Putin's War and World Energy
By launching a war that even the most battle-hardened of multinationals cannot tolerate, Vladimir Putin has jeopardized Russia's own energy sector and set off a new search for oil and gas around the world. While the growing global demand for energy will remain, the main suppliers will change.
LONDON – The decision by many multinational corporations to exit Russia, after decades of engagement between global business and Russia’s state-dominated economy, indicates that investors can no longer rely on the regime to enforce the rule of law. Russian President Vladimir Putin, once regarded as a modernizing autocrat, is now clearly driven by personal obsessions rather than any rational cost-benefit calculation. And though Russia has always been a risky environment for business, even the most experienced international companies have had enough.
In Russia’s all-important hydrocarbon sector, BP and Shell have signaled their intention to sell existing assets, including shares in the vast energy-development project on Sakhalin Island (off Russia’s Pacific coast), shares in the state oil giant Rosneft, and stakes in other joint ventures. Global energy companies will have to look elsewhere for the next generation of resource-development projects, and that search will have major implications for the broader transition away from hydrocarbons.
The global energy transition has only just begun. The world will continue to need around 100 million barrels of oil per day for at least the next two decades, along with a growing volume of natural gas. The Middle East and North Africa still offer the best prospects for new discoveries, despite the continuing challenges of working in countries such as Iraq and Libya. More generally, oil and gas assets are likely to increase in value, and there is a good chance of renewed mergers-and-acquisitions activity in the industry.
But within Russia, new risks will both discourage future investment and unnerve investors in other, less visible sectors. Economic chaos, rising inflation, and a government liable to retaliate against Western sanctions will pose major challenges. Assets are likely to be written down, affecting the strength of some corporate balance sheets. Insurance charges for those working in Russia are likely to become prohibitively expensive. And more Russians may seek to leave the country, taking with them whatever funds they have and increasing the flow of money into safe havens around the world.
Putin is mistaken if he thinks the exodus of BP, Shell, and others will not impede the Russian oil and gas sector’s longer-term development. Over the last 20 years, advanced technology from abroad has helped Russia’s old state-controlled energy sector identify and develop new resources and improve its efficiency and performance. If Russia’s energy sector is to remain viable, it will need far more investment in oil and gas, transmission systems, and pipelines in order to access new markets in the East. Without the presence of the world’s premier international energy companies, it will be difficult if not impossible for the sector to attract the funds it needs.
There will also be consequences for Europe, where Putin’s invasion has moved energy security to the top of the political agenda. Germany, once happy to tolerate its dependence on Russian suppliers, is now seeking to diversify its energy sources, even reconsidering extending the life of its three remaining nuclear power stations. This is good news for the liquefied natural gas business – which already handles more than half of internationally traded gas – and, potentially, for the nuclear sector.
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Because nuclear power generation offers domestically produced supplies of electricity that are immune to international market volatility, it could come to be seen as the key to avoiding dangerous energy dependencies. Small, modular nuclear reactors, like those being developed by Rolls-Royce, should become more attractive in the United Kingdom, parts of Europe, and around the developing world. But the industry would face a setback if the fighting in Ukraine causes any serious damage to the country’s nuclear facilities.
Although the pressure to move away from gas over time will intensify in Europe, demand will continue to grow in many other parts of the world. In a climate of energy insecurity, direct state-to-state-backed transactions are likely to prevail. China is leading this process, but it is hardly the only power with an incentive to build more links with producers in the Middle East, Africa, and elsewhere. Following a recent gas deal with Russia, the events of the last few weeks are likely to trigger a reassessment by China of its increased reliance on Russian supplies (from Siberia and Sakhalin), as has happened in Germany.
At the same time, policies to combat climate change will likely be assigned a significantly lower priority. While increasing the supply of renewables also advances energy security, the extensive public spending required for investment in projects may need to be postponed. With rising energy prices already driving up retail bills, governments will not want to impose the additional costs of the green agenda on their constituents.
Russia’s war in Ukraine brings both opportunities and risks. Investment in natural resources – food, minerals, energy – remains as necessary as ever. A renewed Cold War may limit the features of globalization that have defined the past 30 years; but economic life goes on. Nothing in the current situation has changed the global economy’s underlying dynamics: growth driven by an ever-rising population (almost 10,000 per hour), and the continuing spread of prosperity, particularly in Asia. For all the complications and losses caused by what is happening in Ukraine, these will continue to be the fundamental forces driving the energy sector.