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The Ukraine crisis' impact on energy supply chains: Four misconceptions

Last updated: April 8th 2022

In the midst of the evolving humanitarian emergency, analysts are racing to understand and predict how Russia’s invasion of Ukraine will impact global energy, supply chains, and climate change.

Four popular predictions have emerged. They’re intuitive on the surface, but when we dig deeper, they’re not as likely as they seem:

1. The sanctions have cut Russia from global supply chains

Not completely.

Foreign capital is being divested, and major brands and companies are leaving Russia en masse. But the most powerful sanction — a complete trade embargo on Russia’s hydrocarbons — hasn’t been fully adopted, although the US has already announced an import ban of Russian oil, liquefied natural gas, and coal. 

Russia holds a significant share of the EU’s natural gas supplies (40%), making it hugely challenging for the EU to immediately reject them. While the EU has put emergency measures in place to reduce dependence on Russian fossil fuels, it’s yet to find a full replacement. Large pipelines (Nord Stream 1, Yamal-Europe, Ukrainian transit, Turk Steam and Blue stream) still quietly pump natural gas from Russia to Europe, beneath the creak of tank tracks. And Russia continues to trade hydrocarbons with China and India, with the latter even planning to increase Russian oil purchase.

US President Biden’s in-person talks with European leaders last week may bring about tougher measures; but it’s yet to be seen. Most likely, Russian supplies will be slowly and gradually be cut off from Western markets, whether voluntarily, via sanctions, or by Russia as an energy weapon (President Putin has announced that Russia will only accept roubles as payment for natural gas it sells to ‘unfriendly countries’).

2. The Russia-Ukraine crisis is facilitating a switch to renewables

Not on the current trajectory.

The war’s huge disruption to energy markets has revived scrutiny on the fragility of the global energy system and its contribution to the climate crisis, alongside calls for an immediate transition to fossil-free energy.

With the major surge in energy prices and the risk of losing a huge source of hydrocarbons, global leaders have to act fast to tackle immediate energy security needs. Emergency measures are currently leaning to alternative fossil fuels that slot into the current energy infrastructure, such as coal and liquefied natural gas (LNG) — while nuclear power phase-out plans are being reconsidered.

The demand for crude oil and natural gas will increase production in the US and Middle East and attract investment. Europe will likely consider buying more LNG, expanding LNG regasification capacities, and increasing short-term coal consumption, which would increase the lifecycle carbon intensity of its grids. 

On the current trajectory, we can expect a diversification of energy sources, but one that risks further delaying, rather than accelerating, the energy transition.

However, there’s still a chance to change course: it’s not too late for governments to couple addressing immediate energy security needs with longer-term climate goals, and avoid investments that lock in dependence on fossil fuels. There could be a strong economic incentive to do so. 

3. Russia will simply reroute all of its gas to Asia

No.

Although Russia can search for new hydrocarbons buyers while Europe races to find a replacement energy supplies, its choices are limited.

The only country geographically and economically capable of accepting Russian gas by land is China. Currently, the Power of Siberia pipeline delivers natural gas to China from two dedicated Far East gas fields (Chayanda and Kovykta). The pipeline has a design capacity of 38 billion cubic meters (bcm), which it’s expected to gradually reach by 2025. To put this in perspective, the EU bought 155 bcm of gas from Russia in 2021. 

There are ongoing negotiations for a new Soyuz Vostok gas pipeline that would deliver up to 50 bcm each year to China via Mongolia (roughly equivalent to the capacity of the single line Nord Stream that runs under the Baltic Sea to Germany). But terms haven’t yet been agreed, so China still has the freedom to delay the negotiations or cancel the deal. 

It’s also unclear that China would accept such a risky deal in the face of potential secondary sanctions and fines. Chinese banks will likely tread with caution in financing trades with Russia, and previous signals confirm the country’s ambiguous position on the matter. 

This means there’s a huge bottleneck of throughput capacity as well as a technical limitation to connect other major Russian gas fields to the Power of Siberia pipeline.

The map below shows the imbalance of Russia’s current natural gas export capacities. The smaller the arrow, the smaller the throughput capacity of the pipeline:

map2-cropped

What’s more, there’s a fundamental engineering barrier. Since the Soviet era, Russia’s entire oil and gas export infrastructure has relied on stretching long pipelines from the Urals and Siberian regions to the West, directly to European markets or loading ports. The longest crude oil pipeline and gas pipeline network, Druzhba, was commissioned and expanded in the 60s and 70s, to meet growing industry needs and energy demands in Europe, particularly Germany. This laid the foundations for relatively easy connections with more Western routes in later decades. For the Far East, it was never as simple or economically viable. New pipelines — thousands of kilometres in length — can’t be quickly built through the Siberian forests. 

Is shipping the obvious alternative? It’s not that straightforward. Unlike loading additional crude oil tankers — which is relatively easy to scale up you need to liquify gas before you can ship it. This is a key obstacle for Russia. Russia exported 79% of its natural gas by pipelines in 2021, and the remainder as LNG. As sanctions reduce investment and hinder technological development, Russia won’t be able to expand its LNG capacity from 2021’s 28 million tonnes.

4. More Russian gas is desirable for China

Yes and no.

On the one hand, Russian pipeline gas is cheap: around $150 per 1,000 cubic metres, far less than suppliers in Central Asia and Myanmar. And China didn’t pay a penny for the pipeline construction that brings Russian gas to its door.

But, does Russian gas aid China in its climate goals? 

While a coal-to-gas switch is considered a key solution to China’s energy transition, China already has good access to natural gas (through domestic production and imports). In terms of emissions, drawing gas from Russia is less attractive than from somewhere closer like Australia. The required pipeline transmission from gas-rich fields in Russia to densely populated east coast areas of China would be more carbon-intensive due to its length (for example, the well-to-city carbon intensity for gas coming via the Power of Siberia pipeline is about 40% higher than LNG coming to China from Qatar).

Russia’s isolation will also hinder progress towards its own (already insufficient) 2060 net-zero target, through the deterioration of the carbon performance of its plants. As Russian oil and gas facilities struggle to maintain production levels and keep costs low, they’re bound to deprioritize key actions like efficiency measures, methane measurements and flaring reductions. Russia was the top country by flared gas volume in 2021, burning more than 24 bcm of natural gas. That’s half of Nord Stream’s annual capacity.

 

There’s still a chance to accelerate the transition to a net-zero economy

 

As things stand, the uncertainty and volatility from Russia’s invasion of Ukraine are set to lead to:

  • increased investments into hydrocarbons and a delayed energy transition in the short to medium term;
  • increased carbon intensities of national grids;
  • continued dominance of US, Qatar and Australia on the LNG market and an overall growth in LNG’s importance;
  • caution from China in terms of doing business with Russia;
  • a significant reduction in domestic hydrocarbons production in Russia due to sanctions, and deterioration of its environmental performance.

However, it’s not too late for global leaders to double down on low-carbon alternatives and secure a fairer and greener future for future generations. The window of opportunity is small, but solutions exist. At CarbonChain, we hope for a swift and peaceful end to the humanitarian crisis, and for key actors in the global economy ⁠— across policy and the private sector ⁠— to reinforce their ambitions and actions towards a net-zero, climate-safe future


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Picture of Ismayil Jabiyev
Principal Oil and Gas Analyst, CarbonChain