Scope of new sanctions

The sanctions are intended to prevent Russian LNG that will not be consumed in the EU’s energy market from entering the EU, thereby preventing LNG from being sold to third countries via EU ports. Essentially, Russian LNG imported into the EU cannot be re-exported and must be used to meet the EU’s energy demands. They do not prevent the import of Russian LNG into the EU where it will be regasified and used within the EU. The EU still needs to import Russian LNG to meet its gas demands. In fact, the EU’s imports of Russian LNG have increased since the outbreak of the war. So far this year, the United States has been the biggest supplier of LNG to the EU, meeting 41% of the EU’s LNG needs, followed by Russia who supplied 21% of the EU’s LNG imports.

Council Regulation (EU) 2024/1745 amends Council Regulation (EU) No 833/2014 by introducing, among others, articles 3r, 3s, 3t and 3u.

Article 3r

Paragraph 1 of article 3r provides that EU persons are prohibited from providing reloading services in the territory of the Union for transshipment operations of LNG originating in Russia or exported from Russia. Competent authorities in EU member states can make exemptions for transshipment of Russian LNG where the end destination is within the EU. “Conventional” transshipment occurs where LNG is either transferred directly from one LNG vessel to another LNG vessel, or from one LNG vessel to another LNG vessel via onshore LNG pipelines at the import terminal (without being unloaded at the terminal), for further transportation to its end market, including India and Turkey. The prohibition will prevent Russian LNG from being transshipped at ports and LNG import terminals in the EU. This has become a common activity during the winter months when ice-class LNG tankers carrying LNG from Yamal LNG dock at LNG import terminals in the EU and transfer (often smaller cargoes) onto LNG vessels better suited for warmer waters. At the time of writing, only five LNG import terminals in the EU provide transshipment services, including Gate in the Netherlands, Zeebrugge in Belgium and Montoir-de-Bretagne in north-west France.

Although the key measure of article 3r is to prevent “conventional” transshipment of Russian LNG, it would also prevent “conventional” large-scale and small-scale reloading of Russian LNG at EU LNG import terminals. This involves LNG being unloaded at an LNG import terminal, temporarily stored in tanks at the terminal and subsequently reloaded onto another LNG vessel. A number of the EU’s large-scale onshore LNG import terminals now provide reloading services.

Article 3r also introduces further reporting obligations on entities “performing unloading operations” of Russian LNG. Those entities must report all unloading operations and imports into the EU of Russian LNG to the respective EU member state authorities by 26 July 2024 and every month thereafter, suggesting this is not the last we will hear of EU restrictions imposed on Russian LNG imports.

Article 3u

Paragraph 1 of Article 3u of the package provides that EU persons shall be prohibited to purchase, import or transfer, directly or indirectly, LNG originating in Russia or exported from Russia, through EU LNG import terminals that are not connected to the interconnected natural gas system. As all of the EU’s large-scale LNG import terminals provide regasification and send-out services and are therefore connected to a natural gas grid, this prohibition is unlikely to have a material impact on Russian LNG coming into the EU. Instead, it appears to be a “belt and braces” measure to ensure that Russian LNG coming into the EU stays in the EU.

Banned activities under the package extend to providing, directly or indirectly, technical assistance, brokering services, and financing or financial assistance related to the prohibitions in paragraph 1 of articles 3r and 3u.

Article 3s

Article 3s introduces a port ban on specified vessels, as well as restrictions on the provision of insurance, management, and brokering and of conducting ship-to-ship (STS) operations with those vessels. As of the date of this client alert, 27 vessels have been specified (including some associated with targeted Russian LNG projects). These track pre-existing designations by the UK and the United States. This appears to follow the longstanding trend of the U.S. and more recent UK trend of applying extra-territorial sanctions, where non-EU, non-Russian individuals and entities are participating in key sectors of the Russian economy.

Article 3t

Article 3t prohibits new investment and the provision of goods or technology for the completion of Russian LNG projects such as Arctic LNG 2 and Murmansk LNG. The intention is not, however, to affect the purchase and import of LNG from Russian terminals.

When do the sanctions take effect?

Generally, the prohibitions are immediately effective for any new activities. However, in the case of existing contracts for the provision of services covered by the prohibition (i.e., agreements entered into before 25 June 2024), the prohibitions do not apply until:

• 26 March 2025 – in respect of contracts for reloading services (and associated technical assistance, brokering services, financing or financial assistance) under article 3r;
• 26 September 2024 – in respect of contracts relating to the restrictions under article 3t or ancillary contracts necessary for the execution of such contracts; and
• 26 July 2024 – in respect of contracts relating to the purchase, import or transfer of Russian LNG under article 3u or ancillary contracts necessary for the execution of such contracts.

This will give the affected parties time to unwind their contracts and reschedule services prohibited by the sanctions.

Who do the sanctions apply to?

The sanctions are intended to have a broad effect and prohibit any transshipment or reloading of Russian LNG in the EU regardless of who is participating in those activities. They apply to any entity either providing the transshipment or reloading service, which is most likely to be the terminal operator, and to the entity or entities who own the Russian LNG receiving the service, most likely the owner of the Russian LNG. They also apply to any entities who are facilitating the service.

Impact of sanctions on Russian LNG

The exact economic value to Russia of its LNG passing through EU ports is not known. Estimates put revenues in the region of €3 billion a year. How much of that revenue will be affected is the subject of some debate. One possible outcome of the prohibitions is that Russian LNG will continue to be transshipped or reloaded outside of the EU. Another outcome is that Russian LNG will still reach its intended final destination albeit through longer routes. The demand for ice-class LNG tankers may decline, but they are capable of being converted to FSRUs for colder waters. A third outcome is that Russia may divert more of its LNG to destinations in the Far East, particularly while the Northern Sea Route is open during the summer months. In December 2023, Russia indicated that it also has plans to move LNG carriers through the Northern Sea Route with ice-breaker support in the winter months.

Conclusion

There is no doubt that the sanctions will make it harder for Russian LNG to reach its intended destination outside the EU but certainly not impossible. They will increase Russia’s logistical costs in getting Russian LNG to its end market but the adverse financial impact for Russia is likely to be much less significant than hoped for when the package was first discussed and is not expected to be prohibitive. So, to some extent, the sanctions may disrupt the supply of key components and reduce Russia’s long-term output. However, they will have no impact on the levels of Russian LNG being imported into the EU and only minimal impact on the import of Russian LNG to third countries.

In-depth 2024-146