LNG market to a fifth by 2030-2035 from around 8% currently.

The project had been due to become Russia's largest such plant with eventual output of 19.8 million metric tons per year of LNG and 1.6 million tons per year of stable gas condensate from three trains.

Novatek did not respond to a Reuters request for comment on its plans.

The company began liquefied natural gas (LNG) production at Arctic LNG 2's first train in December, but has been behind schedule in supplying its first cargoes of super-cooled gas from the project amid shortages of ice-class gas carriers.

Sources have said the conversion of methane into a liquid at a temperature of minus 163 Celsius (minus 261 Fahrenheit) has now been suspended at the plant.

Its second and third lines were due to begin operations in 2024 and 2026 respectively, with its second production train currently being built at a plant in Belokamenka in the Murmansk region.

However, the third train could be used instead at the Murmansk LNG plant announced by Novatek last June.

"An option is being considered is to send a second gravity platform for Arctic LNG-2 in the summer, and to use a third one for Murmansk LNG," a source familiar with the plans said.

The Murmansk LNG project is slated to be even larger than Arctic LNG 2, with eventual output of 20.4 million tons per year. It is projected to start production at its first two trains by the end of 2027, with a last line scheduled to start operations in 2029.

One of the advantages of the Murmansk project in comparison to Arctic LNG 2 would be its access to the ice-free port in the Barents Sea.

"All attention now is on Murmansk, the ice-class tankers are not necessary there," a source said.

The plans for Arctic LNG 2 were complicated last year when it was included in Western sanctions over Russia's conflict in Ukraine, prompting foreign shareholders to freeze participation and Novatek to issue a force majeure.

Novatek has also failed to secure enough ice-class gas carriers as foreign partners were scared off by sanctions.

The head of Arctic LNG 2 stakeholder Total Energies said in February that the project's third train had been put on hold but the second train was likely to be installed.

(Reporting by Reuters)