By He Jun
The escalation of the Russia-Ukraine crisis, in addition to causing turmoil in the global energy market, is causing deep changes in it as well. According to ANBOUND analysts, the global energy market is undergoing a substantial reset as a result of such developments in the energy sector in some nations.
The very word “reset” here implies there will be major adjustments in different areas including global energy production, trading, transportation, consumption, investment, and financial markets, as a direct result of the Russia-Ukraine geopolitical crisis. This system adjustment has not only altered the past development pattern of the global energy field but has also resulted in the reconstruction of the global energy industry and energy market.
Historically, it is quite common for energy markets to be hit by geopolitical events. The two energy crises in the 1970s – the NATO attack on Yugoslavia in 1999 and the 9/11 terrorist attack in 2001, and the advent of the Russia-Ukraine conflict in February 2022, to varying degrees, all had a detrimental influence on the international energy market.
However, not every shock leads to a major transformation in the global energy markets. What makes the crisis remarkable this time is that Russia is one of the world’s largest energy producers and exporters. As a result of the crisis, which has triggered conflicts between Russia and the West, the massive geopolitical risk is driving a worldwide shift in the energy business.
Russia is currently one of the world’s main energy suppliers. The country’s oil and natural gas production ranks second in the world. Russia is also the second-largest oil exporter and the largest natural gas exporter in the world. Its oil and natural gas exports account for about 25% of global export trade. Russia’s oil exports are second only to Saudi Arabia, exporting about four million to five million barrels of crude oil a day, and two million to three million barrels of refined products per day. In 2021, Russia’s crude oil production was about 520 million tons, ranking third in the world, after the United States and Saudi Arabia. The natural gas production was 761 billion cubic meters, ranking second in the world, which accounted for about 18% of the world’s total natural gas production. In 2021, Russia exported about 230 million tons of oil, second only to Saudi Arabia. The natural gas export was about 200 billion cubic meters, ranking first in the world. Europe is the main destination of Russia’s energy exports. Russia’s oil and natural gas exports to Europe account for 50% and 78% of the country’s total exports, respectively.
The Russia-Ukraine crisis has severely ruined the rapport between Russia and Europe. The West’s multifaceted sanctions against Russia, combined with Russia’s counter-sanctions, result in a long-term regress between Russia and the West. At present, the sanctions imposed by the United States and Europe against Russia, has yet to involve oil and natural gas which are major interests by the United States and Europe, at least for now. If Europe adds to the oil sanctions, they would be critical to Russia’s economy. This is bound to cause a major transformation in the world energy market. Using European natural gas as an example, BP data shows that in 2020, European natural gas consumption was 541.1 billion cubic meters (an average of 547.8 billion cubic meters over the previous five years), and imports from Russia were 184.9 billion cubic meters (accounting for 34.2% of European consumption), with 167.7 billion cubic meters of pipeline natural gas. If Russia cuts off completely the supply of natural gas to Europe, it implies that Europe would need to locate 184.9 billion cubic meters of alternative natural gas.
Europe and other nations have been wary about Russia’s energy exports, as they are well aware that any changes would have an impact on the demand and supply of global energy. On March 3, The International Energy Agency (IEA) said, “Nobody is under any illusions anymore. Russia’s use of its natural gas resources as an economic and political weapon show Europe needs to act quickly to be ready to face considerable uncertainty over Russian gas supplies next winter”. The IEA estimates that by turning to other gas suppliers and alternative energy sources, the European Union could reduce its dependency on Russian gas by more than a third within a year. There is still space for improvement in the supply of pipeline gas in Azerbaijan and North Africa. The United States is the world’s number one supplier of liquefied natural gas (LNG). Europe competes with Asian countries for LNG contracts by Qatar and Australia. Europe must pay a higher cost than pipeline gas to increase LNG imports. Countries with insufficient receiving terminals, such as Germany, have gas supply and storage capacity difficulties.
While a global ban on Russian crude exports has yet to be enacted, refiners from European and American industries have begun to shun Russian oil, and banks have refused to finance the shipment of Russian commodities. This has set off a chain reaction in the global crude oil trading system: On March 1, Russian Urals oil was at a discount of more than $18 to Brent crude. The market estimates that as of March 2, the affected Russian crude oil exports have reached three million barrels per day. The non-Russian crude oil has also been drawn into the turmoil. International buyers are shunning crude oil transported by the Caspian Pipeline (CPC) because the crude oil transported by the pipeline could have mixed with Russian crude oil and the terminal of the Caspian Sea pipeline is a Russian port on the Black Sea, according to Reuters. The Caspian pipeline transports more than one million barrels of crude oil per day from Kazakhstan, equivalent to more than one percent of the world’s supply. Against the background, the market expects that Russia might be forced to partially cut down production.
The energy resetting would also affect the traditional energy and nuclear energy policies in some countries. With the escalation of the Russia-Ukraine crisis, international oil and gas and coal prices have soared, and nuclear power is gaining attention from some countries. On February 11 this year, French President Emmanuel Macron announced a large-scale revival of the nuclear power program. France will build at least six new nuclear reactors and study the possibility of building eight more reactors. On February 16, the construction of nuclear power plants in Kazakhstan is likely the most promising solution in the event of an expected power shortage, Kazakhstan’s Ministry of Energy said. The Philippines has also determined to embrace nuclear power. Philippine President Duterte mentioned in a recent executive order to include nuclear power in the country’s energy mix as local authorities get ready for the phasing out of coal-fired power plants after earlier efforts were unsuccessful due to safety concerns. Next, on March 3, the Finnish utility FORTUM applied to the government to extend the life of the LOVIISA nuclear power plant, which has been in use for more than 40 years, to 2050. Previously, the plant was supposed to close in 2030. On March 2, German Economy Minister Robert Habeck revealed that Germany is weighing whether to extend the life of remaining nuclear power plants to safeguard the country’s energy supply amid uncertainty over Russian gas supplies. Germany had plans to close its nuclear power plants by the end of 2022. India, South Africa, and other countries also plan to significantly expand nuclear power.
Coal also becomes a part of this transformation. Germany has loosened its coal policy under pressure. The German Institute for Economic Research recently recommended in a report that coal power plants that had been mothballed for reasons of climate protection should be brought back into service. According to Germany’s plan, all coal-fired power plants will be closed by 2038, and the use of natural gas will be abandoned by 2050. Under energy crises brought by geopolitical challenges, these green and environmentally friendly plans would be greatly affected. Other European countries might also reuse or increase the use of coal.
These changes brought by the energy crisis, which has been exacerbated by the geopolitical crisis, are driving many countries to reconsider the application of nuclear power and coal power, along with other green energy and energy-saving applications. A massive energy transformation process has taken place all across the planet. Due to the energy resetting, the changes might not only occur in the energy market, but also in the laws, industrial plans, fund investments, government energy policies, and financial insurance.
Final analysis conclusion:
The escalation of the Russia-Ukraine crisis not only exerts pressures on global geopolitics, but also greatly impacts the global energy industry and energy market system. This leads to a great energy resetting in the areas of global energy production, trading, investment, finance, law, and consumption. As one of the world’s largest energy consumers and energy importers, China is bound to be significantly affected by this. Given the comprehensive assessment of the impacts of the global energy resetting and the timely manner formulation and adjustment of energy security strategies in the world, China must act.
Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound’s research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.