mohamed basyoni

Russia is one of the most important players in the global energy markets. As it occupies a leading position in the production of crude oil and petroleum products, and the second largest producer and exporter of gas and fossil fuels, especially to the European Union countries; Russia provides about 40% of Europe’s gas supplies via Ukraine. With the outbreak of the Russian-Ukrainian conflict, European fears rose about the use of Russian gas as a means of political pressure and its threat to stop Russian gas supplies, and then it took pre-measures by searching for alternatives to secure its energy supplies, and developed a plan to gradually get rid of dependence on fossil fuels from Russia by diversifying Supplies and increased investments towards sustainable energy, and the imposition of a gradual ban on Russia’s energy exports with the aim of reducing its foreign exchange earnings and curtailing its ability to finance the ongoing war in Ukraine.

This has cast a shadow over the Russian energy sector. As it contributed to the decline in the volume of Russian gas and oil production, and negatively affected the volume of new investments in Russian energy projects, in addition to the decline in the volume of Russian exports of fossil fuels. This would effectively reduce Russia’s share of internationally traded oil and gas by half by 2030, especially after stopping its shipments of gas and oil to European Union countries.

strategic importance

Russia is the largest exporter of oil; As its oil exports represent more than 5 million barrels per day of crude oil, or 12% of the total world trade, and the equivalent of about 15% of the global trade in refined products. Russia is also the second largest producer of natural gas in the world, and provides about 40% of Europe’s supplies from Natural gas, the strategic importance of the Russian energy sector is as follows:

1- One of the largest oil and gas producers and exporters in the world: Russia is a major player in the global energy markets; It is the second largest producer of natural gas in the world, after the United States, with a production volume of about 762 billion cubic meters in 2021, and it exported approximately 210 billion cubic meters of natural gas, occupying the position of the largest exporter of gas in the world, and it has the largest gas reserves in the world. the scientist. Russia is also one of the most important oil producers at the global level, with an estimated share of about 10% of global supplies. As Russia’s production of crude oil and condensate oil during the year 2021 reached about 10.5 million barrels per day; Which constitutes 14% of the total global supply. The country has oil and gas production facilities across the country, and the bulk of its fields are concentrated in western and eastern Siberia.

2- Plans to increase LNG production: A strong influx of LNG in 2020, amid increased global supply, has reduced the share of Russian gas to about 40%. It remained at a similar level in 2021, driven by Gazprom’s strategy of reducing short-term sales, and then the Russian government issued a long-term plan to develop LNG in 2021, in order to compete with growing LNG exports from the United States, Australia and Qatar. The plan aims to increase LNG exports from 110 to 190 billion cubic meters per year by 2025.

3- The EU’s dependence on Russian energy imports: Russia’s exports of crude oil and condensate in 2021 amounted to about 4.7 million barrels per day; The equivalent of more than 45% of the total production of 10.1 million barrels per day, and the European Union countries are the main importers, with about 49% of the total Russian energy exports, followed by the Asia and Oceania region by 38%.

Russia has an extensive network of gas export pipelines, through transit routes through Belarus and Ukraine, and through pipelines that send gas directly to Europe, and given that most Russian gas shipments are exported to European countries through Ukraine, the Ukrainian war may cast a shadow on those supplies.

Western pressure

In the context of the escalation of the Russian-Ukrainian war, and the rise in European countries’ fears of using Russian gas as a means of Russian pressure, Western countries have taken several measures that in turn contribute to reducing Russian dominance over European gas imports. This is through the following:

1- Plans to phase out Russian imports: In the aftermath of the military intervention in Ukraine, the European Commission outlined on March 11 in the Declaration of Versailles a plan to phase out dependence on Russian fossil fuels before the end of this decade, through diversification of supplies, increased investments in renewable energy and improved energy efficiency, and the production of 35 billion cubic meters of gas. vital by 2030, as well as accelerating the deployment of renewable hydrogen, and making the efforts required to ensure that minimum gas reserves are stored by national governments to ensure that the average EU level of storage is 80% by the end of September 2022.

2- European sanctions on the Russian energy sector: The European Union imposed the sixth sanctions on the Russian energy sector, including a complete ban on Russian coal as of August 2022, while a partial ban on oil and petroleum products was adopted on June 6 to reduce about 90% of oil imports from Russia by December 2022, and a ban on petroleum products in February. 2023. The major European countries aim to get rid of Russian imports. For example, Germany, the largest importer of Russian gas among the European Union countries, aims to reduce the share of Russian gas in its gas supplies to 10% by the summer of 2024. It cannot be overlooked that these policies would redirecting Russian natural and liquefied gas away from EU markets; This reduces Russian gas exports by 15 billion cubic meters compared to 2021.

3- Introducing a mechanism for pricing Russian exports: Western countries, especially through the Group of Seven (G7), have proposed during the past months the idea of ​​imposing a cap on the prices of Russian oil and gas exports. in Ukraine. This may affect the global purchasing map. As it works to expand the range of buyers of Russian crude, but at the same time raises the discounts and rebates that it used to enjoy to promote its purchase; This could prompt Russia to threaten to completely cut off its supplies.

Two main tracks

Western pressures on the Russian energy sector pose two main paths for this sector:

1- The severe economic impact of the energy sector: According to this path, the future of the energy sector in Russia appears pessimistic. This is in light of a number of indicators:

A- Low oil and gas productivity: As the US Energy Agency forecasts revealed that Russia will cost a cumulative production loss of more than 550 billion cubic meters in the medium term for the period 2022-2025; The prospects for the 27 bcm/year Arctic LNG project have worsened dramatically, both in terms of financing and access to technology. According to some estimates, Russian gas production declined, from March to August 2022, by about 25% from what it was in August 2021 and about 40% less than production in January 2022, as a result of the significant drop in pipeline gas exports. According to OPEC expectations, Russian oil production will decrease in 2025 by two million barrels per day compared to what it was in 2021, and gas production will decrease by 200 billion cubic meters.

B- The adverse effects of economic downturn: The reasons for the decline in oil and gas productivity, in addition to the Ukrainian war, are attributed to the decrease in the production of refineries, after demand reached its peak during the summer of 2022, in addition to expectations of a contraction of the economy by between 7.5% and 8% on an annual basis in the third quarter of 2022, and by a rate ranging between Between 10% and 11% in the last quarter of 2022, according to estimates by the Russian Central Bank. The decline in economic activity will also put pressure on refinery production, as it is expected to fall by about 700 thousand barrels per day on an annual basis, to reach 5.2 million barrels per day by December 2022.

C- The decline in the volume of Russian energy exports to Western countries: Russia’s share of global fossil fuel exports has fallen dramatically as a result of the current war; As of September 2022, Russian gas shipments to the European Union decreased by 80%, and Russian coal imports to Europe stopped as of August 2022, while Russian oil production and exports remain close to pre-war levels.

D- Growing uncertainty about new investments in Russian energy projects: Sanctions imposed by the European Union and the United States are stricter than they were in 2014, to include widespread restrictions on the ability of international companies to invest in Russia, on the scope of Russian companies to raise financing internationally, and on Russia’s access to Western technology.

Although Russia tried to overcome these restrictions through the import substitution program, it was not entirely effective. As some Russian oil fields are at risk of being shut down, and an increasing share of Russian oil production was set to come from new production areas, including projects in eastern Siberia and the Arctic, while the risks to those developments and their cost are exacerbated; Because of the absence of Western companies and technologies and some service providers.

2- The ability of the Russian energy sector to recover quickly: According to this path, the energy sector will be able to overcome Western pressures and recover quickly based on maneuvering mechanisms, which is a path that is linked to a number of major determinants:

A- Russia’s adoption of a ruble payment system: Moscow faced Western pressures by announcing the adoption of a new payment system for its Russian gas exports in rubles instead of dollars, and cut off gas supplies to countries that did not adhere to the new payment system, which is the approach through which Russia sought to reduce its attachment to the Western financial and economic system and try to reduce its economic losses.

B- Redirecting Russian shipments to alternative markets: Russia tended to search for alternatives to its exports in Asia. The total Russian natural gas exports to Asia reached 32 billion cubic meters in 2021. China is Russia’s largest market in Asia with an import volume of about 17 billion cubic meters, followed by Japan with about 9 billion cubic meters, and Korea with about 4 billion cubic meters. Russian gas shipments to Asian markets will increase by 40 billion cubic meters per year, reaching more than 70 billion cubic meters by 2025.

Since the start of the Ukrainian war, Russian crude supplies to China have risen to record levels of about two million barrels per day, which is equivalent to 55% of the year-on-year growth for the month of May, and India’s purchases of Russian crude rose to about 800,000 barrels per day in May, benefiting from discounts. Between 25 and 30% on Russian shipments, Russia can transfer more than 10 billion cubic meters of LNG that passes through the Yamal LNG plant from Europe to Asian markets.

C- Increased revenues from Russian exports of oil and gas: Despite the decline in the volume of Russian exports of fossil fuels and the decline in the volume of production, Russia’s revenues from its oil exports increased as a result of the rise in global oil and gas prices. In the first six months of the Ukrainian war, Russia exported fossil fuels worth about $158 billion, of which about $85 billion were exports to the European Union, and about $34.9 billion were export revenues to China as the single largest destination for Russian exports, followed by Germany, Turkey and the Netherlands.

Russian oil and gas revenues rose in March-April 2022 to their highest historical levels, but witnessed a sharp decline starting from May 2022, declining by about 14% between August and September; It amounted to about $15.3 billion compared to about $18.5 billion in August, but this is still higher than the average monthly level in 2021. The Russian Ministry of Economy expects that Russian energy export revenues will reach $338 billion by the end of 2022, an increase of more than a third from About $244 billion in 2021. And this jump in revenues, if achieved, will help support the Russian economy in facing comprehensive Western sanctions that are crippling some of its industries.

Numerous complications

Finally, it seems that the Russian energy sector is facing many challenges in light of the Western pressures imposed on it against the backdrop of the Ukrainian war. Russia’s orientation to Asian markets will not be a sufficient substitute for Europe, and it represents a challenge, especially in the case of natural gas. As the market opportunity for additional large-scale deliveries to China is limited; This is in light of expectations that the growth in demand for natural gas in China will decline to 2% annually between 2021 and 2030.

In the same context, Russia’s structural shift towards the East contributes to the high costs. All tankers of seaborne crude oil from Russia bound for India in April and May were insured by companies in the United Kingdom, Norway and Sweden, and the decision to ban insurance and reinsurance of seaborne cargo of Russian crude has increased costs for Russian companies that need transportation. The reorientation of flows will also take more time to take shape due to the need for new investments in infrastructure, and with no linkages to alternative markets, the Asian market will not be an adequate substitute for natural gas shipments westward to Europe.