Sanctioned Russian LNG shipments test U.S. resolve

Russia is testing U.S. resolve by selling LNG directly to China in a clear sanctions violation that could continue unless Washington calls it out. Since late August at least two Russian LNG cargoes have been delivered to China. More could follow.

Citing ship-tracking data, several media outlets reported on August 29th that Russia’s LNG tanker Arctic Mulan left China’s Beihai LNG terminal a day after unloading a partial cargo. Reuters reported that the ship’s draught was at 8.7 metres as it departed, down from 9.8 metres previously, indicating it discharged some, but not all, of the cargo it was carrying from Russian energy giant Novatek’s Arctic LNG 2 export terminal.

The report included confirmation from a trader familiar with the terminal in China that LNG had been discharged from the ship. A week later another Russian tanker, the Voskhod, discharged its cargo at the Beihai import terminal. It was also carrying gas from the Artic LNG 2 project.

Novatek holds 60% of Arctic LNG 2, with TotalEnergies, CNPC, CNOOC, and Japan Arctic LNG (Mitsui/JOGMEC) each holding a 10% stake. By next year, the massive project will include three liquefaction trains with a combined capacity of 19.8 mtpa. The Biden administration slapped sanctions on the project in November 2023, targeting associated companies, vessels, and infrastructure to disrupt Russia’s energy revenues.

Post-sanctions, the project’s foreign partners froze new funding, leaving Moscow to prop up the project through state banks and subsidies. On paper the equity hasn’t shifted, but in practise the Russian government is now carrying a much larger share of the financial burden, with some sources indicating a near 30% stake.

Flagship Russian LNG project

Though still under sanctions, Arctic LNG 2 is positioned as Russia’s flagship LNG project. It’s a core part of Moscow’s plan to triple LNG exports by 2030 and an integral part of the country’s gas pivot to Asia as pipeline gas deliveries to Europe dry up due to pushback against Russia’s ongoing aggression in Ukraine.

After peaking between 175-180 bcm in 2018-19, Russian pipeline gas exports to Europe collapsed to just 32 bcm in 2024. That’s a drop of over 85%. The shutdown of transit via Ukraine (effective January 1st) left only the TurkStream pipeline functioning, an 18% month-on-month drop in March, according to some estimates. Russia holds the world’s largest gas reserves at about 37 tcm, roughly 19% of the global total. Moscow claims a higher figure.

At least three more vessels from Arctic LNG 2 appeared to be on the way to China, according to vessel-tracking data. Other shipments may take longer to reach as ice has built up in the Northern Sea Route, making it difficult for traditional vessels to traverse the shorter route to Asia, Bloomberg reported.

Both shipments, and the possibility of more to come, display assertiveness and political gamesmanship by Russian President Vladimir Putin. Ostensibly, the Arctic Mulan and Voskhod set sail from Russia the same day that Putin met U.S. President Donald Trump in Alaska for peace talks aimed at ending the war in Ukraine.

The shipments are plausibly calculated geopolitical moves, a strong signal that Russia and China are continuing to deepen their ties in defiance of U.S. sanctions. It also came just days after the conclusion of the Shanghai Cooperation Organisation (SCO) summit held in Tianjin, China. The timing is notable as the summit served as a platform for Russia and China to reaffirm their strategic partnership and discuss strengthening their cooperation, particularly in the energy sector.

U.S. back-pedalling

The White House has long warned against Russian LNG as part of its effort to choke money flowing to Russia’s war chest. After banning Russian LNG imports in 2022, Washington cautioned foreign firms, Chinese companies included, against supporting the Arctic LNG 2 project. However, the Trump Administration has remained silent over Russia’s two recent LNG shipment to China.

Philip Andrews-Speed, ​​​​a Senior Research Fellow at The Oxford Institute for Energy Studies, offered a nuanced take. He told Gas Outlook that the arrival of a second LNG shipment in China along with the Power of Siberia 2 gas pipeline MOU between Russia and China and other economic agreements indicate two developments.

“First, that China-Russia economic relations are closer than they have been for several years, and second, that China feels that the U.S. has little scope to respond vigorously.” He further explained that the rationale lies in China’s hold on critical minerals, especially refined rare earths and products which the U.S. (and the rest of the West) cannot weaken in the short-term.

“I guess that Trump does not care about the U.S. demand for rare earths for wind turbines and EVs, but he does care about the military,” he added. “So, the key will be the quantity of rare earths and products the military holds right now, and how quickly the new refineries, magnet factories in the U.S. and Canada can be brought online.” 

Awash in supply

Russia’s LNG foray into Asia, despite sanctions violations, has an even more pronounced take-away: global gas markets don’t necessarily need the extra supply.

By 2030, LNG supply is expected to outpace demand with a multi-year supply glut materialising by 2026.

Bloomberg projects a consistent supply surplus between 2027 and 2030, while the International Energy Agency (IEA) forecasts a surplus of around 130 bcm of liquefaction capacity by 2030 under its Stated Policies Scenario.

Moreover, cheaper gas prices are forecasted in the short-term, dropping to their lowest levels since they spiked in the aftermath of Russia’s invasion of Ukraine in early 2022. Gas prices could dip as low as US$10/MMBtu in both Europe and Asia by Q4 2026.

(Writing by Tim Daiss; editing by Sophie Davies)