A couple of months after Russia’s invasion of Ukraine, President Vladimir Putin gave a press conference on the status of Russia’s oil and gas sector.
During the speech, he told his ministers that in order to protect the country from the actions of “unfriendly states” Russia would “need to draw up plans with oil and gas companies for expanding the export infrastructure to countries in Africa, Latin America and the Asia-Pacific region”.
The move followed announcements from Europe, the UK and the US that they would curtail and eventually stop imports of Russian fossil fuels.
Russian gas is a no-go
Despite Russia’s claims, however, rewiring a country’s entire oil and gas system is not a task that can be carried out overnight. Its oil and gas both require pipelines to be transported from Europe to Asia, and the pipelines Russia currently has in place do not have enough capacity to replace the volumes that the country had been selling to Europe before the invasion of Ukraine.
While oil is more fungible, as it can be moved on ships, gas represents a bigger challenge as it heavily depends on pipelines.
Out of the three global regions cited by Putin in his press conference, Asia-Pacific is the only option that Russia can realistically turn to. Latin America is too far away and, while it could bridge the gap for oil, Africa does not have any infrastructure to receive natural gas from Russia even if new pipelines were built.
In 2021, Russia sold about 33 billion cubic meters (bcm) of gas to Asia, compared with a European market that typically imports 160 to 200bcm from Russia.
According to the Center for Strategic & International Studies (CSIS), two-thirds of the gas that Russia sends to Asia comes in the form of liquefied natural gas (LNG).
Of this, 14bcm has come from the Sakhalin-2 project, going to Japan, South Korea, Taiwan and China, and 8.5bcm from Yamal LNG, serving mostly China, but also Japan, South Korea, Taiwan and India, with smaller volumes going to Bangladesh, Indonesia and Singapore.
“Russia also delivered 10bcm to China through the Power of Siberia pipeline, which was launched in late 2019 and will eventually flow 38bcm a year,” CSIS says.
None of that comes even close to making up for the 160 to 200bcm of gas that Russia exports to Europe every year. New pipelines to Asia will have to be built in order to equate the volumes of oil and gas that are sold to Europe.
“We need to plan the construction of new oil and gas pipelines from the fields in western and eastern Siberia […] to boost the capacity for oil transhipment in Arctic and Far Eastern ports […] as well as to include the power of Siberia and Sakhalin-Khabarovsk-Vladivostok gas pipelines in the Unified Gas Supply System to distribute gas to the regions in that part of the country,” Putin said during the press conference.
But again, all of this seems somewhat ambitious, at least in the short term.
On the LNG front, Russia is building the Arctic 2 project, which will double the country’s LNG capacity in the Arctic. It is also working on the Ust-Luga or Baltic LNG project.
However, the first project is dependent upon foreign partners – both as equity partners and financiers, and as providers of key technology and project management expertise – something that is not easy to secure for Russia following the Ukraine invasion.
The second project is at an even less advanced stage than the first and has been something of an on-and-off affair, having already been cancelled in 2008.
From a pipeline gas perspective, in February 2022, Gazprom signed an agreement with the China National Petroleum Corporation to deliver an additional 10bcm to China through the Far East.
“None of the details were made public – when deliveries will start, where the gas will come from, what route will deliver the gas, and so on," says Nikos Tsafos formerly at CSIS and now chief energy adviser to the Prime Minister of Greece. "There is some gas in the area, in Sakhalin-1, but not under the control of Gazprom, and in Sakhalin-3, under the control of Gazprom subsidiary Gazprom Neft. Neither supply option is simple.
“Russia will never have market power in Asia, certainly not compared to its dominant position in the European market. The gas pivot from Europe to Asia will work, but it is not a one-to-one shift by any means.”
Oil exports might be harder to hit
According to the International Energy Agency (IEA), Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia.
In December 2021, it exported 7.8 million barrels a day (b/d), of which crude and condensate accounted for 5 million b/d, or 64%.
Russia is also the world’s third largest oil producer behind the US and Saudi Arabia, with 11.3 million b/d produced in January 2022, of which 10 million b/d was crude oil, 960,000 b/d condensates and 340,000 b/d natural gas liquids.
About 60% of Russia’s oil exports go to European countries that are members of the OECD, and another 20% go to China, according to the IEA. Russian oil is transported either through pipelines or via seaborne routes, on ships. For this reason, it is more fungible and easier to redirect than gas.
According to IHS Markit of S&P Global, Russia exports nearly 50% of its crude oil and refined products via long-distance pipelines, with the balance made up by waterborne liftings and trade.
Russia has the two longest oil pipelines in the world, the Druzhba (which means 'friendship') to the west, and the Eastern Siberia-Pacific Ocean oil pipeline to the east.
Very Large Crude Carriers, medium-size Aframax tankers, and other vessel sizes and types provide additional Russian crude oil disposition options.
“Compared with gas, the oil export situation is less of a problem for Russia to handle as Europe tries to wean itself," says Dr James Henderson, director of the energy transition initiative and chairman of the gas research programme at the Oxford Institute for Energy Studies. "Because the oil market is so fungible, it is much more difficult to interrupt exports, and while production will go down, it will not collapse completely.”
Henderson adds that the current high energy price scenario has allowed Russia to offer significant discounts to new partners.
“India has recently gone from buying 100,000 b/d to almost 1 million b/d and Russia is offering a 30-40% discount," he says. "While this constitutes a bit of a hit on revenues, it still means that Russia is able to sell, and not at a disastrous price.”
An appropriate sanctioning system can make the difference when it comes to hurting Russian oil exports, says Roger Diwan, vice-president of research and analysis on upstream at S&P Global Commodity Insights.
“There is a secondary system of transport, where Russia exports unfinished oil – which is refined but is not a product yet – to European facilities," he says. "Pre-invasion, Russia exported about 2.5 million b/d of crude and 2 million b/d of finished product through this system. Sanctions could have a strong impact on this.”
While it imposed a partial embargo on Russian oil as of 3 June, 2022, the EU’s sixth package of sanctions against Russia will ban seaborne imports of Russian crude oil from 5 December, and – with some caveats – petroleum product imports from 5 February, 2023.
“Once sanctions are applied to both receiving shipping and insurance, most of that trade becomes very problematic," says Diwan. "At that point, Russia could try to redirect some of it, but where could it turn?
“China is already at capacity and there is no available infrastructure for additional oil. India has already increased its import to 1 million b/d. Shipping becomes essential in this scenario, which is why sanctions become key to cut the redirecting of Russian oil exports.”
Short-term versus long-term impact
A macroeconomic background of rising energy prices and the fact that Russian energy revenues come predominantly from oil (about 80%) and only on a smaller scale from gas (20%), might make the implications of a reconfiguration of the energy trade map less dramatic for Russia in the short term.
“Timing and global markets are on Russia’s side for now," says Henderson. "We estimate Russian gas exports to Europe to be about 80-90 bcm in 2022. While this is half the volume of 2021, revenues are likely to be double if not triple thanks to the rise in energy prices.
“LNG supply will grow through 2023 and 2024, although not rapidly enough to replace all Russian exports to Europe. While China had a drop in demand in 2022 because of the Covid-19 lockdowns, demand is expected to go back to more normal levels from 2023 which will increase competition in the global market.”
The situation, however, will start to change in a few years as a wave of international LNG projects come online, Henderson points out.
“Beyond 2025, the situation starts to change significantly as energy prices will start to come down as the supply on the LNG market starts to increase rapidly," he adds. "This will start to hurt Russia as it will create more competition. Over the next two to four years, however, Europe is in a much more difficult position.”
S&P Global’s Diwan is more optimistic on the effectiveness of sanctions in harming Russian oil exports.
“The oil trade map is shifting quickly and is going to be redrawn on 5 December when sanctions on shipping come into effect," he says. "Russia will end up with a deficit and will have to send its oil elsewhere.”
“Sanctions will also diminish Russia’s access to the oil sector altogether. While it is true that oil is more important than gas in terms of revenues, gas is more important in terms of industrial linkage to Europe.”
While a short-term advantage can be gained from the current macroeconomic scenario, Russia is progressively losing ground on the international market and is becoming more and more isolated.
“The lack of access to Western technology and capital will have a big impact on the Russian economy," says Diwan. "Russia will be in dire straits in the medium to long term when it comes to the energy market and it cannot come back from that without having access to OECD capital and technology."
The journey towards a new energy trade map
Just like Russia – and possibly to an even greater extent – Europe is working hard towards rejigging its energy market. Regardless of which of the two will be the hardest hit, the end result is likely to be an overhaul of the global energy trade map.
“A reconfiguration is already under way," says Filip Medunic, programme coordinator of the European power programme at the European Council on Foreign Relations. "Europe was Russia’s biggest export market and has announced an end to this dependency in a few years.
“Lower energy deliveries are accelerating the decoupling and giving new impetus to expanding deliveries to Asian markets. Global prices are under pressure and in case Russia lowers its production to counter an oil price cap or because it has fewer buyers, this would impact global prices as well and most likely lead to an increase of prices because a major supply source is reduced.”
Over the next five years, global energy markets will be more volatile and fragmented, Medunic believes.
“It is questionable whether energy relationships with Asia will be developed to fully compensate for European demand in as soon as five years," he says. "European demand will be increasingly connected to North American production, but also declining through more renewable energy sources.”
In Henderson’s opinion, Europe’s diversification from Russian fossil fuels and, in turn, Russia’s reduced share of the global energy market will strongly depend on whether Europe can accelerate its energy transition.
“If Europe does increase the amount of renewables [it uses], if it can find the will to decrease gas demand, then Russian gas will be the first to go," he says. "If the transition plan goes ahead, then there is potential for a proper shift of the future energy trade map.”
Russia may think it has the upper hand in the current energy crisis, but it is playing a risky longer-term game, one that could come back to bite it.