The LNG Tanker with the Big White Moustache
The Russian invasion and Western sanctions have upended Putin's ambitions for Russian LNG. Total sacrificed ten years and its CEO in the effort. Will the Chinese now come to the rescue?
On the evening of October 20 2014, Christophe de Margerie, the colorful and popular CEO of the French oil company Total—his affectionate nickname in the company was “Beeg Moustache,’ from his bushy white upper lip--was returning to Paris from a lightning 24-hour trip to Moscow. As the company jet gained speed for takeoff, a drunken airport worker unexpectedly drove a snowplow onto the runway, directly in the path of Margerie’s plane. It careened into a nearby building and burst into flames. Everyone on board was killed.
Margerie had worked tirelessly for a decade to develop a business in Russia. He believed strongly in the country’s future and its potential importance for Total. His expansive personality struck a chord among Russians, quickly leading to friendships and contacts. Total became a sponsor of the famed Mariinsky Theater in Saint Petersburg, and Margerie became friends with its artistic director, Valery Gergiev, who had been close to Putin since the latter’s early days. This in turn led to a connection to Putin himself.
Despite this, Total had difficulty finding a suitable project in Russia, and as late as 2009 it was well behind its major Western rivals, Shell, ExxonMobil, and BP. Over a decade of negotiations with Gazprom over an LNG prospect in the Barents Sea had led nowhere. But in that year, with Putin’s strong personal support, Total concluded an alliance with a company called Novatek, led by two oligarchs close to Putin, Leonid Mikhelson and Gennadii Timchenko. Total took a 20% stake in the company, as well as a 20% share in its key project, Yamal LNG.
For Putin, this was a highly promising arrangement. LNG, he proclaimed, was the bright future of gas. LNG from Yamal would be exported eastward to the thriving markets of Asia, via the Northern Sea Route along Russia’s Arctic coastline, taking advantage of the melting sea ice. The project thus served all of Putin’s policy objectives simultaneously. But with it came a potential danger. Putin was choosing to rely on a foreign-led consortium using foreign technologies and foreign contractors, temporarily waiving Russia’s policy of “import substitution”—for the sake of getting off to a fast start in LNG and quickly gaining a global market position.
But following Russia’s annexation of Crimea, Yamal LNG suddenly faced a crisis. Fearing sanctions, Western banks shied away from Russia, and the financing for the project fell apart. Total and its Russian partners were stuck. On his last fateful trip, Margerie had flown to Moscow, partly to address a conference of fellow investors, but partly also to meet with his partners to figure out how to rescue the financing for the project.
There was only one place to turn—China. With the direct personal support of Vladimir Putin and Xi Jinping, the Russians and the Chinese negotiated a new financial package for Yamal LNG, although much of the actual spadework on the ground in Beijing was done by the energetic CEO of Novatek, Leonid Mikhelson. As a result, two Chinese energy companies, CNPC and the Silk Road Fund, joined in as investors.
The project was saved. And three years later, the first tanker from the Total-Novatek alliance sailed for Asia with LNG from Yamal via the Arctic Northern Sea Route. At a ceremony attended by Vladimir Putin, it was christened the Christophe de Margerie, and on its bow was painted a large white moustache.
After the signal success of Yamal LNG, Novatek and its partners turned to their next project, known as Arctic LNG-2. This was a much more ambitious affair. Whereas Yamal LNG was located onshore, Arctic LNG-2 would be offshore. It was designed as a complex of three so-called “gravity-based” offshore platforms. The liquefaction units, called “modules,” would be mounted on the platforms in a new construction facility Novatek had built in Murmansk, then towed into position in the middle of the Ob’ River estuary. The LNG would then be transported to Asia via the Northern Sea Route by a new generation of ice-class tankers.
Neither the Russians nor the Chinese had the necessary experience or expertise to develop a project of this complexity and sophistication, and Total and Novatek once again turned to a large cast of international contractors and equipment providers, as they had done for Yamal LNG. A new financial package was assembled, consisting about half of Russian banks and the other half from Western ones. (Chinese banks, for whatever reason, had a smaller role this time.) Work on the new Arctic LNG-2 progressed rapidly, and as 2021 went by all seemed to be going well. The Chinese yards were in full swing, and in late August the first two modules for the first train left China for Murmansk, to be coupled to the waiting platforms.
THE IMPACT OF THE INVASION AND WESTERN SANCTIONS
But then in February 2022 came the Russian invasion. In mid-March, the European Union issued the first of a rolling series of sanctions, banning new investments in Russian energy projects. In early April, the EU stepped up the offensive, prohibiting export from EU member-nations of goods and technology for the liquefaction of natural gas benefitting a Russian company.
The consortium assembled for Arctic LNG 2 quickly began to fall apart. Technip, the general contractor, suspended its activity. In China, all work on the modules stopped. The Dutch cargo shipping company that transported the finished modules from China to Murmansk terminated its contract. The next month the South Korean shipbuilder Daewoo stopped work on the LNG tankers for Arctic LNG-2, as well as the two floating “transshipment barges” destined for storage. Baker Hughes, responsible for the gas turbines for Yamal LNG 2, withdrew from the project and recalled its engineers, as well as the service personnel for Yamal LNG. The Novatek yard at Murmansk, formerly a buzz of activity, fell eerily quiet, as the Italian-owned hotel vessel that housed foreign workers at Murmansk set sail for Italy, taking with it most of the foreign skilled labor on the project.
The massive suspensions and withdrawals of the Western players left Novatek in the lurch. At that point, the platform for the first line was nearly finished, and once the modules were installed it was due to be towed to position over the summer of 2022. Baker Hughes had been scheduled to supply seven gas turbines for the first line, but when the invasion came Novatek had only received half of them, and there were no Russian-made models. Arctic LNG 2 was effectively stopped cold, a dramatic illustration of the impact of the Western sanctions.
WILL THE CHINESE COME TO THE RESCUE AGAIN?
With the apparent disintegration of Arctic LNG-2 consortium, the critical question is whether the Chinese will come to the rescue, as they did with the financial package for Yamal LNG in 2014-15. So far there is no sign of it. There has been a conspicuous silence from Chinese Development Bank and the Chinese Export-Import Bank, the two banks that provided the bulk of the financing for Yamal 1, and which had committed 2.5 billion euros toward Arctic LNG-2. Other Chinese banks, meanwhile, have announced that they are restricting credits to Russian borrowers, and the Asian Development Bank has suspended all business related to Russia.
Several things could account for this silence. First, the Chinese financial system is currently in some disarray, owing to the COVID-19 lockdowns and an epidemic of bad loans inside China. In addition, the Chinese Belt and Road Initiative (CBRI) is in financial trouble, owing to its poor management of loans to several developing countries; and although Russia was not one of the countries on the danger list, loans to Russia under the CBRI were zero in the first half of 2022. The atmosphere in China, in short, is considerably less expansive than it was a decade ago.
Another important difference is that the post-invasion sanctions are considerably wider and tougher than those of 2014-15, and while Chinese officials denounce them vigorously in public statements, in practice Chinese banks and companies have been cautious about incurring secondary sanctions that might damage their business in the US and Europe. It is also clear that the Chinese were taken aback by the exclusion of Russia from the SWIFT international payments system, and have been at a loss, at least at present, over how to respond to it.
Finally, the more serious underlying problem is likely not the lack of finance, but the lack of things to lend money to. If, as we have seen, the supply chain for Arctic LNG-2 has been disrupted and the consortium of Western contractors and suppliers has exited, then that would more than explain the lack of financial activity.
The silence of the Chinese banks is matched by an equal silence at higher levels. In 2014-15, the post-Crimean sanctions provoked a flurry of Russo-Chinese activity. Gennadii Timchenko, the partner of Leonid Mikhel’son in Novatek but also chairman of the Russian-Chinese Business Council (RCBC), traveled to Beijing with Putin for meetings with Xi Jinping, and played a key role as an intermediary in putting together the rescue package for Yamal LNG. There has been nothing like that this time around—at least not yet. The website of the RCBC reports no high-level meetings or any new projects related to Novatek or Arctic LNG-2. As for Timchenko, since he was added to the EU and UK’s sanctions lists in March, he is hardly to be seen. But the result is to leave the Russians in limbo, and not least Putin’s ambitions for rapid expansion of Russian LNG exports to Asia.
For Total, the situation is awkward. Margerie was a visionary who believed strongly in the future of Russia as a major partner for Total. But the Russian market has become toxic. In late April, Total announced it would no longer book proved reserves for Arctic LNG 2 and make no further investments, and it took an “impairment” of $4.1 billion. Like the other Western oil companies, Total is seeking a way out of Russia, although it has been unable so far to find a buyer for its stake in the Yamal projects. Meanwhile, Total, under Margerie’s successor Patrick Pouyanné, faces new challenges, as the company attempts to balance new fossil-fuel projects with investment in renewable energy.
For Putin, this is a serious setback. The development of LNG in the Far North was the key to his plans for a pivot to Asia, the development of the Northern Sea Route as a major trade artery, and the eventual replacement of the European gas export market. His long-term goal for Russia was to produce over 100 million tons of LNG per year, and to take 20% of the world market. He was willing to trade dependence on Western technology and know-how to get fast results, while postponing the development of Russian home-grown capabilities. But his policy is now a casualty of his invasion of Ukraine, and of the Western sanctions. The dream of Big Moustache seems very distant today.
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Thane Gustafson is the author and co-author of eight books on Russian affairs, including most recently Wheel of Fortune: the Battle for Oil and Power in Russia (2012), The Bridge: Natural Gas in a Redivided Europe (2020), and Klimat: Russia in the Age of Climate Change (2021), all with Harvard University Press. I am grateful to Yanliang Pan of Georgetown University for his valuable collaboration in the research for this post.
This made no sense when you posted it and gas was at record highs and it still makes no sense now since Russia still has a trade surplus. Russia has become the dominant one in its relation with China: https://aaronlee.substack.com/p/the-russian-financial-superpower https://aaronlee.substack.com/p/ruble-vs-yuan-part-2
This is a great review of what was recently the largest natural resource development project in the Arctic. Novatek's ambition was to expand from the Yamal LNG facility at Sabetta to LNG 2, an offshore facility across Ob Gulf on its eastern shore. As noted in Professor Gustafson's colorful and insightful story, LNG 2 completion is in deep trouble in the wake of Russia's invasion of Ukraine. There may well be be consequences for traffic along the NSR and the number of new icebreakers required to keep the LNG carriers and oil tankers moving year-round to the east through Bering Strait and into the Pacific.