By Oka Daisuke and Takechi Hironori
Novatek, a major Russian oil company, will receive about 200 billion yen from Sumitomo Mitsui Banking Corporation and the Japan Bank for International Cooperation (JBIC) as part of an international syndicated loan associated with Arctic 2, an LNG project in the Arctic Ocean. While the project is expected to help Japan diversify its sources of energy imports, the banks involved in the project may become subject to the U.S. sanctions against Russia. To offset the risk, the government-backed Nippon Export and Investment Insurance (NEXI) will provide Sumitomo Mitsui with insurance on favorable terms.
The Arctic 2 project, a joint venture formed around Novatek, involves constructing a drilling facility in the Gyda Peninsula to produce 19.8 million tons of LNG starting in 2023. Chinese and French oil companies will also participate in the project, along with Japan’s Mitsui & Co. and Japan Oil, Gas and Metals National Corporation (JOGMEC), an incorporated administrative agency. The Japanese entities as a group will hold a 10% participating interest. Arctic 2 is viewed as a heavily politicized project, whose 2019 contract signing ceremony was attended by then Prime Minister Abe Shinzo and Russian President Vladimir Putin. Over one trillion of the 2.5 trillion yen in total costs will be procured through loans from banks in Japan, Russia, and China.
Novatek is a target of the U.S. sanctions. Gennady Timchenko, a Russian businessman, a long-time ally of Putin, and someone seen as influential in Novatek’s operations, is also a target of U.S. sanctions. An Italian bank that had been expected to participate in the project cancelled its involvement. Some at Sumitomo Mitsui had also been cautious about proceeding with the plan.
Projects in the Arctic Ocean are attracting global attention as the arctic ice has started to melt due to climate change. In addition to transporting LNG from Arctic 2 westward via the Suez Canal, global warming may soon enable Russia to export LNG via a shorter eastward route year-round. For this reason, the Japanese government, keen to improve the country’s energy security [through diversification], encouraged Sumitomo Mitsui’s participation through favorable assistance from NEXI.
Some in the energy business are pessimistic about the prospect, however, claiming that the eastbound route is only passable with the assistance of a Russian nuclear icebreaker, which would make year-round commercial passage difficult. “For Russia, the entire route has military significance,” said a source.
Others question whether it is justifiable to use public funds through NEXI to shoulder a risk for a private bank.