LONDON (ICIS)--Europe’s energy markets witnessed a year of record prices and extreme volatility in 2021. But, with tensions high between Russia and Ukraine, could any escalation lead to more difficult conditions for global markets?
GAS SUMMARY
- Europe depends on Russia for 40% of its gas
- Russia cut gas shipments to Europe via Ukraine by two-thirds in January 2022
- Gas storage low in Europe, winter demand 30% higher than rest of year
- Record shipments of liquified natural gas (LNG) to Europe so far in 2022
- LNG could ease Europe shortages if Russia supplies cut
- Europe LNG processing operating at full capacity
- UK gas prices could quadruple in event of a conflict
AMMONIA SUMMARY
- Russia supplies 20% of global seaborne ammonia market
- Disrupted supply could impact fertilizer and food prices
OIL SUMMARY
- Friendship oil pipeline flows through Ukraine
- Russian oil feeds around a quarter of Europe demand
- Oil prices could spike to triple digits in wider conflict
CHEMICALS SUMMARY
- High Europe gas and electricity prices force energy surcharges
- Soaring oil prices dent chemical producer margins
- Elevated oil prices dent consumer confidence and demand
Europe is heavily reliant to Russian gas and exposed to disruptions in supply, but Russia is also an important oil exporter and a supplier of fossil fuel products, which find their way to international markets via Ukraine's ports.
Any interruptions in supplies caused either by cyber or physical attacks or sanctions in response to them could send shockwaves across the global economy, lifting the cost of living, impacting industrial and agricultural production and potentially leading to social unrest.
ICIS journalists have taken a broader perspective, asking how vulnerable energy and energy-related supplies would be to disruptions, what contingency plans are put in place and what could be expected in the upcoming weeks.
How vulnerable are energy and
energy-related Russian supplies to
disruptions?
Europe depends for
close to 40% of its annual gas consumption on
Russian supplies, imported via four routes –
Ukraine, Belarus-Poland as well as the Nord
Stream 1 and TurkStream corridors linking
Russia to Germany and Turkey via the Baltic and
Black Sea, respectively.
Overall Russian pipeline supplies were limited throughout 2021, and since the beginning of this year producer Gazprom has shipped only one-third of the gas that it was expected to deliver to European consumers via Ukraine as part of a five-year transit agreement.
If tensions escalate, Ukraine transit pipelines may come under attack but disruptions could be limited because the infrastructure had been built to grant flexibility, allowing the operator to reroute flows away from potentially damaged segments.
Energy markets are on edge as winter demand is around 30% higher than the rest of the year and gas held in storage is at one of the lowest levels ever.
AMMONIA
IMPACT
The Togliatti-Azot
pipeline, the world’s longest ammonia pipeline
stretching 2,471km from the Togliatti Azot
plant in Russian Samara Oblast to the
Ukrainian Black Sea port of Yuzhny, could be
caught up in the cross-fire. Russian ammonia
supplies account for around 20% of the global
seaborne merchant ammonia market each month.
Around two thirds of those volumes are exported via Yuzhny, with the rest reaching European and global markets via Baltic ports. Ammonia is a prime material for fertilizers, so curtailments could potentially lead to higher food prices and shortages.
OIL PIPELINES
VULNERABLE
Supplies on the
world’s longest oil pipeline, the Friendship
(Druzhba) pipeline, could be threatened if
tensions escalate into conflict. The pipeline
carries oil from central Russia 4,000km west to
Ukraine and Belarus and runs close to the
Belarus-Ukraine border. Russia exports around
5m bbl/day, of which half are exported to
Europe, including via this pipeline.
Russian oil accounts for about a quarter of Europe’s consumption, with the Druzhba pipeline carrying close to 1m bbl/day. Should sanctions be imposed and exports hindered, Europe will need to secure alternative cargoes from the global market.
Europe consumed most exports of Urals, Russia’s biggest export grade, in 2021 after Saudi Arabia boosted market share in China. Almost 10m tonnes of Urals went through Rotterdam in the first half of last year, up 2m tonnes on 2020.
Germany stands most exposed because it gets 25% of its oil from Russia.
CHEMICALS IMPACT
Gas and
electricity are important components in the
production costs of many chemicals. Surging gas
prices in Europe have already caused some
producers to separately seek energy price
surcharges in their contract negotiations.
Although gas prices have fallen from their peaks of late 2021, they remain at historically high levels in Europe. If a conflict in Ukraine pushes them up again, some chemical producers may consider ceasing production, or adding further energy surcharges.
Rising oil prices in late 2021 have already put chemical margins under pressure. Any further increases will pressure them further, especially if downstream demand is not robust enough to pass the increased costs through.
Elevated oil prices also dent downstream consumer confidence and spending.
What contingency plans are being put in
place?
Throughout most of
January, US and European officials have been
planning for backup supplies. Exports of LNG
from Algeria, Qatar, the US and even Australia
have been discussed as alternatives. Although
Europe imported a record 11 billion cubic
metres (bcm) of LNG in January alone, half of
which were sourced in the US, much of future
supplies would depend on price as well as
supply and processing capacity.
For example, the ICIS East Asia index (EAX) for February ’22 assessed before expiry on 31 December stood at $29.65/MMBTu (€90.67/MWh) while the reference ICIS benchmark TTF front month - considered a reference point for European and global markets - was assessed at €91.50/MWh on 28 January.
If the Asian premium were to increase, LNG cargoes would head in that direction, even as seasonal European winter gas demand is on average 30% higher than the rest of the year.
Supply disruptions caused by escalating tensions may lead to a price rebound, incentivising more LNG to return to the continent.
However, European import terminals are already operating at nameplate capacity. A record of 5,000GWh/day was reached in mid-January, according to EU data.
Even if more LNG were to reach European terminals, countries in central and eastern Europe which rely on Russian flows shipped via Ukraine, would struggle to secure imported LNG.
For oil markets, in case of an attack but no international sanctions, the worst-case scenario would be for approximately 240,000 bbl/day of lost Russian exports via Ukraine.
Although there are other seaborne routes, including the Russian Black Sea port of Novorossiysk, sentiment could push prices towards $100/bbl.
According to ICIS analyst Ajay Parmar: “In our latest base case crude price forecast, we expect a peaceful resolution to the tensions in February. We therefore do not expect triple digit crude prices in that case.
“In our high case, we also do not expect a triple digit increase, as we expect any military conflict to be contained largely between those two countries, limiting the impact on prices.
“We only see triple digits possible if a military conflict spreads to the wider region as a whole.”
How have markets reacted so
far?
Gas markets have been
factoring in some geopolitical risk, but there
is little expectations among traders of
full-blown conflict.
Even so, US investment bank Stifel estimated that UK gas prices could increase fourfold in case of disruption.
Despite the current tensions, ammonia prices appear to have peaked after a year of upward momentum. Falling natural gas prices in northwest Europe have prompted some producers to bring plants back online rather than import volume.
OUTLOOK
The odds of a
full-scale conflict and disruption to
energy/energy-related supplies may be small.
Oil and gas revenue provide around 40% of
Russia’s federal budget and 60% of exports.
A full-scale disruption to supplies would inflict long-lasting damage to Russia’s credibility as a supplier.
Russian ammonia from Yuzhny ends up mainly in Turkey, Morocco, Tunisia, India and Bulgaria. Producers in north Africa would be well-placed to fill the gap.
Financial or trade sanctions could be a bigger hurdle for buyers reliant on Russia, rather than a reduction in cargoes.
Listen to a special ICIS Think Tank podcast Ukraine edition.
Listen to a podcast analysing the impact on oil markets
Listen to a podcast with Sergiy Makogon, CEO of the Ukrainian gas transmission system operator, GTSOU, and Szabolcs Ferencz, CEO of the Hungarian counterpart, FGSZ.
Insight article by Aura Sabadus. Additional reporting by Will Beacham, Richard Ewing and Sophie Udubasceanu. Maps and graphs by Yashas Mudumbai.