Slavyanskaya compressor station of Nord Stream 2 gas pipeline
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Russia-Ukraine Conflict and Global Energy Market Switch

Pandora Boss’s Opinion

Because Poland and Bulgaria refused to pay Russia’s gas bills in rubles, Russia announced that it would cut off gas supplies to these two countries from April 27. Poland and Bulgaria have become the first countries to suffer supply cuts since the outbreak of the conflict between Russia and Ukraine, which means that the “Ruble Settlement Order” previously issued by Russia has been genuine and is considered to be the “severest” Moscow has imposed on relevant sanctions so far. revenge”.

Pandora Boss observes that since last year, the impact of the epidemic on the energy supply industry chain has caused a mismatch between time and space of energy supply and demand, resulting in a sharp rise in international oil and gas prices. The short-term impact of rising oil and gas prices is obvious, with inflation in many countries and a slowdown in economic recovery. The international community hopes that the subsequent restoration of the energy supply chain can bring down the high oil and gas prices.

However, the conflict between Russia and Ukraine has brought international oil and gas prices to a new level. Judging from the current situation, the Russian-Ukrainian conflict has caused changes in the international oil and gas market to become a high-probability event. As the EU relies heavily on oil and gas, which accounts for 59% of energy consumption, and Russia is the EU’s largest supplier of oil and gas, about 40% of the EU’s natural gas imports and nearly 1/3 of its crude oil imports come from Russia. Since the conflict between Russia and Ukraine, the supply pattern of the international oil and gas market is changing. Russia has begun to look for new oil and gas sales channels, and Europe is also trying its best to get rid of its oil and gas dependence on Russia. In April this year, Russia announced that it would gradually shift its oil and gas exports from Europe to the eastern and southeastern markets in the future. The EU then said it would take gradual steps to cut off EU oil and gas imports from Russia. Last month, the EU proposed to reduce Russia’s natural gas imports by 2/3 in 2022. The main safeguard measures include the annual import of more than 50 billion cubic meters of liquefied natural gas from Qatar, the United States, Egypt, and other places, and annual imports from Azerbaijan, Algeria, Norway, etc. to import 10 billion cubic meters of pipeline natural gas.

Although the global oil and gas supply map will be restructured, the oil and gas market switch not only needs to find new partners but also involves the reshaping of the oil and gas transportation infrastructure system, which is not easy and takes time to complete. The switch in the oil and gas market will lead to the abandonment of some existing oil and gas transportation infrastructure, as well as a greater demand for the construction of new oil and gas transportation infrastructure. At present, the relevant infrastructure for transporting oil from Russia to Southeast Asia is not in place, and oil and gas transportation must use large tankers, which are slow and costly. To address this reality, Russian President Vladimir Putin pointed out at the recent National Energy Conference that it is necessary to speed up the construction of infrastructure (including railways, pipelines, and ports) for oil and gas exports to increase access to countries in Africa, Latin America, and the Asia-Pacific region. energy exports. At the same time, it is necessary for Russia to build new oil and gas pipelines between Western Siberia and Eastern Siberia to improve the ability to transfer oil and gas resources between Europe and Asia. Obviously, Russia has realized the importance of accelerating the construction of oil and gas export infrastructure.

At the same time, the EU faces the same dilemma. In order to achieve an effective substitute for Russian oil and gas imports, additional imports from Qatar and the United States are bound to be added. However, neither Qatar nor the United States has established a large-scale and stable oil and gas transmission infrastructure with Europe. Although the United States and Europe reached a 15 billion cubic meter liquefied natural gas transmission agreement not long ago, the United States cannot alleviate the problem of oil and gas shortage in Europe in the short term due to insufficient infrastructure and limited capacity. At present, the liquefied natural gas (LNG) transportation system in the United States is already operating at full capacity, and LNG ships are in short supply and insufficient capacity. Since the shipbuilding industry in Europe and the United States is in a long-term recession, it is difficult to significantly increase the production capacity of LNG ships in the short term.

At the same time, the construction of oil and gas market infrastructure also faces other constraints. As the global low-carbon energy transition and the promotion of non-fossil energy development have gradually become a global consensus, in recent years, the global oil and gas upstream capital expenditure has shown a downward trend as a whole, and the global oil and gas industry investment in 2021 will only be 70% of that before the outbreak. Due to the stagnation of investment in the oil and gas industry, the construction of supporting infrastructure is insufficient, and it is difficult to rapidly increase the supply capacity in the short term. In addition, due to the impact of the epidemic, problems such as labor shortages and insufficient available equipment in the oil and gas industry have become more prominent. Even if the capital market increases investment in the oil and gas industry driven by high oil and gas prices, the large-scale transportation infrastructure construction required for market switching is still difficult and required. longer time.

On the other hand, the EU’s new energy transition process cannot be accomplished overnight. In March this year, the European Union outlined an ambitious low-carbon energy transition path in a new plan, the core of which is to increase the proportion of renewable energy from the current 22% to 2030 by increasing investment in clean energy and nuclear energy. 45% of the total, its installed wind, and photovoltaic capacity will double by 2025 and triple by 2030, and it is expected to replace 170 billion cubic meters of natural gas demand. Therefore, promoting the replacement of fossil energy with clean energy cannot be completed in the short term.

In short, the conflict between Russia and Ukraine has led to changes in the international oil and gas supply and demand pattern and market switching, which will have a huge impact on the global oil and gas supply chain. In the next few years, imperfect infrastructure construction will become an important constraint on oil and gas trade, leading to sluggish transactions and higher transaction costs in the oil and gas market. Given the mismatch between oil and gas supply and demand and the lack of infrastructure, international energy prices are likely to remain high for years to come. China’s energy supply is dominated by coal, and oil and gas account for less than 30% of energy consumption. The impact of high oil and gas prices caused by the oil and gas market switching on China’s inflation and economic performance is relatively controllable.

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