Russia Can’t Replace the Energy Market Putin Broke


Russia has been building its energy market in Europe for almost 50 years. President Vladimir Putin overthrew it in less than 50 weeks. Finding a replacement would be nearly impossible.

While Russia has found alternative markets for its crude oil, mostly in India, switching to sales of refined products and – perhaps even more – natural gas will take years and come at a huge cost. It is possible to create markets as the world moves away from fossil fuels.

When Moscow’s troops invaded Ukraine on February 24, its European energy customers panicked. The market, which includes about 2.5 million barrels of crude oil per day, another 1 million barrels of refined products and 155 billion cubic meters of natural gas per year, has completely disappeared.

The flow of crude oil from Russia to parts of Europe began soon after Putin’s troops crossed the border. On December 5, when the European Union’s ban on sea imports of Russian crude went into effect, they were already in short supply, with Bulgaria, which secured a temporary exemption, the only remaining market. The flow of refined products follows the same pattern ahead of similar sanctions that take effect on February 5.

The Russian natural gas market in Europe has also disappeared. A huge network of gas fields and pipelines, built at a cost of hundreds of billions of dollars, has been launched since the first gas crossed the Austrian border in 1968.

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In 2017, it was estimated that $100 billion had already been invested in the development of gas reserves in Russia’s Yamal Peninsula, most of which are connected to Europe via pipelines, including those that run under the Baltic Sea and Connecting Russia with Germany. This number was expected to double by 2025. Much of that investment now seems redundant.

While Russia could end up having an energy relationship with Europe after the war, it is unlikely that EU countries will ever afford, or need to, become so dependent on Russian gas. years ago

Governments and consumers in Europe are finally serious about limiting demand and energy efficiency, while the record prices paid for gas and electricity are driving investments in renewable energies and the first serious attempts to change the way they are formulated considering retail electricity prices. reduction of the share of fossil fuels in electricity production.

Russian oil companies have succeeded in shipping crude oil shunned by traditional European buyers, thanks in large part to Indian refiners’ thirst for cheap feed. But this separation came at a high price for Russia and its oil industry. The huge discount, which seems to have been about $35 a barrel, about a 40% discount, is expected to hit the Indian market.

By the end of last year, Russian barrels accounted for nearly a quarter of India’s crude oil exports, displacing shipments from the continent’s traditional Middle Eastern suppliers – Saudi Arabia, Iraq, the United Arab Emirates and Kuwait.

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It’s one thing to divert crude flows to a thirsty market with a large refining sector that can handle the high-sulfur crude exported by Russia; moving refined products into that market is another. I’m sure there will be some countries willing to take cheap Russian diesel while bringing their locally produced fuel back to Europe, but they’ll need big enough discounts to justify the trade – another cost borne by the Kremlin and it is closed. oil companies.

But oil, both crude and refined products, has a major advantage over natural gas: It can be easily and cheaply transported by sea.

For most of the past 55 years, Russia has looked to the West for its gas buyers. Huge pipelines, thousands of kilometers long, connect gas fields, first in Siberia and finally on the Yamal Peninsula, to buyers in Europe.

Over the past decade, Russia has been looking for new markets for its gas in the east, and the Power of Siberia gas pipeline now delivers fuel to China. But the gas is coming from new deposits, more than 1,300 miles east and 600 miles south of the Yamal fields that once served Europe but are now underutilized. Russian state-owned gas company Gazprom PJSC’s official cost of Power of Siberia and its associated gas fields is $55 billion. An independent appraisal came up with a figure nearly twice as large — an investment, he argues, that will never pay back.

There will be limits to how much Russian gas Beijing can buy. While its energy needs are huge, it would be wary of repeating the mistakes that some European countries have made by becoming too dependent on Moscow. So Russia will need to look elsewhere to replace its lost European markets.

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It wants to supply India, another fast-growing nation with vast and growing energy needs. But natural gas pipelines to India will be more difficult than getting it to China. The route will either pass through some of the highest mountains in the world, or pass through Afghanistan and Pakistan. Each route will cross several other countries, making it more expensive to build and operate than a link between two nations with shared borders.

Putin’s war in Ukraine caused Russia to close its energy market to Europe. Instead, it will not be easy. Whatever rapprochement Moscow and Europe eventually reach, the Russians will pay the price of the war for generations to come.

More from Bloomberg Opinion:

• Some of Putin’s Oil Deals Demand Deep Discounts: Julian Lee

• Can Europe’s Energy Bridge to Russia be rebuilt?: Javier Blas

• Warning of the Gap Between the West and the Rest: Clara F. Marques

This column does not necessarily reflect the editorial opinion of Bloomberg LP or its owners.

Julian Lee is an oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Studies.

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