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Friday, October 07, 2022

Analysis: Ukraine Crisis Reshaping Global Energy Flows

As the Ukraine crisis continues, the West is rethinking its dependence on Russian energy, analysts say.

According to Russian thinking, Europe’s energy dependence on Moscow would prevent it from interfering with Russia’s attack on Ukraine. Yet on February 22, two days before the invasion, Germany halted the $11 billion Nord Stream 2 Baltic Sea gas pipeline project designed to double the flow of Russian gas to Germany.

Large oil companies have announced that they would exit the Russian market, with BP leaving on February 27, Exxon on March 1, and Shell on March 8.

As restricting energy trading with Russia becomes popular in the United States and Europe, according to CNN, Moscow faces challenges in shipping its oil and gas to alternative markets such as China and India.

FILE - A Shell petrol station is seen in the town of Klimovsk outside Moscow, March 9, 2022.

FILE – A Shell petrol station is seen in the town of Klimovsk outside Moscow, March 9, 2022.

Analysts told VOA that the European Union’s transition to renewable energy would continue to offset Russia’s influence over European energy in the short term, and that the US would increase supply from domestic producers and perhaps also expand on supply from less friendly foreign sources.

Europe and America

Russia is the world’s third-largest oil producer behind the United States and Saudi Arabia, and its gas and oil account for about 40% and 25% of the imports respectively by the 27-member EU, according to the International Energy Agency.

Europe needs to speed up the promotion of clean energy technology and decrease its dependence on Russian oil, coal and gas, said European Commission President Ursula von der Leyen. “We simply cannot rely on a supplier who explicitly threatens us,” she said March 8, as the European Commission unveiled the REPowerEU project, a road map for ending the EU’s reliance on Russian natural gas. The plan also features a key role for renewable energy.

Yet experts note that building renewable energy infrastructure takes time, and European countries such as Italy and Germany also rely heavily on imported natural gas to transition from fossil fuels to wind, solar and other clean energy.

Henry Lee, director of the Environment and Natural Resources Program at Harvard University, told VOA Mandarin that while reducing reliance on Russian gas was consistent with the EU’s long-term goals, in the short term, people in Europe would feel the pain.

“If Europe cuts off Russian gas and runs its liquefied natural gas stations at close to 100% of capacity, … they would still face a shortage in the 15-20% range next winter,” he said, even if the EU used all the natural gas now in storage and reduced consumption by 15%.

“In the longer run, three to five years, the substitution options will be greater,” Lee added.

FILE - A worker at the Novatek's Offshore Superfacility Construction Center (OSCC) for the world's first facility production of natural gas liquefaction trains in the village of Belokamenka in the Murmansk Region, Russia, Nov.  29, 2021.

FILE – A worker at the Novatek’s Offshore Superfacility Construction Center (OSCC) for the world’s first facility production of natural gas liquefaction trains in the village of Belokamenka in the Murmansk Region, Russia, Nov. 29, 2021.

Duncan Wood, interim director of the Global Europe Program at the Wilson Center, a Washington-based think tank, argued that Russia’s political influence would significantly decrease as the EU forges ahead with its carbon-reduction plan.

“In the long term, the energy transition will completely negate the power that Russia has over European energy, and Putin is painfully aware of that. Nord Stream 2 was always going to be the peak of Russian energy power over Europe, but Putin has hastened the decline of that power by his actions in Ukraine,” Wood told VOA Mandarin.

The US, on the other hand, is much less dependent on Russian energy, with about 3% of its oil imports from Russia and no imports of its natural gas.

“The US has plenty of gas, so prices may go up slightly, but it is in a far better situation than Europe,” said Harvard’s Lee. Natural gas prices have not dramatically fluctuated since the Russian invasion of Ukraine, according to the US Energy Information Administration.

Lee pointed out, however, that oil is a globally traded commodity, “so the US would face the same oil price increases experienced in Europe.”

FILE - Axel Vogt, mayor of the German coastal resort town of Lubmin, northeastern Germany, stands in front of an information point container decorated with a map showing the Nord Stream 2 gas pipeline, which was expected to deliver Russian gas to European households, in Lubmin's industrial park, March 1, 2022.

FILE – Axel Vogt, mayor of the German coastal resort town of Lubmin, northeastern Germany, stands in front of an information point container decorated with a map showing the Nord Stream 2 gas pipeline, which was expected to deliver Russian gas to European households, in Lubmin’s industrial park, March 1, 2022.

Prior to its invasion of Ukraine, Russia was exporting about 5 million barrels daily, according to the IEA, of which 4.3 million were going to Europe and the US Russia was not among the top 10 crude oil suppliers to the US in 2020, according to EIA.

High US energy costs can be addressed by increasing the supply, said Ehud Ronn, a finance professor at the University of Texas at Austin. “That increase can come from potentially friendly, and perhaps less friendly, foreign sources and from domestic producers,” he told VOA Mandarin.

China and India

While Europe relies heavily on Russia for energy supplies, Russia in turn depends on fossil fuel exports, which account for more than two-fifths of Russian government revenue.

Being abandoned by the West will force Russia to seek new partners, and China is a possibility. Before the Ukraine crisis, China was one of Russia’s largest export markets for oil, gas and coal. China absorbed 20% of Russia’s oil, according to the IEA and 25% of Russia’s coal output, according to the EIA. Russia exported 16.5 billion cubic meters of gas to China in 2021, and the two nations signed oil and gas deals worth an estimated $117.5 billion in early February, according to Al-Jazeera.

FILE - BP petrol station employees check fuel tanks in the town of Chekhov outside Moscow, March 9, 2022.

FILE – BP petrol station employees check fuel tanks in the town of Chekhov outside Moscow, March 9, 2022.

Ana Maria Jaller-Makarewicz, an energy analyst at the US-based Institute for Energy Economics and Financial Analysis, told VOA Mandarin that while Russia was looking to strengthen its commercial tie-ups to countries in the East,” the continuation of that relationship also depends on the sanctions measures being imposed and how the crisis evolves.”

The Wall Street Journal reported that Russia is now offering to export oil to India and China at prices 20% below global oil benchmark prices.

Yet it remains to be seen how the parties will get around the US financial sanctions to get the deals done. Logistics is also a problem because Russia currently does not have enough infrastructure to move energy easily to India and China, said Lauri Myllyvirta, a lead analyst at the Center for Research on Energy and Clean Air.

“In the case of gas, Russia quite simply doesn’t have the physical infrastructure to export anywhere else, as the gas comes to Europe by pipeline,” he told VOA Mandarin. “Similarly, most oil is shipped from ports on the Baltic Sea and the Black Sea. There is limited scope to divert these to the Pacific due to long transport distances and the fact that refineries in those markets aren’t configured to process Russian crudes. ”

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This article is republished from – Voa News – Read the – original article.

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