NEWS AFFAIRS 7 : WHERE EVERY STORY HAS IT'S AFFAIR!
Key Points:
- Samsung Heavy Industries (SHI) to sue Russian shipbuilder Zvezda.
- Zvezda terminated contracts for 10 LNG carriers and 7 shuttle tankers.
- Contracts were impacted by international sanctions against Russia.
- SHI seeks legal resolution in the Singapore Arbitration Court.
Samsung Heavy Industries (SHI), a prominent South Korean shipbuilding company, has announced plans to sue the Russian shipbuilder Zvezda. This legal action follows Zvezda’s decision to terminate two significant contracts with SHI. These contracts involved the construction of 10 ice-class Arc7 liquefied natural gas (LNG) carriers and seven shuttle tankers. The combined value of these contracts was approximately 4.84 trillion won ($3.52 billion).
Back in November 2020, Zvezda awarded a contract to SHI valued at around 2.8 trillion won ($2.04 billion) for providing blocks and equipment for the 10 Arc7 carriers. These vessels were intended to support the Arctic LNG 2 project, operated by the Russian company Novatek. Then, in October 2021, the two companies signed another contract worth about 2.04 trillion won ($1.48 billion) for the supply of blocks and equipment for seven icebreaking Arctic shuttle tankers.
However, SHI recently disclosed in a filing with the stock exchange that Zvezda had unilaterally terminated these contracts. Zvezda’s claim was that SHI had defaulted on the contractual obligations. SHI, on the other hand, argued that Zvezda’s claims of default were made during ongoing negotiations and demanded a termination notice along with the repayment of an advance payment of about $800 million plus delayed interest.
The backdrop to this dispute is the series of sanctions imposed on Russia by the United States and South Korea. SHI had suspended work on the vessels during the design phase in February 2022 due to these sanctions. They notified Zvezda of the situation, citing force majeure, a legal term used to describe unforeseen circumstances preventing contract fulfillment. Despite these notifications, Zvezda moved forward with the termination.
Between February and June 2022, the U.S. government designated the shipowner involved in the project as a specially designated national and blocked person. This designation effectively prohibited financial transactions with the shipowner, further complicating SHI’s ability to fulfill the contracts. SHI stated that the sanctions made it impossible to conduct any financial dealings with Zvezda, hampering their ability to proceed with the project.
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In response to the contract termination, SHI plans to file a lawsuit in the Singapore Arbitration Court. They aim to dispute the legality of Zvezda’s termination notice and the extent of the repayment demanded. Despite the legal action, SHI indicated they are open to continuing negotiations.
This development follows Zvezda’s progress with the Arctic LNG 2 project. In September 2022, Zvezda hosted a naming ceremony for the first of the fifteen ice-class Arc7 carriers, named Aleksey Kosygin, built for Sovcomflot. SHI had constructed the hulls of the first three vessels in this series. Zvezda officially began constructing the first vessel of this batch in November 2020, with Sovcomflot ordering it directly from the Russian yard. Novatek, Sovcomflot, and VEB.RF had finalized construction and charter deals for the remaining 14 vessels in September 2020.
However, the imposition of sanctions has severely impacted these projects. French LNG containment company GTT, which was collaborating with Zvezda on the Arc7 carriers using its Mark III technology, ceased its activities in Russia following EU sanctions. This halt has further complicated the shipbuilding and LNG shipping operations.
The Arctic LNG 2 project, operated by Novatek, aims to leverage the Utrenneye field on the Gydan Peninsula, near Novatek’s Yamal LNG project. Despite the installation of the first gravity-based structure platform in August 2022, LNG production from the project has faced delays due to sanctions and vessel shortages.
International stakeholders in the project include TotalEnergies, CNPC, CNOOC, and a Japanese consortium. TotalEnergies, holding a 10% stake, declared force majeure in January 2023 due to sanctions, halting further capital input and withdrawing from the Novatek board.
As SHI prepares for its legal battle, the broader implications of international sanctions on global shipbuilding and energy projects remain significant. The outcome of this dispute will likely set a precedent for future contractual negotiations under similar geopolitical pressures.
