Dr Daniel Quiggin
Hello and welcome to this discussion on the War in Ukraine, the Energy Crisis and Europe’s Impending Long Winter. My name’s Daniel Quiggin. I’m a Senior Research Fellow in the Environment and Society Programme here at Chatham House, and for the next hour I’m going to be your Chair. The discussion is going to be on the record and is being recorded, for those who aren’t able to make it, and it will appear on the Chatham House website in due course.
The chat function will be open for members to share observations or comments with the wider group, but please, please,– and I really can’t emphasise this enough, please do pose questions for the panellists in the Q&A box, such that I can see them and then pose them to our experts, and I may ask you to unmute yourselves and ask your questions directly.
We have two fantastic speakers for you today: Michael Bradshaw and Olena Pavlenko. We’ll have around 15 to 20 minutes of opening remarks from our distinguished experts, followed by a bit of back-and-forth between the three of us, and then around 30 minutes of open discussion, where we’ll try and address as many of your questions as we possibly can.
Without further delay, please let me introduce Dr Olena Pavlenko, who is the President and Co-Founder of the Ukrainian DiXi Group think tank and the Ukrainian Energy website. Olena has worked in the energy sector for more than 20 years, covering issues such as energy security, energy transparency, integration of the EU-Ukraine energy markets and open data in the energy sector. She also served as a non-staff Advisor to the Energy – sorry, to the Minister of Energy and Minister of Foreign Affairs. She is an Author of the brochure, Playing a long game: How civil society can lead to changes, about Ukraine’s experience in EITI implementation for civil society organisations in other countries.
Without further ado, Olena, over to you, please.
Olena Pavlenko
Thank you. Thank you very much, Daniel. Thank you and your colleagues for the opportunity to talk today. I will, if you don’t mind, I will share with you some slides to be more interesting, and also, I would be – would like to start from – do you see the slides?
Dr Daniel Quiggin
Yes, we can, yeah.
Olena Pavlenko
And I would like to start from the – one of the questions you mentioned, actually the dependency on single-state actors, because I’ve seen this as one of the causes of the problem we have now. This is not the secret, that Europe was deeply dependent on Russian gas and despite the fact that actually rules of diversification say that there should be no more than 30% dependence upon one source of supply, sometimes dependencies of European Union from Russian gas reached almost 50%. Just to check, do you see my slide where I show this dependency? Thank you.
Dr Daniel Quiggin
You’re still on slide one. I think if you move to slide two, that would be great.
Olena Pavlenko
Unfortunately, I could not do this, cannot do this. You don’t see this, no?
Dr Daniel Quiggin
No. If you were to unshare and then put it on presenter mode and then reshare your – there you go, we can see it now.
Olena Pavlenko
I will do this. I would like this to be easy. So, actually, this is to show you that during that quite a lot of time, the Europe was really dependent on Russian gas, and sometimes this dependency reached up to 50%. That is why, when we bring the process of switching from Russian gas started, it was really so painful, because, having so big share on the European market, Russia had the ability to stronger influence the price, and it influenced when it didn’t like something what Europe did. For example, when Germany did not want to certify Nord Stream 2, Russian pipeline, actually, you can see how this was connected to the prices, and how they – how Russia started to – not to actually allow European companies to buy additional volumes of gas, bought from Russia, to fill the gas storages, for example, and gas promotions did not fill gas storages, which again influenced Russian gas, so – sorry, which again influenced what happened with the European market.
Again, it was like a hard dependency, and when European Union wanted to move from Russian gas, it became quite a painful task and influenced the prices on European markets. But I wanted also to say that this strategy Russia already used with Ukraine in 2009 and in 2013, so, for us it’s not a new strategy. You can see that in 2000/2001 Russia started to demand from Ukraine gas pipeline, to own the – co-own Ukrainian gas pipeline, and when Ukraine refused, there was quite a similar strategy. Russia became the single source of supply and then it started to increase prices for Ukraine. And then, in exchange for agreement on Black Sea fleet and also, in exchange of not to sign association agreement, when we’re offered was a $100 discounts, but again the price was too high for Ukraine, and the very, very, very huge lessons learned.
What I wanted to say here is that the war which we have now, it is not the cause of the crisis in Europe, and Russia used European and Ukrainian dependency to blackmail us, and the situation could be even more complicated if there – for example, Nord Stream 2 could be built, and Europe could be even more dependent on Russian gas. So, in some way, the war which we have now just speaks out the solution of the problem, which started way before, and which we have now. And the lessons learned also is that we probably should take into account the dependency, it’s a threat for the country, it’s threat for the European Union, and even if we do the transition, we will start developing the critical minerals, and by critical minerals, yes, well, the renewables development, other stuff, this also should be taken into account and we should not fall into dependency of one country.
Now coming back to the winter, which we will have soon, the prices of gas has fallen, and thanks God, we have in Europe quite enough amount of gas, the storages are filled with 90%, and there are discussion where other possible ways to store gas. And here I think Ukraine also can be helpful, because – sorry, this is just to show that, how the dynamic of prices moved, and why Ukraine could be helpful, because Ukraine does have gas storages, especially on its Black Sea borders. And we actually already did this business because of war, and our gas storage operators still propose such possibility to store gas in Ukraine, which also can be helpful for European countries to survive through the winter, and also closer to the spring, 2023.
What else can happen this winter? I think that Russia will still make a pressure on European countries, and if it is not happy with some decisions, it will further…
Dr Daniel Quiggin
Olena.
Olena Pavlenko
Yes?
Dr Daniel Quiggin
Sorry, I’m just going to interrupt you. There’s a couple of people in the chat who are really interested in your presentation and what the slides contain, but people are struggling a little bit with the size of it. Is there any way that you could just make it bigger, try and put it on presentation mode? Just ‘cause there’s a real interest in seeing the text and the detail.
Olena Pavlenko
I’ll try to do this, just a moment. I will stop share and then will do – will…
Dr Daniel Quiggin
Thank you, that would be great. Really appreciate it.
Olena Pavlenko
Apologies, please. Do you see my second flight – slide?
Dr Daniel Quiggin
No. The best way generally to do it is if you stop screen-sharing, and then, in PowerPoint, put it on presentation mode to begin with, then press screen share and select the presenter mode.
Olena Pavlenko
I will do this.
Dr Daniel Quiggin
Thank you [pause]. Sorry to interrupt your flow of thought.
Olena Pavlenko
[Pause] I’m sorry, I think that I still can’t do this.
Dr Daniel Quiggin
Okay, not to worry, let’s just – let’s keep going in the manner that you are.
Olena Pavlenko
I will be happy to share this.
Dr Daniel Quiggin
Brilliant.
Olena Pavlenko
Yeah. One more issue, what can happen this winter is that Russia will start – will try to stop gas transit through Ukraine. It already decreased the amount of gas transit quite significantly. We still have some volume, which should transit to Europe, but Ukraine could be the next, after the Nord Streams, where – as an instrument, as a mechanism to make a pressure on Europe. So, that’s a question, which I was asked quite regularly and, yeah, I would like – I think this scenario is possible.
I also wanted to say about another, not threat, but point which can happen, is that by cutting gas through Ukraine, Russia can also continue demanding from Europe, and specially from Germany, to start Nord Stream 2, right? It is already doing this. I think it will continue doing this, and for Russia it is important to start launching especially Nord Stream 2, because if Europe does this, it means that Europe is ready to break its own rules, because Nord Stream 2 is not certified. So, I think this is very important for all of us, for European Union not allow such scenario.
We may not have problems with gas at the beginning of the winter, because again, we all have our gas storages filled, but there might be the issues, especially the low temperature, by the end, closer to the end of the winter or beginning of the spring, there might be the questions with the gas prices and the amount of the gas. But I think another issue is to start thinking how to be ready for that heating season or winter season 2023, the next season, because if we do not use Russian gas, starting from the next year or middle of the next year, we have to think about additional sources of supply already now.
Maybe a few words about Ukraine. Ukraine has a lot of problems now with energy supply. We have 40% of Ukrainian energy infrastructure damaged. We do have gas reserves and coal reserves as of now, but Russia really badly damaged our infrastructure, so, we can get through the winter, if there are no strikes and no further damages of the infrastructure. As of now, we have outages of the electricity. Me, personally, I live four hours with electricity, four hours without electricity. We are waiting for the – when the Government, when the companies will restore and will maintain the electricity supply to consumers. And as of now, Ukrainians really need support with the generators, with transformers, with other equipment to help our companies to deal faster with these damages.
I would like to finish with four lessons learned from this situation where we are. First, I think this gas crisis, these gas wars, they will speed up the development of renewables, the green transition of many countries, because biogas, biomethane, hydrogen projects, they might be more competitive for the future. But at the same time, again, we should keep in mind that this security benchmark should be present in our strategies, because the Germany – Germany was a leader in energy transition, but it was – it had greater dependency from Russian gas and now it pays quite a huge price for this.
We also have to reconsider what the energy security is, because if one country can blow up three pipelines in the sea and no-one gets punished for this, I think this is not the kind of security which we want to have.
And the last issue is, I think we have to reconsider the role of Russia in nuclear sector, because the case with Zaporizhzhia nuclear power plant, which is captured, shows that if Rosatom builds its own nuclear powerplants in other countries, like Africa or Central Asia and others, it can use its nuclear powerplants, as happened with Ukraine, in Ukraine, you know, it could be a potential nuclear weapon. So, I think this is a question for the countries who develop nuclear energy and build nuclear powerplants, to think how to remove Rosatom from such business.
Thank you very much. I will stop here and will be happy to answer all your questions.
Dr Daniel Quiggin
Olena, thank you very much, and thank you also for dialling in and giving us your insights, given that you’re in Kyiv and suffering from, you know, four hours of blackouts every day, so, really, really appreciate your time. I have some questions for myself, but – sorry, of my own, and some questions have started coming in, in the Q&A, please do keep them flowing. We will keep all of those questions, though, for after Michael has presented.
So, let me just quickly introduce Michael. Michael Bradshaw is Professor of Global Energy at the Warwick Business School. He gained his PhD at the University of British Columbia, and now works at the interface between economic and political geography, business and management and international relations. He is a Fellow of the Royal Geographic Society and past Vice-President, and Fellow of the Academy of Social Sciences. Michael’s research on the geopolitical economy of the global – of global energy has examined the role of foreign investment in Russia’s oil and gas industry, global energy dilemmas and the interrelationship between energy security, climate change and global – sorry, economic globalisation and the challenges to the UK’s gas security.
Again, without further ado, Michael, please, over to you.
Michael Bradshaw
Thanks, Dan, and thanks for the introduction. Now I’ve got a lot to live up to. So, I don’t have any slides. I mean, this is a fast-moving area and trying to keep up with yesterday’s news is challenging enough. But, I mean, there’s also a huge amount of information out there and some of it, at times, seems contradictory, and trying to actually, sort of, get to an understanding of how all this all stacks up, I think, is constantly challenging and I’m relying on the expertise of many others, I guess, as an academic. I spend a lot of time reading and listening and trying to synthesise what’s going on, and so, that’s what I want to do, and I want to put the – you know, the comments we’ve had so far, I think, have been really useful both in the, sort of, historical context of how Europe has got to where it is and the specific issues around the role of Ukraine and what Ukraine might offer in the future. But I want to talk about the – what’s happening in a global context, but also, you know, in terms of wider issues in relationship to the energy transition. You know, whether or not this current global energy crisis is going to derail the transition or not.
And of course, I mean, many of you probably listened to the IEA launch its World Energy Outlook last week, where there was a very clear narrative that actually that, far from it, what this transition is going – what this crisis is going to do is actually accelerate the transition. Well, I guess that’s a question for debate, and maybe that’s something we’ll pick up in the Q&A as we go forward.
I think it’s useful to go back at least 12 months and probably more, to understand the state of the global gas market in particular. Coming out of the COVID pandemic lockdown, obviously we were suffering at this time last year what we were calling a global price crisis, because, you know, demand was surging and, for one reason or another, the supply side was finding it difficult to match, and prices were going up very rapidly.
But little did we realise at the time, of course, that Russia was also, you know, in the process of, kind of, softening up Europe by constraining supplies into Europe, not filling up storage, not engaging in the stop – in the spot market, you know, as part of perhaps trying to make sure that, you know, it was benefiting from very high prices, but it perhaps had other motives in mind that became clearer, more recently, of course.
So, I mean, what I – Dan posed three questions and I want to address them in turn. But I think the key point that comes out of where we were 12 months ago is, even before this we had a very tight oil and gas market, with very little room for manoeuvre, you know, and those in the industry will know that, you know, building LNG plants takes a lot of time. It also takes an awful lot of capital, you know, you have – you know, once you’ve declared a final investment decision, four to five years, in most instances, to build a plant.
Getting to FID itself takes a lot of time. You have to sign up buyers who are going to agree to take your gas to finance the development of the terminal. It’s not something you can build up very quickly, and that does mean that, you know, at this moment in time, we know how many – how much more LNG is coming onto the market in the next two to four to three – two to three to five years, and the answer, in the next couple of years, is not very much. So, we already have a tight market and we also have a situation where additions to supply are going to be fairly minimal, and we also know that the LNG industry itself, you know, is subject to technical failures, and we saw that, you know, we saw the problem with the Freeport LNG plant in the US with the fire, you know, the Gulf of Mexico, it’s hurricane season and from time-to-time that has caused problems.
There are other constraints on the industry: the availability of shipping and also the, you know, the terminal capacity to import the LNG. And all of these things are very important to understand that it’s very difficult to suddenly adjust and start finding alternative sources of supply to compensate for the loss of pipeline gas from Russia. So with that in mind, the first question that I was asked was, “Have European preparations been sufficient to stave off an energy crisis this winter?” Well, I guess the simple answer is, we’ll wait and see. But I, you know, I want to be optimistic and say, well, actually, you know, Europe has done as much as one might expect, you know, because the – I mean, you know, we’ve had Repower IU – Repower EU, we’ve had various challenges to reduce gas demand, you know, we’ve had ten-point plans and all of this. And so, what the Europea – well, Europe and, I mean, one of the problems I think in this debate is we tend to talk about Europe and states, but this gas industry is countries, not – it’s companies, not countries. And so, it’s companies involved in the flow, in the market, in the delivery, and it’s the market and pricing rules that change the flow of gas.
So, Europe has been successful in finding alternative sources of supply. You know, existing pipeline suppliers like Norway and Azerbaijan have increased production, there has been reductions in supply from North Africa, but overall that’s a positive. But the most significant thing that’s happened, of course, is that they’ve found alternative sources of LNG, and I’ll say a bit more about that in a minute. So, all of these policies have been successful in attracting LNG, but it’s come at a very high price, you know, and we saw the price markers on one of Olena’s charts there, not just for Europe and European customers, but for elsewhere in the world as well.
I mean, Europe has essentially exported its own energy insecurities by driving up the LNG price and diverting LNG from other countries, Pakistan and Bangladesh being two in point, who now have their own energy crises ‘cause they can’t secure affordable gas, and that’s what we need. We do need to understand that, that what Europe’s – you know, this is why, in a sense, the tragic situation in Ukraine has planetary consequences, both in terms of the impact on availability and access to energy, but also the carbon consequences, in terms of emissions.
So, we’ve seen this drive to try and reduce demand, and that’s been primarily driven, over the summer, by demand destruction. Industrial demand has fallen quite significantly, simply because gas prices are so high that industry has stopped producing. That is not a positive. That has negative impact on economic output, on employment, and very real questions are being asked now about the ability of high-energy-intensive industries in Europe to supp – to survive the next two or three years, and what this means longer-term for these industries, you know. So, it’s a real challenge in terms of the dangers of de-industrialisation.
Of course, we’re now focused on households as well, coming into the winter season, where energy poverty is the form of demand destruction. People simply cannot afford to purchase the energy services, against a back – you know, the cost of living crisis challenges, you know, summarised by notions like “heat or eat.” You know, so, this is not a positive situation, but it is driving down demand, and the demand seem to have fallen by about 10%. The target is 15%, but it’s coming at a social and economic cost, but it’s very necessary.
The other thing to remember, of course, is although we’re focussed on, and the comments are on gas, we actually also have an electricity crisis in Europe at the same time, in part because of the interconnection between gas and electricity. Across the European Union, I think gas is responsible about 20% of power generation; in the UK it’s about 40%. But there are other problems elsewhere in the power sector. We have problems with the nuclear fleet in France, we have Germany continuing to retire nuclear power generation, and we have problems with hydropower in places like Norway, after a very hot and dry summer, and even problems moving coal around because of low water levels in European rivers.
Now – so, if they’re all negatives, there is a positive and that’s, we’ve enjoyed a mild autumn so far. You know, Dan and I were talking about the fact that neither of us have put our central heating on yet because it’s been very mild. But unfortunately the Met Office in the UK says that we’re looking – it looks like a cold winter; I don’t know how they know, but clearly that is a key issue, you know, ‘cause because of the role of gas in heating, European gas demand is so weather-dependent. So, we – so, the positives, demand is falling, but at a cost. The other positive is storage is full, 90% plus. So, I think, as Olena herself said, we’re going into the winter in a fairly positive situation, albeit at a very high cost.
What happens next? Well, it’s weather-dependent, it’s dependent on the continuing flow of LNG, and I’ll say more about that in a minute, and it’s also dependent on there not being too many technical outages, which can cause disruption in delivery. So, the other – second question I got asked was, “What would Russia’s reaction be during the winter, after the winter period if Europe avoids market failure? If we get through the winter, how would Russia respond?” Well, I think we need to, sort of, look at the scale of the adjustment that’s having to happen, you know, that, you know, in 2021 Russian pipeline exports to Europe stood at about 140bcm, about 40% of European consumption.
Now, I’ve seen various estimates out there, you know, suggesting that by yearend, this year, they would have fallen to about 60bcm. So, fallen by more than 50%, you know, and so – and again, Elena’s alluded to this. If we look at the four pipeline routes into Europe: Nord Stream 1 and 2, Yamal, transit through Ukraine and TurkStream, well, Nord Stream is effectively out of operation. Nord Stream 1 certainly, one of the pipes of Nord Stream 2 is damaged, but I agree with Olena, we should just think that Nord Stream is just not there, and it’s not going to be there, you know, indefinitely probably. So, Nord Stream’s gone, the Yamal pipeline through Belarus and Poland has not been delivering gas, you know, and for quite a while. So, what we’re left with is flows through Ukraine, and I agree that they are very vulnerable, and TurkStream, and TurkStream may continue, because TurkStream is supplying Southern Europe, including Hungary, that’s done a deal with Gazprom. But the problem with the TurkStream flow is it doesn’t move gas elsewhere into Europe and therefore compensate for failures elsewhere.
The other factor is that Russian LNG continues to flow into Europe. Russian LNG from Yamal, being delivered by Novatek and its partners, is being delivered everywhere but the UK and Lithuania, who currently have sanctions on it. So – and that will continue for the foreseeable future. I don’t see the European Union sanctioning those flows. More likely is that Russia might decide it’s going for cold turkey and say, “Right, no flows,” but even that, I think, is unlikely.
So, what that means is, you know, if we come through the winter, how are we going to fill up for next year, as Olena has said, and where is that LNG going to come from? Do we – if we’re just left with TurkStream and Russian LNG, I mean, what are we looking at? 30/40bcms at most, you know, a lot – a big gap to fill, and the harsh reality is that there’s really not enough LNG in the world to do that.
The other thing to factor in is one of the reasons that we’ve been able to fill the storage in Europe is because Asian and Chinese LNG demand has been down very significantly. So, you know, as – over 20% reduction in China’s LNG demand year-on-year, for a variety of reasons, and that’s meant that many of the long-term contracts signed by Chinese companies have actually been delivering gas into Europe, and making plenty of money out of it in the process.
But what if Asian demand recovers? You know, we could find ourselves, next year, faced with a double whammy of very low flows of Russian gas from TurkStream and LNG, on the one hand, and an even tighter LNG market as Asian demand recovers, against the backdrop of a minimal amount of new LNG production. And that’s why people, and I think Olena has also alluded to this, are talking about, “Even if we get through this year, this time next year it could be even more problematic,” and the bad news is, the following year it’s not going to be any easier either, because there’s not a lot of new LNG coming into the market. So, I do think we need to think about this as being at least a three-winter crisis, and in the – over that time we can make significant changes. We can make – take measures to improve efficiency, reduce demand and build resilience.
So, what does Russia need to do? I think the harsh reality is that Russia doesn’t need to do anything. You know, if Russia wants to continue to flow gas through Ukraine, and Ukraine wishes that to continue, then it might happen. But I would expect that the minimum that Russia will do is continue to flow TurkStream and continue to supply LNG. But more than that, it doesn’t need to, it just needs to wait and see what happens this winter and what happens next. What else can it do? I mean, all it can – I think it’s pretty much written off the long-term prospects of the European gas market for Gazprom, and certainly, if we look at the IEA’s analysis, their working assumption is that Russia is no longer supplying pipeline gas to the European Union and struggles to reorient to Asia.
So, the last question, and I’ll be very quick on this, ‘cause Olena’s also alluded to it, is about how will the energy crisis ensure future dependence on single-state actors of goods and services don’t occur in the future, and I agree entirely with, you know – we mentioned this issue of critical materials. I think at the end of the day, you know, this heightened concern about energy security, securitisation, you can already see that it’s focused minds on thinking on – of – about supply chain diversity, you know, and everyone now, you know, we – this oft-quoted Churchillian call for “diversity, diversity, diversity.”
You look at any of the critical materials strategies coming out of the United States, out of the European Union, the UK, Japan and on and on and on, where you have all these charts showing about, you know, the concentration of production of critical materials in certain countries, the role of China and Chinese companies in processing, the role of Chinese companies in producing low-carbon technologies, against a backdrop of growing, you know, continued tension between the United States and China.
You look at the intent of the CHIP Act in the US, the Inflation Reduction Act, you know, terms like nearshoring, ally-shoring, all of these are coming into our vocabulary, in terms of wanting to look at building resilient supply chains as close to home as possible, around critical materials and high technology, you know, required for not just the development of low-carbon technologies, these same materials are critical in the defence sector, in EVs and so on and so forth.
So, I think the question then perhaps is, you know, “What about the low-carbon transition, will this be accelerated by this?” That’s the intent. I think the reality is that there are various barriers, some of which are identified in Repower EU, you know, issues around planning and permitting, for example, issues around supply chain, having the capability to construct and install the new infrastructures.
Equally, you know, you might be able to install your new windfarm, but if you can’t connect it to the grid, it’s not much use. All of these things are probably going to mean that, you know, there are significant hurdles to be overcome to accelerate the low-carbon transition as the solution to the current crisis, and it may also be more costly, you know, because the Economists will tell you that, you know, globalisation, international trade has delivered lower-cost inputs into these industries.
Now you put the veneer of global energy – of global geopolitics across it and you worry about dependence on China; it changes the equation. So, I think at the end of the day, you know, the pluses and minuses may result in an acceleration of intent, but we must see whether it will be an acceleration in – on the ground.
But I would say that, coming back to where I started, the mention of the WEO and the IEA the other week, you know, it seems to me, I mean, they have talked consistently about an investment gap existing between investment in fossil fuels and investment in low-carbon energy. The answer is, not to increase investment in fossil fuels, it’s to invest in, more in efficiency and more in low-carbon power generation to provide the answer. But there are those who would rather see the answer as being more fossil fuels. But I think the lesson learnt here is, you know, fossil fuel dependencies are not sustainable in any number of ways, you know, not just geopolitically, but clearly environmentally, and I’ll leave it there.
Dr Daniel Quiggin
Brilliant. Thank you very much, Michael, that was really fascinating, as always. I’m going to keep my couple of comments and questions fairly short, because we have actually had lots of questions come in. I suppose my – I think this narrative and analysis, I think, we’re all agreeing on and I think is that what’s been developing in policy circles as well, that it’s not really this winter that’s the biggest concern, it’s next. And there’s lots of projections around how much LNG capacity within Europe, import capacity will expand.
I suppose the question that lingers in my mind is, given the upstream investment declines globally, but also within the US, and the pressure that the fracking industry has been under in the US, I was looking at US EIA data just earlier on today to look at the drilled and uncompleted wells, and if people don’t know what drilled and uncompleted wells are, they’re simply the wells that have been drilled by the fracking industry before, and then covered over to be used later on. And the drilled and uncompleted wells have been declining sharply as they’ve ramped up output. I suppose the question that I have to both of you is, do we think – where do we think the constraint, particularly re the US exporting LNG to Europe, is going to come from? I’m thinking about this particularly because, you know, at the moment around 40% of EU’s LNG comes from the US, and that will likely rise next year because there’ll be less of that, kind of, Russian import left within the statistics.
So, yeah, what is the constraint to US supply of LNG, is it LNG import terminal capacity within the EU, or is it the ability of the fracking industry in the US to expand and ramp up? And that goes to both of you; maybe I’ll go to Michael first and then Olena.
Michael Bradshaw
Yes, a really interesting question and one I, you know, I’ve, sort of, been pondering myself, you know, kind of, you know, “Will the United States actually build all these terminals and then run out of gas?” And I think in, only in the last couple of days President Biden’s alluded to what were, sort of, veiled threats to the industry, in terms of potential windfall taxes if they don’t start investing in new drilling activity. You know, but their industry itself has, you know, has shown what it says is financial discipline. You know, it’s returned money to shareholders, it’s paid down debt and, as you say, I mean, it makes sense to go for the easy wins, for those wells, which haven’t been completed, many of which were drilled just to keep a licence, and now you can go back.
I mean, there are other constraints, in terms of pipeline systems, still a huge amount of methane being flared, because it’s being – the primary target is tight oil, and there’s no pipe – gas pipeline to connect and collect that gas. You know, and you – I’ve certainly heard industry commentators from United States, you know, those proposing LNG terminals, of course, saying, “There’s huge amounts of gas, there’s no problem, we’re not going to run out of gas,” but, you know, the geological presence of a resource does not make it a reserve, and it doesn’t make it commercially viable, you know, so, I think there is a concern here.
I mean, I think that it’s probably inevitable that the United States will overbuild LNG capacity, and how long that capacity will be required remains to be seen. So, I think – I don’t have an answer to the question, but I do think it should be a concern. I don’t – I think, you know, what – at the same time, of course, Europe is expanding its LNG import capability very rapidly. You know, in Germany, you know, there’s, what, four or five floating storage and regas units being leased and installed at the moment and plans to build others. There’s a new one just opened up in the Netherlands.
So, you’ll build a lot of capacity, and you’ll have LNG flowing, but I guess the other issue we haven’t really touched – you haven’t, sort of, mentioned, which is part of the problem, is how long do you need that gas for? And again, listening to the industry at a conference a couple of weeks ago in London, you know, the US industry was saying, “Well, you know, ideally to finance new projects, we need you to sign up to a long-term contract,” and, you know, they – European companies don’t want to do that, because they think in the 2030s they might not need that gas.
You know, so, I think there – I mean, and that’s certainly the Qatari position, you know, is quite clear: if you want energy security you pay for it, and discussion of this so-called Asian model, so, it’s not just, is there enough gas? Is, is there enough commitment to purchase that gas to finance the continued expansion of LNG in the United States?
You know, we’ve seen earlier this year Henry Hub price going up to close to $10 an MMBtu, in part because of the flows of gas going into the LNG terminals, you know, and of course, United States has experienced a reindustrialisation off the back of cheap gas. But there’s a lot riding on there being a continued supply of cheap gas, and whether there’s enough to continue to satisfy domestic industrial demand and a growing LNG sector remains to be seen. But of course, the reality in the power sector is you’re not going to get financed to build a gas-fired power station in the United States because renewables are so much cheaper. So, essentially they’ve got a lot of gas. You know, can they get enough of it to market quickly enough to make enough money, remains to be seen.
Dr Daniel Quiggin
Yeah, the big question mark there.
Michael Bradshaw
So, I think there’s a question mark, but I don’t think – at the moment it doesn’t seem to be something that the industry or the government’s worried about. I think the government’s most concerned about the fact that the, you know, “Drill, baby, drill” is not really delivering.
Dr Daniel Quiggin
Yeah, brilliant, thanks, Michael. Olena, did you want to touch upon that? Otherwise we’ve got a whole bunch of questions around Ukraine as a gas transit route and North Stream 1 and 2 and Ukrainian storage, so, we could move onto that, unless you wanted to touch upon that question first.
Olena Pavlenko
I just wanted to say that I totally agree with Michael, and just a few words. I think now we’re just in a perfect storm, you know, everybody, and it is really hard to discuss how to – how this sector will be developed for the nearest future. I think, within few years, just one, two years we will come to some equilibrium, I guess, when the countries will understand how much they will need this gas, for what period of time, the companies will understand what exactly money and from where they can get to invest. And then there might be some understanding, how long contracts will be signed for the gas extraction and delivery to Europe and world. And, yes, happy to move forward with other questions.
Dr Daniel Quiggin
Great. Jorgen Andrews, I’m just going to give you a slight advanced warning that we’re going to ask you to unmute and ask your question directly, but your question sits in a whole group of questions that have come in. So, I’ll just go over those ones first and maybe, Jorgen, you could come in at the end, unmute and ask your question.
So, there have been mainly around clarifying the situation in regards to North Stream 2. “Can Turkey act as a gas hub to replace North Stream 1 and 2?” “What’s happened to Ukraine as a gas transit?” And “What motivated Russia to blow up North Stream 1 and 2?” So those are, kind of, a group of questions there. Jorgen, are you able to unmute, do we have Jorgen to unmute and ask his question?
Jorgen Andrews
Yes, I’m here, thank you very much. Hi, Olena. Jorgen Andrews with the US Institute for Peace. I’m also a State Department Foreign Service Officer. Just wanted to ask, and I apologise if you mentioned this in your presentation and I missed it, but approximately how full are Ukraine’s vast underground gas storage areas right now? You know, in other words, we know it’s going to be a harsh winter, but how is Ukraine situated, headed into this winter, does it have more gas or less gas than normal winters? Thanks.
Olena Pavlenko
Thanks.
Dr Daniel Quiggin
Thank you, Jorgen. Given the nature of the questions, Olena, let’s go to you first, and then I’ll come to Michael.
Olena Pavlenko
Yes, thank you again for the question. Right now we have around 15 billion cubic metres of gas in our storages. Usually we would have 17/18 billion cubic metres of gas to be sure that we have safe winter period. We – there might be issue if we have a really cold winter, but we also have a huge decrease in consumption. We have around 30% decrease of consumption of gas in the country. So, we have, sort of, discussion between our government and our state company, Naftogaz, ‘cause company says that it should be – we probably will need more, some two more billion cubic metres of gas to buy, while the government see – thinks that 15 billion cubic metres might be enough.
Very – to sum up, again, as I said, if we have no serious damages when we have to increase consumption of gas, or if there is no really very cold winter, we will probably survive with the amount of gas we have now in our storages, because Ukraine produces gas by itself, and we just did not export our gas, we just collected it in our storages for the winter.
Dr Daniel Quiggin
Thanks, Olena. Michael, if you could touch upon this briefly, just given we’ve got quite a lot of questions to get through.
Michael Bradshaw
Yeah, I mean, I can’t comment in – with any degree of expertise on the situation in Ukraine. I mean, I – you know, and I would quote actually what I heard from Tatiana Mitrova on a podcast in the last 24 hours about the TurkStream issue, in the sense of, that, you know, expanding the capacity of TurkStream is not straightforward, would take time and does rely on a lot of Western equipment. So, I don’t think – you know, so, you’ve got to go with what you’ve got, in terms of creating a Southern hub.
There are also problems of connection, in terms of getting that gas, you know, through a system, which is essentially designed to move Russian gas from the East to the West through – you know, there have been connections moving gas North and South as part of the – of European projects to create a single market, but I think it’s not that straightforward to suddenly decide that you’re – you know, we’re finding that with the LNG terminals, of course, because they are not necessarily well-aligned, in terms of supplying North West Europe. So, I just don’t think it’s very straightforward to be starting to build lots of new infrastructure.
And why would you do it anyway, you know, to make yourself reliant again Russian gas? So, I don’t really – it may become part of a supply, a continued supply of Russian gas into – to certain countries in Southern Europe, without mentioning names, but I don’t really think that it’s a viable solution. You know, I think Europe should actually base its assumptions, its working assumption on, they’re not going to take any Russian pipeline gas in the future.
Dr Daniel Quiggin
Brilliant, thank you, Michael. We’re now going to switch a little bit, and go back to the, kind of, “Is it this winter, is it next winter we need to be concerned about?,” and I’m going to ask Frederica Recchia, I think I’m pronouncing your name correctly, to unmute and ask your question. But I suppose, just as that gets set up, I think the, kind of, thinking here really is, “Okay, in the time being, for this winter we have fairly good storage across Europe, partly because it’s being pumped full, partly by Russian gas and then supplemented by others, and demand in China has been low this year, that’s maybe helped these things. But then looking forward for next year, we’re going to have to fill up all of that storage again, and demand may be returning in China.”
So, Frederica, do you want to unmute and just ask your question? I’m thinking in terms – you’ve posed four questions, I’m thinking about the one in regards to global recession.
Frederica Recchia
Yeah, and thanks a lot for the interesting – very interesting discussion. Yeah, I was just wondering if – just if we’re not being too pessimistic about our next winter, what’s going to be the role of the recession in pushing down demand and helping us to go through next winter probably a bit more comfortably? So, that, yeah, that’s my question.
Michael Bradshaw
Perhaps I – you know, I think it comes off this back, you know, of this notion about, you know, “We’re reducing demand because of demand destruction, you know, we don’t – we’re reducing demand because we have a recession.” You know, politically, that is not easy to handle. We already have a cost of living crisis, you know, we have governments with budgets badly battered by the pandemic, and I, you know, I don’t disagree with the prospect of recession, whether it’s global recession or recession in Europe, as a consequence of this crisis.
But no doubt it will – you know, recessions have the impact of dampening down energy demand, and so, we might solve one problem, but there’ll be plenty more other problems to manage. So, I’d probably put it another way, “How can we manage the energy crisis without having a recession, or with minimising the possibility of a recession?” And maybe that’s more to do with more constructive ways of managing demand reduction than energy poverty and demand destruction, which seems to be what we’re left with at the moment.
Dr Daniel Quiggin
Olena, would you like to add to the answer to this question around demand, recession, what winter 2023 might look like?
Olena Pavlenko
It’s a tough question. I may only – I would only add probably that, I mean, all gas producers understand the situation now, and I think it’s not only the US. We’re thinking how to increase gas production, and probably replace Russia, because again, everybody understand that they have to produce and sell gas as fast as possible, because then there will be a green transition.
So, I think some European countries will also think how to develop more, how to come back to the sea gas development, like running a gas field. I think, in Africa region, countries will also think about more investments and better communication, yes, with energy companies. You know, and in Ukraine we are thinking how to increase gas production in the short perspective, again because we also believe and we also signed for the Green Deal and decarbonisation issues and goals. So, I think it’s realistic to replace Russia, maybe not in the very short-term perspective, but in mid-term perspective, yes.
Dr Daniel Quiggin
Thank you very much. Okay, we’re now going to, sort of, slightly switch again, got two questions here, the first one, I’m going to ask William George to unmute and ask his question, and then secondly, Rowley Sword to unmute and ask his question. Whilst they’re doing that, we – these questions are basically in the group of, “What’s been the impact on Russia of the sanctions, and what might Russia do next to seek to minimise those impacts and sell their gas and oil elsewhere?” So, if we could just have William first unmute and ask your question.
William George
Good evening, and thanks very much for the talk tonight. My question is about the sanctions that the West has been pretty unified in imposing on Russia, and the impact that the reduction in Russia’s market for selling its hydrocarbons has had on the Russian economy. So, how damaging do we think this reduced market is for the Russian economy, and do we think this’ll have an effect within Russia itself? Thank you.
Dr Daniel Quiggin
Brilliant, thank you. Before my two esteemed colleagues start answering that, can I ask Rowley to unmute and just ask your question as well, and we’ll group them together, and hopefully Olena and Michael can answer both simultaneously. Go ahead, Rowley.
Rowley Sword
Sure, I hope you can hear me okay. Michael, this, sort of, follows up from one of your comments about Russia basically recognising that the Europe – Europe is not going to be one of its core markets for pipeline gas, at least in the near future, and also likely the Europeans view Russian supply, its two pipelines, as unlikely as well.
So, I mean, if Europe is not, no longer in the market, I presume the intention is for Russia is to redirect its way – to right to Asia and given, kind of, current limited capacity to do so, how realistically do you think they can redirect without affecting its domestic gas output? I’m here thinking that, you know, given it’s not being supplied and a lot of it’s being held in quite aged gas fields, to what extent is, sort of, the pricing issue becoming a problem?
How do you think it will redirect and how competitive do you think it can be compared to, sort of, Qatari or Australian LNG in Asian markets?
Dr Daniel Quiggin
Brilliant, thanks. I will go to Olena first, if that’s okay.
Olena Pavlenko
Yes, sure. Actually, the sanctions already impact Russian economy and Russian energy sector particularly. I just saw that the gas production decreased, I think, up to 20% – 18% recently, so, they are losing markets, but they cannot so far replace energy market with Asian market. They – the only thing they can do now is to decrease their production, which of course mean also for the future a decrease of the profits, yes, of the money, which they will receive from this business.
Yes, they will try to go to the Asian market, to China and to India, but so far we see that Russia will not be able to refuse – or replace a so huge amount of gas, which it sell to Europe.
Dr Daniel Quiggin
Thank you, Olena. Michael, do you want to come in here?
Michael Bradshaw
Yeah, yeah, just first on the, sort of, the impact on the Russian economy. Of course, one of the problems that the West has been facing is that, you know, even though volumes may have fallen, the price has been very high and Russia has been making, you know, record levels of revenue from its exports of oil and gas. But, you know, if you look at traditionally, it’s oil that’s been the major source of revenue for the Russian Government, gas has been important, but not critical, and LNG even less so, partly because of the tax breaks it’s been given, you know, but…
So, there’s this – so, in response to this issue there’s much discussion about trying to put a cap on oil prices, for example. But we all – we know already that Russian oil is trading at a significant discount into India and China, and it may be in the future that Russian LNG is traded elsewhere in the world, I mean, again at a discounted price, which would be good news for those countries. You know, we mentioned Bangladesh and Pakistan, for example, so, in effect, there would be a reduction in revenue because the effective – finding markets requires the offer of a healthy discount.
But, I mean, there’s a lot of complexity around an oil price cap, because Russia’s response may simply – and it’s already – they’ve already said, I think, you know, any country that prices – puts – place a cap won’t get any oil, so, we have to wait and see what happens in early December when the European Union sanctions come on crude oil. I think that’s another critical juncture, in terms of disruption to global energy, but I’m not an oil expert and I don’t want to speculate on what’s going to happen.
The issue of pivoting away from Europe to Asia I have spent a lot of time working on. I’ve spent far too much time working on places in – like Sakhalin. I mean, I think there is an issue around the future capability of Russia’s LNG industry, which is heavily reliant on Western technologies, and I think there are issues around the continuing maintenance and production from existing terminals.
The Arctic 2 LNG project, which was the next project the Yamal – that Novatek was developing on the Yamal together with Total, is now delayed indefinitely. Total has said, although it’s not pulling out of its current investments at the moment in Novatek and Yamal, it’s not making any new investments. And then there’s a whole question of what happens to the Sakhalin 2 LNG project. You know, Shell has left the project, the two Japanese companies who’re remaining; speculation that Novatek might take over a large chunk, together with Gazprom, but how long they’ll be able to operate that terminal remains in doubt perhaps. So, I think, you know, being able to maintain production, let alone expand LNG production, is a question mark. Pivoting away and building new pipelines to China, again, I think at the moment – you know, I mean, China itself would be – would look at the experience of Europe and think, whoa, we don’t want to get too dependent on Russia.
You know, they’re obviously – they have significant volumes coming from Central Asia, they now have Power of Siberia ramping up to its 38bcms. They could expand the capacity on that, but that is using gas fields in Yakutia and East – and in Eastern Siberia, but it’s not using the Yamal fields. I think building a Power of Siberia 2 to Yamal, which is what Russia wants, does give an – gives an outlet for Russian gas that might have flowed either as LNG or to Europe as – in a pipeline, to go further South.
It’s a very long pipeline. The capacity is not going to be sufficient to compensate, so, some of the new fields coming online in Yamal may not be developed to capacity. Others may never be developed, the gas may be left in the ground. There is an interesting analysis of this very question in the world energy outlook, in terms of looking at the role, the changing role of Russia in the global energy system, both in terms of oil and gas exports, as a consequence of their failure to compensate fully for the loss of the European market, you know, and the various estimates suggesting that, you know, that current share of Russian international trade in gas was 30% of the global market in 2021.
You know, under their announced pledges scenario, it could fall to 15% by 2030, and that is a reduction in income from 75 billion in – at 2021 prices, from 75 to 25 billion. You know, so, those are significant numbers, you know, and gas might get left in the ground.
I think the other point I would make is that…
Dr Daniel Quiggin
This just briefly, Michael, ‘cause we’ve only got a few minutes left.
Michael Bradshaw
Yeah, I would say is, you know, the other thing that the IEA did conclude was that the golden age of gas is over, you know, is that this has done lasting damage to the reputation of natural gas as being available, affordable, and acceptable, and so, I wouldn’t rush into too many new gas projects.
Dr Daniel Quiggin
That’s a strong and powerful statement to almost end on. I just wanted to again switch, and we’ve only got a few minutes left here, so just brief answers if you can, but really to the, sort of, the title of this entire discussion, in terms of the long winter and the impact that this is going to have on Europe. I mean, I think we haven’t really touched on, and I feel a bit bad that we haven’t touched upon it really, in terms of the impacts to consumers and vulnerable households of energy prices, which is obviously going to be hard, but – and severe. But I think the general consensus that is growing is that there’s enough gas in storage for this winter, it’s next winter.
But just in terms of picking up on something that you said in your opening remarks, Michael, in terms of the impact of business, Dina Mufti, I think I’ve pronounced her name correctly here, in the chat has asked one question that I’m picking up on here, which is, “Over the next three years, which business sectors in the EU will be most affected?”
I think there was a piece in the FT as well today about this, in terms of EU businesses start seeking to go over to the US. Maybe just a brief couple of comments from you both, Olena first, in terms of, maybe from your experience, in terms of Ukraine and businesses moving away from Ukraine and Europe and the impact on business sectors, and then briefly from you as well, Michael.
Olena Pavlenko
Well, in our case actually, again, we do not use Russian gas for a long – since 2014 actually, when, after the Revolution of Dignity, we started to import gas from Europe. Okay, there are discussions that there might be some Russian molecules, but again, we are buying gas from Europe in companies who use – d just use gas from Europe. So, in this case – and Ukraine is very, very energy-intensive country.
I don’t know how to provide an example of Ukraine, how businesses moved from gas in Ukraine to others, to other resources, but I can use an example of Germany, because actually Germany was heavily, heavily dependent on Russian gas. That’s – again, they suffer a lot now to decide what to do, if they want to move from Russian gas, whether they have to go to another source of gas, or they have to choose just another, you know, I don’t know, go to the hydrogen, or do the more energy-efficiency issues, and this is usually a hard industry, which actually created a lot of Germany GDP and was a basis of German economy.
So, I think these businesses, they will be – they will suffer the most. They will discuss how to switch from Russian gas to other projects, and again, what I see from German discussions now, they – notice they not – do not discuss whether they should immediately change, let’s say, to the gas from Qatar, but they also discuss, “Maybe we will already use, like, hydrogen, maybe we will already use some completely new ideas or new technologies to decrease gas consumption in the future.” And I’ve seen – I see this as a very promises – promising signs for us.
Dr Daniel Quiggin
Brilliant. Michael, you’ve almost got minus seconds, so, if you could just keep this very brief.
Michael Bradshaw
Yeah, yeah, I would just agree with that. I’d say, you know, one of the things we’ve already seen, through the supply chain problems, you know, industries like fertiliser production where natural gas is a raw material rather than a heat source, but also, you know, those that use – process heat, the ceramics, the metals industries, all of these things face challenges.
But, as Olena’s alluded to, they also are difficult-to-decarbonise sectors, where we’ve been wor – we’re thinking about how we’re going to decarbonise them. So, now is the opportunity perhaps to look where we can promote electrification where possible, and alternative sources of heat and hydrogen may be one of them, but not blue hydrogen, because the high cost of natural gas is going to create a problem for that in the next few years.
So, again, keeping the industry where it is means addressing deca – it always meant addressing decarbonisation. Now there’s another reason to do it.
Dr Daniel Quiggin
Brilliant, thank you both. Thank you so much for your insights, your opening remarks and the absolutely brilliant manner in which you answered a very diverse set of questions. We didn’t manage to get through everyone’s questions in the chat, so, I do apologise for that, but thank you all very much for your participation. There’s plenty of members’ events coming up. There’s plenty more to discuss, as there always is.
Next time, I would like to discuss a little bit more the energy transition and the impact of gas prices and oil prices on the energy transition, and focus a little bit more on that. That’s my own personal preference, but for now, I won’t take up any more of your time. It’s one minute past six. Have a lovely evening, and yeah, we all hope to see you very soon. Take care. Bye, bye.
Olena Pavlenko
Bye, bye, thanks a lot.
Michael Bradshaw
Bye.
