War in Ukraine is transforming the outlook for the supply, demand and price of hydrocarbons and the pace and cost of the energy transition. While the precise timing and implementation of future bans on Russian commodity imports are difficult to predict, a rewriting of energy trade flows is now underway.
With the global economy on a knife edge and energy prices structurally higher, there a real risk of some global supply being lost. Europe’s push for more liquified natural gas (LNG) as it looks to reduce Russian pipeline gas has pushed spot prices to record levels and is supporting strong demand for coal. At the same time, supply-chain risks are growing, and inflation is increasing costs across the energy sector.
These are the latest insights from new analysis by Wood Mackenzie, which also found that against this backdrop and with coal currently more resilient, further advancing the energy transition could be more expensive and potentially prove more carbon intensive.
Massimo Di-Odoardo, Vice President of Gas and LNG Research at Wood Mackenzie, said: “It is inconceivable that Europe will abandon its diversification strategies and return to any meaningful dependence on Russia.” Based on the assumption that Europe bans all Russian commodities by the end of 2024, Wood Mackenzie’s new analysis considers the impact on commodities over the next decade, as well as for investment, the energy transition and geopolitics.
“While prices will be structurally higher and a ban on Russian gas will be more challenging than that of other commodities, the ‘west’ can live without Russian commodity exports and we are already seeing a new trade balance taking shape,” said Di-Odoardo. “Increasing domestic coal production in China and India will compensate lower seaborne availability. While perhaps the biggest risk to Russian oil production is in the long term and relates to the loss of access to western partners, technologies and services”
The research by Wood Mackenzie emphasises that a future ban on Russian gas will see competition for LNG intensifying as Europe competes with Asia for limited supply growth through to around 2026. Across all hydrocarbons, LNG looks the most compelling investment option over the next few years.
“A huge increase in LNG project investment is being supported by a rapid increase in European LNG demand, with US developers already looking to fill the space,” said Di-Odoardo. “As a result, there is a potential for 50 million tonnes per annum of new US LNG capacity that will take final investment decisions over the next two years – and this could double if Europe bans imports from Russia by 2024.”
“But despite disruptions to Russian exports, global supply chains are now emerging as the biggest concern. Rising costs could delay investment in necessary energy supply and delay the pace of investment in clean energy needed to meet decarbonisation goals,” said Di-Odoardo.