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Cutting gas supplies would also harm Russia’s long term energy strategy

The whole world is imposing sanctions on Russia after its invasion of Ukraine. Over 30 countries have announced restrictions, first targeting the banking sector and the oligarchs close to President Vladimir Putin, then it was the turn of high technology and new decisions are now affecting the energy industry as well. US President Joe Biden has just signed an Executive Order to ban the import of Russian oil, liquefied natural gas (LNG) and coal to the United States.

According to the White House, last year, the US imported nearly 700,000 barrels per day (bpd) of crude oil and refined petroleum products from Russia. Therefore, this Executive Order will deprive Russia of billions of dollars in revenues from US drivers and consumers annually. Also, it will ban new US investment in Russia’s energy sector while Americans will be prohibited from financing or enabling foreign companies that are making investments to produce energy in Russia.

Oil embargoes on Russia could create a hole difficult to replace

To fill this gap, the US Administration has committed to releasing more than 90 million barrels from the Strategic Petroleum Reserve this fiscal year, with an emergency sale of 30 million barrels announced just last week. Moreover, the Member Countries of the International Energy Agency (IEA) agreed to a collective release of an initial 60 million barrels of crude oil from their reserves, with the US committing half of that in the emergency sale.

gas supplies
US President Joe Bide. Photo: Twitter/White House

“We’re moving forward on this ban, understanding that many of our European Allies and partners may not be in a position to join us,” said President Biden. “The United States produces far more oil domestically than all of the European countries combined. In fact, we’re a net exporter of energy. So we can take this step when others cannot. But we’re working closely with Europe and our partners to develop a long-term strategy to reduce their dependence on Russian energy as well.”

Head of Oil Markets at independent think tank Rystad Energy Bjørnar Tonhaugen is warning that oil prices could hit 240 US dollars per barrel this summer in the worst-case scenario if Western countries roll out sanctions on Russia’s oil exports en masse.

“Market volatility is at an all-time high, with prices surging on the expectation that supply will further tighten due to restrictive sanctions on Russian energy from the West,” he said. “Although fortunately not the most likely scenario, traders, analysts and decision-makers alike should prepare for elevated prices based on the current landscape.”

“If more Western countries join the US and impose oil embargoes on Russia, it would create a 4.3 million bpd hole in the market that simply cannot be quickly replaced by other sources of supply,” he added. “[…] If 4.3 million bpd of Russian oil exports to the West are halted by April 2022 and where China and India only keep current import levels intact, Brent would need to spike to 240 US dollars per barrel by the summer of 2022 to destroy demand. This collapse would be the largest potential oil supply shortage since the 1990 Gulf War when oil prices doubled.”

Russia will want to keep the gas trade business with Europe for several reasons

Still, Russia has not responded to energy bans, but fears of cutting gas supplies to Europe remain. The IEA has presented a 10-point action plan to decrease Europe’s dependency on Russian gas, followed also by the European Commission’s plan, based on two pillars, the diversification of gas supplies, via higher LNG and pipeline imports from non-Russian suppliers and the increased use of renewables, hydrogen and biomethane.

Indeed, the EU imports 90 per cent of its gas consumption, with Russia providing more than 40 per cent of the EU’s total gas consumption. Russia also accounts for 27 per cent of oil imports and 46 per cent of coal imports.

However, if Russia halts gas supplies to Europe, it will damage itself as well. After all, if Europe is the biggest importer of Russian gas, it is also true the opposite and these exports count a lot to Russia as well.

At the beginning of February, Russia’s energy giant Gazprom and the China National Petroleum Corporation (CNPC) signed a long-term Sales and Purchase Agreement for natural gas to be supplied via the Far Eastern route. The signing of this document was an important step towards further strengthening the mutually beneficial cooperation between Russia and China in the gas sector. As soon as the project reaches its full capacity, the amount of Russian pipeline gas supplies to China is going to grow by 10 billion cubic metres (bcm), totalling 48 bcm per year.

“This is already a second contract to be signed for Russian gas supplies to China and it is indicative of the exceptionally strong mutual trust and partnership between our countries and companies,” said Alexey Miller. “Our Chinese partners from CNPC have already seen for themselves that Gazprom is a reliable gas supplier.”

Exactly this reliable role, is something that maybe Russia would want to protect.

“Russia takes a long view for its gas business and Gazprom has always emphasised its reliability as a gas supplier,” says Edmund Siau, Lead Analyst, Gas/LNG at global energy consultancy FGE. “Russia will also want to keep the gas trade business with Europe for financial and political reasons.”

Some have seen the recent agreements with China as a first step, a prelude to what was coming and a way to secure a certain amount of gas exports. For Mr Siau, exporting more gas to China does not mean less gas for Europe, as currently there are different upstream sources of gas supplying Europe and China.

“Russia’s gas strategy toward China brings itself both commercial and political benefits,” he tells CEENERGYNEWS. “The recently-announced Far Eastern gas pipeline project allows monetisation of gas reserves on Sakhalin for which there are limited alternative markets.”

Especially now that large multinational companies (like bp, Shell, ExxonMobil) are exiting Russia and their energy projects in Russian territory, the country cannot afford to lose other contracts that still stand.

“Therefore, cutting gas supplies in any significant amount would go against Russia’s long term gas strategy,” concludes Edmund Siau.

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