politics
Novatek Profit Slumps 60% as Arctic LNG Projects Struggle Under Western Sanctions
Western sanctions are finally showing an effect as profits from Arctic LNG projects drop sharply in 2025. And the road ahead looks even more bumpy for Russian gas giant Novatek.
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Russian gas producer Novatek reported a 60% plunge in annual profit in 2025, as four years of Western sanctions on Moscow’s Arctic energy projects battered its Arctic liquefied natural gas projects, disrupting logistics and forcing deep discounts to attract buyers.
Net profit fell to $2.37 billion in 2025 from roughly $5 billion in each of the previous four years, reflecting mounting costs, production setbacks, and restricted market access.
The sharp decline underscores how sanctions imposed after Russia’s invasion of Ukraine in 2022 are increasingly weighing on the country’s liquefied natural gas ambitions, even as Moscow has sought to reroute exports from Europe to Asia.
Forced to switch
Sanctions have primarily hit Novatek’s Arctic LNG 2 project, intended to be the cornerstone of Russia’s future LNG growth. The project is only about 50% complete overall, and that after significant and costly redesigns.
Western restrictions cut off access to key liquefaction technology, forcing the company to switch from turbine-powered systems to electric drive solutions supported by onshore power plants. Elements of the power plant remain at a Chinese yard, uncovered by HNN during a 2024 investigation.
We’ll no longer be able to market the Yamal LNG to Europe
While Arctic LNG 2’s first production line has been completed, the second line is only 50% built and the third remains in early-stage construction. Work on the third train has been effectively mothballed for two years, with its future uncertain.
Substantial discounts reduce margins
Commercial challenges compounded construction delays. Europe, once seen as a natural destination for Arctic LNG 2 cargoes, at least during the early years, is effectively off limits. That has left China as the sole confirmed buyer, with cargoes heading to the Beihai terminal.
Industry sources say Novatek has had to offer substantial discounts on Arctic LNG 2 cargoes to Chinese buyers, reportedly between 30% and 40%, eroding margins further.
The pivot has significantly increased tonne miles – a measure of cargo volume multiplied by distance travelled – adding freight costs and straining a logistics network already constrained by sanctions.
Crucially, the Chinese outlet only emerged in August 2025, about a year after initial production began. In the interim, around a dozen cargoes were produced and loaded but remained unsold, floating in the Barents Sea and the Far East as Novatek sought buyers willing to navigate sanctions risks.
To maintain exports, Novatek has also quietly built up a fleet of nearly a dozen LNG carriers through subsidiaries and opaque third-party structures, mirroring tactics used in the so-called “shadow fleet” for oil. The vessels range from relatively new ships to older tankers, raising operating and compliance costs.
Yamal LNG remains key
By contrast, Novatek’s older Yamal LNG project has been less severely affected, though not immune.
One of its 15 Arc7 ice-class LNG carriers was lost to sanctions, tightening shipping capacity. Yamal LNG also underwent extensive maintenance, contributing to a 7% decline in production.
Logistics became more complex after the European Union banned LNG reloading at EU ports from March 2025. Previously, some Russian cargoes were transshipped at European terminals before heading to Asia.
Although some EU buyers absorbed part of those volumes directly, other cargoes had to be transferred via ship-to-ship (STS) operations near Kildin Island in the Barents Sea.
The number of STS transfers at Kildin Island doubled from 2024 to 2025, increasing operational risks and costs and further squeezing margins.
Time is running out for Yamal LNG
And more pressure looms. In 10 months, the EU market will be fully closed to Russian LNG, and pending EU and UK maritime services bans are expected to further complicate shipping, insurance and maintenance arrangements. Vessels may have to travel longer distances for servicing and exports, raising expenses.
The ban will apply for sure to imports going to Europe
The growing uncertainty was highlighted by Patrick Pouyanné, chief executive of France’s TotalEnergies, a minority partner in Yamal LNG and a major Novatek shareholder. In an interview with the Financial Times, Pouyanné said TotalEnergies might have to stop selling its annual 4 million tonnes of LNG from Yamal once the EU ban takes effect.
“We’ll no longer be able to market the Yamal LNG to Europe, and maybe beyond Europe,” Pouyanné said.
“(The ban) will apply for sure to imports going to Europe, but does it also apply to any European company doing any form of business with Russia?”
Novatek has not publicly detailed how it will manage potential marketing restrictions affecting its partners.
The company’s struggles reflect broader trends in Russia’s energy sector. Oil and gas revenues, a cornerstone of the federal budget, have declined from their 2022 peaks amid price caps, sanctions and shifting trade flows.
While crude exports have largely found alternative buyers, LNG projects requiring advanced technology and specialised vessels have proven more vulnerable.
For Novatek, Yamal LNG and Arctic LNG 2 were meant to cement Russia’s position as a major global LNG supplier. Instead, sanctions are steadily raising costs, narrowing markets and clouding the outlook for the country’s Arctic energy projects.
