- Russia’s invasion of Ukraine has set in motion a series of events that will forever change the global energy order.
- In the medium- and long-term, the United States is in a very strong position to take advantage of these new dynamics.
- While Russia is benefitting from high oil and gas prices in the near time, the long-term outlook for its energy industry is poor.
The new global order after the Russian invasion of Ukraine is set to create new winners and losers in energy as trade flows are changing. Russia is still receiving close to $1 billion in oil and gas revenues every day as Europe continues to buy Russian gas and is panicking over the possibility of Russia cutting off gas supply entirely.
In the short term, Russia may have a winning hand, having hooked major European economies to its natural gas.
Winners and Losers
But in the medium to long term, Moscow is likely to lose its global energy superpower status, as Europe’s decision to cut off its Russian energy dependence is irreversible, Gideon Rachman, chief foreign affairs columnist for the Financial Times, writes.
Asia could take many Russian oil barrels unwanted and banned in the West, but a gas pivot to China would come in years, not months, due to a lack of sufficient infrastructure for Russia to redirect gas flows from its biggest market, Europe, to China.
At the same time, high oil and natural gas prices are helping the U.S. shale patch, which could be a big winner of the new global energy order, in the medium to long term, as the West will seek non-Russian oil and gas for years to come, regardless of the developments in the war in Ukraine.
Yet, the U.S. oil and gas industry faces short-term constraints in boosting production. These hurdles include supply chain issues, cost surges, and a U.S. Administration with an unwavering desire to promote clean energy and equally unwavering statements blaming the oil industry for tight fuel markets and for contributing to record-high gasoline prices.
If U.S. producers have a regulatory environment supportive of investments in new supply, the United States has the chance to win the geopolitical game of energy in the long term. American products and crude will be sought in major consuming regions, including in Europe and in U.S. allies in north Asia, which will want to never depend on Russian energy again. Due to the proximity to the U.S., Latin America is also a natural outlet for U.S. energy exports, especially as Europe – starved of all types of energy now – is not exporting as much fuel to the Americas as it was before the Russian invasion of Ukraine and before the energy crisis of the autumn of 2021.
The forever-changed energy trade flows and Europe’s decision to cut off dependence on Russian oil and gas—with the oil embargo by end-2022 and a Russian gas independence deadline tentatively targeted for 2027— is undermining Russia’s energy powerhouse position in the medium and long term.
“Before the war, Russia was looking at 30 more years of guaranteed oil and gas revenues. Now they are looking at three,” a senior German official told FT’s Rachman.
Russia’s Gas Pivot To Asia To Take Years
Russia earned $98 billion (93 billion euros) in revenue from fossil fuel exports in the first 100 days of the war in Ukraine, with the EU paying 61% of this for imports, according to data compiled by the Centre for Research on Energy and Clean Air (CREA).
As the EU aims to reduce Russia’s oil revenues by imposing an embargo on seaborne oil imports from Russia, Moscow is redirecting more volumes to Asia. But Russia will face a more difficult task of replacing European gas exports and revenues with those in Asia. The pipeline and LNG volumes Russia is sending to China are just a fraction of Russian pipeline exports to Europe, even as Russia has slashed gas supply to Europe in the past weeks.
Russia is already sending natural gas via pipeline to China through the Power of Siberia pipeline, which became operational at the end of 2019. There are plans for another major gas pipeline to deliver gas from Russia to China, but this will take years to complete and commission.
“Russia could eventually build a sizable business geared toward Asian markets, but the shift will be neither immediate nor easy, and it will depend critically on foreign partners, including China,” says Nikos Tsafos, the James R. Schlesinger Chair in Energy and Geopolitics at the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS).
U.S. Energy Could Help Allies In Long Term
The U.S., the world’s largest crude oil producer ahead of Saudi Arabia and Russia, could help offset at least some of the supply losses from Russia, both in oil and gas. American LNG exports to Europe are surging, and fuel exports are also strong despite multi-year-low fuel inventories in the U.S.
But the U.S. shale industry faces short-term constraints in boosting production as costs continue to escalate and supply chain delays are worsening. Moreover, American producers are focused on paying down debts and rewarding shareholders. They are also wary of the continued attacks from the Biden Administration, which don’t encourage companies’ investment plans.
Last week, more than a dozen energy associations led by the American Petroleum Institute (API) urged President Biden to visit U.S. oil and gas production centers before heading to Saudi Arabia to plead for more oil from the world’s largest crude oil exporter.
“On behalf of millions of Americans working in the U.S. oil and natural gas industry, we wish you every success on your upcoming trip to Saudi Arabia. But before you visit Riyadh, we invite you to visit Reynoldsville, Pa. It’s the heart of the Marcellus Shale in the state where you were born, one of the most prolific natural gas-producing regions in the world,” the energy associations said in a letter to President Biden.
“U.S. energy reserves – produced to among the highest environmental standards in the world – are the answer in the global quest for reliable energy supplies. American energy bolsters U.S. competitiveness and national security and brings economic opportunity to every corner of America,” the organizations noted.