15 icebreaking LNG carriers run aground! GTT completely withdraws from the Russian market

The outlook for Russia's highly anticipated Arctic LNG 2 project is increasingly uncertain. Following the withdrawal of several contractors, French engineering firm GTT has become the latest European company to end its operations in Russia. GTT's withdrawal means that the construction of 15 ice-class LNG carriers and three platforms for the Arctic LNG 2 project may be stalled.

GTT announced the termination of its Russian business, including the design of LNG carrier tanks for 15 LNG vessels and the design of 3 GBS.

On January 2, GTT announced that after a thorough analysis of European sanctions, particularly the clauses prohibiting the provision of engineering services to Russian companies, the group would cease operations in Russia. In Russia, GTT was involved in the design of LNG tanks for 15 ice-class LNG carriers built by Zvezda Shipbuilding Complex, and the design of three gravity-based structures (GBS) for the Russian company Saren.

GTT stated that the contract with Zvezda Shipbuilding Complex will terminate on January 8, 2023. GTT will only provide limited support to the two LNG carriers with the fastest construction progress to ensure project safety and technical integrity, in compliance with current international sanctions. As for the GBS project, the terms of GTT's withdrawal are "currently being finalized".

As of October 1, 2022, GTT's unconfirmed revenue for the 15 ice-class LNG carriers (until 2025) was €74 million (approximately RMB 547 million), and the unconfirmed revenue for the three GBS projects (until 2027) was €12 million (approximately RMB 87.5016 million).

It is understood that these 15 ice-class LNG carriers and three GBS will serve Novatek's Arctic LNG export project, Arctic LNG 2, a Russian energy giant.

The ice-class LNG carriers will use GTT's Mark III cargo containment system. The new vessels are 300 meters long, 48.8 meters wide, and have a cargo capacity of 172,600 cubic meters. They will primarily use LNG as fuel, with a power plant output of 45 megawatts, comparable to that of a nuclear-powered icebreaker. This allows them to safely transport LNG while breaking ice up to 2.1 meters thick at -52 degrees Celsius. GTT technology is already adapted to harsh environmental conditions, enabling these LNG carriers to operate and navigate safely in ice-covered waters.

In addition, the LNG and ethane tanks installed inside the three GBS will be provided with membrane containment system design, construction research, and technical support by GTT. The first two will each consist of two 114,500 cubic meter LNG tanks and one 980 cubic meter ethane tank, while the third will consist of only two 114,500 cubic meter LNG tanks. The GBS will be located on the seabed, composed of concrete caissons, and will feature membrane containment tanks using GTT's GST® technology. These units will be built in the dry dock of the Novatek-Murmansk LNG construction center, then towed to their final location on the Gydan Peninsula in the Russian Arctic and installed.

GTT stated that ceasing operations in Russia will have a financial impact on the company starting in 2023, and future backlog orders will no longer include Russian projects. Furthermore, starting in 2023, GTT's annual targets will not include revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) generated from final services in Russia.

GTT: Construction of 14 LNG carriers and 2 FSUs by South Korean shipyards for the Arctic project is still proceeding normally.

In addition, GTT stated that the construction of six ice-class LNG carriers and two floating storage units (FSUs) currently underway at Asian shipyards for the Russian Arctic project is still proceeding normally. As of October 1, 2022, these backlog orders will bring GTT a total of €31 million in unconfirmed revenue (until 2024).

It is understood that the aforementioned six ice-class LNG carriers and two FSUs are being built by Daewoo Shipbuilding & Marine Engineering (DSME) in South Korea. DSME received orders for six ice-class LNG carriers for the Arctic LNG 2 project in 2020, three from Mitsui O.S.K. Lines and three from the Russian state-owned shipping company Sovcomflot. It is worth mentioning that DSME canceled the orders for three ice-class LNG carriers from Sovcomflot last year, but construction seems to be continuing.

In addition, in June 2020, DSME also received an order for two 360,000 cubic meter LNG floating storage units (LNG-FSUs) from Russia for approximately US$750 million, also for the Arctic LNG 2 project. These are the world's largest FSUs, each with a capacity of 360,000 cubic meters and equipped with six membrane-type tanks, to be deployed at the Kamchatka and Murmansk transshipment terminals.

       Meanwhile, GTT also stated that international shipowners have ordered eight conventional LNG carriers from Asian shipyards, also for the Russian Arctic project, but these vessels can operate under all types of conditions.

It is reported that these eight vessels are being built by Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries, four each. In September 2021, Mitsui O.S.K. Lines signed a time charter contract for four 174,000 cubic meter LNG carriers with Novatek and placed an order with Daewoo Shipbuilding & Marine Engineering. The four new vessels are scheduled for delivery starting in 2024. In October of the same year, a joint venture between NYK Line and Sovcomflot also ordered four 174,000 cubic meter LNG carriers from Samsung Heavy Industries, also chartered by Novatek, with plans for delivery between 2023 and 2024.

GTT stated: "The Group remains sensitive to the evolution of the situation and is taking all necessary measures to protect its employees and stakeholders, in compliance with international sanctions."

The Arctic LNG 2 project is expected to start production this year, and two European contractors have already withdrawn.

It is understood that the Arctic LNG 2 project, located on the Gydan Peninsula, is the second large-scale LNG project led by Novatek, Russia's largest independent natural gas producer, following the Yamal LNG project. It has a total design capacity of 19.8 million tons per year, with three LNG production lines scheduled to start production in 2023, 2024, and 2026 respectively. This is an important part of the Arctic strategy and LNG development plan.

The total financing for the Arctic LNG 2 project is US$21 billion. Gazprombank, VEB (the Russian State Development Corporation), and other financial institutions have previously decided to provide €4.5 billion in project financing, and the Central Bank of the Russian Federation will provide up to €3 billion in financing. In November 2021, Novatek reached a loan agreement worth €9.5 billion with foreign and Russian banks, securing the necessary external financing for the project.

       The Arctic LNG 2 project consists of three LNG production lines, each with an annual capacity of 6.6 million tons, to be installed on three gravity-based structures (GBS). The total value of the EPC contract for the project is as high as US$11.2 billion, with NovArctic as the direct EPC contractor. This company is a joint venture of Technip Energies (France), Saipem (Italy), and NIPIGAS (Russia), led by Technip Energies.

Technip Energies has entrusted the fabrication of modules totaling 350,000 tons for three LNG production lines of the Arctic LNG 2 project to five Chinese shipyards. Bomaico secured contracts exceeding 6 billion RMB for module design and construction, making it the largest recipient among the five contractors. In addition to Bomaico, COSCO Heavy Industry, Penglai Jituo (PJOE), Wison Offshore & Marine, and Qingdao Wuchuan McDermott also participated in the module fabrication for the Arctic LNG 2 project.

According to the plan, the modules for the Arctic LNG 2 project will be prefabricated in Chinese shipyards, then transported to a large assembly plant outside Murmansk for final assembly before being towed to the Arctic LNG 2 project site on the Gydan Peninsula in Western Siberia, Russia. The first production line is expected to be operational in 2023, the second in 2024, and the third in 2025, reaching full capacity in 2026.

As of early 2022, the first production line of the Arctic LNG 2 project was 85-95% complete, while modules for the second and third production lines were still under construction at Chinese shipyards. The second line was approximately 40% complete, and the third line less than 10%. Due to EU sanctions, foreign workers from Technip Energies left the site by the end of May that year.

Previously, Technip Energies and Saipem had announced their withdrawal from the Arctic LNG 2 project. Technip Energies stated in October of the previous year that it had signed a framework agreement with the client to withdraw from the Arctic LNG 2 project, expecting completion in the first half of 2023. Saipem also stated last year that it was negotiating the termination of two contracts related to the Arctic LNG 2 project, valued at $1.4 billion.

Despite the withdrawal of major contractors, Novatek CEO Leonid Mikhelson remains optimistic that the company will be able to launch the Arctic LNG 2 project on schedule, with the first production line starting up in December 2023. He revealed that five of the fourteen modules for the second production line were 99% complete, and another five were 85-90% complete. The platform for the second production line will also be ready in early Q2 2023. Mikhelson also stated that the equipment for the Arctic LNG 2 project will be domestically produced within the next 2-3 years.