Russian natural gas giant Novatek and its shipping partner Sovcomflot finalized orders for ten Arc7 ice-class LNG carriers. These specialized ice-capable vessels are an essential component of Novatek’s Arctic liquefied natural gas (LNG) projects and transport LNG from the Arctic to markets in Europe and Asia.
The first 15 vessels of the type were constructed by South Korea’s Daewoo Shipbuilding & Marine Engineering (DSME) between 2016-2019 and transport natural gas from the Yamal LNG project. This latest batch of ships will be constructed by Russia’s Zvezda shipyard with delivery in 2023 and 2024 and will transport LNG for the new Arctic LNG 2 project.
Novatek entered into a long-term charter agreement with Russian shipping company Sovcomflot allowing for the financing and construction of the vessels to move forward. A pilot Arc7 carrier had already been contracted for during October 2019 and four additional ships were ordered in January 2020. The first five vessels are expected to transport LNG from the Ob LNG project and help transport excess production from Yamal LNG, while the latest order of ten ships will service the Arctic LNG 2 project.
Building ships in Russia requires help
The construction of the 15 vessels by Zvezda comes at a time when the Russian government is looking to reinvigorate its domestic shipbuilding industry. However, given the high level of technical expertise required in constructing these complex types of ice-capable vessels South Korea’s Samsung Heavy Industries was selected last year as a partner on the project to provide technical assistance with the construction of the vessels.
Under the agreement between Samsung Heavy Industries and Zvezda, the Russian shipyard will initially focus on less technical aspects of the construction such as the hull, steering columns and general machinery. Russian shipping experts remain skeptical as to what degree of localization, i.e. the amount of construction performed locally and not outsourced to companies abroad, can be achieved. For example, Zvezda subcontracted France’s Gaztransport & Technigaz SA to construct the LNG tanks for the first five Arc7 carriers.
Ordering more ships from South Korea
Novatek was originally mandated to order all future Arc7 carriers from Russian shipyards, but was granted an exemption for up to ten ships in order to speed up construction. The Zvezda shipyards are limited to five vessels per year, not enough to meet all of Novatek’s transportation needs arising from the Arctic LNG 2 and Ob LNG projects, slated to open by the end of 2023, and planned Arctic LNG 1 and 3 projects.
The company is expected to place a firm order for six Arc7 carriers with DSME before the end of September, with an option for an additional six vessels. The contract for all twelve ships could be valued as high as $4bn with delivery of the vessels in 2023 and 2024. The new ships will be owned and operated by Sovcomflot and a joint venture of MOL and COSCO Shipping Group.
No orders for Chinese Shipyards?
This latest round of orders raises questions if China’s Hudong Zhonghua shipyard, a subsidiary of state-company China State Shipbuilding Corporation, is going to miss out on all future orders. The company was reportedly offering attractive financing options to secure its first-ever order of ice-breaking LNG ships.
Last year the shipyard presented its own design for a 175,000 cubic meters Arc7 ice-breaking LNG ship. Given that Chinese state-owned banks and shipping companies are large investors in Novatek’s Arctic projects, shipping analysts expected Chinese shipyards to secure future orders for some of the new Arc7 carriers.
Between the order of 15 Arc7 carriers placed with Zvezda and the anticipated contract for 6 ships with an option for an additional 6 vessels at DSME, Novatek will receive almost 30 new LNG carriers in the next 5-6 years, nearly doubling the current fleet of 15 vessels.
And additional orders may already be on the horizon. According to the company’s CEO and Chairman of the Board, Leonid Mikhelson, Novatek will require an additional 15-17 vessels to meet the transport needs of the planned Arctic LNG 1 and 3 projects.