As Europe and Asia scramble for natural oil and natural gas and energy prices spiral out of control, Vladimir Putin is likely plotting his next geopolitical chess move.
Last week, the Russian president chided European governments for not securing long-term natural gas contracts that would have favoured his country’s producers such as Gazprom PJSC, calling the EU’s reliance on spot prices a ‘mistake’.
“After all, this is not like trading in watches, underpants, or ties, or cars; it is not even like oil, which can be produced and stored anywhere, including in tankers, waiting for the market situation to clear up. Gas is different,” Putin said in a televised meeting according to a translation by VGTRK , the All-Russian State Television and Radio Broadcasting Company.
Natural gas prices in Europe have hit record levels in recent months, as lower Russian gas exports, a lack of wind power, COVID-related supply chain and labour issues, and underinvestment in fossil fuels conspired to turn an energy crunch into a full-blown economic crisis reverberating across the world.
“Gazprom denies that its decline in natural gas flows to Europe is a form of political pressure, but it is hard not to read politics into the move, especially since Russia has used its control over natural gas supplies as a form of political pressure in the past,” said Ellen Wald, president of Transversal Consulting and a fellow at the Canadian Global Affairs Institute.
Putin’s assurances that Europeans will not shiver in winter immediately soothed roiled markets, but also underscored the power he wields over the energy world in the clear power era.
“This is the kind of price impact that makes OPEC jealous,” Wald said.
Apart from pulling the strings of European and Asian natural gas markets, Russia has also entrenched itself into the affairs of the Organization of the Petroleum Exporting Countries — remarkably, without being a member of the group.
As one of the central leaders of OPEC+, — a 23-country group comprising OPEC and allies, including Russia — Putin is the puppet master behind OPEC’s moves for well over the past year or so.
Along with Saudi Arabia, Moscow orchestrated a production quota with OPEC members and other allies to stabilize prices that had hit rock-bottom last year. Their efforts to control supply have seen oil prices climb above US$80 per barrel.
Any power Putin has over the energy market will be that much more fleeting if the market doesn’t believe his word
Ellen Wald
Despite the strict adherence of the OPEC+ group, Russia has repeatedly been among the least compliant, but the group has looked the other way lest Moscow and Riyadh engage in a market share battle that dragged oil prices into negative territory in April 2020.
But Putin’s commodity high may not last.
“Putin may be the most powerful man in the European energy scene at the moment, but as Saudi oil ministers like (the late Saudi oil minister) Zaki Yamani and (another former Saudi oil minister) Ali al Naimi could tell him, that kind of power is fleeting,” said Wald, who wrote the book Saudi Inc., focused on the Middle East kingdom’s oil strategy.
High commodity prices will likely usher in fresh investments and new players, diluting any one producer’s influence.
“As oil markets know, and natural gas markets will come to understand, Russia may or may not follow through with its commitment,” Wald noted. “Any power Putin has over the energy market will be that much more fleeting if the market doesn’t believe his word.”
But for now, Putin is the beneficiary of energy-consuming countries’ well-intentioned but hasty climate change policies, and the strong man is enjoying a golden run as the wider fossil-fuel industry and governments remain reluctant to approve new projects.
Last week, the U.K. regulator rejected Royal Dutch Shell Plc’s plans to develop a gas field in the North Sea. In North America, a consortium that included Enbridge Inc. decided to scrap its plan to build a natural gas pipeline connecting the Appalachian basin to New Jersey. While 42 international oil companies (IOCs) are expected to see a US$1 trillion windfall due to higher prices, many are reluctant to spend capex without clear government guidelines, according to energy consultancy Wood Mackenzie.
“Carbon now represents an existential threat,” said Kavita Jadhav, research director at Wood Mackenzie.
“The upstream industry needs to work harder to communicate to regulators that upstream decarbonisation at scale is not just an added cost. For many IOCs it is now joined at the hip to all other forms of upstream investment. If the decarbonization spend cannot be enabled, then the whole investment machine will grind to a halt.”
But the energy transition has upset the outlook for oil and gas producers, changing the rules of the game for not only IOCs, but also national operators and host governments. Crucial decisions will be required on capital allocation, the pace of decarbonisation and future energy policy.
Analysts expect a renewable energy backlash in North America and Europe, with US$174 billion invested in expanding renewable energy capacity in the first half of the year, a record, according to BloombergNEF. The COP26 United Nations climate change summit in Glasgow in November will also likely see more countries pledging to move away from fossil fuels.
Carbon now represents an existential threat
Kavita Jadhav
“Over in Brussels, the EU (and most national governments) sees the current supply crunch as a sign that over-relying on fossil fuel imports exposes its people and industry to price and supply shocks,” said Henning Gloystein, director of energy, climate and resources at Eurasia Group. “The long-term investment signal from high fossil fuel costs (and in Europe high carbon permit costs) that drive up wholesale and retail electricity costs is clear: invest into clean and domestic energy and, crucially, storage solutions.”
The Europeans are also not expecting Canadian and U.S. natural gas and oil producers to come to the rescue either, despite their abundance of production and reserves.
A survey of 53 Canadian companies by Raymond James found that only 19 per cent were planning to raise capex, with debt reduction (38 per cent) and dividend increase (32 per cent) their top priorities.
Canada’s East Coast liquefied natural gas projects targeting European markets also remain in limbo and struggling to secure financing.
Even though it’s not easy to ramp up LNG exports, Wald notes that it would behoove European nations to take heed of the crisis and work to secure LNG contracts with suppliers in the U.S. and Canada.
“The question isn’t if this situation will happen again, it’s when.”
It’s also unclear that for all of Putin’s bravado, Russia can meet rising the demand of its customers.
Wood Mackenzie notes that the weather in Europe, Asia and Russia will determine whether commodity prices will surge or peter out over the winter season.
The question isn’t if this situation will happen again, it’s when
Ellen Wald
Frigid European and Asian winters will mean there is insufficient gas available to meet demand, said Massimo Di-Odoardo, vice president, gas and LNG research, at Wood Mackenzie.
“A cold European winter could boost heating demand up to 20 billion cubic metres, while a cold Asian winter could add up to 10.5 bcm of LNG demand across China, Japan, South Korea and Taiwan. This would take 10.5 bcm in LNG imports away from the European market,” Di-Odoardo said in a report.
“With only 29 bcm of gas in storage, there is a risk storage levels could drop to zero. If this plays out, Europe would be wholly dependent on Russian flows above existing capacity.”
The looming crunch also gives Russia an opportunity to push for approval of its controversial Nord Stream 2 natural gas pipeline that runs under the Baltic Sea to Germany and is complete.
Germany’s energy regulator has asked Russia-backed Nord Stream 2 AG to provide assurances that the controversial pipeline meets regulatory requirements when it enters service, Reuters reported.
Russia itself is also stocking up for the winter to ensure smooth flow of supplies for domestic industries. State-controlled Gazprom has likely been asked to fill that domestic gas shortage to avoid a winter supply crunch.
“As a result, export flows to Europe have been lower than expected,” Gloystein said. “Interestingly, Russian gas pipeline supply to China is also below expectations, much to the anger of Beijing, since China is suffering an even worse energy supply crunch than Europe.”
The focus on the domestic market is strong, with Gazprom keen to avoid destabilizing Russian supply despite the prospect of record profits abroad, Ildar Davletshin, an analyst at Wood Mackenzie told Bloomberg. “Gazprom does not have much additional spare capacity to raise production straight away.”
Western governments are applying pressure on Russia, with a group of European Parliament lawmakers asking the European Commission in September to investigate Gazprom’s role in soaring European gas prices, saying the company’s behaviour had made them suspect market manipulation.
U.S. Energy Secretary Jennifer Granholm also noted the U.S. and the European Union had to be prepared to “stand up” when there are energy-producing nations who may be “manipulating supply to benefit themselves.”
Energy markets will remain beholden to Putin this winter, but it is also sowing the seeds of strong backlash in the coming years.
Gloystein expects the current gas and coal supply crisis will probably accelerate, not slow, the green energy transition in Europe and China. The problem will likely reoccur and climate action and a green energy transition will clash with the short-term priority to ensure affordable energy access for households and businesses.
Energy shocks are nothing new and lead to a spirited response by the afflicted parties. The 1970s OPEC oil crisis triggered the development of Canadian, North Sea, U.S. Gulf and Brazil reserves.
“Today, the shock will also trigger building more storage options in the short-term and to invest into alternatives — this time, these long-term alternatives are the green energy transition.”
But Wald warns that renewable energy cannot currently reliably power our technology-driven lifestyles, especially if some of it’s dependent on winds blowing.
“This means a major step back in the quality of life for Western countries that will be incredibly difficult, maybe impossible, to sell to people accustomed to a certain lifestyle,” Wald said.
With additional reporting by Reuters and Bloomberg News
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