Global Energy Markets & Altered Priorities


Published Nov 30, -0001 12:00 AM by

G. Allen Brooks



(Article originally published in May/June 2022 edition.)


The “Energy Crisis of 2021” has transitioned into the “Energy Mess of 2022.” It means the path to a decarbonized world envisioned a year-ago will not be the path the energy world will follow.

Worldwide, governments are working hard to get back on that path, but actions are complicated by the Russia-Ukraine war. The war has lasted longer than initially expected. Now fears are there will be no near-term conclusion. What happens then?

Early this year we found out how much Europe had come to depend on Russian fossil fuels without ever considering the economic and political ramifications for such dependency. Attempting to punish Russia for its militancy exposes countries to economic blowback ranging from minor to serious, depending on the country’s level of dependency. This is complicating efforts to forge an unified response to the hostilities.

A Global Issue

While the current focus of the Energy Mess is Europe, it’s now a global issue. The actions of many of the world’s leading governments, aimed at punishing Russia in hopes of quickly ending the hostilities, have made it such. The common denominator of these actions is imposing economic and financial sanctions on Russia. The target of these sanctions is Russia’s fossil fuel industry, the source of much of the government’s war funding.

Russia is a top three global oil producer. In 2021, it produced 10.5 million barrels per day and exported roughly 40 percent of that. Three-quarters of the exports landed in Europe with the US receiving 600,000-800,000 barrels per day. A total European ban on Russian oil imports has proven difficult to achieve due to the high dependency of countries such as Hungary, which gets 40 percent of its oil from Russia. The Hungarian government claims banning Russian oil would upend the country’s energy sector, necessitating years of large capital investment to restructure it for alternative oil supplies and other energy fuels.

The US has banned Russian oil. Finding sufficient alternative supplies is proving more challenging than anticipated because of the domestic oil industry struggles to boost output given the impediments imposed by the Biden Administration.

On Day One in office, President Joe Biden canceled the permit allowing construction of the Keystone XL pipeline that would have shipped 830,000 barrels per day of Canadian and Williston Basin crude oil to the US Gulf Coast refining complex. The cancellation also cost several thousand workers their jobs.

But that was not the only anti-oil move Biden made. He banned drilling on federal lands, suspended the issuance permits for new wells on federal leases already held by oil and gas companies, and instituted new standards to be met when applying for other permits necessary for drilling and producing hydrocarbons.

With oil prices soaring and gasoline and diesel pump prices hitting levels not seen in decades, consumer inflation is accelerating. Attempting to counter rising pump prices, Biden resorted to periodic crude oil releases from the Strategic Petroleum Reserve, but their dampening power proved transitory. He turned to begging Saudi Arabia and the United Arab Emirates to boost production to help control prices. His pleas were ignored. Keeping OPEC’s recovery plan intact and rebuking Biden’s Middle East policies proved more important.

Biden’s negotiation of a new Iranian nuclear agreement was a point of contention for Saudi Arabia. The agreement would reduce sanctions against Iran’s crude oil, which Biden is counting on to help lower US gasoline prices. No agreement has been reached so far. Now, he’s easing restrictions against Venezuela to secure oil.

After turning his back on the domestic oil industry and failing to woo oil from oil producing despots, Biden continues ignoring the supply potential from Canada. Furthermore, the US is stepping up shipments of crude oil, refined products and LNG to Europe to help it navigate the Energy Mess. The effort has drawn down US petroleum supplies to critically low gasoline levels, leading to empty stations in Washington, nearly empty diesel storage tanks in New York Harbor and exploding pump prices.

In 2021, 62 percent of the European Union’s fossil fuel imports came from Russia. The EU imported 3.1 million barrels of Russian oil per day, satisfying 30 percent of its needs. Most oil arrives by tanker with a quarter coming via pipeline. The primary destinations are Germany and the Netherlands.

Reducing Russian Energy Dependency

Countries are working hard to reduce their Russian energy dependency. Germany is down to only 12 percent oil dependency. The EU’s latest economic sanction plan calls for reducing Russian oil purchases to an amount “strictly necessary” for energy security, a requirement that is overriding environmental considerations.

Russian coal exports represent 32 percent of EU supplies. The EU has banned all Russian coal imports by August, meaning European utilities and industries now must develop more local resources or find new international suppliers. Long-term, the EU wants to ban coal and replace it with renewable energy, but not all members are onboard.

The biggest EU challenge, however, is natural gas. Russia accounts for 40 percent of EU supply and now is demanding payment in rubles to circumvent financial sanctions. Several governments have allowed such payments, but Finland refused and is facing a gas-supply cutoff. This is as Finland is asking to join NATO, Russia’s avowed enemy.

Unraveling the Russian fossil fuel dependency is proving difficult due to logistics and limited alternative suppliers. These challenges have global energy sector ramifications. Europe has been maximizing its LNG import capacity and has increased pipeline volumes from Norway but needs more. Since late February, Russia’s share of EU natural gas imports has fallen to 26 percent. Long-term, these actions are insufficient to completely displace Russian gas – enter the new EU energy plan.

REPowerEU

“REPowerEU” calls for stepping up LNG imports from the US and Canada while also boosting pipeline supplies from Norway, something already being done. The EU will establish a platform enabling countries to jointly purchase energy to keep prices down. Energy-savings tactics will also be urged including turning off lights and limiting air-conditioning use.

Long-term, boosting renewable energy’s share from 40 to 45 percent will be helped by plans to cut the amount of time necessary to secure new renewable project permits. Heat pumps playing a prominent role in the plan too. The final piece is a greater commitment to hydrogen production and imports to decarbonize heavy industries and transportation.

The plan will cost $221 billion over five years, but many pieces will require legislation, meaning all EU members must still approve.

Finding new oil to offset the 3.7 million barrels a day that Russia was sending to Europe and the US is a challenge – for two reasons. First, where is the alternative supply going to come from? And second, what will Russia do to keep selling its oil?

Absent Russian exports, global oil supply falls short of demand, which will drive prices up sharply. But Russia is finding buyers for its oil in China, India and other Southeast Asia countries because it is willing to discount the price significantly. These willing buyers are upsetting the geopolitical alignment against Russia while also upsetting the energy industry’s structure. New supply routes, new payment arrangements, new refinery output configurations are all in the process of being established.

The question for the industry is: Will its prior operating structure be restored when hostilities end? If so, companies will be reluctant to invest in infrastructure to overcome current system inefficiencies. If this new energy structure is to become permanent, the other investments and adjustments will be necessary. How long will this uncertainty last? What is the cost of these inefficiencies?

Altered Priorities

Despite the focus on oil and gas, the coal issue lingers. Last fall’s UN environmental conference’s conclusion was a warning sign that the transition path the global energy market was on might be in trouble.

The belief that can rapidly and cheaply transition from fossil fuels to renewable energy was proving unrealistic. The Texas ice storm and the wind stillness across Western Europe demonstrated the failures of intermittent power. For developing developing possessing large populations and huge coal reserves, the economic benefits from using that fuel – reducing energy costs and creating new jobs – outweighed environmental concerns. Security of energy supply is the new reality, but this phrase is only just beginning to enter our lexicon.

Countries led by India and China are turning into indigenous coal resources. More coal mines, coal-fired power plants and carbon emissions are the outcome while emission-reduction pledges are repeated. Hypocrisy? Governments are not truly “thumping their noses” at the COP26 agreement and their individual emissions commitments, but governments must prioritize the near-term needs of their citizens against inflicting pain on them in trying to solve a potential problem 70 years away.

This year is turning out to be tumultuous. The Energy Mess, the war in Ukraine, soaring global inflation, the continuing pandemic, regional and possibly a global economic recession in the offing, a collapsing stock market, geopolitical tensions and selection rejecting climate change politicians are forces shaping 2022.

The only safe bet: The world in 2023 will look a lot different than we thought on January 1, 2022. – MarEx

The opinions expressed herein are the author’s and not necessarily those of the Maritime Executive.

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