Aftermath of Russia Novatek LNG Project... Shipbuilders Facing Deep Concerns

Western Sanctions on Russia
Shipbuilding and Delivery Underway
Closely Monitoring Contract Termination Concerns

[Image source=EPA Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] Amid growing concerns over contract cancellations for ships by domestic shipbuilders due to Western countries' sanctions on Russia, the Russian Novatek LNG (liquefied natural gas) project, which was highlighted as a 'record-breaking order' just two years ago, is being reexamined.

According to the industry on the 31st, the Russian state-owned energy company Novatek initiated the 'Arctic 2 LNG' project in 2020. They ordered 21 icebreaking LNG carriers to be used in the development of the Arctic gas field, with 15 vessels contracted to Zvezda Shipbuilding and 6 to Daewoo Shipbuilding & Marine Engineering (DSME).

The shipowners of the vessels ordered by DSME are Russia's Sovcomflot and Japan's Mitsubishi, with 3 vessels each, and the total contract amount reaches around 1 trillion KRW.

All six vessels were scheduled to be delivered sequentially starting next year, but on the 18th, DSME canceled the contract for one of them, citing non-payment of the construction installment by the deadline. DSME did not disclose the shipowner, but the market estimates it to be one of the three vessels owned by the Sovcomflot Group.

The price of the canceled vessel is approximately 337.9 billion KRW, and contracts for two other vessels worth 678.5 billion KRW remain valid. However, due to economic sanctions making payment difficult for Russian shipowners, there is a high possibility of further cancellations. On the other hand, since the other three vessels' owners are Japanese companies, there is still room for the contracts to be maintained.

[Image source=Yonhap News]

Samsung Heavy Industries is participating in the Zvezda Shipyard project. In November last year, Samsung Heavy Industries signed a contract worth 2.5 billion USD (3.14 trillion KRW) to supply blocks and equipment for icebreaking LNG carriers to a European shipping company. This was the largest single contract in the company's history. The client is estimated to be 'Smart LNG,' a joint venture between Sovcomflot Group and Novatek.

Despite sanctions against Russia, shipbuilding and delivery are proceeding as planned. According to the shipping industry media TradeWinds, Samsung Heavy Industries delivered two vessels to the Russian side last month. Currently, hull construction for three vessels is ongoing as scheduled.

The scale of the hulls Samsung Heavy Industries will deliver has not been disclosed, but with export sanctions against Russia making normal operation of the Zvezda Shipyard difficult, it is uncertain whether the remaining vessels will be delivered as planned.

The industry estimates that the total amount ordered by the three major Korean shipbuilders?Korea Shipbuilding & Offshore Engineering, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries?from Russia is about 8 billion USD (approximately 10.18 trillion KRW). Samsung Heavy Industries leads with 5 billion USD, followed by Daewoo Shipbuilding & Marine Engineering with 2.5 billion USD, and Korea Shipbuilding & Offshore Engineering with 550 million USD.

An industry insider said, "It cannot be said that all Russian orders are losses. Most of the vessels have not yet been built, and even if contracts are canceled, resale of some vessels is possible, so we need to watch the situation a little longer."