PAST NEWSLETTERS

Main Takeaways for the week of March 2, 2022

Russia invades Ukraine, opening up a bloody and horribly unnecessary conflict in Europe. The Western World imposes sanctions on Russia with carve-outs for energy, but Western banks and energy companies go even further to combat risk, potentially causing de facto energy sanctions. New world energy order in the cards, as Europe looks for ways to remove its dependence on Russian energy. IEA steps in to try to stabilize oil markets, but WTI punches through $100/bbl regardless. JCPOA deal close. OPEC+ shows no cracks as Gulf states consider war in Ukraine immaterial.

Featured Article

Preparing for the First Winter Without Russian Gas, by Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann for Breugel

Headlines

Global Petroleum Liquids

• BP will pull money out of 20% stake in Rosneft
• IEA member countries agree to release 60 million barrels of oil to reassure global oil markets following Russian invasion of Ukraine
• OPEC+ unfazed by war, will likely maintain current output quota increases at March 2 meeting
• Exxon will leave Sakhalin-1, will also look to cut costs, likely cancelling expensive marginal oil projects

Global LNG

• Shell exits Sakhalin-II LNG project, raising questions about the future of LNG exports from Russia into East Asia
• Germany will accelerate permitting and construction for two LNG import terminals accounting for a combined 20 mtpa, plus 2bcm more gas storage
• Some LNG buyers pause purchases from Russia to avoid possibility of being hit by Western sanctions
• Italian state lender CDP freezes loan for Russian 20 mtpa Arctic 2 LNG

Global Coal

• Germany may run coal plants beyond intended cutoff date in 2030 to help reduce dependence on Russian energy

North American Energy Infrastructure

• Pipeline constraints are keeping New England more exposed to LNG prices than it has any right to be

U.S. - China Energy Relations

• No significant developments

EU – Russia Energy Relations

• Nord Stream 2 operator fires all employees and files for bankruptcy after certification suspension by Germany and U.S. sanctions
• Glencore announces opposition to Russia’s invasion of Ukraine
• Container shipping giants cease all container shipping to and from Russia, with the exception of food and humanitarian aid

China – Russia Energy Relations

• Chinese banks distance themselves somewhat from Russian energy firms due to Western sanctions
• Chinese research organization and advisory body to Xi Jinping predicts limited impact of sanctions on Russia
• Beijing signals intention to play a role in ending the war in Ukraine, due to role as a credible economic partner to both Russia and Ukraine

U.S. - Canada Energy Relations

• Almost every grade of crude oil across the U.S. breaches $100/bbl
• Biden pledges to use “every tool at our disposal” to limit gas price hikes caused by sanctions on Russia

Middle East Energy Geopolitics

• Putin and Abu Dhabi Crown Prince Mohammad bin Zayed hold talks to discuss OPEC+ strategy in advance of March 2 meeting
• Iran is cutting back on crude oil exports to China in anticipation of higher value exports elsewhere once sanctions are lifted following reestablishment of JCPOA

Central Asia Energy Geopolitics

• No significant developments

Canadian Oil and Gas

• Canada will ban imports of crude oil from Russia, with potential for a ban on petroleum products
• Pembina and KKR combine Canadian gas assets under new company

Electricity

• Russia attacked on day of test disconnection of Ukraine’s grid, and now Ukraine will permanently connect with the EU instead

Renewables

• Germany’s economy ministry plans to speed passage of renewable energy bill with more tenders for solar and onshore wind, goal of 2035 renewable grid

Copper

• Chilean copper production drops to lowest level since 2011, no clear reason given for the drop

Lithium

• Republican U.S. lawmakers criticize Canada’s “complicit approval” of Neo Lithium purchase by China's Zijin Mining Group, urge U.S. investigation

Nickel

• Nickel continues gains due to concerns over nickel supply following Russian bank exclusion from SWIFT

Cobalt

• No significant developments

Carbon/Graphite

• No significant developments

Hydrogen

• Blockade of Yuzhny port near Odessa sends prices of ammonia sharply upward

Nuclear

• No significant developments

Biofuels

• Chevron outlines renewable fuels as central to energy transition goals

Quotes

Over the next 12 months, there is little that can be done to remove hard physical bottlenecks. Without Russian gas, there will remain a gap between supplies and a ‘normal’ year’s demand. Exceptional measures are possible to reduce demand. They would send a signal of united European defiance and stop billions of euros currently flowing from west to east.

From Preparing for the First Winter Without Russian Gas, by Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann for Breugel

Still, getting through the current winter without further Russian imports is one thing. It will be far more difficult to run the European economy for several years without Russian gas. On the supply side, some states might be able to scrounge up spare import capacity from Qatar and the United States. Allies such as Japan and South Korea might also be able to divert some of their excess seaborne gas shipments. But completely replacing Russian gas would be very expensive and might prove physically impossible.

From The Kremlin’s Gas Wars, by Niclas Poitiers, Simone Tagliapietra, Guntram B. Wolff, and Georg Zachmann for Foreign Affairs

Russia would not be able to afford this war were it not for the fact that oil and gas prices are ratcheting up. They’ve got enough in the war chest for now. But over the longer term, this will not be sustainable without the investment that comes into Russia and all of the Russian commodities, not just oil and gas, that are being purchased on world markets. And, our international allies, like Saudi Arabia, should be increasing oil production right now as a temporary offset. Right now, they are also indirectly funding war in Ukraine by keeping oil prices high.

From an interview with Fiona Hill for POLITICO

Germany will now shed the accusation of free-riding on others’ security spending. When Scholz announced a one-off investment of 100 billion euros in the German military and the intention to make defense spending exceed two percent of overall economic output—the goal set for NATO member states—he stunned the foreign policy community, the country, and even many in his own parliamentary group who were not privy to this snap decision.

From A New Germany, by Sudhe David-Wilp and Thomas Kleine-Brockoff for Foreign Affairs

All major Iranian state-owned enterprises, including the National Iranian Oil Company, are also under full blocking sanctions. Critically, the United States has also used the threat of so-called secondary sanctions—measures targeting third parties that transact with sanctioned entities—to drastically reduce Iran’s oil exports and isolate Tehran almost entirely from the global economy. No such sanctions are currently in place against Russia.

From The New Russian Sanctions Playbook, by Edward Fishman and Chris Miller for Foreign Affairs

Western countries that import Russian energy should require all payments placed into escrow accounts that will only be settled once the crisis is resolved. This would put additional risk on energy markets—an outcome Western governments want to avoid—but could be an escalatory tactic if necessary.

From Rapid Response: The future of European energy security, by Lee Beck, Randy Bell, Reed Blakemore, Andrew Bochman, Charles Ellinas, David Goldwyn, Ameya Hadap, Robert F. Ichord, Jr., Irina Markina, Jonathan Maxwell, Richard Morningstar, John Roberts, Paddy Ryan, Brenda Shaffer, Andras Simonyi, and Ellen Wald, for the Atlantic Council

For European countries wanting alternatives to Russian gas, the US is an obvious place to find suppliers. The US has the gas resources, the infrastructure, and the construction capabilities to achieve a significant increase in LNG exports relatively quickly. It cannot be an answer to any immediate shortages — US LNG export facilities are already running at full capacity — but in a few years’ time it could make a significant contribution to reducing Europe’s dependence on Russian gas.

From Europe looks for alternatives to Russian energy, by Ed Crooks for Wood Mackenzie

Infrastructure, including transportation, water, sanitation and energy systems have been compromised by extreme and slow-onset events, with resulting economic losses, disruptions of services and impacts to wellbeing (high confidence)

From the AR6 Working Group 2 Report for The Intergovernmental Panel on Climate Change