Russia can't replace the energy market Putin broke
A network of gas fields and pipelines developed at a cost of hundreds of billions of dollars has been effectively thrown away
Russia spent almost 50 years building its energy market in Europe. President Vladimir Putin destroyed it in under 50 weeks. Finding a replacement will be almost impossible.
While Russia has found alternative markets for its crude oil, mostly in India, switching sales of refined products and — perhaps even more so — natural gas will take years and come at huge cost. That's if it's even possible to create markets as the world turns away from fossil fuels.
When Moscow's troops invaded Ukraine on 24 February, 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 5 December, 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 5 February.
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Russia's Crude Shipments to Europe
Four-week average crude shipments from Russia to Europe
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.
Lost Market
Russia has lost most of the European gas market it built up over decades
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.
Muscling In
Russia now supplies a quarter of India's crude imports
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 elsewhere to replace its lost European markets.
It would like to supply India, another rapidly growing nation with vast and rising energy needs. But piping natural gas to India will be even more difficult than getting it to China. The route would either have to cross some of the highest mountains in the world, or pass through Afghanistan and Pakistan. Either route would cross several other countries, making construction and operation more costly than the a link between two nations with shared borders.
Putin's war in Ukraine has cost Russia its European energy market. It won't be easy to replace. Whatever rapprochement Moscow and Europe may eventually reach, Russians will be counting the cost of the war for generations to come.
Russia spent almost 50 years building its energy market in Europe. President Vladimir Putin destroyed it in under 50 weeks. Finding a replacement will be almost impossible.
While Russia has found alternative markets for its crude oil, mostly in India, switching sales of refined products and — perhaps even more so — natural gas will take years and come at huge cost. That's if it's even possible to create markets as the world turns away from fossil fuels.
Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies. @JLeeEnergy
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
