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How Russia's Invasion of Ukraine is still impacting the European Oil & Gas Markets and Global Climate Policies?
In Q4 2022, the Russian conflict continued to fuel oil & gas market dynamics.
|Rig Count||World||1 352||1 706||1 828||1 889||1 889||-|
|Excess (+) / Deficit (-)||-2,4||0,1||0,7||0,5||0,1||0,4|
Source: IFP, IEA projections 28/11/22
*Source: EIA projections December 22
**IEA projections that might be revised upwards if a 1mb/d cut in supply is confirmed by OPEC+
The crude oil price continued to decrease in November following a three-week decrease. In addition, Brent has lost $10/b since early November. Bloomberg predicts that this will reach $96.3/b in 2023. This decrease can be explained by the containment measures and movement curbs in China, which should be lifted following the latest Chinese government announcement, thereby creating a progressive demand. An increase in China’s oil demand could be reached in early 2023, impacting the recent projections by the AIE, which predict a slight decrease in demand during the first quarter of 2023 of 1 mb/d.
|Location||Spot Price 07/12||This month future January||Next month February||Next 2 coming months'futures March|
|Henry Hub (US) [$/mmbtu]||5,478||5,449||5,345||4,944|
|TTF (Europe) [€/MWh]||149,6||149,600||150,485||149,950|
|JKM (Asia) [$/mmbtu]||32,845||32,845||36,470||34,910|
Source: ICE Index, gas futures
The IEA price projections for last quarter didn’t reflect their actual evolution. In fact, during Q4 2022, IEA projected a price increase of $9.10/MMBtu for Henry Hub. The Gas spot price decreased by 27% from early September until the 9th of December. Nevertheless, in January 2023 prices should increase by around $6/mmbtu for Henry Hub. On the other hand, the IEA expects a progressive price decline due to the perspective of an increase in US natural gas production in 2023.
The Asian crude consumption fell to its lowest level in seven months given the Covid-19 situation in China, the world’s biggest importer. As the number of daily cases hit record levels between the end of November and the beginning of December, the lockdown measures became stricter, leading to a significant decrease in demand for Chinese oil during the last quarter of the year. Despite Covid curbs easing during the month of December, the demand for Chinese oil is facing a bumpy road to recovery, which isn’t expected to happen before the second quarter of 2023.
On November 24th the premium of Oman futures over Dubai swaps fell below $1/b on the Dubai Mercantile Exchange, making its decrease about 80% in November. On the other hand, the contango of the Dubai swaps had hit hard in the inter-month, indicating an abundance in their near-term supply. Brent crude and West Texas Intermediate dipped into contango as well. Brent futures declined to their cheapest price in 2022 near the end of November. Spot premiums for key Persian Gulf grades have also declined sharply during this last quarter.
The decline in oil prices was seen on a global scale this last quarter.
In a context of a decreasing oil price, OPEC+, led by Saudi Arabia, rejected the American request to delay its meeting and stuck to its initial decision to cut production by 2 mbbl/d from November 2022 until the end of 2023, corresponding to 2% of the worldwide demand. The USA tried to push for an economic boost through a diminished cost of fuel in the framework of strong inflation, but OPEC+ rejected this analysis, arguing that prices have been following a declining trend, widening the rift between both.
However, recent analysis shows that real reductions were standing at 700,000 bbl/d in November; with some countries, including Russia, having not reached their reduction targets. It is important to note that this has been the largest reduction since April and that the gap between the reduction objective and the real production was reduced between October and November. The production cut watchword is thus significantly driving the market dynamics. The pending question is “Could the OPEC+ go further in terms of production cuts?”. The recent forecasts performed by the group show a 2.2 mbbl/d demand increase for 2023, based on the assumption of better geopolitical context and relaxation of anti-Covid measures in China. The demand growth should mainly be driven by the USA (with 2023’s level projection being superior to the one in 2019). OECD Europe and Asia’s demand will also rise, although 2023 levels will still be inferior to 2019 ones. Based on these projections, projection cuts in the future should not be encouraged by OPEC+.
Another incentive to stabilize the market came from Europe by applying a ban on Russian seaborne crude oil (representing ⅔ of Russian imports) as well as a $60/bbl price cap on the Russian crude. Pipeline flows will not be included in the scope, as some European countries such as Hungary, Slovakia, Bulgaria, and the Czech Republic are still relying heavily on these types of imports, however, no resale can be done to another EU or non-EU country. A ban on refinery products could be decided in February. The principal objective has been to limit Russia’s capacity to finance the war in Ukraine.
In response, Russia warned that any country enforcing the capping mechanism could see its imports from Russia completely stopped. The country also deepened its shift to the East, proposing an incredibly competitive crude price (below the $60/bbl European cap), mainly to India. Recent figures show that exports to India reached record levels in November, amounting to 1.3 mbbl/d. Until this point, India purchased very little Russian oil.
The European ban and price cap will force European countries to replace 1 mbbl/d of crude and 1.1 mbbl/d of refined products. The countries have already started to increase imports to avoid shortages, but a recent IEA analysis highlighted that supply from Brazil, Norway, Kazakhstan, Guyana, and the USA will have to be increased to fully offset the end of Russian flows. However, the challenge remains high, for example, Europe has increased its imports of diesel products coming from Russia, ahead of the planned February ban.
Thus, the worldwide oil trade flows have been completely reshaped and the market is still trying to find a viable supply-demand balance. The competition in Asia and Europe has been challenging the market, and Russia has been able to divert its barrels even if the loss of a large part of the European market is a milestone in the war. The different measures could also have an impact on the price by increasing it, while the economy continues to struggle with high fuel prices.
Imports of Russian liquefied natural gas rose significantly between January and October this year, compared with the same period in 2021, with France, Belgium, Spain, and the Netherlands taking up almost the entire volume. "From January to September 2022, EU countries imported 16.5 billion cubic meters of Russian LNG, compared to 11.3 billion in the same period last year," reports Politico, which calculates an increase of 46 % in one year.
Pipeline gas from Russia is down nearly 80 percent compared to the same period last year, according to data from think-tank Bruegel.
Since 2017, the country has been a top-three source for Europe, accounting for about 20 percent of its total imports in the past three years. Russia has been the second-largest source this year, but its share has dipped to 16 percent despite record imports, as Europe has taken in more US LNG, which accounted for 42 percent. Qatar was the third-largest LNG supplier to Europe, accounting for 13.7 percent.
European solidarity is already being tested with a rift developing between countries such as Spain and Greece in favor of a cap on gas prices, while Germany, Denmark, and the Netherlands have remained skeptical of such a move. If the solidarity breaks, “then we might run the risk that more countries than just Hungary would be very willing to accept Russian gas easily and that would be a big issue” - Georg Zachmann, senior fellow at Bruegel.
France opted for Total Energies' proposal to set up a new import point for LNG (Liquefied Natural Gas) in Le Havre in 2023 via a floating terminal called FSRU (Floating Storage and Regasification Unit). The use of a floating terminal makes it possible to mitigate the consequences of a sharp drop or disruption in gas supply while being temporary, reversible, and quick to set up.
The characteristics of the port of Le Havre make this site the only one in France to have a major transport network with the available routing capacity. In addition, due to its location, the Bougainville Sud site, selected after a study to minimize the impact of technological risks, has no significant impact on the environment.
European countries have increased the acquisition of long-term LNG contracts with different countries to offset the reduction of gas imports coming from Russia. For example, Germany concluded a contract with Qatar for LNG supply from 2026 until at least 2031.
In the framework of the war in Ukraine, Europe decided to resume a lot of LNG regasification and terminal projects to significantly increase its import capacity, this could rise by 34% in Europe and the UK by 2024 vs. December 2021’s level.
On the other hand, Asian countries are also building new LNG terminals, and the new projects under development equal the total 2021 LNG trade. China is the Asian leader in the dynamic, planning to commission the largest LNG terminal in the region, with 214.9 mtpa. Other countries, such as Bangladesh, have invested in LNG infrastructures, and in total, the pipeline of Asian LNG development projects could increase the import capacity of the region by 50%.
Nevertheless, Europe and Asia’s competition for LNG has increased its global cost, and some countries, such as Pakistan or Bangladesh, are struggling more and more to buy LNG. The higher cost could lead to a lower utilization rate of LNG infrastructures and bring about the cancellation or delay of some projects, costing billions of dollars. Thus, the high level of competition for LNG could compromise the energy security of more vulnerable countries. A balanced LNG market must emerge with reliable exporters and forecastable importers.
The UN Climate Change Conference COP27 took place from the 6th to the 20th of November 2022 in Sharm el-Sheikh, Egypt. A Breakthrough was agreed on in Glasgow for COP26 in which a phase-down of the use of coal was decided, taking aim at the most polluting fossil fuel and marking the first time a resolution on fossil fuels had been included in the final text of the conference. COP27 was therefore a widely anticipated event. The aspiration for this 27th edition was to build on the momentum of Glasgow and decide on new measures to help achieve the key aspects of the Paris agreement (COP21).
However, these hopes were quickly dashed, even before the start of the conference. The strong presence of fossil-fuel industry representatives among the registered participants couldn’t go unnoticed. At least 636 oil and gas representatives were registered to attend the Sharm el-Sheikh COP, which is 25% more than last year’s COP in which they were already very present, and they outnumbered the delegation of any other country. The large presence of representatives for the fossil fuel industries was frightening for activists as the representatives could stall negotiations at an essential time and prevent fossil fuels from being phased down more than was hoped for.
Admittedly, the proposal of extending the Glasgow agreement to all fossil fuels was put forward during the conference and was led by India. This was however interpreted by several parties as India’s attempt to take the focus away from coal given that the country is the world's second-biggest buyer of coal and derives the majority of its power supply from it. Not to mention, India was blamed, along with China, for weakening the final agreement about ending coal use at last year’s Glasgow summit.
Nevertheless, 80 countries including the EU and the US took up India’s call and endorsed its proposal. This proposal was also pushed through by Ukraine's delegation who stressed that all nations need to think about their energy independence, not just from Russia but from fossil fuels, while highlighting that fossil fuels are not only funding Russia's invasion but have also left many countries at the mercy of soaring energy and food costs.
The EU’s green chief Frans Timmermans stated in a news conference that the bloc was supportive of “any call to phase down all fossil fuels''. On the other hand, it was disclosed that major hydrocarbon producers blocked any language that would have called for a plan to phase out oil and gas, and focused instead on the decarbonization of the sector. Major producing countries such as Canada and Saudi Arabia were keen to emphasize technologies to ‘clean up’ rather than phase down their fuels in the future. Finally, the Egyptian presidency refused to include India's proposal in the cover statement and the resolution included was the same as that in Glasgow. Mr Timmermans explained that provided the commitment to phase-down coal was not undermined as a result, the Indian proposal would be acceptable.
Moreover, the COP27 agreement’s final text offered a tacit blessing to natural gas by slipping the message that “low-emission" energy should be part of the world’s response to rising seas and searing heat waves into the final version of the deal moments before delegates accepted the text. This last-minute text modification went unnoticed by several negotiators who only later read the complete final text and discovered the added message.
These resulting COP27 decisions were qualified by many as insufficient given that they failed to include stronger commitments on cutting greenhouse gas emissions and they fell short of securing an agreement to peak global emissions by 2025 as the IEA states. A clear follow-through on the phasedown of coal was also omitted from the final text. This led many parties to believe that this COP protected oil and gas petrostates and the fossil fuel industries.
The frustration with the COP27 decisions was deepened by the fear that the stance on fossil fuels will get softer in COP28 with its host being the UAE, the world’s eighth biggest oil producer in absolute terms, the second biggest per capita and a member of the Organization of the Petroleum Exporting Countries (OPEC). Furthermore, the country is making intensive efforts to amplify its oil and gas production and has pitched its role in providing the world with reliable and low-carbon intensity oil and gas for decades to come.
“The UAE is known as a responsible supplier of energy and will continue to play this role as long as the world needs oil and gas”, President Mohammed bin Zayed al-Nahyan told the leaders’ summit at COP27. Knowing that the debate on the phase-down of fossil fuels will most likely be brought up in the upcoming COP, many fear that the Egyptian scenario will repeat itself in Dubai resulting in a retreat from the commitment to the Paris agreement. On the other hand, the UAE is the first Gulf state to set a 2050 net zero goal and is heavily investing in clean energy at home and overseas. The country is also the first to announce absolute emission cuts at COP27. It aims to cut emissions by 18% of 2019 levels by 2030 and by 60% by 2040. With the UAE’s two-pronged energy policy, the outcomes of COP28 are highly anticipated, to say the least.