Where will Russia’s oil and gas go?

WITH global energy supply chains in the midst of a historic reroute, one question is whether Russian oil and gas, soon to be sidelined by the European Union (EU), could find their way to Asia – for consumption or even for laundering.

“If the EU starts buying gas from other sources, it will put pressure on prices from those sources as it will probably create a discount for Russian gas,” Antonio Fatas, economics professor at business school Insead, tells The Business Times.

And if Russia is not sending all that fuel to Europe, it could be interested in selling even more to Asia and possibly at a steeper discount, says Olga Khakova, deputy director for flagship convenings and global engagement at the Atlantic Council’s Global Energy Center.

Countries in Asia that do take the bait of cheaper Russian fossil fuels may enjoy savings, but risk facing secondary sanctions from the West.

Meanwhile, those which rely on other sources of oil and gas might encounter competition from European countries shopping around for alternatives.

Either way, global energy prices are expected to stay elevated until next year, observers say, even as the European Commission (EC) attempts to roll out its most ambitious plan yet to wean itself off Russian fuel alongside a switch to renewable energy.

“The price outlook is very bullish for oil and gas in coming months amid a confluence of developments, including logistical challenges, supply constraints and growing demand as industrial and economic activities ramp up,” says Sharad Somani, head of infrastructure advisory for Asia Pacific at KPMG in Singapore.

Noting that the United States became the world’s largest liquefied natural gas (LNG) exporter in January, Chris Lafakis, economic research director at Moody’s Analytics, says US gas prices have also roughly doubled in response.

“Should the EU continue to view Russia as an unreliable supplier even after the war eventually ends, it would take years for Russian supply to be diverted to the global south, and in the meantime, Russia’s source of supply would be erased,” he says.

But if political will were quantifiable, money might well be its unit of measurement. That’s how watchers view the EC’s 210 billion euro (S$309 billion) plan to end its reliance on Russian energy by 2027.

The funds – likely left over from fighting the Covid-19 pandemic – could well have been used for other purposes, the Atlantic Council’s Khakova tells BT over a call from Washington DC, where the think tank is headquartered.

“It does speak volumes that they’re saying, ‘Well, actually, we want you to prioritise using these leftover funds towards strengthening your decarbonisation journey and making sure that you are energy secure’, especially with what is happening currently in Ukraine,” she says.

The hefty price tag signals a path of no return for the bloc, says Cedomir Nestorovic, geopolitics professor at ESSEC Business School Asia-Pacific.

“If we didn’t have this kind of amount, if they are saying, ‘Temporarily we will stop something and we will not spend so much money on this’, I would say they can go back to (having) gas supply from Russia. But not with 210 billion euro,” says Prof Nestorovic.

And if the EU does succeed in achieving its goals, this could engender a seismic shift in the energy world order, with implications far beyond Europe.

The EU’s lofty goals

In 2021, Russian gas accounted for 40 per cent or 155 billion cubic metres (bcm) of the EU’s total gas consumption, according to the International Energy Agency (IEA). Of this, 15 bcm was in the form of LNG.

Shortly after Russia invaded Ukraine on Feb 24 this year, EU leaders agreed to end this reliance on Russian energy as soon as possible.

“Nobody is under any illusions anymore. Russia’s use of its natural gas resources as an economic and political weapon show Europe needs to act quickly to be ready to face considerable uncertainty over Russian gas supplies next winter,” IEA Executive Director Fatih Birol said in a statement in March.

The IEA then offered 10 suggestions that could help the EU slash Russian gas imports by a third as soon as the year’s end.

By May 18, the EC had put forth a plan called REPowerEU, which covers several key actions: saving energy, diversifying its supplies, and substituting fossil fuels by accelerating Europe’s clean energy transition. This requires “smart investment”, referring to an effective combination of investments and reforms.

But these plans will require the aforementioned additional investment of 210 billion euro for the next 5 years. This is on top of what is already needed to realise targets under existing Fit for 55 proposals, the EC’s plans to cut its net greenhouse gas emissions by at least 55 per cent by 2030.

Major replacements for Russian gas are expected to be LNG and pipeline gas from other sources, estimated at 50 bcm and 10 bcm respectively.

Victor Nian, advisor at Singapore-based independent think tank Centre for Strategic Energy and Resources, says the Middle East is likely the only option for the EU, even though the US would also be selling gas to the bloc.

Building pipelines from the Gulf states, including Qatar, is a possible long-term solution, says Prof Nestorovic. But he adds that this could raise security concerns, given that the infrastructure would need to cross dangerous conflict zones in the Middle East.

“The most realistic solution in order to replace this gas is through LNG terminals. However, I don’t think they are handling enough gas in order to replace what’s coming from Russia,” says Prof Nestorovic.

Still, this could be a quicker and cheaper solution than building gas pipelines from the Middle East or from the US or Canada across the Atlantic, he adds.

Bringing gas infrastructure – including LNG import terminals and pipelines – to a sufficient level is likely to cost about 10 billion euro, according to EC estimates.

Biomethane, derived from organic waste, could help save 17 bcm of gas with an investment of 37 billion euro, while solar and wind energy could replace 21 bcm of gas at the cost of 86 billion euro.

Meanwhile, 27 billion euro would be needed for direct investment in renewable hydrogen technologies that could potentially replace 27 bcm of natural gas.

Another 97 billion euro would be needed to improve energy efficiency in the residential and industrial sectors, such as by having high-efficiency heating systems, insulation in buildings and measures that encourage switching to heat pumps. In all, this could reap gas savings of 37 bcm for the residential sector and 12 bcm for industry.

Another 10 bcm of gas could be saved if EU citizens chipped in to turn their thermostat down by 1 degree Celsius, work from home, use public transport and drive more slowly on the highway.

To decarbonise the grid, a faster roll-out of renewable energy and demand-side measures for energy efficiency will be vital, KPMG’s Somani says.

“Demand-side measures, such as energy efficiency and load management, have the ability to shape end-user consumption, which will provide a longer runway to deploy supply-side measures. This will also provide opportunities to lower overall costs for the system at the same time,” he adds.

A critical factor that will determine whether the EC’s plans succeed is political consensus, observers say.

“This vision is so critical and important, but at the end of the day, the member states need to buy in and integrate this into their energy strategy and make sure that it aligns with their energy security strategy but also their climate goals as well,” says the Atlantic Council’s Khakova.

‘One dirty energy to another’

But hidden in the EU’s plan is a paradox that may be challenging to resolve in the short term.

“This document is clear – because we cannot increase, automatically, green sources of energy, we must use dirty sources of energy even more,” says Prof Nestorovic.

This is because even though the long-term goal is to switch to clean energy, having to plug a supply gap as large as 40 per cent is a mammoth task.

While several countries are looking into nuclear energy as a sustainable way forward, some EU members are instead considering coal imports to address the current energy crisis, says Dr Nian.

“But this will put EU on a dangerous and potentially irreversible path away from their climate objectives. This will not only jeopardise the global decarbonisation effort, but also increase air pollution,” he says.

Adds Prof Nestorovic: “The environmental groups are using a term which I find interesting – they’re saying we are replacing one dirty source of energy with another dirty source of energy.”

While this would not be a “total setback” in the long term when it comes to achieving objectives set out in the Paris Agreement on climate change, Dr Nian says “in the short term, it is not looking very promising”.

Noting that it is a question of mitigation and priority, he says: “The prioritisation is we have to get rid of Russian oil and gas, and probably there is a price to pay. So the price to pay is to put aside the Paris Agreement… I don’t see how we can reach it if we must increase coal and other dirty sources of energy.”

On top of additional mining activities, the need to build additional LNG infrastructure as well as increased shipping activity when transporting LNG would also worsen the climate problem and raise emissions in the short term, says Gaurav Ganguly, head of European economic research at Moody’s Analytics.

Khakova has a more sanguine view, believing that it is still possible for the world to stay on track with its climate goals as long as it continues to move “robustly” towards renewable energy, more energy efficiency and diversified, cleaner sources in the middle to long term.

“We’re seeing a very temporary usage, going back to using coal in countries where that’s absolutely necessary for energy security,” she says.

When it comes to coal, Asia and Australia could emerge as likely sources, says Prof Nestorovic, given the fuel’s abundance in the region.

That could spell trouble for Asean’s own transition away from coal, particularly if coal mining becomes more lucrative.

“It will be slower for Asean because Asean can continue to produce coal and sell them… On the other hand, if prices are going up, there is no substitute. For instance, the use of coal in India is very huge, so even if India is maybe buying more gas and oil coming from Russia, it cannot substitute the use of coal in India,” he says.

Dismantling the very well-established gas transportation infrastructure between Russia and Europe would also take time, notes Brent Vasconcellos, energy, resources and industrials leader at Deloitte Southeast Asia.

“However, if both Europe and Asia are able to procure long-term cost-effective replacement sources from non-Russian suppliers, this would be a major blow to the Russian economy in the long term,” he adds.

Yet if Russia is able to divert its supply elsewhere, the EU’s plans may not necessarily leave too much of a dent in its economy.

“Remember, at the beginning of the war, when they stopped selling, everyone was predicting that Russia is going to be destroyed, but in fact, no. They continued to sell practically at the same pace,” Prof Nestorovic says.

He adds that the EC has allowed some countries to continue buying gas from Russia despite sanctions because those countries do not have other options.

And as long as the global market remains hungry for energy, he believes Russia would likely continue to be a price setter and sell to other countries, particularly in Asia.

Looking east

Amid rising oil prices, India began turning to discounted Russian oil shortly after Moscow launched its invasion of Ukraine on Feb 24.

In the 2 months that followed, refiners in India ordered at least 40 million barrels of Russian oil, more than double the 16 million barrels they imported in the whole of 2021, according to calculations by Reuters.

Meanwhile, China’s oil imports from Russia are expected to jump to 1.1 million barrels per day in May, up from 750,000 barrels per day in the first quarter, a Reuters report says, citing data from Vortexa Analytics.

And for China to meet its carbon neutrality target by 2060, natural gas could be the only practical immediate step towards cleaner options like nuclear energy and renewables, making Russian gas an attractive option, says Dr Nian.

Still, not all the oil and gas that Russia sells to Europe can be diverted to Asia, as rewiring global supply chains cannot happen overnight, say Moody’s Analytics’ Lafakis and fellow economist Heron Lim.

“Although China and Russia declared in February that their friendship had no limits, this didn’t apply to China’s appetite for Russian crude,” Lafakis and Lim say.

A key concern is logistics. There are only 2 crude-oil pipelines that link Russia to China, with contractual limits on capacities and flows each day, they add.

“Even if the rest are exported via seaborne oil, out of the 4 largest ports that handle such exports, only one, Nakhodka, is located in the East of Russia,” say the Moody’s Analytics economists. Of the others, Primorsk and Ust-Luga are on the Baltic while Novorossiysk is in the Black Sea.

“Such Russian crude would have to complete an expensive, complicated round-trip voyage to make delivery in the near term,” they say, adding that China faces no such constraints with its Middle Eastern suppliers.

Besides, developing gas infrastructure to re-route gas supplies requires financing to which Russia no longer has access, and sanctions have lowered the international will to engage with Russia, says Gauguly.

Where things are less clear is whether Russian crude could be resold as refined products, the Moody’s Analytics team says.

Prof Nestorovic adds: “There could be some kind of black market concerning this Russian oil and gas with the repackaging and going through different countries. This is like money laundering, and it is going to different places.”

But this would of course be a high-risk endeavour. “Sanctions have complicated transactions with Russia, insurance is less available and there is also political risk,” say Lafakis and Lim.

“Chinese refineries that serve export markets may not want to run afoul of US secondary sanctions. India has been more aggressive in importing more Russian crude, but it seems aimed at serving local demand.”

They add that Russian fuel may be more of a boon for domestic energy costs within China and India, given the high energy consumption of the 2 Asian markets.

As for Singapore, about 95 per cent of its electricity is generated from natural gas, chiefly LNG, most of which comes from Australia, the US, Qatar and Angola.

Could the EU’s search for non-Russian gas affect Singapore’s gas supplies and prices? Given that Singapore likely has long-term contracts, Prof Nestorovic believes the Republic may not be affected for now.

“The only point is that if, for instance, Australia and Indonesia are asked by other countries to supply at very high prices, in that case, they may reconsider supplying Singapore or someone else,” he says.

But Dr Nian notes that Indonesia, with its “soaring energy demand”, may need to reconsider energy export in the long term, which means Singapore’s pipeline of imported natural gas may be affected at some stage.

A day after the EC presented its REPowerEU plan, Singapore’s Energy Market Authority (EMA) issued a request for proposal with the intention to appoint 2 more LNG importers, on top of the current 4.

In response to BT’s queries about energy security and pricing, an EMA spokesperson says the authority is looking for LNG importers who can offer and deliver “reliable and competitively priced gas supply” to gas users in Singapore.

“This will enhance competition and give our gas users more options to meet their gas needs,” the spokesperson added.

Unlikely catalyst

Even with cheap Russian fossil fuels available, the war in Ukraine could still leave oil and gas looking unattractive to the world, including South-east Asia.

Lim believes that the potential EU ban on Russian gas could serve to highlight the very volatility in energy costs after a period of relatively low energy prices as well as implications for energy security.

“Together with concerns over climate change, a rethink in Asean capitals over an acceleration of an energy transition strategy that weighs in favour of sustainable, renewable options is likely,” he adds.

Some Asean countries, such as Malaysia and Vietnam, are among the global leaders in solar photovoltaic production; others, including Indonesia and the Philippines, are top mineral producers of nickel and tin, which are important parts of a renewable energy push, says Lim.

This means Asean is likely to make more commitments on energy security and renewables moving forward.

Watchers tell BT that these developments create unique opportunities for Asia and particularly Singapore.

Despite the likely increased reliance on dirty energy in the short term, KPMG’s Somani says there is potential for nations to come together in partnership with multilaterals to drive the broader innovation and energy transition agenda in the medium to longer term.

“Certainly, this brings a unique opportunity for Singapore to be a testbed and living lab for innovative solutions in the low carbon space, especially by aligning with global initiatives in this area and collaborating with research institutions, multilateral agencies and regional blocks to drive the low carbon agenda across sectors,” he adds.

The increase in demand for LNG also means a need for more ships.

Says Khakova: “There’s a tremendous opportunity in Asia to work on decarbonising the maritime sector just because we’ll see a lot more movement, because of what’s going on with Russia diverting some of its oil to Asian countries… and that would actually help in terms of the cost and carbon impact.”