Sanctions and Drones Are Devastating Putin's Energy Empire

Russia's biggest producer of liquefied natural gas (LNG) has suspended production because of the impact of sanctions, it has been reported, as the war in Ukraine started by Vladimir Putin continues to adversely impact his country's energy industry.

Reuters said Novatek had stopped operations at its Arctic LNG 2 project, which processes gas from the Utrenneye field on West Siberia' Gydan Peninsula, in the latest blow to Russian fuel exports.

Newsweek has contacted Novatek for comment by email.

It comes as Russian exports funding Putin's war have been hampered by repeated drone strikes on oil facilities, blamed on Ukraine. One energy industry expert told Newsweek that state oil giant Rosneft had reduced daily oil processing in March by a fifth.

Replacing lost gas markets

Novatek had been looking to expand LNG exports after Russia lost its key pipeline gas exports to Europe because of sanctions imposed after the invasion of Ukraine.

The project had aimed to start commercial LNG deliveries in Q1 this year but foreign shareholders stopped their participation after the company was included in Western sanctions, Reuters said.

One train—a production unit used to convert natural gas into LNG—will stay shut until at least the end of June, a source told Reuters. The other two trains will be delivered by sea from the Arctic port of Murmansk.

However, sanctions have caused a lack of specialist tankers to transport the LNG from Russia through thick sea ice. Six Arc7 tankers were due to be built by Hanwha Ocean— three for Russia's leading tanker group Sovcomflot and three for Japan's Mitsui O.S.K. Lines.

But the three tankers ordered by Sovcomflot were canceled after it was sanctioned by the U.S. in February.

Russian newspaper Vedomosti cited Russian Energy Ministry officials saying output at the project had dropped to 83 million cubic meters in February because of a delay in LNG shipments.

Russian oil installations targeted

Russia is the world's fourth-largest LNG producer, with annual exports of 32.6 million metric tons. The suspension of the Novatek project will hurt the country's goal to capture a fifth of the global LNG market by 2035.

It is the latest blow to Russia's energy exports, which are key to funding its war effort in Ukraine and Putin's ambitious social spending plans over the next six years.

In recent months, oil facilities across a wide area of Russia have been targeted by Ukraine, including in Ryazan and Pervyy Zavod south of Moscow, the Rostov region by the Ukrainian border, as well as Nizhny Novgorod and Kirishi, close to St. Petersburg.

Targets were the main technological installations that ensure the processing of raw materials to obtain oil products of export quality. Bloomberg said the refineries hit were responsible for 12 percent of Russia's oil refining capacity.

Mykhailo Gonchar, president of the CGS Strategy XXI group, said analysis had shown the average daily oil refining capacity in the largest Russian oil company, Rosneft, had decreased by 19 percent compared with January.

"Rosneft's large export-oriented refinery in Tuapse (in the Krasnodar region) has been out of business for more than two months," he told Newsweek. "Therefore, these losses are significant, but not yet fatal."

Gonchar, who is also chief editor of the journal Black Sea Security, said that the impact of military strikes depended on how much damage was done and if the recycling process was suspended during repairs.

"Somewhere it is done faster if the damage is less, the repair may last several weeks," he said. "In the case of more serious damage, the repair may take several months.

"To a large extent, it also depends on how quickly the Russians will be able to purchase Western-made equipment or Chinese analogues, which are equipped with technological installations."

So far, the strikes have caused losses, and costs for repairs, while hampering Putin's war machine, but "for these strikes to have a fatal effect, they must continue unabated," he added.