Crisis in Ukraine Exacerbates Global Gas Market Turmoil

On February 21, 2022, the situation in Eastern Ukraine, which has already been turbulent for the past eight years, saw a historic development. As Russian President Vladimir Putin issued a presidential decree recognizing the independence of the “Donetsk People’s Republic” and “Luhansk People’s Republic”, the Russian army has sent troops to maintain peace in the Donbas region. Following this, Western countries are rolling out a series of sanctions against Russia.

For the EU, however, sanctions against Russia, especially its energy exports, will be a painful decision. Russia’s GDP is only about USD 1.5 trillion, which is lesser than Italy’s. For this reason, Jason Furman, chair of the Council of Economic Advisers (CEA) under President Obama, called Russia a “big gas station”, implying that, aside from oil and gas, Russia has little impact on the global economy.

The catch is that Europe would not be able to survive without Russian oil and gas. Russia is Europe’s largest energy exporter, and Europe needs to import nearly 40% of its natural gas and 25% of its crude oil. With the northern hemisphere still in the coldest time of the year, sanctioning Russia’s energy exports is tantamount to restricting energy flow into Europe itself. Western countries have called for sanctions against Russia, yet at the same time, they need more supplies of natural gas from Russia for the winter. The United States also has considerable demand for Russian crude oil. According to BP’s Statistical Review of World Energy 2021, Russia, the United States and Saudi Arabia are the world’s top three oil producers, with a daily output of nearly 10 million barrels. Yet, the U.S. also consumes 17 million barrels of energy per day. By the end of 2021, the U.S. needs to import nearly 600,000 barrels of crude oil per day from Russia.

The latest geopolitical turmoil has hit the international energy markets. On February 21, the price of Brent crude oil rose as high as USD 97/ barrel, just one step away from USD 100. In early trading on February 22, the oil sector opened sharply higher. Brent oil hit a fresh high of USD 97/ barrel since September 2014, as conflicts between NATO, Ukraine and Russia intensified. In the short term, the market believed that a military confrontation between Russia and Ukraine was inevitable, and the risk premium on crude oil caused by geopolitical events may continue to drive oil prices higher.

Germany is the European country with the highest demand for Russian energy. The majority of Germany’s natural gas is imported, with Russia accounting for half of the country’s natural gas supply. Statistics show that Germany imported a total of 119 billion cubic meters of natural gas from January to October 2021, and the domestic natural gas consumption in Germany in 2021 was 100 billion cubic meters. In the same year, 15.3% of Germany’s electricity generation was from natural gas. Half of Germany’s 41.5 million households rely on natural gas for heating. In manufacturing, industries such as ceramics cannot sustain production without natural gas. The market said that the role of Russia as a gas supplier will be irreplaceable in the next few years. Germany’s energy needs for Russia go beyond natural gas. In January-October 2021, 34% of Germany’s crude oil came from Russia. In 2021, 53% of the hard coal received by German power plants and steelmakers was from Russia.

For decades, Germany and Russia have maintained a strong energy supply partnership. However, after the crisis in Ukraine escalated, Germany was ready to use energy sanctions against Russia. German Chancellor Olaf Scholz recently announced that with the escalation of conflicts between Russia and Ukraine, the German government will halt the approval process for the Nord Stream-2 natural gas pipeline project. This means that the pipeline with a designed gas transmission capacity of 55 billion cubic meters per year will be delayed. It is understood that after the completion and operation of the Nord Stream-2 project, the total capacity of the Baltic Sea pipeline will reach 110 billion cubic meters per year, exceeding the annual transport capacity of the Ukraine pipeline of 95 billion cubic meters. At the same time, after Nord Stream-2 is put into operation, the total capacity of Gazprom’s supply to Europe will reach 297.5 billion cubic meters per year, which can meet all the outsourcing needs of the European market.

Therefore, Germany’s willingness to sanction the Nord Stream-2 natural gas pipeline project is an indication of its seriousness. The White House spokesman immediately expressed support for Germany’s energy sanctions, saying that the United States has been in close consultation with Germany and welcomed the measures taken by Germany. British Prime Minister Boris Johnson also welcomed this move. “This is a morally, politically and practically correct step in the current circumstances,” Ukrainian Foreign Minister Dmytro Kuleba wrote about Germany’s sanction.

Meanwhile, the Russian side also showed a tougher attitude. “Welcome to the brave new world where Europeans are very soon going to pay 2.000 euros for 1,000 cubic meters of natural gas!” said Dmitry Medvedev, Russia’s former president and an ally of Vladimir Putin. Several senior Russian officials also said on the same day that Russia is not afraid of being sanctioned by the West, including the suspension of the North Stream-2 project, for recognizing the two “states” in Ukraine. Russian Energy Minister Nikolay Shulginov said that Russia is committed to fully fulfilling the existing natural gas supply contracts, and will continue to export natural gas without interruption to seek a balance between supply and demand in the global natural gas market.

Some market institutions remain skeptical towards the impact of the conflicts. Barclays Bank believes that EU gas inventories will be near record lows by the end of the winter, and Russia is unlikely to cut off gas supplies to Europe. At the sixth Gas Exporting Countries Forum (GECF) held in Doha, Qatar’s Emir Sheikh Tamim bin Hamad al-Thani said that the global natural gas market was turbulent due to geopolitical tension and other factors, and the 11 natural gas producing countries participating in the conference pledged to maintain the market stability and ensure global energy security. However, some countries seem to be less than willing to provide natural gas to Europe to make up for the gap caused by Russia’s reduced supply. For example, the Libyan oil and gas ministry said that the country’s natural gas has been used up and cannot send more natural gas to Europe. Qatar’s energy minister Saad al-Kaabi also said that the country has yet to have such an amount of LNG to replace Russia’s gas for Europe.

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