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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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How The Worsening Ukraine-Russia Crisis Will Affect Energy Markets

How The Worsening Ukraine-Russia Crisis Will Affect Energy Markets

The confrontation between Ukraine and Russia has entered a potentially dangerous new phase that could increase the likelihood of a dispute over energy supplies.

On Aug. 15, Ukrainian authorities reported that they destroyed a convoy of armored vehicles that had pushed into Ukraine from Russia. The details were murky, but armored vehicles apparently entered Ukraine from Russian territory close to where a convoy of Russian aid trucks was located.

Tensions over Russia’s attempt to send aid to eastern Ukraine had been brewing for days, as Ukraine suspected it was a cover for a shipment of military supplies to pro-Russian rebels. Ukrainian officials said artillery was used to destroy Russian armored vehicles, forcing the standoff to a dangerous low point.

European diplomats tried to calm tensions, but the incursion indicates that the conflict is not going away anytime soon. And that’s going to affect the energy trade in Europe and Asia in several ways.

First, the prospect of an interruption of natural gas flows from Russia to Europe has just gone up; European foreign ministers have said they are prepared to take additional measures against Russia due to its ongoing support for rebels in eastern Ukraine and Ukraine approved a law on Aug. 14 that allows it to impose sanctions on Russia. Both moves could lead to supply disruptions.

Second, relations between Russia and Europe are so low that the South Stream pipeline is probably doomed in the near-to-medium term. Intended to bypass Ukraine – a key Russian objective – South Stream would connect Russian natural gas to Europe via the Black Sea, arriving on EU soil in Bulgaria. South Stream is an important strategic project for Russia, and for that reason, European officials will likely keep it on ice.

As a result, European support for South Stream’s competitor project, the Trans-Adriatic Pipeline (TAP), will likely receive a boost. The TAP project will bring natural gas from Azerbaijan to Italy, diminishing Russia’s role as an energy supplier to Europe. TAP recently signed up former British Prime Minister Tony Blair to advocate on behalf of the pipeline. The pipeline is still facing environmental opposition in Italy, but the more Russia meddles in Ukraine, the more likely European politicians are to try and make TAP a reality.

Another effect of the worsening tensions in Ukraine is Russia’s decision to shift its priorities towards the east. Russian oil exports to Asia have already accelerated as relations with Europe deteriorate. Russia now exports 1.3 million barrels per day – about one-third of its total exports – to Asia, the highest share ever recorded. At the same time, Russian is pairing back its oil exports to Europe, dropping from 3.72 million barrels per day in 2012 down to 3 million barrels per day in July 2014. This trend will continue.

That means Russia will need to lean more heavily on the Chinese market for its energy exports, which is not necessarily a good thing for Moscow. This past spring, Russia largely gave in to Chinese demands on the terms of a $400 billion natural gas agreement that could see 38 billion cubic meters of Russian natural gas flow to China. As Russia loses more and more friends, it risks becoming too dependent on China.  

Finally, with Russia becoming an international pariah, oil companies operating in Russia will face increasing risks to their investments. This is bad news for ExxonMobil, BP, and Shell, but potentially good news for Chinese firms. Chinese banks and Chinese companies building offshore oil rigs, and other oil field service companies, could pick up the slack.

The next phase of conflict between Ukraine and Russia may be unclear, but one thing is already clear: European and Asian energy markets are in for a bumpy ride.

By Nick Cunningham of Oilprice.com

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  • From Australia on August 19 2014 said:
    Hello Nick, just to point out a correction. Firstly, The US staged a Coup of Ukraine, with the EU's support (search for "fuc^ the EU, Ms Nuland, US Secretary Of State). US put in a Facist Regime for the overthrow of Ukraine and to put terrorists into Russia! The people fleeing (known as pro-russians) are just citizens like you and me, except they speak Russian and have Russian relatives, not surprisingly. This current regimne has make it law that NO ONE is allowed to speak Russian nor teach its language anymore. Upon DEATH! If your a Jew, than you will be hunted down and shot! Doesn't sound like he cares for much people staying around, does it? The US wanted to put NATO in there, though Mr CHoco King so far has said no, but they are trying hard, and using this Facist regime to stir up the pot, as has been witnessed with the downing of MH17.
  • mf on August 19 2014 said:
    Russia turning east is a good thing for Europe, at least in the long run. Current course that Russia took practically guarantees disintegration of Russia and long term turmoil there. All the talk of harms of de-dollarization to the West are just that, talk. De-dollarization happened before, it was called transfer Rouble. If China gets her oil from Russia, China does not take oil produced elsewhere, or takes less of it. Ultimately, Russia is likely to lose everything east of Ural mountains to the Asians, as she properly should. To the commenter above, you have taken leave from reality. What happened in Maidan was a social explosion. Is Fergusson MO KGB work?
  • Andrey Palyura on August 19 2014 said:
    Russia is not an international pariah. May be some politician like to be so. South Stream is vital for South Europe. North EU coountries, which already have North Stream, do not want South EU countries have their own stream. It is example of competition for resources inside of EU. There are more than 150 countries in the world and sanctions annouced maybe 20. But Switherland, China and most of the others did not. Japan annouced simbolic sanctions. Good luck to every one from Crimea.
  • mf on August 19 2014 said:
    the person above took a leave from reality. Is Fergusson MO a KGB plot then?

    It is good for the world if Russia sells all of it's oil to China. Menace of de-dollarization is a red herring, we saw this all before, the name was transfer Ruble. Ultimately, Russia will end up dismembered, Asians will take everything east of Ural mountains. As they properly should, free us of this multi-century nightmare called Russia.
  • from Ukraine on September 29 2014 said:
    Just to point out a correction to the person from Australia who sounds VERY PRO-RUSSIAN and PRO-FASCIST.
    Don't tell lies!Upon DEATH!
    Firstly, it is RUSSIA who annexed the Ukrainian Crimea and now is trying to occupy the eastern part of Ukraine. Millions of Ukrainians have been funding our National Army to help them put away with Russian occupants. Ukrainian teenagers give their savings instead of buying new notebooks or I-phones, pensioners - what they have saved for the last day. Thousands of volunteers are digging trenches not to let Russians to Mariupol, Berdiansk,Kramatorsk... Actually, more than 4,000 Russian soldiers have died in Ukraine while trying to occupy Donetsk and Luhansk, killing Ukrainian civilians, children including. It is RUSSIA who are trying to put in a Fascist Regime in Ukraine and is supplying terrorists into Ukraine!
    And I ask you: what country are you a citizen? I am a citizen of Ukraine. How can you in Australia know better what is going on here, in Luhansk?
    Secondly. Everybody can speak any language in Ukraine, Russian is still taught and there are thousands of Russian schools in Ukraine.
    Thirdly, Jews (e.g. Kolomoyskiy, Kernes, Groysman) are heads of local and regional authorities here as well as Ukrainians, Russians, Armenians (Avakov)...
    Fourthly, the current government in Ukraine is legitimate. In May, Ukrainians elected today's President Poroshenko, in October we are going to elect Parliament. That will be the end to the pro-Russian regime of Yanukovich who killed students in Kiev for civilian protess early this year.
    Fifthly, It was pro-Russian terrorists with the help of Russian rocket who brought down MH17.

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