European Energy Market Amid Russia Sanctions and Nord Stream 2 Cancellation

Europe-Russia energy relationship “fundamentally broken” by Ukraine conflict

In an Interview with Third Bridge Forum, the specialist said Russia exported approximately 5 million barrels of crude a day in 2021 and 2.8-2.9 million of petroleum products – volumes they say there is “no way” the market can replace. A full shut-off of Russian fuel exports would cause “big trouble” for Europe’s supply of crude oil along the Druzhba pipeline and refineries in Sweden and Finland, according to the specialist. 

Russia also supplies approximately 40% of Europe’s natural gas in a typical year.¹https://www.reuters.com/business/energy/what-are-europes-options-case-russian-gas-disruption-2022-03-29/ The specialist said there will be pressure on the EU to prepare for winter 2022 and ensure gas inventories are 90% full. This will require a “herculean effort”, the specialist said, and is not something they are confident Europe can accomplish. Much of the world’s gas supply has already been purchased and if Europe is to find new gas imports it will have to “take all the volumes it can” and outbid other markets in Asia, which could be “expensive”. 

The International Energy Agency’s plan to replace approximately 50bcm of Russian gas from Europe with liquified natural gas (LNG) is “optimistic”, according to the specialist. Currently, there is no “big wave” of LNG arriving imminently, and Europe will therefore be dependent on finding excess volumes from other buyers. 

The specialist told us that, in response to Europe’s embargos, Russia could decide to cut off gas supplies through Nord Stream 1 and reduce exports of other key commodities including nickel, palladium and grain. But they said such a move is not in Russia’s economic self-interest, given it needs “all the hard currency it can get”. However, the specialist warned, “all things are possible” in this kind of situation.  

The reduction in Russian energy exports, as well as the departure of a number of western oil majors in the country, are likely to be a “massive threat” to Russia’s position as an energy exporter, according to the specialist. Although BP, Equinor, Shell and ExxonMobil’s decision to leave does not affect Russia’s ability to keep oil operations going in the short term, it will challenge its ability to invest in the next oil frontiers and sustain production over the medium to long term, we were told. 

The specialist said that although Russia could attempt to send more supplies to China, they do not think it could “soak up” all of Europe’s excess supply. The specialist said this will likely cause Russia to curtail oil production, while also giving China more leverage in its relationship with the country.

The specialist concluded by saying that the conflict in Ukraine had “fundamentally broken” the European-Russian energy relationship, potentially to the point of no return. 

To access all the human insights in Third Bridge Forum’s European Energy Market – Outlook Amid Russia Sanctions & Nord Stream 2 Cancellation Interview, click here to view the full transcript.