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Russia’s invasion of Ukraine has triggered a cascade of sanctions with long-lasting implications for geopolitics and global energy security. Brian Davis reports how analysts at Rystad Energy perceive the potential impact in terms of oil and gas supply, and the speed of transition to renewables.
Russia’s ferocious attack on Ukraine in late February triggered a raft of sanctions as OECD countries united in a concerted effort to terminate dependence on Russian energy supplies. Within days, certification of the Nord Stream 2 pipeline was suspended and Western companies including BP, Shell, Equinor, ExxonMobil and others withdrew from major Russian projects.
The green shift is now likely to accelerate in Europe, motivated by energy security. Countries such as Germany and Italy are expected to ramp up LNG gasification capacities, with Germany planning to build new regasification plants at Brunsbuettel and Stade. However, in the medium term, carbon emissions could rise as coal switching replaces some Russian gas supplies in Europe.
Russian oil exports could plummet by 3–4mn b/d as a direct and indirect impact of sanctions. Although Saudi Arabia and the United Arab Emirates (UAE) are reported to have spare capacity, there may still be some delays in meeting any shortfall. Strategic reserves of 60mn barrels are ready for release in the US and OECD, but US production is only likely to ‘respond meaningfully’ towards the end of the year, according to Rystad Senior Analyst Louise Dickson.
Meanwhile, an expedited Iran deal would bring some calm to the oil markets, although Dickson warns that it is ‘unlikely that Iranian fields could fully ramp up in 3–6 months, so we are still going to see short-term volatility’.
There is also potential for relaxed sanctions between the US and Venezuela as a further source of supply.
Slashing dependence on Russian gas
Russia’s invasion of Ukraine has put 155bn m3 of annual gas imports to Europe at risk – 30% of Western Europe’s annual gas demand.
The EU plans to slash dependence on Russian gas by two thirds by the end of 2022, as part of a European Commission (EC) plan, called REPowerEU. It further aims to become independent of Russian oil and gas well before 2030.
However, there is ‘still a lot of detail that needs to be defined, as 40% of gas imports come into Europe from Russia; so quite a substantial volume needs to be substituted with other sources of gas,’ notes Carlos Torres Diaz, Head of Power and Gas Market Research at Rystad Energy.
‘Higher LNG imports could potentially reduce European dependency by half this year. Gasification plants are running at 50% utilisation and could allow Europe to import about 70bn m3 of additional gas volumes – with supplies from the US and Qatar and possibly Nigeria, Egypt and Australia,’ he says.
Russia is the world’s second largest oil and gas producer, and sixth largest energy consumer. In 2021, it exported 155bn m3 of natural gas to Europe. Rystad Energy suggests that most of the Russian energy supply could be replaced – boosting LNG imports by 70bn m3 from other sources; 15bn m3 of added production from Norway, the UK and Netherlands; 2bn m3 of Azeri gas; 10bn m3 of additional gas from storage; 30bn m3 by switching to other fuels like coal, liquids, biomass, nuclear and hydro; and 30bn m3 of demand destruction in the industrial sector.
This leaves Russia with few options for gas export. Domestic storage levels are already full of western Siberian gas and can’t be diverted until the new Spirit of Siberia 2 gas pipeline is built in the next two to three years under a new Russia-China deal. A significant amount of oil production will also have to be shut in.
‘Europe accounts for over 50% of oil and gas imports from Russia and EU sanctions will really hurt. Other countries can’t absorb all these volumes. This will change the energy market, with an acceleration of the green shift and a new emphasis on energy security for European countries.’ – Jaron Rystad, CEO, Rystad Energy.
Russia typically exports about 7.5mn b/d of crude and oil products, with China taking some 2mn b/d. About 3.5–4mn b/d could be taken off the global supply market by Western sanctions; but Russia could also cut off gas supplies to Europe as an ‘energy weapon’.
Rystad Energy estimates the US could ramp up production by 1mn b/d of oil, including 600,000 b/d from shale, replacing 20% of lost volume. The company also anticipates demand destruction due to high prices, which will take down demand for coal, oil and gas.
‘We will also need redundant power supply and base production’, notes Per Magnus Nysven, Head of Analysis at Rystad. ‘Therefore, we will not dismantle as much coal and nuclear power plant as anticipated but have them “warm stacked” as back-up for energy security.’ This could lead to an uptick in coal consumption. Here again, Europe uses about 800mn t/y of coal – 80% sourced from Russia, so this source is also at risk.
OPEC+ will have to prove it has additional capacity available, above the 400,000 b/d promised recently. As already noted, Saudi Arabia and the UAE are believed to have the most manageable and immediate spare capacity, of about 2mn b/d and 1.2mn b/d respectively; while a fast-track deal with Iran could release 1mn b/d.
Dickson points out that while the US only imports about 100,000 b/d of Russian oil on a monthly basis (which is to be sanctioned), Europe imports about 4mn b/d via pipelines and ports. Although there are alternative sources with spare capacity in OPEC, ‘Europe will be the primary consumer affected by shifts in the crude diet from the medium-sour Urals blend to other OPEC blends,’ she says. ‘We still haven’t seen any ramp-up in production capabilities… and would have to see demonstrated production increases over the next 3–6 months.’
Historically, 94% of Urals Novo grade has been exported by Russia, with preference towards European refineries. The sanctioning of Russia’s main banks has made it very difficult for oil companies to process payments in the West. So, losses of Urals grade barrels will be to China/Asia’s gain. Meanwhile, Indian refiners have snapped up at least 3mn barrels, capitalising on strong discounts.
‘No matter what, the oil market is going to change in extremely unexpected and volatile ways. We are going to see the worst oil crisis since the Gulf War… and oil prices could go to $200 in the very short term.’ – Louise Dickson, Senior Analyst, Rystad Energy.
The power sector is seen as the most flexible source of gas demand in Europe. As Russian gas exports fall, lower gas power generation could help balance the market, with coal generation ramp up and additional nuclear power as plant life is extended.
The European system is well interconnected, making the distribution of electricity from alternative sources across the continent feasible.
Even with a decline of total installed capacity of coal to 133 GW as more plants close in response to environmental policies, utilisation rates for remaining plants could rise, adding 63 TWh in 2022. However, as Europe is highly dependent on Russian coal it will have to seek new sources of supply. Meanwhile, liquids and bioenergy plants could supply an additional 77 TWh, according to Rystad Energy.
Wind energy generation was relatively subdued in 2021, but could provide an additional 22 TWh, suggests the market analyst. Installed photovoltaic capacity could add 11 TWh of new solar supply.
Meanwhile, hydropower plants in Europe produced 570 TWh in 2021, 1% less than in 2020. The outlook for nuclear is similar as plants are decommissioned and unplanned outages curtail capacity. Nuclear power is the largest source of energy in Europe, providing 60 TWh in February 2022, but installed capacity is expected to drop to 124 GW in 2022, with a maximum output of 870 TWh. Some nuclear facilities that were scheduled to be shut down could remain operational for a longer period, while Germany is rethinking its nuclear strategy.
Looking ahead, Torres Diaz expects there will be a fast growth in renewable capacity, ‘because of the energy security issues we are facing and renewables are becoming a lot more competitive cost-wise’.
He continues: ‘We expect to see Europe being able to meet the “Fit for 55” targets – with 55% of electricity generation from renewables by 2030. The main issue in the transition is the drive to increase renewables. Gas was seen as one of the key sources of flexibility, allowing for the loss in capacity by coal and nuclear, as well as providing back-up to intermittent renewables. But now we are less optimistic about the future of gas in Europe. Because of the supply issues, there will need to be some rethinking about back-up. One way will be to give more incentives to build storage or to pay capacity charges for the gas to provide security during intermittent renewable energy supply.’
Meanwhile, UK Prime Minister Boris Johnson promises to ‘double down’ on new wind power, greatly accelerate the roll out of new offshore farms, do more to exploit the potential of solar power, modernise the nation’s electricity grid, and build out a fleet of small nuclear reactors to provide baseload for a grid increasingly dominated by intermittent wind and solar. French President Emmanuel Macron promises similar nuclear and renewable power ambitions if re-elected, and German Chancellor Olaf Scholz suggests reversing Germany’s adverse policy towards nuclear power to ensure energy security.
Certainly, there is a climate of change in terms of energy security.