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Analysts’ reaction to Russian invasion of Ukraine
2/3/2022
Market analysts point out that about a third of Russian gas supplies go to Europe, usually via a pipeline crossing the Ukraine. So there’s plenty of cause for concern and trepidation as the Russia-Ukraine situation escalates, and the world waits to see whether sanctions will bite or Russia will be tempted to staunch the flow of Russian oil and gas.
‘Supermajor E&Ps and major service providers with exposure to Russia will now be facing tremendous pressure to pull investments from Russia,’ commented Rystad Energy Analyst Artem Abramov to Reuters.
‘With Nord Stream 2 coming to a halt, Germany will be losing the additional 15mn m3/d due to come from the envisaged pipeline. Gas transit through Ukraine currently holds annual capacity of over 100bn m3. As the crisis unfolds, the massive gas imports route via Ukrainian trunk pipelines may stop at any point,’ says Veronika Kustkova, Senior Oil and Gas Analyst at GlobalData. ‘This brings an immediate threat to Europe while withdrawals from gas storage continue to rise.’ But she thinks it is doubtful they will reach 2018 historical lows.
Kustkova expects European demand for gas, which has increased since 2020, ‘to stay at the same level in the short term, placing Europe in an uncomfortable position as Qatar has already declared that it will not be able to fulfil the supply shortage’.
According to Eurostat and GlobalData analysis, Russian imports made up 45% of EU imports in the first 10 months of 2021. Similarly, Russian gas exports are reliant on Europe and Turkey, which made up around 78% in 2021 despite increasing volumes going to China.
Kustkova suggests that an alternative source of gas is US LNG imports. ‘But volumes will be constrained by capacity,’ she says. While medium-term increases will depend on new projects with the likes of Rio Grande which has already seen a delay. ‘However, in the past two months we have seen US LNG imports to Europe taking over from Russian pipeline gas for the first time in history.’
On a more positive note, renewables could eventually take up some of the slack. As Kustkova reflects: ‘Another offset could be from wind and solar, which is anticipated to see a 7% increase in the European energy mix in 2025.’
Meanwhile, analysts from Wood Mackenzie suggest that geopolitical tensions caused by Russia’s invasion of Ukraine will have an immediate effect on the global economy and markets, with lasting implications for commodities, energy policy and the energy transition. They also emphasise that the world’s dependence on Russia for certain commodities ‘cannot be overstated’ – from gas, coal, iron ore, aluminium and platinum group metals to zinc, copper, lead and petrochemicals and fertilisers.
‘War in Ukraine piles more pressure onto a European gas market that was already going through its worst crisis on record,’ says Wood Mackenzie. Short-term prospects look worrying but longer-term are even worse. ‘Russian pipeline imports account for 38% of EU demand. If the EU were to impose sanctions that stopped Russian gas flows today, it could muddle through this winter, but struggle to build gas inventories for next winter. Prices would climb. Industries would need to shut down. Inflation would spiral. The European energy crisis would, we believe, trigger a global recession.’
But Russia too would suffer if it halted gas flows. ‘Consequently, we think business as usual is the most likely outcome, though the EU will inevitably be forced to question its dependency on Russian gas.’
