Analysis: Russia’s energy weapon is losing steam

Russian President Vladimir Putin used his control over a large chunk of the world’s energy supply to inflict economic suffering on the West as part of his strategy in the Ukraine War. This has taken Europe, which may see oil prices rise again in the coming months, to a worrying precipice in the months leading up to winter.

But Putin’s adoption of the energy weapon appears to come at an increasingly significant cost to Russia; the country has put its energy sector on a dangerous trajectory.

Detonating the natural gas trade with Europe

Putin has exploited Europe’s dependence on Russian natural gas to make Western support for Ukraine more expensive. He hoped this would weaken and fracture Western aid to Kiev. So far, that hope has not been realized.

Instead, Europe has rushed to reorganize its energy supply mix, in a way that must be deeply worrying for the Kremlin.

Liquefied natural gas suppliers in the United States and elsewhere are doing well with new supply contracts. The same applies to renewable energy developers, as the continent’s campaign for green energy now also becomes a defense of energy security. Coal suppliers are also benefiting, at least for now.

Europe will face one – or more likely a few – difficult winter(s) without Russian natural gas. But a new combination of post-Russia energy sources is coming into focus.

Putin, for his part, has detonated the natural gas trade with Europe, which has always been profitable, without a clear plan to make up for the loss.

Accelerating Russia’s turn toward China is Putin’s best option. But this is not likely to happen in a way that could offset the losses the country will suffer in Europe; and the effort will come at a high price, as it would take billions in infrastructure investment to connect Russian natural gas fields to China.

In addition to these practical difficulties, there are also likely to be limits to China’s appetite for more Russian energy. One of the basic principles of Chinese energy policy during the last two decades has been the diversification of supply. Beijing will see the pain that Europe is suffering today not only as an opportunity to obtain resources at a low price, but also as a warning against excessive dependence.

Narrow horizons for Russian oil

Oil is a much more flexible commodity than natural gas, and Putin’s cards are probably stronger in this area. But even so, there are many warning signs.

For example, Moscow is being forced to sell its crude oil at steep discounts, even to allied countries. The economic pain these discounts cause has been offset by high prices for much of this year, which has driven many petrodollars into the Kremlin’s coffers. But the discounts will hurt a lot more when prices drop.

Moscow is also becoming dependent on a smaller group of customers, which weakens its bargaining power. India and China are helping the country maintain a much larger flow of oil than Western officials and analysts predicted a few months ago. However, these countries now have more power to continue extracting favorable conditions from Moscow.

The cap on oil prices that the West has threatened to impose has been heavily criticized, and it seems very unlikely that China and India will agree to the plan. But even if they do not accept it, the two countries will likely use this factor as leverage in their negotiations with Moscow to obtain strong discounts. For the US and Europe, this may even be a preferable outcome to a major supply disruption, which would send crude oil prices soaring again.

Gloomy prospects for oil and natural gas production

The sanctions imposed so far will not cause an imminent collapse of Russian supplies, but the long-term prospects are much less bright than they were a year ago.

The positive view on Russian supplies is that the country has been under Western sanctions for years and production has held up perfectly well, despite what skeptics say.

But the exodus of large Western oil companies and oil services operating in Russia, due to the war, has dimensions completely different from those registered in previous rounds of sanctions, which had already imposed quite severe restrictions on Western operators in the country.

The Kremlin’s feud with ExxonMobil over the future of Sakhalin-1, a highly complex project in Russia’s far east, is an example of the difficulties the future of Russian energy may face.

Analysts and industry sources say the Kremlin is trying to force Exxon to continue operating Sakhalin-1, largely because Russian companies lack the technical capacity to operate the field. Oil field production dropped from 220,000 to 10,000 barrels a day.

This year’s energy crisis shows that Russia’s massive energy reserves give the country plenty of ammunition to inflict economic pain on the West. But the reaction to that will also be painful for Moscow.

New data

This Wednesday (14), the European Union will vote on the future of the wood pellet industry. Members of the European Parliament will decide whether to adopt revisions to their Renewable Energy Directive, including a clause proposing to exclude burning whole trees as a source of renewable energy.

The directive was established in 2009 to boost the bloc’s consumption of clean energy, and set targets and subsidies. The burning of biomass such as wood was classified as renewable energy, based on the idea that it would be possible to regenerate forests.

The sector has come under fire in recent years as scientists have warned that burning wood pellets emits more carbon than burning coal, and there is no way for forests to grow back at a pace similar to their current depletion. Last year, more than 500 scientists wrote a letter to the leaders of the United States, European Union, South Korea and Japan, urging that burning wood be excluded from the definition of renewable energy.

“The EU’s renewable energy directive should only apply to real forms of renewable energy – and forests are not renewable,” wrote Greta Thunberg and eight other climate activists in an opinion piece published last week by The Guardian newspaper. .

Since the adoption of the directive, EU wood pellet consumption has increased to a record 23.1 million tonnes last year, a growth of around 50% from 2014 to date, and accounts for a share of 55 % of the world market. The demand has significant repercussions for the United States, which has become the largest source of supply for the product to Europe.

The European Union vote comes at a time when Brussels is facing an energy crisis caused by the Russian invasion of Ukraine. The sectoral association Bioenergy Europe has warned that, if adopted, the revised directive will reduce Europe’s renewable energy supply by 20%, which is equivalent to 4% of the region’s total energy consumption.

Justin Jacobs

Financial Times correspondent in Houston

Amanda Chu

Data Journalist at the Financial Times

derek brower

US Energy Editor at the Financial Times

Myles McCormick

Financial Times correspondent on US energy

Translation by Paulo Migliacci