Russia’s invasion of Ukraine has caused significant disruption to global oil and gas supply networks. With Russia representing the largest gas exporter and second-largest oil exporter globally, Western-imposed sanctions and import bans on the energy giant have further threatened market stability, while causing prices to skyrocket. In light of this, Rystad Energy’s Impact Report, ‘Russia’s Invasion of Ukraine: What’s at stake for global energy markets?’, assesses the impact the crisis has had – and will continue to have – on global energy supply-demand equilibriums.
The Russia-Ukraine conflict has sent global energy markets into turmoil, causing price increases and supply disruptions, particularly in Russian energy-reliant regions, such as in Europe. Overall, the market implications have and continue to be significant. On the oil front, prices skyrocketed to $139.02/barrel when stocks opened on Monday, February 7, and with prices expected to rise to a staggering $200/barrel in the short term, Rystad provides insight into several key impacts. Notably, the short-term stoking of prices will see disruptions to trade flows. With Europe importing 25% of its oil from Russia via piped crude, disruptions regarding supply, as well as ill-equipped import infrastructure and terminals preventing the switch to port deliveries, will deepen the energy crisis. Rystad predicts immediate at-risk supplies of one million barrels per day (bpd) from Russia will last through June 2022.
For Russia, the impacts of the crisis will be equally as significant. With the country producing an average 11.1 million bpd – half of which is exported, while the other half is refined domestically – domestic refineries will be forced to reduce intake if the conflict persists, thereby negatively impacting upstream activities. What’s more, Russia’s onshore storage is expected to reach capacity, with the only option for operators being to shut-in production wells. In this scenario, Rystad expects Russian rail exports to increase to China, with the potential of rerouting pipelines from Europe to Asia standing at 500,000 bpd at a maximum.
Meanwhile, on the global gas and Liquefied Natural Gas (LNG) front, the suspension of the Nord Stream 2 pipeline – which would have increased gas supplies from Russia to Europe by 10 billion cubic meters (bcm) in 2022 – is likely to create a prolonged period of supply deficit in Europe, exacerbating price hikes and contributing to an already tight post-2021 gas market, whereby storage levels reached a five-year minimum. Despite the escalating conflict, the Nord Stream 1 pipeline continues to operate at full capacity, with Russian exports over February 25-27 reaching two-year highs. However, if these supplies are shut off – however unlikely – Europe will be forced to find alternative sources for the 155 bcm a year of gas that the continent imports from Russia.
In this regard, Europe has already started to source alternative supply chains, in a bid to reduce its reliance on Russian gas and diversify supplies, of which Rystad notes several solutions. Firstly, Europe could offset Russian supply via domestic production driven by Norway, the U.K. and the Netherlands. Secondly, LNG imports could comprise the largest source of new gas for Europe. Rystad notes that if all European import terminals operate at full capacity, up to 70 bcm of gas can be sent into the market. Already, there is sufficient flexible LNG supply in the market to address Europe’s needs – primarily from the U.S. – however, limitations regarding regasification prevent takeoff. Thirdly, storage withdrawals could offer short-term relief for the continent. However, if unfilled, significant supply constraints will be felt in the medium-term.
Finally, regarding the power market – considered the most flexible source of gas demand in Europe – Rystad notes that additional sources of gas power could add up to 152 TWh of additional supply. This supply would come predominantly from coal – with existing plants ramping up production despite certain plant closures due to environmental policies – bringing an additional 63 TWh online in 2022, while liquids and bioenergy plants could supply an additional 77 TWh. Despite the potential of renewable resources, wind, for example, was relatively subdued in 2021 due to low wind speeds. The wind sector could generate up to 22 TWh in new capacity, while solar has the potential to bring on 11TWh of new supply.
As the conflict persists and global supply chains continue to face disruption, Europe will be looking to other resource-rich countries. In this regard, it is imperative, now more than ever, for mature and emerging oil and gas producers in Africa to step in and meet European energy demand. In addition to benefits regarding market stabilization, by emerging as the preferred supplier to Europe, Africa can benefit from enhanced revenue streams, improved energy systems and accelerated socioeconomic development in 2022 and beyond.