Global gas report – the effects of the Russo-Ukrainian War on global supply
by David Stent, Content Editor, Energy Council
The broad macro effects of the Russo-Ukrainian War on oil and gas supplies upended the global energy markets, creating varied questions to the energy security of many nations. The most drastically affected have undoubtedly been the Ukrainians themselves, yet the over-reliance on Russian oil and gas supplies has led to a scramble for alternative supplies – most notably by European states. However, the constraints created by this market shock could provide the impetus to engage more constructively with low-carbon fuels, encourage investments into publicly-traded oil majors with net-zero strategies and hopefully, underscore the struggles of the 900 million people without access to electricity prior to the war.
Undoubtedly the state in the greatest distress while the nation remains under a Russian invasion. Russians have attacked pipelines, drilling wells and even nuclear facilities – placing the state’s energy infrastructure under intense stress, despite Ukraine being a significant oil, coal and natural gas producer. Ukraine required 27.3 bcm of gas in 2021, in which 19.8 bcm came from domestic production, domestic storage supplying 4.9 bcm and importing 2.6 bcm. Obviously, much of the capacity to operate and produce oil and gas during wartime becomes increasingly challenging, as these are often strategic military targets primed for control. The 2.6 bcm of gas came from Russia via Europe, as no trade had been conducted since Russia’s invasion of Crimea, but this supply is also threatened as the EU considers cutting off Russian energy. Directly, there have been no Russian supplies since 2015.
Despite electricity demand of 23,000 MW have largely been sustained, normally supplied through four nuclear facilities (down to three), hydro-power generation and a network of thermal plants. The grid has now been backed-up by a synchronization of the Ukraine and Moldova grids which have connected Ukraine to the Continental European Grid. A typically year-long task which the European Union Commissioner for Energy stated was completed in just two weeks.
The EU-Russian relationship has been defined by energy relations for much of the last three decades, a suitable conduit to iron out disagreements through a mutual need to satisfy each other’s supply and demand needs. This balancing act was given it’s first test when Russia occupied and annexed Crimea, a crime by international norms but an act that was effectively accepted in favour of escalating to a wider European war. While acceptable to all parties but Ukraine, it allowed Putin to develop a plan for further aggressions in Ukraine – which he timed to coincide with a global economic downturn and elevated commodity prices, effectively when Russia was enjoying the greatest economic benefits it could access.
The EU has therefore developed a ten-point plan to reduce EU demand of Russian energy by at least two-thirds. This would entail finding replacements for an average of 55 mcm/day, although Russia developed capacity to supply up to 109 mcm/day. These inflows will be partially replaced by increases in the quantity of LNG via tanker delivery, over natural gas pumped from Russia’s pipelines which have decreased 25% y-o-y in Q4 2021 – even before the Russian invasion. In Q1 2022, these fell another 37% y-o-y, according to the IEA.
The likelihood of a normalization of prior energy relations is unlikely, leaving major questions as to the future of the NordStream2 pipeline which has effectively been cancelled. EU leaders have been calling for a swift replenishment of oil and gas storage before the winter returns, buying up whatever fuel they can access from Scandinavia, the Americas and North Africa. Partially facilitated by the milder winters elsewhere which have lowered global gas demand.
United States of America
Biden’s administration has been caught in a balancing act of leading the Western democratic efforts against Russian aggressions while seeking to combat record gas prices, excessive inflation and the looming potential of a recession. The US approach has been diplomatically measured but leaves much to be desired in terms of improving conditions for domestic consumers and finding a swift solution to the Russian problem.
Domestic producers have been requested by the White House to increase supply volumes, yet the sector's underinvestment has resulted in an inability to increase production to levels that would make significant impacts on gas prices.
Together the EU and US have signed a memorandum of understanding to develop energy relations and security between the two actors – further deepening the NATO alliance to include strategic commodity supplies. Since winter began, the US supplied over 50% of the EU and UK's additional LNG demand, and 37% of all LNG supplies into Europe. The USA's position as global hegemon has been rumbled by China, and their economy looks on the brink of being undermined by runaway inflation – yet, the importance of the upstream sector in the US cannot be understated.
Despite the current need for Biden to release fuel from the Strategic Petroleum Reserves to quell record gas prices, the WTI has been far more insulated from price spikes than the Henry Hub. Moreover, the upstream sector has effectively made their case for long-term support for oil and gas investments – as matter of importance for keeping profits away from their authoritarian competitors.
Naturally, the OPEC states were approached as the go-to producers to solve the energy crisis as restrictions and sanctions on Russia ramped up. The US appeared to secure an early gain by getting the UAE to increase production volumes. A development that ended as soon as it began, with the UAE rolling back on the statement the next day and stating production would adhere to OPEC+ monthly increases of 400,000 boe per day.
Saudi Arabia’s position was keenly watched for signs they may alleviate the crisis and hastily increase production volumes, however the capacity to do so was limited. A position worsened with Houthi rebels attacking supply infrastructure in Jeddah over the past weekend. Nevertheless, Saudi Arabia has secured agreements with Turkey to provide additional oil and gas and was seeking to increase capex from $35 billion in 2021, to between $45-50 billion in 2022 to assist with production increases. While these are small successes, the UK’s Boris Johnson failed to secure additional reserves from the Saudi government to ease a spiraling energy crisis in Britain.
Iran has found itself an avenue to restore global diplomatic relations and provide their struggling economy with an injection of funds. The oil giant has reduced production capacity to around 2.5 million boe/pd in 2021, but state they are prepared to increase to 4 million boe/pd if sanctions are lifted and they can restore their place in the global economy. This, however, comes with distinct assurances about their nuclear programme.
China is arguably the only winner from the invasion of Ukraine, establishing itself as the go-to demand option for Russian energy supplies. As the majority global states continue to reject Russia’s approach and beginning to reconsider their demand for Russian oil and gas, China has no such issues and does not conform to the Western standards or approaches.
Following the singing of a new supply-deal between CNPC where Russia will increase volumes by up to 10 billion cubic meters per annum from the Sakhalin Island in Russia’s Far East, adding to total natural gas supplies which will exceed 48 bcm/pa from 2025. The remaining 38 bcm/pa is sourced through the Power-of-Siberia-1 Pipeline via the 30-year deal signed in 2014 worth over $400 billion. That figure could be revisited as China looks to capitalize on Russia’s reduced consumer base.
China is the greatest hope for the Russian economy at this time, a position China will be keen to take full advantage of as they face several major internal crises; the re-imposition of lockdowns in Shanghai, a housing debt bubble about to burst, manufacturing blockages and the ever present issue of Taiwanese sovereignty reflected in Russia's approach to Ukraine.
Asia & Australia
Asia energy demand hubs will be struggling as high oil and gas prices appear to be here to stay for now. Those especially concerned will be the net energy importers; Taiwan, the Philippines India, South Korea, Thailand and Vietnam, especially the latter three who are among the largest importers of Russian fuels, all of whom import gas from the Sakhalin-2 and Yamal LNG pipelines. Consumers are likely to bear the brunt of any fuel price increases, creating worrying shocks to economies that had exciting post-Covid growth forecasts.
These worries for Japan, Taiwan and South Korea are compounded as they are facing a difficulty securing their contracted supplies due Russia’s insistence the contracts are paid-for in roubles – a riposte to the sanctions imposed on Russia’s economy. Japan’s approach to the energy transition was to ramp up their use of natural gas as the transitionary fuel, with 9% or 6.54 million tonnes of LNG being supplied by Russia. Having joined the sanctions, Japan will now be seeking alternatives from Australia, the USA and sourcing from regional supplies across Asia.
South Korea is the third-largest importer of Russian gas, amounting to 6% of the country’s total supply. Moreover, Russia has been one of South Korea’s largest customers for LNG shipping orders – ensuring a relationship built-upon mutually beneficial needs. Of the 83 LNG ships ordered around the world last year, South Korean companies won 83% of the orders – an economic sector South Korea will hope to grow as the energy transition shifts to greater natural gas consumption.
Taiwan’s position has been placed in peril by Russia's actions, with many commentators suggesting that China will be learning from Russia's mistakes in Ukraine. Fortunately, Taiwan's energy independence has been centrally important to their national security – and secure their natural gas supplies from Qatar, Indonesia and Malaysia. Taiwan had already ceased oil imports from Russia back in 2016, leaving them sourcing from Saudi Arabia, Kuwait and the US – and even prior to the recent invasion, have been the global leader in offshore wind power additions.
India remains one of the few major states to continue purchasing Russian oil and gas, unable to replace their vast energy requirements with other major oil and gas suppliers – who are already under significant strain. Therefore, it becomes understandable that India has taken this route, especially as Russia began offering barrels at steep discounts of $35/barrel if India honoured it's contract for 15 million barrels. While the Indian position is understandable from an energy security and economic growth perspective, if India took a more pointed stance against Russia and the war, it may have hastened Russia's impending failure.
Australia will be one of the biggest winners of this crisis, from a commodity perspective. As energy buyers seek new supplies of coal and gas, Australian companies have leaped at the opportunity to replace Russian supplies with their own. Not only has this provided an opportunity to develop new customers for their significant LNG export market, but the crisis will likely speed up the integration of low-carbon fuel alternatives onto the market. The most promising of which, green hydrogen, is set to explode down under with the confirmation and government support for Fortescue's mutli-billion green hydrogen infrastructure developments. If Russian gas is still off the market in 10 years, it may have already been replaced by hydrogen.
The position of African states in this conflict have largely been ignored due to their abstention of the UN vote condemning Russia’s actions, and the growing alignment with the Chinese position at votes in the General Assembly. While this may appear inconsequential to many, the dismissal of the stance of African states will only push them further away from the Western political philosophy.
There is also an air of bewilderment at the approach of global actors toward the invasion of Ukraine, compared to conflicts on the continent – and that the UN member state's approach to Ukraine refugees compared to African or Middle Eastern refugees is noticed by these populations. From an energy perspective, it will be the average African who is hardest hit by a global recession.
Mexico refuses to sanction/condemn Russia as President López Obrador government seeks to carve out a foreign policy mandate distinct from their northern neighbours. AMLO's approach has an air of cynicism toward the norms and standards of international relations, defying the conventional and carving out his own path.
Most surprisingly, is that Venezuela could be coming off the naughty list and be offered a path out of sanctions. President Biden sent a delegation to meet with President Maduro's administration, while no solid progress was made in reversing the United State's position, the commencement of dialogue was an exrtemely positive sign. That being said, the impact which Venezuela could have on increasing global production and lowering prices is limited, the sector has suffered from significant underinvestment and decay.
Elsewhere, there was a split among Central and South American leaders on openly criticizing Russia or not. This is largely unsurprising due to the long-held allegiances with Cuba, Brazil and Venezuela – however, even those states who refused to explicitly condemn Russia by name, were willing to vote to debate Ukraine's motions and pursue a UN reprimand of Russia.
Russia – State of Denial
Russia’s position as a leading actor in natural gas supplies to Europe and beyond has provided a deterrent from overt conflict on the European continent for two decades – the belief being that any disruption to the supply and demand tug-of-war would be unbearably detrimental to all parties. Yet, while enjoying the rewards of record high natural gas prices, Russia may have felt emboldened by their position as Europe’s primary energy procurer and the lack of consequences for the invasion of Crimea, to continue on Putin’s aggressive invasion of Ukraine.
The IEA recorded that natural gas flows from Russia into the EU and UK accounted for 32% of total supply in 2021 – a drop from 60% in 2009, yet remains the dominant single source of supply and demand for Russia. Albeit a position being challenged by China, as the country begins to engage with the energy transition and shift from coal to gas-powered energy generation. Russia does still enjoy a number of major state consumers, but ever since the introduction of sanctions and removal from international currency trading systems, Russia has been left demanding payment for gas in roubles from ‘unfriendly' states who joined the calls for sanctions.
Russia's pipeline exports totaled $55 billion in 2021, through supplies of 203 bcm, has now been severely stunted – and even as they find a selection of consumers in India, China and Africa, they are selling these supplies at hugely discounted rates. LNG exports over the same period totaled $7.3 billion.