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Russia’s energy weapon is running out of steam

by SuperiorInvest

This article is a version of our Energy Source newsletter. Register here to receive the newsletter every Tuesday and Thursday directly to your email inbox

One thing to start with:

Welcome back to another power source. In today’s edition, I will follow up on the topic of Putin, Europe and the energy weapon. Russian pressure on European energy supplies has put him at the forefront of Moscow’s economic war with the West. But Putin’s strategy risks an economically damaging blow to Russia.

In Data Drill, Amanda tackles the fight in Europe over whether burning wood for electricity should count as renewable energy.

Thanks as always for reading! — Justin

Russia’s energy war risks a comeback

As part of his war strategy in Ukraine, Russian President Vladimir Putin has used his influence over much of the world’s energy supply to inflict economic pain on the West. It has put Europe, which could see oil prices rise again in the coming months, into a worrying precipice ahead of this winter.

But Putin’s adoption of an energy weapon looks increasingly likely to come at a significant cost to Russia; it has set its own energy industry on a dangerous trajectory.

Blow up the gas trade with Europe

Putin has used Europe’s dependence on Russian gas to drive up the cost of Western support for Ukraine. He hoped it would weaken and break Western aid to Kiev. This is not the case yet.

Instead, Europe has sought to reshape its energy supply mix in a way that should deeply worry the Kremlin.

LNG suppliers in the US and elsewhere are winning with new deals. As are renewables developers, as the continent’s green push takes on the mantle of energy security. Coal suppliers are also winning, at least for now.

Europe faces a tough winter – probably several – without Russian gas. But the post-Russian energy mix is ​​taking center stage.

Putin, meanwhile, blew up the once-lucrative gas trade with Europe with no clear plan to replace the loss.

Accelerating Russia’s move into China is Putin’s best option. But this is unlikely to happen in a way that will offset the losses in Europe; it will come with a hefty price tag, as many billions would have to be spent on infrastructure to connect Russia’s gas fields with China.

Beyond these practical difficulties, there are likely to be limits to China’s appetite for more Russian energy. One of the tenets of China’s energy policy over the past two decades has been supply diversification. Beijing will see today’s European pain not only as an opportunity to acquire cheap resources, but also as a cautionary tale about over-reliance.

Narrow horizons for Russian oil

Oil is a much more flexible commodity than natural gas, and Putin’s hand is arguably stronger here. But there are still plenty of warning signs.

First, Moscow is forced to sell its oil at deep discounts, even to allies. For most of this year, the economic pain of those discounts has been offset by high prices, which have kept plenty of petrodollars flowing into the Kremlin’s coffers. But the discounts it will hurt a lot more at lower price levels.

Moscow also becomes dependent on a smaller group of customers, which weakens its bargaining power. India and China help to stay away more oil flows than Western politicians and analysts expected a few months ago. However, these countries now have more leverage to continue to extract favorable terms from Moscow.

The West’s proposed oil price cap has been heavily criticized, and it seems highly unlikely that China and India will stick to the plan. But even if they don’t accept the plan, they are likely to use its existence as leverage in their own negotiations with Moscow to hammer out steep concessions. For the US and Europe, this may even be a better outcome than a major supply disruption that would send domestic oil prices soaring again.

The outlook for oil and gas production is dimming

The sanctions imposed so far will not bring about an immediate collapse of Russian supplies, but the longer-term outlook is much weaker than a year ago.

The bull case for Russian supplies is that the country has endured Western sanctions for years and production has held up perfectly fine despite naysayers.

But the post-war exodus of Western oil majors and oilfield services firms from the Russian oil patch is on a completely different level than previous rounds of sanctions that imposed relatively tight restrictions on Western operators in the country.

The Kremlin’s fight with ExxonMobil over the future of Sakhalin-1, a highly complex project in the Russian Far East, is an example of the difficulties facing the future of Russian energy.

Analysts and industry sources say the Kremlin is trying to force Exxon to continue operating Sakhalin-1 largely because Russian firms do not have the technical capabilities to operate the field. Output from the field fell from 220,000 b/d to 10,000 b/d.

This year’s energy crisis shows that Russia’s giant energy reserves give it plenty of ammunition to inflict economic pain on the West. But the blowback for Moscow will also be painful. (Justin Jacobs)

Data drill

Tomorrow the EU will vote on the future of wood pellets industry. MEPs to decide whether to accept revisions to their renewable energy directive, including declassification provisions burning whole trees as clean energy.

The directive was created in 2009 to increase clean energy consumption in the bloc through targets and subsidies. Burning biomass such as wood has been classified as renewable based on the idea that forests could be regrown.

The industry has come under fire in recent years when scientists warned that burning wood pellets released more carbon than coal and forests could not regrow at the rate they were being depleted. Last year, more than 500 scientists wrote a letter leaders in the US, EU, Korea and Japan to stop including wood burning in renewable energy standards.

“The EU’s renewable energy directive should only cover real forms of renewable energy – and forests are not renewable,” wrote Greta Thunberg and eight other climate activists. op-ed in The Guardian last week.

EU wood pellet consumption has grown since the directive was adopted, with the bloc consuming a record 23.1 million tonnes last year, an increase of around 50% since 2014 and a 55% share of the global market. The demand has a significant ripple effect for the US, which has become the bloc’s largest source of imports.

The EU vote comes at a time when Brussels faces energy crisis prompted by the Russian invasion of Ukraine. Trade association Bioenergy Europe has warned that if adopted, the revised directive will reduce by 20 percent of renewable energy stocks in Europe or 4 percent of total energy. (Amanda Chu)

Power Points

Energy Source is a bi-weekly energy newsletter from the Financial Times. Writes and edits Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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