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Introduction

For a number of years the EU, in alliance with the US, has been trying to reduce its reliance on Russia for its energy. Last year, Russia accounted for 36% of Europe’s imports of crude oil and 35% of its total gas imports. In 2014, the EU began to impose a range of sanctions as a protest against Russia’s involvement in Ukraine after Ukraine’s pro-Russian government was overthrown and replaced by one supporting the EU. The sanctions did not target the trade in oil and gas directly, but they did impose restrictions on providing finance for energy projects in Russia. The US meanwhile stopped US companies taking part in a number of upstream ventures in Russia and imposed controls on the provision of finance and technology to energy projects there.

The idea in cases of both the US and the EU was to damage the Russian economy by restricting its ability to export its oil and gas. The US has very little energy trade with Russia, and what little it does have has hardly changed since 2013, the last full year before sanctions over Ukraine began. The main impact on Russia’s energy trade was therefore expected to be on its exports to Europe. In particular, sanctions were seen as helping Europe to reduce its dependence on Russia for its oil and gas. In 2013, Russia supplied 38% of Europe’s oil imports; last year, however, it was still 38%.

New, tougher sanctions

In the absence of any real short-term damage to Russia’s energy trade, the US Congress voted in July for a new and much tougher package of sanctions on Russia and its energy industries. These new measures include banning US firms from investing in Arctic and deep-water energy projects and shale oil schemes where Russian companies have a shareholding of 33% or more. The bill also allows the US President to impose sanctions on companies involved in the financing or building of pipelines designed to export Russian oil and gas.

The new US measures have far more potential impact on Europe and European firms than they do on the US and its companies, and Europe’s political leaders have raised protests against the Congressional bill. One large European project in the firing-line is the proposal for a 5.3 bn cfd gas pipeline called Nord Stream 2, which is designed to carry Russian gas directly to Germany under the Baltic Sea, and there is an implied threat to other pipelines that are intended to supply Southern Europe with gas from Russia.

The Russian military intervention in Ukraine, which began in late February 2014, prompted a number of governments to apply sanctions against individuals, businesses and officials from Russia and Ukraine. Sanctions were approved by the United States, the European Union (EU) and other countries and international organisations. Russia has responded with sanctions against a number of countries, including a total ban on food imports from the EU, United States, Norway, Canada and Australia.

It is clear from speeches made in Congress in support of the sanctions bill that the US has an ulterior motive for wanting Europe to reduce the volume of gas it imports from Russia. US production of natural gas has risen sharply in recent years. In the decade to 2016, for example it increased by nearly 40%, from 52.8 to 72.5 bn cfd, largely thanks to the production of shale gas. This has helped to produce a surplus of gas in parts of the US which has, in turn, driven down domestic wholesale prices.

US gas producers see the remedy for their low price as lying in exports. Pipeline exports are restricted to Canada and Mexico, where gas prices are also low, which leaves liquefied natural gas (LNG) as the only other option: but oversupplied LNG markets mean that further US exports of LNG will almost certainly have to be at the expense of other gas exporters. It should also be noted that Iran has ambitious plans to export LNG in the near future, and it, too, has been added to the list of countries to be sanctioned under the bill just passed by Congress.

Russian Economy (from https://saddahaq.blob.core.windows.net)

The EU Commission has expressed concern that EU firms could be targeted by the proposed new US sanctions, for example for helping to finance Russian energy projects such as gas pipelines, and has suddenly become solicitous about the EU’s energy security in the event that one or more Russian gas export pipelines might not be built as a result of US sanctions (having up to now declared that the EU was too dependent on Russia for its gas). Russia has joined in the chorus about delays to pipeline projects but is also pursuing a long-term aim of future energy schemes eastwards rather than westwards.

Eastward shift

Given the sanction and the EU’s oft-stated desire to reduce its imports of Russian oil and gas, Russia’s response has been to export more to Asia at the expense of its western sales. This has involved developing more fields on the Asian side of the country so as to be in a better position to increase its Asian exports over the longer term.

The increasing emphasis on Asian crude sales has led to a 45% increase in Asian sales since 2013, taking the total to 1.5 mn bpd in 2016. There are plans to increase this substantially. Later this year, the pipeline links to China, which last year carried 475,000 , are to be increased to 600,000 bpd.

China is becoming increasingly important as a trading partner for Russia. Between 2013 and 2016 Russia’s crude oil exports to China rose from 491,000 to 1,051,000 bpd, and last year, Russia overtook Saudi Arabia to become China’s largest crude supplier, accounting for 14% of China’s total crude oil imports.

There are plans to increase oil exports to other Asian countries. Russia’s largest oil company, Rosneft, is building a series of long-term relationships with refiners in Asia by investing in new refinery projects, which it then supplies with crude oil.

There are a number of advantages for the Russians in increasing energy ties with Asia, apart from reducing their exposure to Western hostility. Unlike Europe, where oil demand is generally in long-term decline, Asia has a number of large and growing economies. In the decade before 2016 Asia’s oil demand grew by 8.3 mn bpd, to 32.4 mn bpd. By contrast, demand in the EU went down by 2.2-12.9 mn bpd.

Map of Russian Pipelines
Map of Russian Pipelines

Gas to Europe

Russia is also major producer and exporter of natural gas: hence the particular emphasis of the proposed US sanctions on Russia’s gas business and the controversy that now surrounds the bill recently passed by both houses of Congress. Russia has the world’s largest proven gas reserves, is the second-largest producer (after the US) and has the largest net exports.

Nearly all of Russia’s pipeline exports go to Europe, along with some small volumes to former Soviet republics, notably Kazakhstan and Belarus. A number of mainly Eastern European countries rely on Russia for all or nearly all of their imports of gas, including Austria, Finland, Greece, Poland, and Slovakia.

The large number of European customers, including many in the EU, make the prospect of any US sanctions aimed at the Russian gas industry of considerable concern to both Russia and its customers. What has caused particular anxiety is the powers the new US sanctions bill gives to the US President to impose sanctions on companies involved in the building of future Russian gas export pipelines, since many of the companies involved are European ones.

Pipeline projects

Nord Stream 2 and TurkStream, two large European gas pipeline projects , are seen by many in the EU as being important future supply routes for gas to Europe despite a certain degree of ambivalence on the part of the European Commission concerning Russian gas. They are viewed as important in Russia also since both of the pipelines by-pass the gas pipeline running through Ukraine.

Bad relations between Moscow and Kiev have led to the interruption of Russian gas deliveries to European countries further west by Ukraine. Gazprom argues that the two new pipelines will improve the EU’s security of supply by preventing any further such action by Ukraine.

The EU Commission has previously criticised Nord Stream 2 and TurkStream for the role of providing an alternative to the Ukrainian pipeline, in line with the EU’s wider support for the Kiev government; the threat of US sanctions to the two schemes has aroused opposition in countries across Europe, with threats of unspecified reprisals against the US if these projects are subject to sanctions from Washington.

As with its oil sales, Russia’s long-term aim is to reduce its reliance on Europe for gas sales in favour of greater exports to Asia. A pipeline, known as the Power of Siberia Pipeline, is under discussion with the Chinese, but, mostly additional sales to Asia, have to be of LNG, which will involve new export terminals. These, however, might fall foul of US sanctions and could even be covered by the proposed sanctions on non-US firms since LNG projects will inevitably involve the construction of pipelines between the fields supplying the gas and the LNG terminals themselves.

Conclusion

President Trump has opposed further sanctions on Russia. The push has come from a Congress that wants to tie the president’s hands on Russia and prevent him from lifting earlier sanctions imposed by President Barack Obama over Ukraine.

That earlier round of sanctions was carefully calibrated between the United States and its European allies to keep everyone on board and preserve a united response to Russia’s land grab in Ukraine. Energy, which divides even European partners, was a crucial part of that calculus. But, as time progresses and the real politik starts to bite, Russia will hope that a cold wind will blow through Europe and Washington will become distracted by events to its West, rather than East.

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