The Ukraine War as an Oil and Gas Conflict: Who Stands to Gain

 

Geopolitics and Oil Markets

When the Ukraine War began, Russia halted the flow of natural gas to Europe in retaliation for NATO’s support of Ukraine. Europe also stopped buying Russian oil.

Russia began selling oil at much lower prices to India and China. These two countries took advantage of the situation and gained economic momentum through refining and exporting oil products.

Now, Europe buys refined oil products such as petrol and diesel from India and China. Ironically, this is the same oil Russia sells to India and China.

India and China find this trade lucrative, which has also impacted the oil trade in the Gulf countries.

Suddenly, the Gulf countries find India and China turning into their competitors in the Asian market. Oil and expatriates had dominated the discourse between India and the Gulf region.

India's Prime Minister Narendra Modi shifted the focus of these relationships to defense and security, as well as the possibility of forming a politically significant global alliance. The oil trade had strengthened India's role as a key player in the region.

India's attempt to tap into the availability of cheap oil from Russia seems to have backfired, as America imposed 50% trade tariffs on India, claiming it is a penalty for supporting Russia in the war by buying its oil.

Conversely, Saudi Arabia and other Gulf countries benefit, as they can now sell oil to Europe.

European nations have also turned to Africa for increased oil supplies. Consequently, new oil fields are being established in Algeria, providing an economic boost to African countries.

Last but not least, the US is supplying more oil and natural gas to Europe. Earlier, the major US customers for oil and natural gas were Asian countries.

As global oil trade routes have been drastically redrawn by these developments, global politics also shifts at an equal pace. New economic alliances solidify as strategic geopolitical partnerships. A multipolar world is emerging in an all-new way.

How Has Russia Been Impacted?

While the Russian natural gas industry has suffered greatly after halting supplies to Europe, the Russian oil industry has, to some extent, weathered the European and US sanctions. The two hurdles the Russian oil industry faced were:

1) They had to cut oil prices to win new customers among the Asian countries, and

2) The oil shipping costs escalated as Russia had to resort to roundabout routes to reach Asia.

As a result of the above,

Russia’s revenue from oil and natural gas declined by 24% between 2022 and 2023. This will lead Russia to introduce new taxes on oil and gas and other sectors to finance its war. The consequence will be a general economic decline and an added economic burden on the people of Russia. As the tax burden on the oil and gas industry increases, the output will decrease, completing a vicious cycle of economic setbacks. Of this situation, one consequence that the West eagerly looks forward to is public resentment against the Putin regime.

An overlooked area is how Russia is still exporting LNG to Europe and gaining revenue from it. Only the piped gas supplies have been cut so far. However, the LNG companies of Russia had been exempted from taxes for many years ahead as an incentive before the war began. For Russia, it largely reduces government revenue from LNG exports.

Gazprom is Russia’s largest natural gas producer. It has received a big blow from cutting supply lines with the EU. In 2022, Russia cut gas supplies to Europe from Gazprom to pressure the European countries and NATO from supporting Ukraine. However, Europe did not suffer or budge as Russia expected. The EU countries found alternative suppliers and sources.

Russia thought that they could sell gas to China at a lucrative price, but China has alternative sources. They are not ready to buy gas from Russia at the price Russia wants. There is a proposed Siberia 2 pipeline to take gas from Russia to China, but the transportation costs can be met only when Russia gets the price it aims for.

In September 2022, the G-7 nations imposed an oil price cap on Russia. $60/barrel was the price cap set. However, Russia continues to sell oil to China through the Eastern Siberia Pacific Ocean Oil Pipeline at a price above this price cap. Quite recently, the European Commission has decided to find ways to enforce the price cap.

A crucial advantage for Russia has been the undisrupted and even increased sale of LNG to Europe. For example, in 2023, Russia sold more LNG to Europe than in the years before the war. Yet, Russia suffered one major setback.

The US enforced sanctions against its Arctic LNG-2 project. The project, as a result, stopped midway.

It is clear that for Russia, one of its most precious bargaining chips, its oil and gas reserves, has lost some of its allure. Yet, the oil trade among Russia, China, and India has helped the Global South to gain geopolitical weight.

How Europe Changed the Problem into a Solution

Following Russia's invasion of Ukraine, it became evident that Russia could no longer be considered a future supplier of oil and gas, prompting Europe to focus on developing renewable energy sources. At the time, the idea of replacing oil and gas with renewables appeared to be an ambitious dream. Thankfully, the concern that coal would see a major resurgence in Europe due to the shortages of oil and gas did not come to pass. Although there was a slight increase in coal-based electricity production, this shift was only temporary.

Europe invested in and expanded wind, solar, and other renewable energy sources. By the end of 2022, the amount of wind and solar energy generated surpassed the electricity produced from natural gas.

Europe relied on Russia for 40% of its natural gas and 27% of its oil supply. Renewable energy technologies are becoming more affordable than traditional methods of fossil fuel production. The war accelerated advancements in renewables, and Europe anticipates a significant energy transition in the coming years.

The Future of Oil Politics

General economic decline has led to steadily diminishing oil demand worldwide. Concerns about climate change continue to compel more countries to find environment-friendly energy sources.

The future of global politics will see many reasons to move away from oil and gas. That change will accompany changes in political power structures, too. Such a global transformation is a distant hope yet. In today’s reality, Russia, Europe, China, India, the Gulf countries, and the Global South, as a whole, are locked in a multi-level bargain over the two major conventional fossil fuels of the world, oil and gas.

References

How Russia’s War in Ukraine Is Changing The World’s Oil Markets, Jackie Northam, February 28, 2023, npr.org

Oil, Gas, and War: The Effect of Sanctions on the Russian Energy Industry, Vladimir Milov, May 2024, atlanticcouncil.org

What Europe Showed the World about Renewable Energy, Rebecca Leber, Feb 21, 2023, vox.com