By Scott Wright
RUSSIA’S war on Ukraine is transforming the outlook for the supply, demand and price of hydrocarbons, as well as the pace and cost of the energy transition.
And, while the timing and implementation of future bans on Russian commodity imports are difficult to predict, a rewriting of energy trade flows is under way.
Stark new analysis from Wood Mackenzie, the energy sector consultant, sets out the ongoing impact of Moscow’s invasion of Ukraine and subsequent efforts by the west to reduce energy imports from Russia. It considers the impact on commodities, investment, the energy transition and geopolitics over the next decade, assuming Europe bans all Russian commodities by the end of 2024.
The analyst warns that, with the global economy on a knife edge and energy prices structurally higher, there is a real risk of some global supply being lost.
The European Union (EU) approved a sixth package of sanctions against Russia last month that includes a complete ban on all seaborne crude oil and petroleum imports. This will cover 90 per cent of the bloc’s oil imports from Russia, the EU said, though pipeline crude oil is temporarily exempt until it can be phased out.
Wood Mackenzie said that Europe’s push for more liquified natural gas (LNG) as it looks to reduce Russian pipeline has driven spot prices up to record levels, and is supporting strong demand for coal. It adds that supply-chain risks are growing, and inflation is increasing costs across the energy sector.
Massimo Di-Odoardo, vice president of gas and LNG research at Wood Mackenzie, said: “It is inconceivable that Europe will abandon its diversification strategies and return to any meaningful dependence on Russia.
“While prices will be structurally higher and a ban on Russian gas will be more challenging than that of other commodities, the west can live without Russian commodity exports and we are already seeing a new trade balance taking shape. Increasing domestic coal production in China and India will compensate lower seaborne availability. While perhaps the biggest risk to Russian oil production is in the long term and relates to the loss of access to western partners, technologies and services.”
Wood Mackenzie forecasts a future ban on Russian gas will see competition for LNG intensify as Europe competes with Asia for limited supply growth until 2026.
LNG looks like the most compelling investment option across all hydrocarbons over the next few years, the analyst adds.
Mr Di-Odoardo said: “A huge increase in LNG project investment is being supported by a rapid increase in European LNG demand, with US developers already looking to fill the space.
“As a result, there is a potential for 50 million tonnes per annum of new US LNG capacity that will take final investment decisions over the next two years – and this could double if Europe bans imports from Russia by 2024.”
He added: “But despite disruptions to Russian exports, global supply chains are now emerging as the biggest concern. Rising costs could delay investment in necessary energy supply and delay the pace of investment in clean energy needed to meet decarbonisation goals.
“The most successful governments, companies and investors will be those who best navigate these complex market conditions to accelerate the energy transition.”