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An ‘Energy Cold War’ has begun

Europe is still buying Russian gas, but Germany has sent a strong signal by sealing off Nord Stream 2
Last Updated : 02 March 2022, 17:45 IST
Last Updated : 02 March 2022, 17:45 IST

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Russian President Putin finally attacked Ukraine, which was expected, on February 24. Again, as expected, the OECD countries, led by the US and EU, have imposed financial sanctions. But there has been no direct involvement in terms of sending their militaries to support Ukraine.

Also as expected, they have not imposed any sanctions on Russia’s energy sector. When interests are intertwined, as they are with Russian oil and gas supplies to Europe, it becomes difficult to take unilateral decisions. In the case of Venezuela and Iran, the US did not hesitate to impose sanctions on their energy sectors since there was minimum collateral damage to the US in doing so.

Sanctioning Russia’s energy sector would hurt both sides more or less equally. For Russia, oil and gas export earnings account for 60% of its total exports and nearly 40% of its federal budget. Europe, on the other hand, depends on Russia for 40% of its gas imports. In the short to medium term, Europe cannot meet its gas requirements if Russia stops gas exports -- one of its strongest weapons.

It can even be argued that the Russian economy can withstand the shock of a sudden drop in its export earnings from the loss of the European gas market, but Europe cannot manage without Russian gas supplies, especially during the winter months, although it must be noted that winter is about to end. It is this unequal position that has led the western industrial democracies not to impose sanctions on the Russian energy sector. In fact, the US had been warning its allies not to rely on Russian supplies ever since the first Russian gas pipeline to Europe was constructed.

Even before the Ukraine crisis started to dominate the news, the Nord Stream pipelines had been attracting unusual attention. In order to reduce dependence on Ukraine, through which Russia used to supply gas to Europe, it developed two Nord Stream gas pipelines through the Baltic Sea. Together, they have a combined capacity of 110 billion cubic meters (bcm). Nord Stream 1 was already in operation and Nord Stream 2 was ready to be commissioned once certified by Germany.

Initially, Germany was ready to approve Nord Stream 2 despite the US opposition to it. Germany’s current gas demand is 90 bcm. Thus, Nord Stream would have added to its energy security since gas would be piped directly from Russia to Germany. Currently, Germany gets most of its Russian gas supplies through Ukraine but some supplies through Nord Stream 1 also.

However, after the start of the Ukraine war, Germany decided not to certify Nord Stream 2. Thus, in a way, it can be claimed that it is Germany that has started the ‘Energy Cold War’. Whether Germany was ready and willing to start it or was pushed to do it will be known only when events unfold in the future. At present, it is difficult to predict how and when this Energy Cold War will end. It is possible that Nord Stream 1 may also be forced to shut down.

But it is a surprise that the western countries have not imposed sanctions on crude oil and petroleum products from Russia. This may be because even before the Ukraine Crisis, the oil market was sending signals that demand was exceeding potential supply. Some experts were predicting oil prices to reach as high as $125 per barrel.

In the event, prices did not skyrocket, as they had during disruptions in oil supplies in 1973/74 during the Arab embargo and in 1977/78 during the Iranian revolution. Soon after the attack on Ukraine started, Brent crude reached $106/b. But it then fell below $100/b. This shows that the US and its allies could have taken the risk of imposing at least partial sanctions on Russian oil, restricting the ban to only the developed countries. They could have used their petroleum reserves to put pressure on Russia. Such steps would have reduced Russian flexibility in selling crude oil and petroleum products. Russia accounts for about 10 million barrels per day (MBD) of oil production (about 10% of world oil production) and exports about 5 MBD.

While much is written about the political and economic impact of the Ukraine invasion in the short, medium and long term, there is hardly any discussion of how the oil and gas trade will change in the future due to the Energy Cold War. In the medium term, western countries will certainly reduce imports of gas and oil from Russia to a minimum. While there will be minimum impact on Russian oil production, its gas sector will suffer. It will not be easy to find a market for the large quantity of gas that it exports to Europe. This will be a big economic loss to Russia.

Russia will likely become a more active member of OPEC+ in the future, and unlike in the past, it may not threaten to unilaterally increase production, but rather lend more cooperation to OPEC.

In this Energy Cold War, India will face a difficult situation in terms of its relations with the Russian energy sector. The developed countries have the economic clout to cut off trading with Russia in the petroleum sector, but not energy-deficient India. It may have been relatively simpler to decide to abstain from voting against Russia in the UN Security Council, but India will have to pause to see how the West will look at any greater Indian involvement with Russia’s energy sector.

Yet, India should strategically place itself to promote large quantities of oil and gas (in the case of gas, it is mostly the import of LNG) which are likely to be available at attractive prices from Russia once the developed countries treat it as a pariah. In addition, India should also promote even greater investment in the Russian petroleum sector by Indian companies and by Russian companies in India. Energy transition to renewables will, however, make this a complex task.

(The writer is a former international oil and gas industry professional)

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Published 02 March 2022, 16:57 IST

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