Samsung Heavy Industries has initiated the liquidation process of ZVEZDA-Samsung Heavy Industries LLC, a joint venture with Zvezda Shipbuilding, according to recent news from Korean media. Established in 2020, the joint venture was formed by Samsung Heavy Industries and Zvezda Shipbuilding with a 49% and 51% shareholding, with the aim of jointly building shuttle tankers and providing technical support to Russian shipyards.
In the second year of the establishment of ZVEZDA-Samsung Heavy Industries LLC (2021), Samsung Heavy Industries announced the establishment of a separate subsidiary in Russia called Samsung Heavy Industries Rus to strengthen its responsiveness to the Russian market. In addition to the joint venture, the modernization project of Zvezda Shipbuilding also involves Samsung Heavy Industries, and the two parties further solidified their partnership through cooperation in crane installation and dry dock construction.
Samsung Heavy Industries has won an extremely sizable contract from Zvezda Shipbuilding through the excellent foundation of cooperation established between the two companies. Between 2019 and 2022, Samsung Heavy Industries has been awarded a cumulative total of 22 newbuilding contracts from Zvezda Shipbuilding, including 15 ice-breaking liquefied natural gas (LNG) carriers and 7 shuttle tankers, with a total contract value of $4.2 billion, the largest shipbuilding contract on record at that time, which were originally planned to be delivered for use in Russia’s large-scale LNG development project – the -ARCTIC LNG-2 project.
The 15 ice-breaking LNG carriers are part of the new ice-class ARC7 high-value-added LNG carriers, a joint project of Russian shipping giant Sovcomflot and Russian energy giant Novatek. The LNG carrier is 300 meters long and 48.8 meters wide, with a deadweight of 81,000 tons and a cargo tank capacity of 172,600 cubic meters, and is mainly fueled by LNG and flies the Russian flag.
However, as the Russian-Ukrainian conflict intensified in 2022, the partnership began to falter. The Office of Foreign Assets Control of the US Department of the Treasury (OFAC) placed Zvezda Shipbuilding on the Specially Designated Nationals List (SDN List), meaning that all of the shipbuilder’s funds were frozen and it was prohibited from doing business with foreign countries. The two companies were unable to renew their cooperation.
As of today, only 5 out of 15 ice-breaking LNG carriers have been delivered. Samsung Heavy Industries announced the suspension of the construction of the remaining 17 ships and the withdrawal of workers from the Zvezda Shipbuilding due to force majeure factors.
In June 2024, Samsung Heavy Industries received a contract termination notice from Zvezda Shipbuilding, requiring Samsung Heavy Industries, as a technical partner, to terminate the contract for hull section construction and Marine equipment supply for the remaining 17 vessels and refund the advance payment. The contract termination involves 10 ice-breaking LNG carriers and 7 shuttle tankers, and Zvezda Shipbuilding is seeking a total of $800 million in advance payments and deferred interest to be refunded by Samsung Heavy Industries.
Samsung Heavy Industries disputed the legality of Zvezda Shipbuilding’s notice of termination of contract and commenced proceedings before the Singapore Court of Arbitration in relation to the notice. Samsung Heavy Industries claimed that the owner’s unilateral termination of the contract and refund of the down payment was due to force majeure.
It is worth noting that Samsung Heavy Industries signed a design contract, not a construction contract, as a technical partner of Zvezda Shipbuilding. As a result, the series of LNG carriers were built at Zvezda Shipbuilding rather than Samsung Heavy Industries Geoje Shipyard. This is also the reason why Samsung Heavy Industries announced the supply of hull segments and equipment after signing the contract, rather than including it in the new ship order.
It is said that Russia originally planned to improve the shipbuilding technology of the country’s shipyards and accumulate relevant construction experience through cooperation with Samsung Heavy Industries.
As Samsung Heavy Industries and Zvezda Shipbuilding turned from a cooperative relationship to a litigation relationship, it is also reasonable for the joint venture between the two companies to start liquidation procedures. According to Samsung Heavy Industries’ recently released Sustainability Report 2024, the company’s overseas operations in Russia have only seven employees as of 2023.The industry believes that the four-year-long joint venture is in the process of being terminated after Samsung Heavy Industries withdrew most of its employees sent to Russia.