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It was to be a hugely ambitious project on the freezing Ob Gulf in Russia’s Far North, a stepping stone in Moscow’s growing ambitions to be a powerhouse in liquefied natural gas as much as in oil and gas delivered by pipeline.

When Russian President Vladimir V. Putin launched his war on Ukraine, the $21 billion project known as Arctic LNG 2 was well advanced with dozens of wells drilled, an airport built and most of the equipment ordered.

Now, however, European Union sanctions that ban the sale of gas liquefaction equipment to Russia have cast doubt on the giant complex. The sanctions mean, at best, that only one of three planned liquefaction facilities at Arctic LNG is expected to be completed anytime soon, analysts say.

The project’s main international backer, TotalEnergies, recently canceled its $4.1 billion investment. It is “difficult to believe that it can be built with the sanctions”, declared at the end of April to the analysts Patrick Pouyanne, the general manager of TotalEnergies.

The problems go far beyond LNG

In the years to come, Russia will likely be forced to retreat across a wide range of energies. The future growth of its oil and gas exports – for decades the backbone of the country’s economy – is now deeply uncertain. Ukraine’s shockwaves extend even to nuclear power, where Finland recently suspended a deal for Russia to build a reactor estimated to cost 7 billion euros ($7.4 billion).

Credit…Vincent West/Via Reuters

“Russia is going to be a greatly diminished international player, there’s no doubt about that,” said Matt Sagers, vice president and head of Russian and Caspian energy at S&P Global, a financial services firm.

Russia will likely find markets for at least some of its oil and gas; in April, Mr Putin said that while the country risked losing traditional buyers, he would find more at home and abroad. But it could gradually lose its influence in the industry, becoming a pariah for former international partners like the big international oil companies.

Some analysts also say it’s hard to see how Moscow can remain co-chairman, along with Saudi Arabia, of the oil producers’ organization known as OPEC Plus. So far, however, Saudi officials and others are sticking with Russia with the aim of preserving cohesion within the group for some distant future date when the world is oversupplied with oil rather than worrying about shortages.

LNG is effectively a proxy for Russia’s energy ambitions. It is growing rapidly, in large part because chilled liquid can be transported around the world on ships, allowing a country like Russia, whose gas is now delivered largely by pipeline to customers increasingly most hostile in Europe, to reach any market with a suitable terminal. Handling chilled gas is also a technical challenge.

LNG is still in its infancy in Russia, but Moscow aimed to compete with world leaders: Qatar, Australia and the United States. It would capitalize on its enormous gas resources and its relationships with Exxon Mobil and Shell as well as TotalEnergies, which held 10% of Arctic LNG 2. All are big players in liquefied gas. (LNG imports have increased by about 7% per year.)

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Such ambitions are now disappointed. S&P Global analysts now estimate that Russia will likely have only half the LNG gas capacity it was aiming for by the end of the decade. An Exxon Mobil liquefied gas project on Sakhalin Island in Russia’s Far East has been scrapped and Shell has announced it will vacate Russia’s first LNG facility, also on Sakhalin Island .

In the oil and gas sector, setbacks can be divided into two broad categories. With international oil giants like Shell, BP and Exxon Mobil having announced their intention to leave Russia, Russian industry will lose access to advanced technologies and capital. For example, Russian gas giant Gazprom worked with Shell on using chemical blends to boost oil extraction in a project called Salym, which Shell is now pulling out of.

In the past, Russia’s vast fields were generally easy to exploit, but after decades of pumping, the remaining oil will be harder to extract. “The longer Russia is locked out of the system, the greater the risk of falling production,” Oswald Clint, an analyst at Bernstein, a research firm, wrote in a recent report.

But a more immediate concern is the fact that Russia has been forced to shut down oil production due to sanctions and the reluctance of buyers to handle Russian crude and petroleum products.

In a sign of such distress, the oil project operated by Exxon Mobil on the island of Sakhalin in Russia’s Far East shipped no oil in April, according to Kpler, a firm that tracks energy transportation. Exxon Mobil declared force majeure in Sakhalin, meaning it could no longer perform its obligations due to conditions beyond the company’s control. Exxon said it had difficulty “complying with its obligations” and “conducting operations at the required level of international standards.”

Credit…Vladimir Soldatkin/Reuters

Russia does not have a large oil storage system, and so when it is unable to export oil, it is forced to curtail wells or shut them down altogether. There is nowhere to put the oil. Russian oil production fell by 900,000 barrels per day, or 10%, in April compared to March. The International Energy Agency, the Paris-based group, said recently that the amount of the production cut could approach 3 million barrels per day later this year.

And in a sign that more taps could be turned off, analysts at Kayrros, a research firm, said oil on tankers was rising rapidly. This suggests that “Russia may again find it harder to dump its crude,” they said.

Russia managed to find oil buyers who otherwise could have gone to Europe and the United States. Flows to India have increased. Viktor Katona, an analyst at Kpler, said China, where energy consumption has fallen due to Covid lockdowns, appears to be stepping up purchases.

Russia is also making money, thanks to high oil prices. S&P Global analysts estimate that Russia made about $26 billion in natural gas sales to Europe since the start of the war in Ukraine on February 24 until the end of April, more than three times the period of the previous year. Of this total, about a quarter went directly to the government and about half to Gazprom, the gas monopoly. About $5 billion went to Asian and Western LNG investors. (Tax exemptions intended to encourage investment in LNG mean that chilled gas now generates little revenue for the Russian government.)

Credit…Leonhard Foeger/Reuters

Analysts say it would be wrong to underestimate Russia’s oil industry. It was struggling when the Soviet Union collapsed in the early 1990s, but recovered with the help of Western companies and has since absorbed technologies such as hydraulic fracturing and horizontal drilling. Despite sanctions imposed to punish Mr Putin’s takeover of Crimea in 2014, Russia managed to increase production to a peak in 2019.

Novatek, the Russian company developing Arctic LNG 2, even deployed largely local LNG technology on an earlier project with TotalEnergies, called Yamal LNG. But the process has run into problems and it’s unclear whether it can work at full commercial scale. Novatek declined to comment.

“I wouldn’t say they’re finished as an oil powerhouse,” Bernstein analyst Clint said in an interview. “But they are certainly knocked down the rankings for a good period.”

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