The Russian invasion of Ukraine has sent ripple effects throughout the world, not least in the energy sector. Ongoing sanctions levelled against Russia have shifted the balance of who Western nations are turning to for their energy supplies, and who will be stepping up to the plate as the largest oil and gas provider.
With Russia public enemy number one, the possibility of sourcing energy supplies from previously blacklisted nations is increasingly likely as Western nations race to beat supply restrictions.
Here, we look at the geography of oil and gas, and how Russia’s invasion of Ukraine is shifting the needle on output as nations grapple with meeting internal power demands while adhering to sanctions on Russia.
The flight from Russia
The impact of losing Russian supplies cannot be underestimated. According to the World Economic Forum, Russian energy imports to the EU were worth $108bn in 2021, with more than 40% of the EU’s gas and coal imports coming from the region, as well as a quarter of its crude oil.
A report from the International Energy Agency (IEA) says that possible large-scale disruptions to Russian oil production could create a “global oil supply shock”, estimating that three million barrels per day of Russian oil could be halted as a result of sanctions. Similarly, a report from energy market analysts ICIS says that supply interruptions could “send shockwaves across the global economy, lifting the cost of living, impacting industrial and agricultural production and potentially leading to social unrest”.
In such a context, balancing the aim of economically isolating Russia with the need for energy security is a delicate one, and protecting supply chains is the MO of Western nations as they move forward. Yet finding viable alternatives to Russian supply is a challenge, and the IEA report highlighted just how limited options are. While exactly how the oil and gas sector will develop remains to be seen, what is clear is that the next few months will be crucial for the industry.
The most viable option is the oil-rich nation of Saudi Arabia, which the IEA identified, alongside the United Arab Emirates (UAE), as the only regions with “substantial spare capacity” to offer immediate assistance to the shortfall from Russian supplies.
Saudi Arabia, the de facto leader of the Organisation of the Petroleum Exporting Countries (OPEC), has an estimated two million barrels per day (bpd) of oil to spare. It is also one of the few nations known to be planning significant ramp up of oil and gas production, with state-owned Saudi Aramco recently announcing plans to boost investment in both oil and gas production as part of its goal to reach 13 million bpd of oil production by 2027.
Despite having one of the largest global oil production capacities, the likelihood of Saudi Arabia actually turning up the dial on oil supplies is unlikely, with the IEA noting they are so far “showing no willingness to tap into reserves”.
UK Prime Minister Boris Johnson’s recent attempts to discuss options with Crown Prince Mohammed bin Salman have been seemingly fruitless, while relations between Riyadh and Washington have been marred since the 2018 murder of journalist Jamal Khashoggi by Saudi agents. Collaboration with the nation has therefore been tainted by this distrust, and makes a deal on oil production dubioud.
Offering slightly less spare capacity than Saudi Arabia, the UAE has an estimated 1.1 million bpd to offer the oil market, and political figures have been going to meet energy majors in the Gulf nation in a bid to access it.
At the beginning of March, Yousef al-Otaiba, the UAE’s ambassador to Washington, told the Financial Times that the nation would be bumping up oil production to help drive down crude prices, and would be encouraging other OPEC states to do the same.
“We favour production increases and will be encouraging OPEC to consider higher production levels,” al-Otaiba is quoted as saying.
The UAE is the first and only OPEC member to have vocalised its support for increasing production in the face of Russia’s invasion, however a supply increase has not yet been seen, and appeals to the nation have continued to roll in. Thus far, the larger OPEC+ group has been gradually raising output each month – by 400,000 barrels a day – despite pressure to act more quickly.
While Iran was the fifth largest crude oil producer in OPEC in 2020, and the third-largest natural gas producer in the world in 2019, ongoing sanctions against the nation mean it is not able to run at full capacity.
According to the US Energy Information Administration (EIA), if sanctions were to be lifted, Iran could see production increasing once more to reach 3.8 million bpd, enough to offer spare capacity to the global oil market in need.
While a new deal with Iran would ease the pressure on supply squeezes, collaboration between Iran and Western economies remains uncertain as it would be reliant on achieving resolution in talks between Tehran and western economies about reviving the 2015 deal on Iran’s nuclear ambitions. Even then, the IEA says that ramping up its exports to one million bpd could take as long as six months, making its impact in the short-term limited.
Qatar is currently one of the world’s top LNG exporters, exporting approximately 77.1 million tons per annum (Mtpa). The nation has announced its plans to increase its LNG capacity to 110Mtpa by adding four 7.8Mtpa mega-trains, with a targeted first production in late 2025 and a second expansion phase of 16Mtpa planned for 2027.
In March, Germany’s Vice Chancellor and Federal Minister for Economic Affairs and Climate Action Robert Habeck said that he had reached a long-term LNG supply agreement with Qatar, with the Gulf nation reportedly agreeing to supply Germany with LNG as an alternative to Russian gas supplies – though no other details have been released.
Reliance on this nation is, however, not expected to be viable in the short run as Qatar currently has little LNG volume to divert to Europe to displace Russian gas supply. In the mid-term however, there is the expectation for Qatar to have capacity to provide significant LNG volumes to the European market.
Norway is currently the third largest exporter of natural gas in the world, coming in behind Russia and Qatar. Earlier this month, the nation announced it would be looking to bump up its natural gas output to help offset rising prices, with energy operator Equinor saying that it was looking at adding an additional 1.4 billion cubic metres of gas to meet the demand of around 1.4 million European homes during a year.
This plan is, however, a short-term solution rather than a long lasting one, given Norway’s climate commitments of reducing greenhouse gases by 40% by 2030 and phasing out oil and gas – making long term reliance on its supplies unwise.
Anticipated to boast the largest LNG export capacity in the world by the end of this year, expectations are rising that the US will step up as a major power for the gas market. The nation’s natural gas exports to Europe have been increasing since 2017, supplying 26% of Europe’s liquid natural gas in 2021 and rising even further in 2022 in response to Russia’s pressure on energy markets and the UK’s skyrocketing energy bills.
According to the EIA, the US became a net total energy exporter in 2019 and has maintained this status into 2022, with Wyoming the nation’s biggest net energy exporter, producing 14 times more energy than it consumes. President Biden highlighted this status as a reason for the US to step up its production, doing what other nations do not have the capacity for.
“The US produces far more oil domestically than all the European countries combined,” he said. “In fact, we’re a net exporter of energy. So we can take this step when others cannot.”
It has been noted that Europe lacks the terminal capacity to scale up US imports sufficiently, and that the Biden administration maintains its mission to move away from oil and gas, putting it at odds with calls for it to tap into its reserves more fully. However, while these may prove longer-term issues, for now the US is stepping up to fill the void left by Russian supplies. As an oil and gas force that has been growing in export capacity since the 1950s, the US is a logical replacement for Russian dominance, and the nation’s mission to achieve energy independence means its rise to the top is unlikely to abate.