Europe is severing its energy ties with Russia. The problem: there are not many alternatives

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The war in Ukraine continues its course and the economic sanctions are now joined by all the moves that are turning Russia into a pariah state with a collapsing ruble. To the closure of air spaces or the boycotts of large technology companies such as Twitter, Facebook or Google are now also joining the ruptures of gigantic commercial agreements with large Russian companies in the energy sector. That has unpredictable ramifications.

BP and Shell cut with Russia. Shell has announced that it is abandoning its joint venture with Gazprom. that includes leave your share in various large projects with the Russian giant, such as Nord Stream 2. It had a 27.5% stake in the Sakhalin-2 liquefied natural gas factory, and 50% in the Salym Petroleum Development NV joint venture, and the According to Shell, the economic value of these agreements was about 3,000 million euros in 2021. The BP thing is even bigger: it will get rid of its stake in the Russian oil giant Rosneft PJSC, which was worth about 25,000 million dollars. The British company was one of the first to establish itself in Russia after the collapse of the Soviet Union, and its ties to the country and its oligarchs were somewhat contentious. indicate in Bloomberg.

And they are not the only ones. There are several more divorces of Western companies with the Russian energy giants. The French TotalEnergies has announced today that it will not make new investments, but is not talking about cutting existing ones: it has a 19.4% stake in Novatek — the largest Russian producer of liquefied natural gas — and other important agreements in that sector. Exxon is in the spotlight and there are pressures so that it also abandons its alliances with Russian companies such as Rosneft, while the Norwegian Equinor also has announced abandoning its positions in Russia. Interestingly, some giants in the sector in the US are not making any moves at the moment. It happens not only with Exxon, but with Chevron, which only has said that is monitoring the situation”. There are many other Western companies involved that could also take action soon, they indicate in Reuters.

Who needs whom more? This unique pulse between Russia is no longer with Ukraine, but with the rest of the world, which has decided to cut ties that maintained that energy balance that is now compromised. In The Washington Post affirm that Russia needs European money more than Europe needs Russian gas: the old continent is the customer par excellence for its gas exports, and according to these analysts, Europe can diversify its supply “relatively easily”. If we have not done it before, they point out, it is because Russia was still quite cheap and everything was going smoothly.

Gas Oil

Countries with the highest production of oil (left) and natural gas (right) in 2020. Source: Statista.

Russia produces oil and gas like a beast… In 2020, Russia produced 10.67 million barrels of crude oil per day and was the third largest producer in the world. Only Saudi Arabia (11.04) and the USA (16.48) surpassed it. Russia was also the world’s second largest producer of natural gas in 2020 (638,000 million cubic meters) behind the US (914,600) and ahead of Iran (250,800) and China (194,000).

… and also exports it in a big way. The country presided over by Vladimir Putin has the advantage that it consumes much less than it produces (3.2 million barrels a day in 2020), so it is a major oil exporter. China is its largest customer by far: in 2020 the value of exports there was according to Statista of 23,769 million dollars, but Europe is a great client and countries such as the Netherlands (9,418 million), Germany (6,280), Poland (4,177), Italy (3,741) or Finland (2,756) have Russia as their main supplier.

Three quarters of the same thing happens with gas: there are countries that depend 100% of Russian gas (Macedonia, Bosnia Herzegovina, Moldova, Finland, Latvia), and others with significant dependence. Bulgaria 77%, Germany 48%, Italy 46%, Poland 40% and France 24%. Spain imported 10.43% of its supply in 2020: here the gas comes mainly from Algeria and the US.

And then what will we do if we run out of Russian oil and gas? In Europe these cuts force to diversify. In The Economist already they pointed it out last October, and the so-called southern gas corridor poses one of the alternatives to avoid dependence on Russian gas. It will not be easy to do without Russia, and in fact the United States, Qatar and Australia, which are the world’s largest exporters of liquefied gas, are exporting almost at the limit of their capacity. The Qatari Minister of Energy, Saad al-kaabi, has already indicated that in the short term it was non-viable replace the supply that Russia provides to Europe.

Renewables are an option more for the future than for the present —Germany wants that 100% of its supply will be from those sources in 2035—but the dependency is clear. In fact, Europe continued to buy gas from Russia these days despite the sanctions, as explained in Business Insider.

Price escalation in sight and potential “renaissance” of nuclear energy. These movements reinforce the enormous economic pressure to which Russia is subjected, but the impact will also be notable in the rest of the world, where crude oil prices are expected to rise significantly -they are already doing it-. Fred Smith, founder of FedEx, explained the impact of a conflict that is basically “an energy problem… is going to be a punishment for consumers”.

Rising gasoline prices will lower consumption, and policymakers could raise interest rates, which Smith says will cause “a reduction in gross domestic product. 2022 may not be the year of GDP growth as everyone was waiting.” There was another interesting note from this director: “Nuclear energy is going to have a renaissance, and France is leading that way.”

The war in Ukraine continues its course and the economic sanctions are now joined by all the moves that are…

The war in Ukraine continues its course and the economic sanctions are now joined by all the moves that are…

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