When Moscow’s troops invaded Ukraine on Feb. 24, its European energy customers took fright. A market that soaked up nearly 2.5 million barrels a day of crude, another 1 million barrels of refined products and 155 billion cubic meters a year of natural gas has all but disappeared.
Crude flows from Russia to parts of Europe began to dwindle soon after Putin’s troops crossed the border. By Dec. 5, when a European Union ban on seaborne imports of Russian crude came into effect, they were already down to a trickle, with Bulgaria, which secured a temporary exemption, the only remaining market. The flow of refined products is following the same trajectory ahead of similar sanctions that come into effect on Feb. 5.
Russia’s European market for its natural gas has also been lost. A huge network of gas fields and pipelines, developed at a cost of hundreds of billions of dollars since the first gas crossed the border into Austria in 1968, has been thrown away.
It was estimated in 2017 that $100 billion had already been invested in the development of gas reserves on Russia’s Yamal Peninsula, most of which were tied to Europe through pipelines, including those running beneath the Baltic Sea linking Russia to Germany. That figure was expected to double by 2025. Much of that investment now looks redundant.
While Russia may be able to salvage some sort of an energy relationship with Europe after the war ends, which it inevitably will, it’s unlikely that EU countries will ever allow themselves, or need, to be as dependent on Russian gas as they were just a year ago.
Governments and consumers in Europe are at last getting serious about demand restraint and energy efficiency, while the record prices paid for gas and electricity have spurred investment in renewables and the first serious attempts to change the way retail electricity prices are formulated, taking account of the dwindling share of fossil fuels in power generation.
Russia’s oil companies have succeeded in diverting deliveries of crude shunned by traditional European buyers, thanks in very large part to the thirst of Indian refiners for cheap feedstock. But the diversion has come at a huge cost to Russia and its oil industry. Big discounts, which appear to have been as high as $35 a barrel, equivalent to a 40% price cut, have been required to penetrate the Indian market.
By the end of last year, Russian barrels accounted for about one-quarter of India’s crude imports, displacing cargoes from the subcontinent’s traditional Middle Eastern suppliers — Saudi Arabia, Iraq, the United Arab Emirates and Kuwait.
Diverting crude flows to a thirsty market with a big refining sector capable of processing the relatively high-sulfur crude exported by Russia is one thing; diverting refined products into that market is quite another. I’m sure there will be some countries willing to snap up cheap Russian diesel while exporting their own locally produced fuel back to Europe, but they will require discounts big enough to make the trade profitable — another cost to be borne by the Kremlin and its oil companies.
But oil, whether crude or refined products, has a big advantage over natural gas: It can be easily and cheaply transported by sea.
For most of the past 55 years, Russia has looked westward for its gas buyers. Huge pipelines, thousands of kilometers long, linked gas fields, first in Siberia and more recently on the Yamal Peninsula, to buyers in Europe.
In the past decade, Russia has begun to look east for new markets for its gas and the Power of Siberia gas pipeline now carries the fuel to China. But this gas comes from new deposits, more than 1,300 miles east and 600 miles south of the Yamal fields that used to supply Europe, but now sit underused. Russia’s state-owned gas giant Gazprom PJSC put the official cost of Power of Siberia and its associated gas fields at $55 billion. An independent assessment came up with a figure almost twice as large — an investment, it argues, that will never yield a return.
There will be limits to how much more Russian gas Beijing will buy. While its energy needs are vast, it will be wary of repeating the mistakes that some European countries made by becoming too dependent on Moscow. So Russia will need to look…
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