In response to the invasion of Ukraine, major oil companies are panic pulling their interests out of Russia. Despite inevitable financial losses, BP, Shell, and other supermajors in the oil industry have joined the trend of corporate shunning. This may prove to be the catalyst for the accelerated decarbonisation of Europe.
Europe is dependent on Russia for approximately 40% of its gas supply and a quarter of its oil supply. As we move away from coal and nuclear, there has been an increasing reliance on gas and oil whilst renewable generation could not meet energy demands. Gas and oil prices increased in 2021 due to the COVID-19 pandemic. As restrictions lessened and the economy began its recovery, OPEC+ production cuts meant that supply could not keep up with demands and prices were driven up. Now, with further uncertainty on energy security as the Russia-Ukraine conflict escalates, prices have spiked once again. Dutch TTF natural gas increased by 60% and Brent crude reached a 10-year high above 119 USD per barrel.
Germany has a particular reliance on the Russian gas supply due to its strict climate goals and decommissioning of nuclear power stations. The Nord Stream 2, an 11 billion USD gas pipeline project, of which Russian firm Gazprom owns 50%, connects the two countries. The pipeline was designed to double the capacity pumped from Russia; however, this came with opposition from the US, UK, Poland, and Ukraine who believed it would give Russia an overwhelming hold over Europe’s gas supplies and with that, political advantage. Nord Stream 2 was completed at the end of 2021 but has since stood idle awaiting German certification. Its future now looks uncertain as approval of the project has been halted, with 140 employees being made redundant and rumours of insolvency spreading.
Germany is not the only one to begin disassociating itself from Russia. BP has divested its 20% stake in Rosneft. The Russian state-controlled oil giant accounted for half of BP’s oil reserves and the hasty decision will undoubtedly cause damage. Shares in BP fell 7.5% and the company could face charges up to 25 billion USD for the divestment. This dramatic move, although costly, could have long term silver lining for the company’s environmental appearance. BP has pledged to reduce fossil fuel production by 40% by 2030, however, its climate targets exclude Rosneft and this decision had brought with it scepticism from ESG investors who questioned the integrity of the company’s commitment to the planet.
Following BP and Germany’s announcement, Shell also released its decision to exit its Russian operations. The statement included plans to end involvement in Nord Stream 2, Sakhalin 2, and the Salym Petroleum Development. The latter two are ventures with Gazprom and had together contributed over 700 million USD to Shell’s net earnings in 2021. However, the company’s policy has been far from unified: Shell made a second statement announcing the purchase of a cargo of Russian crude oil to prevent disruptions to market supply. This reversal of policy resulted in significant backlash, with the Ukrainian Foreign Minister Dmytro Kuleba equating Russian oil with Ukrainian blood. Since, Shell has apologised and reneged on the policy, stating that all its profits from Russian oil will be dedicated to a humanitarian fund to support Ukraine. Shell’s hesitation to wholly divest from Russia is indicative of a transitional period that will accompany the reality of an international oil exit. Economic imperatives must be balanced with ESG concerns, an equilibrium that not all firms have found.
The move away from Russian gas supplies, although sudden, was not surprising. Reducing reliance is necessary for the EU to reach its net-zero goals and it would also reduce Putin’s political leverage. Russia’s economy is based heavily on its export of commodities, which it leads globally for gas and second for crude oil. Russia is one of the five greatest greenhouse gas emitters globally, yet it has had a consistent reputation for unwillingness to participate in climate negotiations. The move away from Russian supplies, although improving the appearance of Europe’s climate credentials will do little to worldwide carbon production unless commitments can be made to change the composition of energy consumption. The change needed will unlikely be coming from Russia which will look to replace its European customers through expansion in China.
The International Energy Agency (IEA) is taking action, having released its 10-point plan to reduce the European Union’s reliance on Russian gas on March 3rd. The proposal is consistent with the EU’s climate ambitions and the European Green Deal, however, it does not appear to be able to prevent the inevitable increase in gas prices. The plan suggests replacing Russian gas supplies with liquified natural gas supplies from non-Russian sources. Although theoretically possible to increase inflow levels, all importers are drawing oil from the same supply thus the market will tighten, and prices will increase. The IEA has taken consideration of this outcome and suggests temporary tax measures on electricity companies to bring down energy bills when gas prices are high. The plan also included steps that would support decarbonisation. This would be done through the acceleration of new wind and solar projects, maximising the generation of low-emission sources, such as bioenergy and nuclear, and a reduction in energy consumption.
The war-induced political motivation to seek energy independence is not new. In the 1970s, America experienced two oil and gas crises where soaring prices induced widespread panic. The consequence was America’s strive for energy independence through increasing domestic production, with the development of the Bakken Oil Field and Permian Basin, alongside an exploration into renewables. The IEA’s backup plan of ‘fuel-switching’ follows the former. It entails an increased reliance on domestic coal, liquid fuels and fracking, temporary measures that would go against what Europe has been working to move away from.
The extent of damage will be visible in the coming years as the road back to energy security must be decided. It is yet to be seen whether the IEA’s 10-point plan will prove to be a realistic solution, or if the focus on energy security will be at the expense of decarbonisation.
By Alice Lane
Sector Head: Philipp Jiang