War on Ukraine: The geopolitics of energy

James Sherr

Good evening, everyone. Welcome to this Chatham House on the record members’ meeting, War on Ukraine: Geopolitics of Energy. We have been handed a nearly impossible task. The geopolitics of energy is a complex and tasking sub – taxing subject, at the very best of times, and these are not the best of times. Oil, natural gas, delivered by pipeline, liquefied natural gas and coal are very different markets. Moreover, it is intrinsically difficult to reconcile the geopolitics of energy with economic and commercial reality, and it requires discipline, honesty and detachment to say where they cannot be reconciled.

I am here this evening to serve the clock, to ensure that introductory statements, conversation amongst the panellists, and audience Q&A all come to a peaceful and happy end in exactly one hour. When posting your questions, which you can do at any time, please use the Q&A line. For comments, you can use the chat line to your hearts’ content, so, they are two separate lines, and I will only notice questions from the Q&A line.

We have bios of all our speakers; I’m afraid probably you don’t, but we could not have chosen better speakers. The time does not allow me to give them justice in my introductions, but I will just say at the outset very briefly who is who, though I think some of them will be known to nearly all of you.

Olena Zerkal is Advisor to the Minister of Energy of Ukraine. Previously, she was Advisor to the Chairman of Ukraine Naftogaz and before that, when I first got to know her, she was Deputy Foreign Minister for European Integration.

Julian Lee is a recognised authority on international oil markets and since 2014, has been the – has been Bloomberg’s London-based Oil Strategist, and he follows Russian crude oil flows in detail.

Ed Chow is Senior Associate of the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, with 40 years of energy industrial experience across the world, including Russia, Ukraine, the Caspian and the Black Sea regions.

And I am James Sherr, Associate Fellow of the Chatham House Russia and Eurasia Programme, and Senior Fellow of the Estonian Foreign Policy Institute at the International Centre for Defence and Security in Tallinn, from where I am currently speaking.

Each of our speakers, in their introductory remarks, will speak for five minutes, and I trust they will not take it amiss if I am very strict about that. So, Olena, please, may I begin with you, as someone who is both a Ukrainian and a professional, and ask you to present a brief overview of Ukraine’s interests in this area, and how you and Ukraine view the connection between those and the interests of Europe?

Olena Zerkal

Thank you, James. It’s really an honour to me to be among such distinguished speakers, and I would like to start with a statement, or where I have a question to myself as well. What is the main challenge we now face in energy, and of course, in the issue you just put forward concerning the necessity to reconcile the energy challenges in UA, in Ukraine and those in the European Union or in Europe?

And I think that the main challenge is now unity. However, we all face another challenge; it’s of course dependence on Russian energy sources. We here in Ukraine passed through the very difficult period where we had to fully change our consumption and the way how we imported gas for our own needs. In 2014, we had 92% of our imports from Russia. That was 51% of our consumption, but in few years, despite the all difficulties, we managed to diversify our sources, and to stop consume Russian gas.

At the same time, during this period of time, European Union increased its dependence on Russian gas, and we face now the consequences of this strategic mistake. Definitely, it is a very difficult time, and we know that Putin power is based on the oil and gas revenues, and this year, he may earn at least 250 to 300 billions of dollars, only due to the fact that last year they pres – they provided very intensive policy and definitely deepened dependence on Europe on these gas and oil supplies.

We tried to persuade, last year, Europe in necessity to pay attention to the Russian policies, how they proceed with the gas and shorten the supplies to Europe, but we have not been heard. At the same time, in Ukraine we now have a situation where we face a deep crisis in oil consumption, and oil product especially, because we consumed mostly from Belarus, and rely upon imports from the Black Sea, and we lost, at the beginning of the war, all these two sources of supply on oil products. And after dest – Russia destroyed completely one of our biggest refineries [interference] – I have something with the sound.

James Sherr

We’re hearing you very well.

Olena Zerkal

Okay. So, Russia destroyed completely our refinery, and we had to invent new logistic routes, how to supply Ukraine with diesel, with fuel, and with oil products. For us, it was a biggest challenge, one of the biggest challenge in this war, but at the same time, Europe now face the biggest challenge of interruption of gas supplies. So, we are on the same boat, and we very much rely on the support of Europe, in different respects, and we know that the turmoil of the situation may destroy this unity.

And today’s decision of Canada to return the turbine to Germany in order to fulfil a, kind of, desire of Russian Federation to maintain Nord Stream 1, despite the absence of such a necessity, just provide us with a new argument concerning the Russian policy on the ruining of the unity. And we’re very much afraid of such a possibilities, because definitely, Russia pursue this policy of different approaches to different countries, and we know how much reliant, for instance, Hungary is on Russian energy resources, in oil and in gas. And we do understand that next months will be very crucial, because Russia may lose its strongest source of revenues, and lose the status of the energy superpower.

That should be done, but that can be done only together, and these times will be very difficult, not only for Ukraine, who face every day shellings and destructions, but also for Europe, whose population now will have to go through huge inflation and other economic challenges, based on the Russian aggression and Russian energy war. Thank you.

James Sherr

Thank you so much, and thank you very much for being to time as well. Julian, how do you see the impact of the war, and all of the Western sanctions packages on oil markets, both with respect to Russia and ourselves? Julian, you’re muted.

Julian Lee

Thank you, James. Oil is undoubtedly the mainstay of the Russian economy, and oil exports are probably even more important in revenue terms than natural gas exports. And following the Russian invasion of Ukraine, several countries, including the United States, the United Kingdom, the European Union and Japan, have announced that they will either phase out purchases of Russian oil, both crude oil and refined products, or they will impose sanctions.

The problem is that most of those will only come fully into effect by the end of the year. Only the US has actually imposed sanctions more quickly than that, and they were a relatively small importer of crude oil, and a more important importer of a refinery feedstock known as vacuum gas oil. But being a small importer, they have much greater ability to switch suppliers, either from their own sources or from elsewhere, which is what they are doing.

There has however been a significant amount of self-sanctioning by European buyers, and by many of the bigger traders in Russian oil, and that has meant that there has been a dramatic shift in how Russian oil is moving and where it’s moving to. Most of Russia’s traditional buyers in Northern Europe have disappeared. There is almost no crude from Russia now going to anywhere in Northern Europe, with the exception of very small, occasional volumes going to Poland and Finland, under term contracts that are moving towards expiry, and into storage tanks in Rotterdam, and that is one area, I think, that the world needs to look at more closely, is whose those storage tanks are and where that oil is going.

Most of the oil that is now not going to Europe is ending up in Asia. India has stepped in and has emerged now as the second biggest buyer of Russian crude oil shipped by sea, behind only China. While that has certainly thrown a lifeline to Russia, in terms of the volume of crude that it is able to export, it has imposed some significant extra costs. The journey time is at least four times as long as it is to Europe, the shipping costs are much more significant, and in order to move oil into India, Russia has been forced to offer significant discounts.

The flows initially were up in total; they are now down. Overall, they have been trending lower for the last month or so, but they are still at about three million barrels a day. The big problem that the world has is that there is relatively little spare capacity to substitute for Russian oil, whether that is crude oil or refined products. We are currently drawing at least a million barrels a day out of US strategic stockpiles. That can’t go on forever.

The other big producers in the world, Saudi Arabia, the United Arab Emirates, have very little spare capacity to offer, and that is going to make things very, very difficult. I think it’s going to be a toss-up whether we get recession first, which brings down oil consumption in the West and will bring oil prices down with it, or whether we get a spike in oil prices because of a lack of supply.

The proposal to impose a price cap on Russian oil certainly has the right goal in mind, to cut the revenues that Russia earns without cutting the volumes, but I am very sceptical as to whether it will work, and I am very sceptical as to whether Russia will agree to export oil at an externally imposed, capped price, and I think that is going to cause real difficulties going forwards.

James Sherr

Thank you for that catalogue of grim news.

Julian Lee

I’m sorry it’s not more positive.

James Sherr

Well, no, and that’s what you’re here for, and that’s what I would be doing in your place. Ed, see if you can add the gas dimension to what has been said, and also connect the dots, if you’re willing.

Edward Chow

Thank you very much, James. First of all, I’d like to say that there should be no doubt where my sympathies are. I’ve worked on and in Ukraine for more than 20 years. Many Ukrainian friends, colleagues and their families are suffering terribly right now. However, as an Energy Analyst and Practitioner, I have to be objective and realistic, even at the risk of offending people who share the same sympathies. In the limited time that I have, let me make five points to inform our debate and to provoke discussion.

First, there is no substitute for hardnosed military power in response to Russia’s unprovoked, unjustified and brutal war against the very existence of Ukraine. If the objective is to end a war quickly, then a Western-imposed no-fly zone from the beginning, or freeing Ukraine of Russia’s naval blockade even today, would do the job.

For reasons beyond the scope of this discussion, Western leaders chose instead to support Ukraine by arming it sufficiently to prevent a Russian victory. Even then, these efforts often seemed to be a day late and a dollar short. Economic sanctions take a long time to work, if at all. Our sanctions are notoriously leaky, as we saw in Iraq and Libya. Ultimately, direct Western military intervention led to the fall of Saddam Hussein and Muammar Gaddafi. The regimes in Iran and Venezuela are still standing after years of American sanctions. Meanwhile, Ukrainians are dying and their country is being destroyed.

Russia is the world’s largest exporter of oil and gas combined. No sanctions targeted at reducing Russian exports can avoid causing major turmoil in energy markets and a sharp jump in prices. There is simply no ready substitute for Russian volumes in the short or even medium-term.

To illustrate, Russia exported more than 7.5 million barrels per day of crude oil and petroleum products. President Biden will travel to the Middle East this week. Even if Persian Gulf producers, who have some spare capacity, agree to his request to increase production, a generous estimate would have extra two million barrels per day flowing. More likely, a small symbolic gesture would be extended to the American President.

By focusing on oil and gas sanctions, the West is actually combatting Russia on its preferred field of battle, where it holds the advantage in the short run, even as it suffers longer-term consequences. What’s more, Western leaders have not prepared their own populations sufficiently for the impact of sanctions, at least not in the United States. Consequently, a protracted war with severe economic consequences risks the fraying of the Western alliance supporting Ukraine.

As James can explain better than me, Russians will accept these odds, and are more adept than the West in this fight, for example, by shifting the field of fire from oil to gas. In energy trade, as in war, logistics matter, and the transportation of gas is more difficult to change than oil. Russian gas is much harder for Europe to replace, and gas means less to Russian revenue than oil does, as Julian pointed out.

Lastly, it’s been less than five months since February 24th, when the world, including the energy world, changed, maybe forever. People forget the Arab oil embargo of 1973 and 74 lasted only five months and was directed at a few countries only. We have no idea when and how this war will end, but its consequences are likely to be as great, if not greater, than the twin oil shocks of the 1970s.

Energy transitions take a long time to achieve, much longer than Politicians promise, because of the scale of capital investments required, long lead time and implementation, even assuming that we have the necessary technology. When the Iranian revolution happened five years after the Arab oil embargo, the world was no better prepared to face another energy shock. There are simply no quick fixes. Energy supply and demand are balanced at a knife’s edge. If Western leaders want to avoid severe consequences, they’d better find – severe economic consequences, they’d better find ways of ending this war quickly, beyond energy sanctions. Thank you.

James Sherr

Good, thank you very much. Sober, gloomy and gloomier. We now have a few minutes to comment on one another’s remarks and contest them, if we wish to. Let me just begin with a wry observation that, although it surely would not have been Edward’s intention, Vladimir Putin could not be distressed by what you have said. Many of you will have noticed his recent speech at the Russian State Duma – there was a Financial Times article about it, and he said something particularly about energy. He made a point, which he’s made all along about sanctions in general. “Yes, they’re hurting us, but they’re going to hurt you much more than they hurt us, and we can deal with this, and you can’t,” and any increase in sanctions, and, he implied, even the implementation of current sanctions, is going to cause global energy market chaos.

So, the other side of it, though, is that there are some energy specialists, not in this room, whose view, and they can document their views very well, is that, particularly with regard to gas, a – anything more than a relatively short-term cut-off of energy supplies, of natural gas supplies to Europe will, on a monthly basis, be having more and more ruinous consequences for the Russian economy.

So, there is some kind of a balance here, and one has to ask, it’s not the first time this question has been posed, are we really – are we here, as well as in other respects, locked into a contest with Russia for stamina and endurance? So, anyone want to pick up on that broad theme, or anything else at the moment? I can’t see you all at the moment, ‘cause I’m watching Q&A, so, just jump in, please.

Julian Lee

Okay, well, I’ll jump in. I mean, I think, to some extent, yes, we are entering into this, kind of, contest of stamina, and I think that the comment that was made early on, while President Putin may seem to have the upper hand at the moment in terms of the amount of economic pain that will be caused by sanctions, I think there are very, very real long-term damages that are being done to the relationship between Russia and Europe.

I mean, it’s always easy in this kind of a situation to say that, you know, the 40/50-year history of Russian-European energy trade has been irreparably damaged by the invasion, and that Europe will learn from this and will never become dependent on Russian energy again. And I’m not entirely convinced that our political leaders are always quite as savvy as that, or that the next generation of political leaders will quite have the memory of this particular disruption, just as current Ministers don’t have memories of previous disruptions, as Ed mentioned.

So, I do think that in a post-Putin world – and I think it will have to be a post-Putin world, whenever that is, there will be some kind of rapprochement between European countries and Russia, at least as far as some energy trade is concerned. I do hope and think that European countries will think very carefully about the extent to which they rely on Russia or, frankly, on any other single supplier of oil and gas.

But one thing that has struck me very negatively, in terms of the European, and indeed the broader international response to this, is that we quite clearly have a crisis of supply and demand. And if it’s not a crisis now, it’s rapidly escalating towards one, where there isn’t enough supply to meet demand, without current levels of Russian exports, and yet nobody is taking steps to dramatically cut the consumption of oil and gas in European countries, or anywhere else.

We’ve got Politician-after-Politician around the world cutting taxes on fuel prices, which is going to boost demand. We’ve got Politicians refusing to do anything about grants for insulating houses, any kinds of restrictions on use of vehicles, anything that takes serious steps to cut demand, and at some point, we’re going to have to do that. And if we don’t do it as a matter of decision through policy, we are going to end up doing it because either we go into recession, or prices continue to rise to a level that demand is choked off because people simply can’t afford the consumption levels that they’re enjoying at the moment.

James Sherr

Well, I don’t think any of you will object if I say that before the 24th of February, European and Western energy policy was not being made by people who were strat – who had a strategic focus about energy policy. It was being made by other sorts of people for other sorts of reasons, and the question, I think, you raise and Ed has raised as well is, what is there to suppose that that is not still the case? You know, anyone who looked at this whole issue, from the time the Germans decided to scrap nuclear power after Fukushima, would have asked, “Do we really know what we are – do we really have any idea what we’re doing and where we are going?” ‘Cause there’s been – this whole subject has been driven by all sorts of causes, including green energy, one needs to say, which we’re not here to discuss.

And so – and now, suddenly, we have taken exceptionally radical decisions, and one has – anyone who has faith that the people who have taken these decisions understand their implications, I would like to hear that faith justified. Olena, do you have – is there anything you’ve heard so far you want to come back to?

Olena Zerkal

Yeah, I do want to come back to, because I think that we have a relevant experience on cutting up not only supplies, but also demands. We significantly decreased our consumption…

James Sherr

By we, you mean Ukraine.

Olena Zerkal

…and especially – yes, I mean Ukraine.

James Sherr

Yes.

Olena Zerkal

And now we work on farther decrease of consumption, because this is an issue of surveillance. We produce enough gas to survive this winter. It’s definitely much less than we usually consume, but we see the fear in Germany that they may not survive, with the necessity of decrease their consumption. I read the report of International Energy Agency, how to decrease consumption; only by decreasing temperature by one degree in the wintertime, you may save 40BCM.

So, it’s not a big deal to decrease one degree of your heating station, and then not to rely so much on Russian gas. You know, Putin is very much hope on this turmoil, and that this turmoil will ruin everything, and that economic winters will prevail. Yes, they do supply 7.5 million barrels, but that’s their overall supply, not only for Europe. Europe consumes half of this, and definitely, this amount of oil may be substitute, and we now even see their shift in prices.

At the same time, I don’t know how it’s possible, or hardly possible, to implement this policy of the price cap, and for me, it’s a matter of interest and the point of the discussion, how do you see the possibilities to implement this initiative of G7?

James Sherr

Just as a footnote, Julian, in his initial remarks, raised an interesting point that doesn’t appear to feature even in the intelligent mass media, which is that the issue is not simply Russian supply, the issue is who actually owns most of the gas storage facilities we rely upon. You know, we have had a lot of mixed ownership and joint ventures in this entire business, and so, the whole issue of infrastructure relates to this, but in a way it’s separate, and people who are framing the sanctions policy, I’m not sure to what extent they have been thinking about that. Julian, I don’t know if you want to substantiate that point further.

Julian Lee

Well, I think there are two points here. I mean, one is, you know, who owns infrastructure in Europe? And there are, certainly in the oil space, there are several key refineries in the Eastern part of Germany and on the Italian island of Sicily that are owned by Russian oil companies, either entirely or in substantial part, and that is creating difficulties.

I mean, if you look, and at Bloomberg, we’re looking at the flows of Russian oil by ship very closely on a ship-by-ship basis, and you can see a big jump in the flows of Russian crude going to Italy and to Bulgaria. And the reason that that is happening is that there are Russian-owned refineries in both of those countries that, because of sanctions that have already been imposed on them, are unable, even if they wanted to, to buy crude from anywhere else, because they can’t get the letters of credit, and they can’t get the insurance that they need to allow them to trade.

So, they have been forced, one way or another, to take Russian crude because it’s the only way they can continue to operate, so, we’re seeing those flows increasing. We are seeing some steps, and they’re very tentative steps at the moment, towards potential nationalisation of some of these assets, including gas storage fa – capacity that is owned by Gazprom. So, that’s one area of concern.

The other issue is actually how much Russian crude is actually Russian, and if you look at a lot of the analysis of “sanctions-busting”, although it’s not sanctions-busting because the sanctions aren’t actually in place yet, but if you look at what a number of organisations are saying, and the fingers that are being pointed at companies that, they say, are still buying Russian oil, much of it isn’t. I mean, the crude that comes out of the CPC terminal, which is entirely separate from the rest of the Russian network, 90% of that comes from Kazakhstan, and if you were to embargo that, you would do far more damage to the Kazakh economy than you would to the Russian economy.

But even much of the crude, or a proportion of the crude that is exported as Russia’s – Russian Urals blend is actually not Russian, in any, sort of, ownership term, because countries like Kazakhstan and Azerbaijan and even Turkmenistan, export some of their crude through the Russian pipeline system. Now, it’s all blended together to make a standardised export-grade, or two standardised export grades, but some of those cargoes don’t belong to Russian companies, they belong to Kazakh or Azerbaijani or Turkmen state oil companies, and those exports are generating revenue for them.

Yes, there’s transit revenues, there may be duties payable on it to the Russian Government, but they are not wholly Russian crude, and we have to be careful, I think, when we look at the focus of sanctions, is what actually is Russian?

James Sherr

Ed, can one extend that point, to some extent, to pipeline gas, in view of the Kazakhstan factor? In your view, and of course, you have worked in Kazakhstan for quite some time, what is their attitude, and how do they – how do you see them responding to the steps that the EU, the United States and the G7 have taken? You’re muted.

Edward Chow

James, my inclination is to believe that for most countries of the world, Kazakhstan not being an exception, views this fight as a fight between the West and Russia, and they would rather stay out of it than to be in the middle of it, for their own national self-interest. And I think largely they are correct, that Putin is waging a war through Ukraine against the West, not against India or China or other countries. So, the level that the West and Western Politicians are taking this seriously is really, really important and critical to the answers to the questions, including some that have been posted in the Q&A area.

There needs to be a level of understanding of the seriousness of when – if and when Russia cuts off gas, what happens to European industrial processes, if you are running a petrochemical plant, or aluminium, or glass, or steel, it’s not like your industrial processes can stop? You know, it needs to be continuous. So, the self-sacrifice of turning down your – the thermostat in the winter, or turning it up in the summer, along the lines the Japanese did after Fukushima, I’m not seeing Western Politicians talk that way. Instead, they’re giving the impression to their population that this is a short-term problem and it will be over, you know, in half a year or so, and everything will be fine.

No, we’ll still be in very precarious position, as Julian described, months and months from now, if not years. So, a lot of the energy transition work, a lot needs to be started and sustained over a long period of time.

I want to return to one other question that came up in our discussion, which is this price cap idea. I have to say that I have not met a single industry expert who believes that a price cap can work. Now, granted, this is a limited sampling of people I know after 45/50 years in the industry, but I’ve yet to hear anyone explain convincingly how a price cap can work. It strikes me – I used to teach graduate seminars at universities in Washington on energy security. It strikes me as the kind of idea a group of graduate students would come up with, which the Professor welcomes because it’s a great teaching moment to explain the practicalities of how markets work, how the industry works and so on.

But it is going to go the way of the US Treasury Department proposing a floor on corporate taxes in the OECD, I mean, which is also going nowhere, and we’re talking about coming up with a scheme on price cap that may or may not be put in place, not in a few weeks’ time, but by the end of the year. That is way too long for the Ukraine to wait to – for the West to figure out what is the best way of stopping Putin’s war on Ukraine, which I think really needs to be pointed out.

I have an alternative proposal, which I’ve spoken privately on in Washington for many months, and more recently publicly, of putting…

James Sherr

I’m going to ask you to delay that for a moment…

Edward Chow

Okay, fine.

James Sherr

…for two reasons. We have lots of good questions that have now accumulated, but also, at the end, I’m going to ask you, before we close, the “chto sdelat, what is to be done” question, and then I’d like each of you to comment. So, let me now turn to the audience. For the sake of time I’m going to read out the questions rather than call on you. Valeriu Paşa has asked, and forgive me if I’m mispronouncing your name, “Would you comment on what problems you anticipate the Russian gas industry is likely to face if it totally halts gas exports to Europe?”

Edward Chow

Well, if I may, since I’m still unmuted, and let me jump in. I think it will cause Russian gas export a huge challenge, for a couple of reasons. One is, in spite of all the bravado about shifting a market to China, these things take a long, long time. The original Power of Siberia pipeline took ten years to negotiate. I am not sure that they have a deal finally yet on Power Siberia 2. In preparation for this seminar, I checked my sources in China, and they are expecting maybe flows from Power of Siberia 2 by 2027, was the year they gave me, so, the – and that’s only diverting 50BCM a year, not the 150 that Russia used to sell to Europe.

So, one thing to watch for is to see, if the Russians do apply a asymmetric response to Western oil sanctions by cutting off gas, whether we’ll see a lot of gas flaring in Ru – even more gas flaring out of Russia.

James Sherr

Okay. Unless someone desperately wants to jump in, let me take two questions, which are related, they’re opposite sides of the coin, respectively from Sergei Bondarchuk, and from Wolfram Parge, if that is the correct pronunciation of P-a-r-g-e, and really, they’re asking you to speculate on what is going to happen, but I’m going to broaden this. The question was about natural gas, but I’m going to broaden it to include oil as well – to Russian supplies and Russia’s place as a supplier, if – the question was raised, in terms of after Ukraine wins, and then the unpalatable question, which I always ask in myself, is, and what will its place be if Ukraine actually loses, that is to say, seen to lose this war?

Julian Lee

I will jump in at the moment. I mean, I think that Russia is going to face a very difficult job in restoring gas flows to Europe to anything like their previous levels, for as long as Putin remains in power. This is very much seen as his war, his invasion, him and the, you know, the closest people around him, I think, are seen as the architects of this rather than Russia as a nation. So, in a time, as I think I said before, in a time when President Putin is no longer running Russia, however that comes about, then I think there is scope for renegotiation of some of these deals.

But I do think that what is happening now is a wake-up call to Europe about its energy-dependence, not just on Russia, but on a whole host of countries that surround Europe, whether that’s North Africa, the Middle East, Russia, and the energy transition that is underway is an opportunity for Europe to become more self-sufficient in energy. It’s not going to happen overnight, it’s not going to happen by the end of this year, but with a combination of investment in, if you like, indigenous resources in Europe, whether those are hydrocarbons or whether they are renewables, combined with sensible policies on energy efficiency, energy consumption, reducing energy wastage, that, I think, creates a very difficult situation for Russian gas going forwards in the longer-term.

When it comes to this switch from sending gas to Europe to sending it to Asia, you know, one of the things that Nord Stream has shown us is that Russia remains very dependent on technology from outside the country, and in the case of Nord Stream, clearly it’s compressors that are Western-made, Western-maintained, and that will make it, I think, even more difficult for this – the wholesale switch to piped oil and piped gas to China and, you know, even to India, which is being talked about.

James Sherr

Thanks a lot. Olena, please, come in.

Olena Zerkal

I would like to come back to the topic of the main purpose of the war, because this war is not against just Ukraine, this war is against West. So, that’s why we need to specify the definition of the victory and the loss of Ukraine. What is the victory for Ukraine, and what can be considered as the absence of this victory? Because definitely it’s very much connected to the energy war, because Putin has simultaneously two wars. One war in Ukraine is a conventional war now, but another war is non-conventional, this is an energy war, and this energy war is against the West.

And definitely now we need to be, kind of, together against this war, but at the same time, I think that he has his own bluff with this dryness of European market, especially in gas. Their underground storages are full. Yes, they may burn all this amount of gas, but they can burn all the Siberia with all this amount of gas, because otherwise they will need to send this gas back to Europe. They don’t have any other option, and they are very limited in their possibilities to proceed with this bluff. They have around 70BCM of underground storages capacities, and they are almost full.

James Sherr

Thanks very much. So, you can see why even, you know, experts come together with very different, well-substantiated views as to who, over what period of time, will have the upper hand in this situation. Julian, I have a very specific question to you from John Lough. “What is your view of a tariff on imports of Russian oil instead of a price cap?”

Julian Lee

I certainly think a tariff is much easier to implement. I think that, in that sense, it has perhaps a greater chance of success than a price cap, which I really don’t see how that’s going to work. I think that the problem that anything like this is going to run into is, who will agree to implement it and who won’t? And I don’t see either China or India agreeing to impose a tariff on Russian oil imports, and that’s going to leave a very big market open.

What we do have to recognise, I think, is that while headline oil prices on the international market are above $100 a barrel, the price that Russia is actually getting for its crude, if you look at figures from the Ministry of Finance, certainly last month, was much closer to 80, when the global price was above 110. So, there is a very steep discount there, but it’s nowhere near big enough to choke off the flow of funds into the Kremlin that is being used to prolong this invasion.

James Sherr

Two related questions now: one from Joel Cutting and another from Craig Kennedy. I’m not sure whether you’re the Craig Kennedy I know, but basically, they’re both questions about whether the situation is strengthening China. There are some, I confess I’m not one of them, who believe that whatever the dynamics of this and however it ends, China wins. I confess, I’m not one of those, but that’s another subject of discussion, but your take on that, and I would also – I would be interested in Olena’s view, because China’s role in Ukraine economically, before this war has been progressively increasing, and how does that filter into everything else? So, Ed, do you want to come…?

Edward Chow

Sure. Yeah, it seems to me, if you’re sitting in Beijing, you know, you – it’s almost your job to try to take advantage of the situation, which is to buy deeply discounted Russian oil, and you would do the same if you were in Delhi, which Prime Minister Modi explained at the recent G7 Summit. So, no, but I take your point that, you know, it’s not a glass – a full glass for the Chinese either.

China was Ukraine’s largest trading partner, except for the EU as a bloc. So, China had equities in Ukraine and had long-term plans, so – but also, you have to look at Chinese view of Russia as a long-term partner. If there’s anything that this Chinese leadership wants more than anything else, it’s order. And here you have a neighbour who is disorderly, unpredictable and, certainly in the first few weeks of the war, incompetent at the same time. So, how – what kind of a partner does that make?

So, I think the Chinese will be drawing great lessons from this, and will be examining it, and will be cautious in their approach to Russia, no matter what the rhetoric says. You know, the rhetoric is one thing, only Western Politicians telegraph their intentions by talking too much. Chinese don’t do that, by and large, so, I think it’s a mixed bag for China.

James Sherr

Russia disguises its intentions by talking too much, that’s the difference. Anyhow, I want to get in one more question, because I then need to come back to all of you for the “what is to be done” question, I think this is very important, and I then, you know, have to apologise to everyone else who has asked – who have asked some very good, interesting and sometimes provocative questions.

But just, if I may, a final question from Thomas O’Donnell, which is intentionally provocative, but very useful, and he says, “To kill gas and oil demand, look at how the French built 57 nuclear plants in just over 15 years, spurred on by national security, and that was 50 years ago under Monsieur Messmer.” What stops us from adopting such an approach? I can anticipate your answers, but do you see reality forcing us into putting national security at the very centre of energy, and shifting the focus to nuclear?

And there was another question, earlier on, I’ve lost the name at the moment, which was important, about the nuclear energy factor in the war, as we are looking at it, not just with regard to nuclear safety in Ukraine and Zaporizhzhia and Chernobyl, but just the impact of what is taking place on the nuclear industry? So, if you could all address that, and then I’ll ask you to give us your prescriptions. So, Julian, back to you. Up to you, who wants to start?

Julian Lee

Okay, well, I mean, 15 years is obviously not overnight, and I think there is very much a question of timescales here. I mean, you know, what can we do in the next five to six months, what can we do ahead of this coming winter? And to my mind, that is all about demand management, building up stockpiles, if we ever had anywhere to store gas, which we don’t in the UK, because we’ve allowed it to crumble, but building up stockpiles ahead of winter, and taking serious steps to limit demand is the first step.

The logical second step is building resiliency within the country, whether that is building small-scale nuclear powerplants that can perhaps be built much more quickly than the traditional, very large powerplants, building the renewable infrastructure, building the storage infrastructure that is needed. This should be a real wake-up call to Europe and other countries about the fragility of historical dependence on long-distance energy security, whether it’s with Russia, the Middle East or anybody else.

That has – those flows undoubtedly have a role to play, but allowing any particular area to control 30, 40, 50% of your energy, I think, is being shown to be a very short-sighted policy. And so, the response to that should be, absolutely, we should be building certainly more local energy supply, and we should be taking a much more robust view on energy demand and energy waste.

James Sherr

Before coming finally to Ed and to Olena, I think it’s worth quoting what I think is a very authoritative insider view of the Russian state, which is this. “The West has imposed total economic war on us, and we must do the same, not by reacting, but by taking the initiative, and that means using all the potentials at our disposal to defeat the West,” and of course he mentions energy, but he also mentions food. And he says, and it’s the most important point, “We must use all our potentials to change the internal situation in Western countries to Russia’s advantage.”

So, anyhow, all of this is there. Perhaps you might, Ed and Olena, factor that into your replies.

Edward Chow

Yeah, I think…

Olena Zerkal

Thank you, James.

James Sherr

Olena, please.

Olena Zerkal

Me?

James Sherr

Yes, please.

Olena Zerkal

Okay. It’s not an easy question, but, you know, all crises helps us to improve ourselves, and the war is of course the main booster for improvements. We don’t have any other possibility, either to change our behaviour and to increase our efficiency or to die. And this is not just a loud sentence, because for us it was the main challenge, to connect to the European grids in four hours before the war started on the 24th of February, and we managed to survive in an island mode for three weeks.

Now we have a possibilities to export electricity to Europe, and we have a possibility to export now at least 1GW, but we are limited in 100MW now, due to the necessity to prove our technical capability to operate in the European environment, and we already proved this capability. So, we may not only ask for the financial support and unity, but also prove our reliant and to be a reliable partner in energy security, because we do have these nuclear powerplants and they’re operational, despite all factors.

And definitely for us it’s also an issue of income, but we are very much confident in the sufficiency of our nuclear power operation, because we diversified supplies and we have now few not from Russia, but from Western house. That help us to go through all these challenges we face during the wartime, and be more confident in upcoming winter due to the fact that we are self-sufficient in gas and also, electricity.

But at the same time, we do understand that it will require a lot of efforts, not only from us, but also from our partners, in order not to let Putin use all weaknesses of European energy system and their reliance on Eur – Russian energy resources. Because he knows perfectly that he’s too strong in the energy supply, and that Europe may decide that it not worth to protect Ukraine, but it’s not about Ukraine, that’s about the world order, and that require a lot of effort.

We cannot be protected by US armed forces, or NATO, or other means. We can only rely on our own resources and energy resources, first of all, and that’s why I think that development and farther maintenance of our energy independence is one of the crucial points, not only for Ukraine, but also for everybody in Europe.

James Sherr

Thank you, Olena, we must leave it there. Edward, last word to you.

Edward Chow

Very quickly, ‘cause I know we’re short of time. I suspect that Tom O’Donnell knows the answer to his own question, which is that society needs to be willing to pay the cost, the premium that’s required for energy security on top of basic energy costs, and the Politicians need to be willing to invest the political capital to explain to the population the seriousness of the situation, and I don’t see either yet.

Last word, and I agree with Julian that the import tariff idea has a better chance of working than the price cap idea, partly because it was one that I proposed some time ago, but, more seriously, it has a couple advantages. One is, it can be imposed only by Western countries who are participating. We don’t need the Chinese and the Indians to co-operate on this, because commercially, they would have no reason to pay a higher price for Russian oil other than the market price net the Western tariff. So, the idea again is to focus on oil revenue rather than oil volume.

The other advantage, which is part of my proposal, is that any tariff collected should be dedicated for – to support Ukraine and future Ukrainian reconstruction, which is going to be a huge challenge in the years and decade ahead, so, we need to start preparing for that as well.

James Sherr

Indeed, and although I have a great deal to say, I’m not going to say any of it, because we have already used up our five minutes of reserve time. So, it remains for me simply to thank three highly expert speakers, talking from rather different optics, to the audience for some very stimulating questions, only a fraction of which we were able to – I was able to choose and you to reply on, and we look forward to seeing all of you soon, and hopefully in better times. Thanks, and goodnight.

Julian Lee

Bye, bye.

Edward Chow

Thank you.

Julian Lee

Bye, bye.