CNOOC provides shareholder loan for Arctic LNG 2 Project (Linked to Record ID#89463, 67091, 100622)

Project narrative

In June 2014, a special purpose vehicle (SPV) and project company—called Arctic LNG 2 LLC [ООО "АРКТИК СПГ 2”]—was legally incorporated as a limited company in the Russian Federation to finance, design, implement, and operate the development and production of the Utrenneye gas field and the construction and operation of three liquefied natural gas trains (“the Arctic LNG 2 Project”). Arctic LNG 2 LLC holds the liquefied natural gas license that grants an exclusive right to export liquefied natural gas produced from gas extracted from the Utrenneye gas field. Several years later, on November 1, 2017, China Development Bank (CDB) signed a Memorandum of Understanding with Novatek regarding the Arctic LNG 2 Project. Then, on June 7, 2019, CNOOC Limited and CEPR Limited—a wholly-owned subsidiary of CNOOC Limited—announced that they had entered into a share purchase agreement with Novatek and Ekropromstroy Limited Liability Company (Ekropromstroy), a wholly-owned subsidiary of Novatek, pursuant to which, CEPR would acquire a 10% stake interest in Arctic LNG 2 LLC from Ekropromstroy. The acquisition was subsequently completed on July 19, 2019. The cost of the acquisition included (i) a cash consideration of $903 million, (ii) a deferred consideration of $820 million over 2020, and (iii) a series of contingent payments, which were capped at $920 million (based on the date on which the LNG facility train 1 achieved operational start-up and future oil prices). CEPR Limited financed the acquisition with a loan from CDB with an estimated face value of $1.916 billion loan. The loan’s estimated borrowing terms included a 7-year maturity (final maturity: 2026) and an interest rate of EURIBOR plus a margin of 0.7% to 0.93%. The loan’s (principal) amount outstanding was $735 million as of June 30, 2019 and $1.916 billion as of June 30, 2020. Then, in September 2020, a group of lenders—including France’s Bpifrance, Germany’s Euler Hermes, Italy’s SACE, Russia’s Sberbank, China Development Bank (CDB), and the Japan Bank for International Cooperation (JBIC)—expressed interest in financing the Arctic LNG 2 project. At that time, CDB was expected to offer a $5 billion loan in support of the $21.3 billion project. On April 28, 2021, Arctic LNG 2 LLC—a joint venture of NOVATEK (60%), Total (10%), CNPC (10%), CNOOC (10%) and the Japan Arctic LNG, consortium of Mitsui & Co, Ltd. and JOGMEC (10%)—announced the signing of an EUR 3.11 billion loan agreement with a syndicate of Russian banks, including PJSC Sberbank, Gazprombank (Joint Stock Company) and its subsidiary Bank GPB International S.A., State Development Corporation VEB.RF and «Bank Otkritie Financial Corporation» (Public Joint-Stock Company). This loan carries a 15-year maturity and it is apparently collateralized against NOVATEK’s 60% equity stake in Arctic LNG-2 LLC. As of September 30, 2021, about 52% of the total planned capital expenditures of Arctic LNG 2 Project had been financed. Then, on November 30, 2021, Arctic LNG 2 LLC announced the signing of loan agreements with a group international financial institutions and commercial banks. The maximum aggregate borrowing amount under the loan facilities to be provided by the Russian and international banks is EUR 9.5 billion for up to 15 years. These credit facility agreements including buyer’s credit facility agreements with China Development Bank and the Export-Import Bank of China worth EUR 2.5 billion. The borrower also purchased buyer’s credit insurance from Sinosure. Japan Bank for International Cooperation (JBIC) also issued a loan to Arctic LNG 2. The loan proceeds were to be used by the borrower to finance an EPC (commercial) contract with TechnipFMC, which was signed in July 2019. The total estimated original cost of the project was $21.3 billion and it was originally expected to be financed according to a debt-to-equity ratio of approximately 50:50. In order to make its equity contribution to Arctic LNG 2 LLC, CNOOC issued a shareholder loan to Arctic LNG 2 LLC with an estimated value of RMB 8.221 billion and the following estimated borrowing terms: a 19.66-year maturity (final maturity date: December 31, 2040) and a 5.97% interest rate. The loan’s (principal) amount outstanding was RMB 5.975 billion as of December 31, 2022 and RMB 8.221 billion as of December 31, 2023. The purpose of the project is to create a liquefied natural gas (LNG) facility consisting of three trains, each using concrete gravity-based structures. The LNG facility will be located in the Gydan Peninsula in Siberia. Upon completion, its expected annual LNG production capacity is 19.8 million metric tons per year. TechnipFMC — a joint venture of Technip Energies, Saipem and NIPIGAS — is the general EPC contractor responsible for implementation. Wison Offshore and Marine Ltd is a subcontractor involved in the project; its scope of work is engineering, procurement, fabrication, and commissioning of modules in train one with a total weight of 48,000 MT. The project’s front-end engineering design (FEED) was completed in October 2018. A final investment decision (FID) made in September 2019. On June 17, 2021, the first plane landed at the Utrenniy airport built specifically for the Arctic LNG 2 project on the Gydan Peninsula in the Yamal-Nenets Autonomous Region. Shanghai-based Wison Offshore and Marine Ltd, a subsidiary of privately owned Chinese conglomerate Wison Group, shipped the first two of four giant industrial modules for the Arctic LNG 2 project of Novatek, the largest independent natural gas producer of Russia, on August 26, 2021. The modules dispatched from Zhoushan shipyard were slated to arrive in Russia's Arctic port city of Murmansk after 25 days. On September 21, 2021. Arctic LNG 2 LLC announced that the first modules for LNG Train 1 were successfully delivered. The two first pipe-rack modules weighing approximately nine thousand tons each were shipped from the Zhoushan port in China to the NOVATEK-Murmansk LNG Construction Center and were to be further skidded onto the Gravity Base Structure, or GBS, platform of LNG Train 1. The next two modules were loaded onto a transport ship and put in transit to Murmansk. Overall, 14 modules are schedule to be delivered from contractors' shipyards for the first LNG train. By the end of the third quarter 2021, the project had achieved a 52% completion rate and the first train was roughly 69% complete. However, the project encountered significant implementation obstacles and delays in 2022, 2023, and 2024. Technip Energies warned in April 2022 that international sanctions (resulting from Russia's military invasion of Ukraine), would complicate the completion of the project. Technip’s CEO Arnaud Pieton said at the time that '[t]he European sanctions now target LNG goods and technology and services more directly, I would say, making the execution of [Arctic LNG 2] more complicated, maybe even highly complicated.' Then, work on train three was halted on April 29, 2022 and work on train two was halted on May 27, 2022. All foreign workers were to leave their work sites by the end of May 2022, which placed the borrowing institution (Arctic LNG 2 LLC) and its contractors in a race against time to procure essential equipment and technology before deliveries to Russia became much harder or impossible. However, in January 2023, Novatek ordered Chinese yards to restart work on LNG modules destined for the Arctic LNG 2 Project, after an eight-month hiatus in activities related European sanctions on Russia. There are also indications that the Arctic LNG 2 Project has financially underperformed vis-a-vis the original expectations of its lenders. In February 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Directive 3 Under Executive Order 14024, which prohibited U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of greater than 14 days maturity and new equity issued by 13 Russian state-owned enterprises and entities, as well as their subsidiaries, on or after March 26, 2022. The entities included Transneft, Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways. Then, on March 5, 2022, the Russian Government issued Presidential Decree No. 95, which required that Russian borrowers make payments to foreign creditors from ‘unfriendly states’—including most countries that imposed sanctions on Russia for its invasion of Ukraine—in Russian rubles (irrespective of the currency of the loan), unless a permission to make direct payments in the contractual currency was granted by either the Central Bank of the Russian Federation (CBR) or Russia’s Ministry of Finance. This measure made it substantially more difficult for Russian borrowers to make timely payments on foreign- and local-currency debt to certain international creditors in their original currencies of denomination. Then, in June 2022, the Russian Government defaulted on some of its dollar-denominated and euro-denominated debt. Two months earlier, in April 2022, France’s Total, announced a $4.1 billion impairment and Japan's Mitsui & Co, Ltd. decided to take a write-off related to its 10 percent equity stake in the Arctic LNG 2 Project. Mitsui & Co, Ltd. reported that it had recorded a loss of $162 million related to its investment in project as a result of higher loan and guarantee obligations stemming from a worsening Russian credit rating. The fact that at least two of Arctic LNG 2 LLC's lenders (Sberbank and Gazprombank) faced international sanctions in 2022 and 2023 also complicated the implementation of the project. By October 2024, the Arctic LNG 2 facility has stopped liquefying natural gas as Western sanctions had restricted its options to ship and sell cargoes.