Russia spent nearly 50 years developing its European energy market. It was destroyed by President Vladimir Putin in less than 50 weeks. It will be nearly impossible to find a replacement.
Russia has found other markets for its crude oil, mostly India. However, it will take many years to switch sales of refined products or natural gas. This will also come at a huge expense. This is if markets are possible at all as the world moves away from fossil fuels.
On February 24, Russian troops invaded Ukraine, frightening European energy customers. The market that used to absorb nearly 2.5 million barrels per day of crude oil, 1 million barrels worth of refined products, and 155 billion cubic metres of natural gas per year has almost disappeared.
Soon after Putin’s troops crossed into Russia, crude oil flows from Russia to Europe started to decline. When the European Union banned seaborne imports from Russian crude oil, on Dec. 5, they had already fallen to with only Bulgaria, who secured a temporary exemption. The same trend is being followed by refined products ahead of similar sanctions that came into effect on February 5.
Russia’s European market has been closed for natural gas from Russia. The huge network of gas pipelines and gas fields, which were built at a cost of hundreds upon billions of dollars, since 1968 when the first gas entered Austrian territory, was destroyed.
In 2017, it was estimated that $100 billion had been spent on the development of Russia’s Yamal Peninsula gas reserves. Most of these were connected to Europe via pipelines, including the ones running underneath the Baltic Sea, which connects Russia to Germany. This figure is expected to increase by at least two-thirds by 2025. Many of those investments now seem redundant.
Although Russia might be able to salvage some kind of energy relationship with Europe following the war, which it invariably will, it is unlikely that EU countries ever will allow themselves or need to be as dependent upon Russian gas as they were a year ago.
European consumers and governments are finally taking serious concerns about energy efficiency and demand restraint. Record prices for electricity and gas have prompted investment in renewables. These investments are the first serious efforts to alter the retail electricity pricing formula, taking into account the declining share of fossil fuels in power production.
Russia’s oil companies have been able to divert crude from traditional European buyers. This is due in large part to the need for Indian refiners to get cheap feedstock. However, Russia’s oil industry has suffered a significant loss from the diversion. To penetrate India’s market, huge discounts were required, some as high as $35 per barrel. This is equivalent to a 40% price reduction.
Russian barrels had accounted for around one-quarter of India’s crude imports by the end of the last year, replacing cargoes from the subcontinent’s traditional Middle Eastern suppliers, Saudi Arabia, Iraq and the United Arab Emirates.
It is one thing to divert crude oil flows to a market that is hungry and has a large refining sector capable if processing the high-sulfur crude from Russia. But, it is quite another to divert refined products into this market. There will be countries that will buy cheap Russian diesel and export their locally-produced fuel to Europe. However, they will need to pay large discounts to make the trade viable — another cost for the Kremlin or its oil companies.
Oil, either crude oil or refined products, offers a huge advantage over natural gas in that it can be transported easily and inexpensively by sea.
Russia has been looking westward for gas buyers for the majority of the last 55 years. Huge, thousands-kilometre-long pipelines linked gas fields in Siberia, and then on the Yamal Peninsula to European buyers.
Russia has been looking east in recent years for new markets for gas. The Power of Siberia pipeline now transports gas to China. This gas is sourced from new deposits located more than 1,300 miles to the east and 600 miles south respectively of the Yamal fields, which used to supply Europe but are now underutilized. Gazprom PJSC, Russia’s state-owned giant of gas, estimated that Power of Siberia and the associated gas fields cost $55 billion. An independent assessment found a figure nearly twice as high — an investment that, it claims, will not yield a return.
Beijing can only buy so much Russian gas. Although its energy needs are enormous, Russia will not be able to buy as much Russian gas as it used to. Russia will have to search for European markets to replace the European ones that it has lost.
It would love to supply India, a rapidly expanding nation with a large and growing energy demand. Pipelining natural gas to India is more challenging than getting it to China. It would have to pass through Pakistan and Afghanistan or cross the highest mountains on the planet. Each route would have to cross multiple countries, which makes construction and operation more expensive than a link between two countries with shared borders.
Russia’s loss of its European energy market has been caused by Putin’s war on Ukraine. It will be difficult to replace. No matter what rapprochement Moscow or Europe might reach, the Russians will continue to pay the price of war for many generations.
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