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    After Russia’s invasion into Ukraine the “game is on” for oil and gas the next three years will identify the “winners and losers”

    July 2022

    The great oil shocks of the 1970s taught western politicians a sobering lesson about the might of the world’s energy superpowers. Fifty years later, that lesson in my opinion is being learnt all over again – “the game is on”!

    Russia is currently fighting back against western sanctions by restricting the supply of gas to Europe. The prospect of a total cut-off of Russian gas is causing near panic in Europe as Germany and other major economies contemplate energy rationing this winter. Meanwhile, Joe Biden worried and pressurized by seeing petrol prices ahead of the midterm elections – has had to forget his campaign rhetoric about treating Saudi Arabia as a pariah. The US president is off to Riyadh this month to appeal to the Saudis to pump more oil.

    The lesson in my opinion seems to be simple and dispiriting. In 2022 – as in 1973 the world’s major oil producers are back in the game and can still make the world’s biggest political powers dance on their tune. But look beyond the immediate headlines and the geopolitics of energy are much more complex. Russia still has in my opinion a strong hand in the short term but its position will dramatically worsen over the next three years. America has in my opinion a big problem in the short term but is in a strong position over the long term. It is in my opinion the EU that has the biggest short – and – medium term problems. Despite brave talk of diversification and decarbonization, the Europeans are still a long way from finding a viable new energy strategy.

    Russia and the EU are in my opinion locked in a race against time. The Russian goal is clearly to engineer an economic crisis in Europe this winter – so weakening the EU’s support for Ukraine. The government of Hungary, noted for its indulgent attitude to Putin, is already pressing for a quick ceasefire in Ukraine, citing the threat of economic catastrophe. The Europeans only have several months before winter to prepare for the coming Russian squeeze. But even if Moscow’s pressure tactics do work in the short term, over the long term Putin is in my opinion destroying one of the main pillars of Russian power.

    Europe has now learnt a bitter lesson about the dangers of energy-dependence on Russia and is determined never to be as vulnerable again. Let’s be clear: before the war, Russia most probably was looking at 30 more years of guaranteed oil and gas revenues without much of logistic hurdles. Now in my opinion they are looking at about three years. Even in the short term, cutting off Europe’s gas exports is a dangerous game for Russia. Roughly a billion cure a day is still flowing into Russia’s coffers mainly from Europe. If Putin sacrifices those revenues, his ability to wage war would in my opinion rapidly diminish.

    Russia can of course find alternative markets for its oil relatively easily witness the eagerness with which India and China are increasing imports of its discounted oil. But its gas is currently exploited by pipeline and the major pipelines head towards Europe. Constructing new ones to China will take years, so Russia could soon be faced with stranded asset.

    The earnestness of European efforts to free themselves from dependence on Russian energy can be seen in the recent travel schedules of its leaders. Ursula von der Leyen, president of the European Commission, has for example just been in Israel and Egypt, signing a new gas deal. Olaf Scholz, the German chancellor, recently visited Senegal and threw his weight behind the development of a new gas field there. These are in my opinion all efforts which come too late – it’s astonishing that there was never a ‘Plan B’. And This is why there remains the biggest question, about how quickly and smoothly Europe can replace Russian energy. Some senior figures in the energy industry including myself are privately skeptical. The situation over the next five years is likely to leave Europe in my opinion in an uncomfortable position – with the need for Russian energy reduced, but not eliminated, while consumers face persistently higher prices and industry faces insecure supplies. To be able to secure safe supplies and by not relying purely on the Middle East and politically unstable African countries, the EU might have to find resources and supply even from Malaysia and Indonesia, incurring high logistical costs. If the EU can rely on supply from America remains to be seen.

    America, by contrast, is in much more comfortable long-term position as it already has displaced Russia as the world’s leading exporter of energy. Higher energy prices are a big pain for American consumers, but they are a boon to the US shale and gas industry which was in deep trouble and highly indebted, just two years ago.

    One lesson of the Ukraine war in my opinion is that it is dangerous for any country to rely on a geopolitical adversary for its energy. America is now a big net exporter of energy, while China remains heavily dependent on imports. But American production alone cannot protect US consumers from rising global energy prices. America’s desire to isolate not just Russia but also Iran and Venezuela from supplying oil to the world has strengthened the position of Saudi Arabia. It is in my opinion impossible, even for the US, to treat all the world’s major oil-producers as pariahs at the same time. And unlike Russia and Iran, Saudi Arabia is a long standing American ally.

    The real threat to the Saudi position is in my opinion not necessarily geopolitical but environmental. Decarbonization may eventually mean that the world is no longer buying what the Saudis are selling. In the short term however, the global energy crunch caused by the war in Ukraine is increasing demand for non-Russian fossil fuels – including coal, the dirtiest of the lot. Germany is reopening mothballed coal plants to secure its energy supply. And China is clinging even tighter to its most reliable form of domestic energy production – coal.

    Russia’s invasion of Ukraine is by no doubt bad news for the world. It may be even worse news for the planet.