Russian invasion of Ukraine and West’s economic sanctions roil global energy markets
Energize Weekly, March 9, 2022
The Russian invasion of Ukraine and the broad sanctions by western nations in its wake are roiling energy markets from Europe to Asia and may lead to structural changes in regional and global energy markets, according to analysis by industry consultant Rystad Energy.
“Regardless of how this war will end, the attack will have deep and long-lasting implications on geopolitics, European policies and the global energy markets,” Rystad Energy said in report. “European countries will take measures to end their risky dependence on Russia for energy supplies.”
For Asia the fallout could be a long period of high and unstable prices for key fuels such as liquified natural gas (LNG), according to a report by the Institute for Energy Economics and Financial Analysis (IEEFA).
“The Russian invasion of Ukraine is likely to exacerbate commodity price volatility, which undermines Asian countries’ economic growth and obstructs the region’s arduous recovery from the COVID-19 pandemic,” IEEFA analyst Sam Reynolds wrote.
In the short-term, Rystad Energy is forecasting a one million barrel a day drop in Russian oil exports, a result of indirect impacts of the financial sanctions and voluntary actions by companies. Saudi Arabia and the United Arab Emirates have spare capacity that could fill the gap, but may not move quickly.
The U.S. and other developed nations in the 38-member Organization for Economic Cooperation and Development (OECD) are prepared to release 60 million barrels from strategic reserves through the year.
It won’t be until the end of the year, however, that U.S. production will respond in any significant way as oil prices could climb to more than $130 a barrel.
“The short-term stoking of oil prices will have a wide range of impacts on the market,” Rystad Energy said. “Significant disruptions of oil trade flows will be inevitable, as Europe currently sources 25 percent of its oil imports from Russia, and Europe’s terminals and infrastructure are not equipped for a sudden pivot from piped crude and oil products to port deliveries.”
As for the natural gas market, the Rystad analysis shows that Europe could manage an immediate supply shortage brought about by a complete shutdown of Russian gas “albeit at a high price.”
Gas supplies at the Ukraine-Slovakia border at full capacity, with storage levels in the normal range. The weather should also help ease the crunch as spring arrives with milder weather.
A combination of LNG imports and piped gas – from Norway, the Netherlands and the United Kingdom – will get European markets through the summer. “The challenge, however, will be to sufficiently fill storage facilities ahead of next winter – with Russian gas usually playing a vital role in this exercise,” Rystad Energy said.
Russia’s invasion of Ukraine has put up to 155 billion cubic meters of annual European gas imports at risk. That is equal to 30 percent of Western Europe’s annual gas demand. Although a total shutdown of Russian piped gas is unlikely, Rystad said, European gas markets are in a precarious state, with gas stocks at five-year lows amid highly volatile LNG prices.
The suspension of the Nord Stream 2 pipeline, which has been “at the core of a wider geopolitical conflict brewing in Europe,” also means that gas will not start flowing from it in the second half of this year, with the result that incremental gas exports from Russia will remain negligible for 2022 “upending European balances.”
Without Nord Stream 2 the gaps will have to be made up by fuel switching Rystad Energy said. This may also speed the transition to green energy sources, a shift also be “motivated by “energy security considerations.”
Eastern Europe, the region most reliant on Russian imports, would be hardest hit. Western Europe could, in theory, fill the void with increased LNG imports. Countries like Germany and Italy could look to ramp-up LNG regasification capacities as quickly as possible.
Over the long-term, the invasion and the sanctions may lead to structural changes
Western companies will no longer support Russia with finance and technologies for oil and gas developments,” Rystad Energy said. “Gigantic projects like the Vostok Oil development will be slowed and some Russian projects might be cancelled altogether, as time is running out for fossil fuel developments in the era of the energy transition.”
Orders to western contractors currently account for 25 percent of all oil and gas investments in Russia often bringing advance technology to the country. Major companies include BP, Shell and Exxon have already announced they are exiting their Russia businesses.
Russia has the pipeline capacity to rout about 500,000 barrels of oil a day to Asia, but does not have the capacity to reroute natural gas. Asia has depended upon LNG imports, but as European countries also scramble to add LNG capacity, it will have “knock-on effects on prices in Asia,” according to IEEFA.
Spot Japan-Korean Marker prices hit $59.67 a million British thermal units (MMBTUs) on March 4, before closing in intraday trading at $43.40 MMBTUs. The April futures price for the day was $38.65 MMBTUs, $5 more than the day before.
“Energy insecurity and volatility are part and parcel of global fossil fuel markets,” the IEEFA analysis said. “Myriad factors can affect commodity prices, including geopolitical conflicts, pandemics, outages at export infrastructure, and even ships getting stuck in major shipping routes. Such unexpected occurrences can affect prices for billions of consumers in importing countries and potentially trigger nationwide energy shortages.”