• Russian invasion of Ukraine sparks gas supply and oil ramifications

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      Patrick Lavery

      Combustion Industry News Editor

Russia’s invasion of Ukraine has led to a range of ramifications in relation to the energy sector, and more is sure to come under rapidly moving and unpredictable circumstances. One significant occurrence was German Chancellor Olaf Scholz halting the approval process for the Nord Stream 2 pipeline, something that the USA and Eastern European countries such as Poland have been pursuing for years against resistance from Germany. Mr Scholz’s decision was widely described as a surprise move, as he had generally avoided referring to the pipeline in the preceding weeks, but it has been welcomed by the Ukrainian government, the USA, and many European countries, contributing to a sense of unity in opposition to Russia’s invasion. The suspension of the approval process raises the prospect of it never becoming operational, something that from a commercial point of view would impact both Germany and Russia over the medium to long term. However, it does little concrete in the immediate term, as no gas was being delivered via the pipeline, and (as of the time of writing) gas continues to flow to Germany through longer-established pipelines. While until recently one would have imagined both countries would have wanted the pipeline to eventually become operational, this now seems quite unlikely. Germany has already begun to re-evaluate the assessment of Nord Stream 2’s impact on security of energy supply, which had previously been classed as not having any negative impact, and the re-evaluation would have to conclude something similar for the approval process for the pipeline to be restarted. (Russia’s apparent intention to deplete European gas reserves in recent months has also soured Germany’s opinion on future reliability, and in hindsight appears to have been part of a long preparation for the invasion of Ukraine.)

As the Financial Times reports, it appears Russia’s public attitude to the decision so far has been one of dismissal, with former Russian president and current deputy head of Russia’s Security Council, Dmitry Medvedev, writing “Welcome to the brave new world where Europeans will soon be paying €2,000 per 1,000 cubic meters of gas!” Chancellor Scholz for his part has insisted that Germany could avoid the use of natural gas over the long term, and that renewables would allow the country to “produce steel, cement and chemicals without using fossil fuels”. Yet until that point, Germany and certain other European countries, such as Italy, do seem dependent on imports of Russia gas. Germany has yet to build any LNG import terminals (though there is now a political push towards doing so), and capacity at existing terminals in other European countries is already close to capacity, as an interesting analysis by Reuters has shown. European gas prices spiked last week, and there are concerns that Russia may halt supply of gas west in retaliation for the SWIFT sanctions imposed by a range of countries.

Brent crude, meanwhile, hit a price of US$106/barrel on Thursday last week, the highest price since 2014, with Russia being the world’s second largest oil exporter after Saudi Arabia. (Most Opec members have so far refrained from condemnation of Russia, being caught between competing alliances.)

There has also been some puzzlement at the seizure by Russian forces of the site of the former Chernobyl nuclear power plant (the activity around which caused radiation levels to rise, after radioactive dust was disturbed). Some commentators have attributed it to a desire of Russia to prevent any collateral damage to the plant, while others have speculated that it was simply ‘on the way’ from Belarus to Kyiv.

An economic war is expected to be waged over fossil fuel supplies for the foreseeable future, and energy security concerns will be profound. As happened with the Suez crisis of the 1950s and the oil crises of the 1970s, this new energy crisis – secondary, of course, to the humanitarian one – will have long-lasting impacts on the pursuit of alternative sources of energy, and consequently geopolitics. Renewables, nuclear, biogas, and other green energy carriers such as hydrogen and ammonia will become even more attractive. Yet these concerns will be playing out in the context of high inflation, which will also affect the decisions of policy makers.