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The impact of Russia’s invasion of Ukraine on global energy

file photo: gas pipelines are pictured at the atamanskaya compressor station, part of gazprom's power of siberia project outside the far eastern town of svobodny
Gazprom pipelines in Siberia

In the aftermath of this crisis Europe will be even more determined to accelerate transition to renewables and clean energy

 

The unthinkable, and probably illogical, happened. Russia has finally invaded Ukraine. Even though there were ample warnings, many hoped that Russia would stop short of actual invasion. As a result, everybody is now scrambling to understand its far-reaching implications, especially on what was already a challenging and volatile sector: energy. But with Russia’s actions in Ukraine still unraveling and the West’s response still being formulated in response to these actions, it is difficult to see how this crisis will play in terms of long-term impact on global energy markets and flows. But a few new realities are emerging.

Inevitably, global markets are rattled. A week before the invasion the price of Brent crude was $91/barrel and that of natural gas $22/mmBTU (about 1,000 cubic feet). On February 24, reacting to the Ukraine news, the oil price shot to over $105/barrel and gas to $42/mmBTU. But next day, when it became clear that sanctions do not include energy, the oil price dropped to $97/barrel and gas to less than $30/mmBTU. There are warnings, though, that, depending on what happens next, export disruptions may drive the oil price to $130/barrel within months.

Russia appears to have prepared for this move carefully, with timing being in its favour. With the world coming out of the pandemic, the global economy is rising fast and needs not just Russia’s gas, but also its oil, minerals, fertilizers, wheat and so on. That’s why President Biden went out of his way to clarify that sanctions are designed to steer clear of energy and commodity exports. The exception is EU sanctions related to oil refining, but these do not affect gas and crude oil exports.

Russia has also amassed $630billion international reserves and its Sovereign Fund is close to $200billion. These, and its low sovereign debt, are helping it ride the impact of sanctions.

Soaring energy prices are bound to put even more pressure on prices globally, from goods, to food, to mobility and inflation. These will impact the outlook for economic growth in 2022, particularly in Europe.

 

Europe’s energy conundrum

With Europe highly dependent on gas imports, with over 40 per cent of these coming from Russia, there are concerns that Russian gas flows to Europe could be disrupted. But so far, Gazprom is maintaining contracted supplies to its customers.

In the short-term the situation is manageable. Winter has been mild so far, leaving some gas still in storage. Moreover, arrangements have been made to secure additional gas supplies from Qatar, the US and Azerbaijan. Problems may come later in the year. If for example summer is hot and calm, then, as last summer, reduced wind energy will need to be supplemented by gas. In addition, gas storages will need to be filled in preparation for next winter. This cannot be done without Russian gas. However, as long as Gazprom carries on fulfilling its contractual obligations the impact could be manageable – but energy prices are likely to stay high.

In the aftermath of this crisis Europe will be even more determined to accelerate transition to renewables and clean energy and to reduce dependence on fossil fuels, including gas. But this may be easier said that done. As long as renewable intermittency remains a problem, it will require back-up from flexible energy sources, such as gas, for years to come. But with transition progressing, this will become a diminishing dependance, especially as we approach 2030 and beyond.

This could make it difficult to plan and secure investment for new long-term gas supply projects to Europe. This includes gas from the East Med, other than Egyptian LNG exports that have soared. The invasion of Ukraine has revived the idea of such exports, but these are multibillion dollar projects that require certainty that they will be able to operate and sell their gas for at least 20 years. Europe’s determination to accelerate transition to clean energy makes this uncertain and challenging for potential investors.

However, in the short to medium-term Europe will still need Russian gas and Russia will still depend on its gas exports to Europe.

 

The China factor

China’s refusal to condemn Russia, and criticizing sanctions against Russia, is revealing. We may be witnessing a new world order developing. The two countries are closer than they have ever been before.

President Putin’s visit to Beijing early February for the opening of the Winter Olympics and his meeting with President Xi Jinping cemented their cooperation. The meeting statement declared that “a trend has emerged towards redistribution of power in the world” towards China-Russia, and away from the US and the West, and that “the friendship between the two states has no limits.” This is likely to lead to global realignment also affecting global energy flows. Russia and China have strong economic and political incentives to cooperate in the energy sector. Planned pipeline and LNG projects exporting Russian gas to China will eventually make-up for reduced gas exports to Europe.

With the ramifications of the Ukraine invasion still unravelling, and the rift between Russia, the US and Europe growing, with Nord Stream 2 now doubtful, and with Russia emboldened from its pivot to China, the future is uncertain.

 

Impact on Cyprus

First and foremost, with the price of oil going up even further, the price of electricity, diesel and petrol will carry on rising for the best part of this year. In addition, with the price of emission allowances going up, and soon beyond €100/tonne, electricity costs will increase even more.

European leaders announced the setting-up of funds to ease the impact of such price rises on consumers. But inevitably benefits will be limited. The government will need to do more, particularly for vulnerable households. As I have been saying repeatedly, it should use the funds it receives from the emissions trading system that this year look like exceeding €300million.

Like Europe, Cyprus must hasten the switch to renewables combined with electricity storage. But it must do so through competitive auctions that in other similar countries produced renewable electricity prices below €0.02/kWh. With the EuroAsia Interconnector securing funding, it should be possible to increase the share of renewables to more than 50 per cent by 2030.

But the debacle of the LNG import project may yet come to haunt us. Not only will it be late and expensive, it also risks becoming an obstacle to such a transition.

Given all these challenging developments, we must rethink what we do in the energy sector, based on a new long-term strategy, reflecting the far-reaching impact of these developments.

 

Dr Charles Ellinas, @CharlesEllinas is Senior Fellow at the Global Energy Center, Atlantic Council

 

 

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