Russia loses in energy war

• Robert Coster

  Economics reporter

The war in Ukraine is not only being fought on the battlefield. The economic preparation began long before the first shot was fired. By regularly reducing or temporarily stopping the gas supply, Russian President Putin caused an energy crisis in Europe. But a year after Russian troops crossed the border into Ukraine, he seems to be losing in the energy war.

Threatening shortages pushed the gas price and thus also the electricity price to record highs in 2022. While the purchase price of gas on the Amsterdam TTF market in 2021 still fluctuated around 20 euros, in August last year it was well above 300 euros per megawatt hour. Europe is now saying goodbye to Russian gas and the price is back below 50 euros.

Everywhere in Europe, citizens and businesses were hit by high energy prices last year. Governments were forced to help with household energy bills. The energy-intensive industry reduced production or even had to close completely. For example, the aluminum factory in Delfzijl went bankrupt.

The energy war has been carefully prepared by Russia. For example, Gazprom already failed to fill its own part of the gas storage in the Dutch Bergermeer in 2021. Because the storages were poorly filled, turning off the gas supply had even more effect. While Russia reduced the supply, the price rose and tens of billions of euros flowed into the Russian treasury.

It took Europe a while to respond to the Kremlin’s blackmail. The amount of Russian gas flowing to Europe has now been reduced by three-quarters and oil and diesel can no longer be delivered by ship. Moreover, there is a price ceiling, which also makes exporting to other parts of the world more complicated and less lucrative for Russia.

Major changes in the global energy market

The effects of the war on the energy market are enormous. Where gas in Europe was mainly a regional market with pipelines, it is now becoming a global market, just like oil. The gas comes largely in liquid form (LNG) with tankers from America and Qatar and will always have a higher cost price than natural gas from Groningen or Russia because of the conversion.

The Netherlands expanded its capacity to take in liquefied gas in record time, with the help of, among other things, a floating terminal in Eemshaven. The LNG was available because Europe benefited last year from the takeover of Chinese import contracts. This was possible because the Chinese economy was at a low ebb due to corona.

“About half of the LNG tankers sailing to Europe were originally bound for China,” Shell’s new CEO Wael Sawan said at the presentation of the annual figures in early February. Shell is one of the largest liquid gas traders in the world.

As soon as demand in China rises, a shortage may arise again. Although the US, Qatar and Australia are increasing production, it will take a few years before the new LNG plants are ready. “Europe is not out of the woods yet,” Sawan thinks.

Because Europe can pay the main price, there is a shortage in India, Pakistan and Bangladesh. LNG is becoming too expensive for these countries and the use of coal is increasing sharply.

China will determine the price of Russian gas

If it is up to Putin, Russian gas should eventually find its way to China, but it will take years for the pipelines to be ready. Moreover, China will probably determine the price. Russia can also no longer use the knowledge of European companies such as Shell and BP for the exploitation of the gas fields.

The chance that Europe will want Russian natural gas again after the end of the war seems nil. The mysterious explosions in the Nord Stream 1 and 2 gas pipelines also make the recovery of large-scale imports technically complicated.

Russian energy revenues are falling

The carefully planned Russian energy war therefore now seems to be turning against Putin. Lower oil and gas revenues are expected to hurt Russia in the coming years. “A little gas is still coming to Europe via Ukraine and some LNG, but the large bulk via Germany is over,” says Jilles van den Beukel, energy expert affiliated with The Hague Center for Strategic Studies. “The trend is declining and exports to Europe are not expected to return.”

Russia also earns less from oil exports. Oil and diesel from Russia are not allowed to enter Europe in tankers and there is a price ceiling from the G7 countries for the rest of the world. Russian oil goes to India and Turkey, but for a much lower price. “Russia is forced to sell a barrel of crude oil for around 30 dollars below the world price,” says Van den Beukel.

Europe consumes more diesel than it produces and imported much of it from Russia. In recent months, prior to the import ban, there has been a lot of hoarding by both the government and commercial market parties. The coming months will show whether there is enough diesel available elsewhere in the world to replace that from Russia.

Meanwhile, Russian oil products may still end up on the European market. Diesel made from Russian oil, refined in Turkey, India or the Middle East can be exported to Europe. Diesel refined in Russia can also be mixed with diesel from other countries in order to circumvent the import ban.

Leaving that option open in the sanctions package may well be a conscious choice, Van den Beukel thinks: “Governments are trying to find a balance. Russia must earn less, but the volume of Russian oil must not fall so far that it leads to a global price explosion.”

Even though Russia is losing in the energy war, that does not mean that there is no money left to continue the war in Ukraine, says Van den Beukel: “You should not expect Russia to stop for that reason. It has has built up considerable financial reserves and can maintain this for a very long time.”