Rystad Energy - Energy Knowledge House
Rystad Energy - Energy Knowledge House

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Note from the CEO: Russia invades Ukraine - What’s at stake for global energy markets?

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Rystad Energy is closely following the situation and we are offering a detailed complimentary report – Rystad Energy Impact Report: Russia’s Invasion of Ukraine. In the report, which you can access here, you will find data-driven analyses of the energy implications of the war, including its impact on oil, gas and power markets, as well as global sanctions and the future of energy security.

Russia’s brutal and unjustified attack on Ukraine has been condemned globally, and countries representing 60% of global GDP are imposing sanctions on Russia. Regardless of how this war will end, the attack will have deep and long-lasting implications on geopolitics, European policies and the global energy markets. OECD countries will unite around democratic values, increase defense spending and ramp up investments in alternative energy supply. European countries will take measures to end their risky dependence on Russia for energy supplies.

Coordinated legal measures were initiated by the US, Canada, the EU, the UK and Japan in a bid to slow the Russian economy. The impact was immediate, as the value of the Russian Ruble plunged by 50% versus the US dollar.

Furthermore, Western companies will no longer support Russia with finance and technologies for oil and gas developments. Gigantic projects like the Vostok Oil development will be slowed and some Russian projects might be cancelled altogether, as time is running out for fossil fuel developments in the era of the energy transition. Western contractors presently secure orders representing about 25% of all oil and gas investments in Russia, often with leading edge technologies. Should those contractors leave the country, it will undoubtedly cause delays and disruptions to ongoing operations.

The green shift is now likely to accelerate in Europe, further motivated by energy security. In the medium term, however, CO2 emissions could increase as coal may have to replace Russian gas in Europe. Countries like Germany and Italy will likely ramp-up LNG regasification capacities as quickly as possible. In the short-term, this crisis is adding to the ongoing energy crunch, particularly in Europe. The price of Brent crude has already surged to $110 per barrel and European natural gas prices have again passed $30 per MMBtu.

We expect that Russian oil exports will plunge by 1 million bpd from the indirect impact of sanctions and voluntary actions by companies. Saudi Arabia and the UAE have spare capacity to replace these supplies but may not act immediately. Strategic reserves of 60 million barrels will be released by the US and the OECD through the year, while US production levels will only manage to respond meaningfully towards the end of the year. The net impact is that oil prices are likely to continue to climb – potentially beyond $130 per barrel.

The EU has thus far exempted Russian natural gas from the sanctions list in order to avoid exacerbating the ongoing energy crisis. Russia, however, might counter EU sanctions by halting its gas supplies to Europe. Alternatively, the EU could change course and opt to include gas in the sanctioning scheme. Either way, our analysis shows that Europe could manage to survive a supply shortage brought on by a complete stop in gas from Russia – albeit at a high price.

In recent days gas supplies to the Ukraine-Slovakia border returned to full capacity and storage levels returned to within the normal range. As spring approaches and the weather forecast is decent, a mix of further storage draws, LNG imports and non-Russian piped gas will provide the gas needed by Europe through the summer. The challenge, however, will be to sufficiently fill storage facilities ahead of next winter – with Russian gas usually playing a vital role in this exercise.

Looking back, 155 Bcm of Russian gas was exported to Europe in 2021 – and most of this may need to be replaced in 2022. A realistic but ambitious formula to achieve this could be: 70 Bcm of increased LNG imports (supply is not a problem, but regas and the cost of diverting cargoes to Europe could be); 15 Bcm of added production from Norway, the UK and the Netherlands; 2 Bcm of Azeri gas; 10 Bcm of additional gas from storage; 30 Bcm by switching to other fuels in the power sector (max load on coal, liquids, biomass, nuclear and hydro); and 30 Bcm of demand destruction in the industrial sector. This scenario would likely hit Russia hard as the country has nowhere else to export its gas – domestic storage levels are already full and gas from western Siberia can’t physically be diverted to Asia.

As such, there could be an acceptable path forward for Europe in terms of energy security. At a higher level, however, the only appropriate outcome is a swift end to Russia’s invasion and attempted occupation of the sovereign state of Ukraine.

For more updates, you can follow our CEO Jarand Rystad's LinkedIn profile here.