By Daniel Yergin and Carlos Pascual 

What seemed undoable when Russia invaded Ukraine — banning Russian oil and gas sales in a Europe that depends heavily on Russian energy — is becoming increasingly likely. But it will need to be done right if it is going to work.

Sanctions imposed against Russia in February after the war began notably excluded energy because it was feared that Europe is so dependent on Russia energy imports that severing the ties would result in skyrocketing prices, shortages and economic hardship. The European public’s support for the concerted Western response to the invasion might be undermined.

Then came almost two months of war — devastating attacks against civilians, the horrors revealed by the Russian retreat from Kyiv, the imminence of massive battles in the Donbas region. European governments have vowed to wean themselves off Russian energy over several years; but now, amid mounting revulsion over Russian President Vladimir Putin’s tactics, momentum is accelerating for European Union energy sanctions. It has already begun with Russian coal.

But gas and oil are the big-money sources for Russia’s war financing. If Europe cut off shipments completely, we calculate that it would cost the Kremlin, at current prices, more than $250 billion a year. Is it possible to do so without causing massive, destabilizing economic pain? “Self-sanctioning” — refineries refusing to use Russian oil, banks not providing financing — is already reducing European purchases of Russian energy. High import tariffs on Russian energy, intended to force Russia to take massive discounts to make its oil competitive, are now under discussion.

Completely severing Europe from Russian energy, though, will depend on skillfully managing the resulting energy shortages and turbulence. To succeed requires something that has until now been largely missing: collaboration between government and industry.

Politics needs to be put aside, along with recycled sound bites about “price gouging” that ignore the realities of shortages in the global market and discourage cooperation.

U.S. and European governments need to collaborate with companies on a daily basis, sharing information, to coordinate the complex logistics and supply chains of a nearly 100 million barrel per day oil market. This is wartime, and that means reaching back to the government-industry collaboration of World War II and the “voluntary agreements” of the Korean War and “emergency committees” of the 1956 Suez Crisis, which at the time included temporary antitrust exemptions to permit critical information flow among government and companies.

With such cooperation, sanctions against Europe-bound Russian oil may just be manageable. According to our figures, about half of Russia’s 7.5 million barrels per day of crude and product exports go to Europe — meeting about 35 percent of total demand. President Biden’s recent announcement of a huge release from the U.S. Strategic Petroleum Reserve was a major step to help offset shortages.

U.S. oil production will increase substantially this year. Middle East producers could add more oil quickly, but that would mean jettisoning their OPEC Plus agreement and getting beyond the tensions in U.S.-Saudi relations. An Iran nuclear deal, with sanctions lifted, could quickly bring more oil to market. But Russia, a party to the deal, may not support an agreement that would add competitive oil to the market.

Some of the Russian barrels rejected by Europe would move to Asia, but sold at big discounts, and their passage would be impeded by sanctions, limits on insurance and finance, and the physical availability of ships. Here, lessons need to be applied from the 2012-2014 sanctions on Iran.

Natural gas is the biggest challenge, because of Europe’s high dependence on pipeline delivery from Russia — normally about 35 percent of E.U. demand, but fluctuating down to 25 percent. While liquefied natural gas (LNG) has brought much additional gas to Europe and with more to come, there is not enough additional LNG capacity globally or sufficient LNG infrastructure in Europe to offset a shortfall from turning off the Russian spigot.

Significantly expanding renewable energy will take years. But there are immediate steps that could reduce Europe’s gas dependency: temporarily using more coal; if possible technically, not shuttering Germany’s last three operating nuclear reactors; energy conservation; behavioral changes (e.g., adjusting building temperatures); and possibly some form of rationing.

These steps would be heavy lifts politically, especially in Germany, but as horrors continue to emerge from Ukraine, people may be more accepting of the moves than their leaders anticipate. To soften the economic impact, governments may look hard at Russian financial assets in Europe to compensate consumers and companies.

A decade ago, Putin denounced the “fracking” shale revolution, recognizing it as a threat. He was right to worry. If the United States had not gone from importing 60 percent of its oil to becoming the world’s No. 1 producer and, this year, the world’s largest exporter of LNG, Europe might now be his hostage. Now, Putin has revealed just how formidable a strategic asset U.S. oil and gas is — not only for the United States but also, in this deepening crisis, for Europe.

______________________________________

Daniel Yergin, vice chairman of S&P Global, is the author of “The New Map: Energy, Climate, and the Clash of Nations.” Carlos Pascual, a senior vice president at S&P Global, is a former U.S. ambassador to Mexico and Ukraine. Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by Washington Post on April 14, 2022. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.

Original article

Use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

energiesnet 04 15 2022