“I think folks are going to try to get as much LNG on the market and have it traded and sold,” a former VP at Tellurian Inc told Forum. Although Europe has abundant storage capacity, 40% of its gas comes from Russia, so whether there is enough LNG to deliver energy security is the bigger question, the expert said. A sanction on Russian LNG entities would make it “very difficult” for Europe to import natural gas from Russia, they added. They described the US’ ban on Russian energy as “symbolic”, as although the US imports very little from Russia, the ban makes it more difficult for LNG projects to be financed.
Even in the face of an energy crisis, Europe will be reluctant to take on long-term LNG contracts, we were told. “I think for Europe, at the end of the day, it’s still a question of the climate impacts.” In contrast, the specialist anticipates new long-term import “entrants”, with demand increasing in places such as Pakistan, Bangladesh, Hong Kong and Thailand. Indeed, LNG is far from being pushed out of the energy picture completely and the specialist foresees the return of Floating Storage Regasification Units as a way of obtaining LNG without lengthy construction timelines.
Europe is also seeking to reduce its reliance on Russia for energy, with the aim of bringing 150BCM a year down to 50BCM by the end of 2022, the Interview revealed. However, “I don’t actually know if it’s going to be possible,” the former VP at Tellurian said. “Some tough decisions will have to be made in terms of, do you give industrial holidays for companies to not be manufacturing, in order to reduce energy consumption? What are you going to do for just domestic households?”
We were told that coal might have to come into play. “No one wants to talk about it because it doesn’t factor into the green climate that everyone has been pushing,” the specialist said. “It’s going to be interesting to see, at the end of the day, how does Europe cobble together the different tools to meet their energy needs? How do they diversify their supply and source, and what does that look like?” The expert noted that there is a growing recognition that LNG and natural gas are required for the energy transition – and if it does not come from Russia, production could be ramped up in places including Australia, Mozambique and Canada.
As we heard, there is also a long-term decline in oil demand in response to global climate goals. “And if you look out 2050, it’ll be very significant.” But the extent to which this can be accelerated depends on how much governments are willing to spend. “The Europeans very quickly updated the Green New Deal because they’re the most under threat from the lack of Russian energy coming,” a former VP at Royal Dutch Shell plc said.
Of the 11 million barrels Russia produces a day, 6.5 million is exported to Europe, according to our Interview. “I suspect Russia, quite soon, will have to start to shut down some oil production,” the expert added. “They will try to find different customers and additional customers.” The price of Russian crude has, in turn, dropped by 20-30%, we were told. At the same time, the shortage of crude in April and May 2021 is “starting to bite” and “that’s why you’ve seen the forward prices and current prices go so high”.
The medium-term implications of the Russia-Ukraine conflict depend on the direction of the ongoing geopolitical tensions, we heard. “If you restrict it to two years out, I think it’ll settle into whatever accommodations people work out the best if those Russian barrels are missing,” the former VP at Royal Dutch Shell said. “By five years, I think you’d see a bigger downward shift in fossil fuels.”
Although difficult to predict, there are some suggestions that global oil demand could peak after 20251https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/bp-peak-oil-demand-and-long-run-oil-prices.pdf – and potentially sooner if the conflict continues, according to our specialist. “Or if there’s a serious recession and if China would economically start to suffer, then we may have had peak oil last month. That’s really the extreme of that. There are so many moving parts in this.” All outcomes should ultimately accelerate investments in wind, solar and other renewables such as geothermal and hydro, they said. “In gas, I still think peak gas, even with everything else going on, is more than a decade away because if you replace coal or oil by gas, you already get a greenhouse gas improvement.”
A former adviser at Nord Stream AG said that over 50 years of energy cooperation between Europe and Russia has “fundamentally changed”. Although emissions targets might have to take a back seat in the short term, the transition to renewables is expected to accelerate in the long term. “I think you’ll see a step up in the investment in renewables. You should also see a step up in energy efficiencies, so, for example, insulation of homes and the roll-out of heat pumps, etc. I think it will accelerate the shift to non-fossil fuel forms, but in the short term you might see an increase in emissions due to, for example, increased use of coal.”
Ultimately, our experts appear to see a secular decline in the role of gas in Europe’s energy mix – but the forced speed of change due to geopolitical tensions and widening supply-demand imbalances could mean that the journey will be a bumpy one. “It’s clear what to do, it’s just a question of whether governments have the long-term commitment to do that vs the pressure on short-term prices and political votes in the short term,” the former Royal Dutch Shell VP said.
Related Transcripts
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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