How does the future of the fuel and energy sector look through the prism of the crisis

The year 2022 has become extraordinary for the Russian oil and gas industry and the world as a whole in terms of its significance, scale and consequences, not inferior to the 1973 oil shock. The crisis has led to an abnormal increase in energy prices, primarily in Europe (but also in other regions of the world), as a result of which energy consumer bills have radically increased. This has created social and economic problems, including bankruptcies, closure of production facilities and relocation of industry to other jurisdictions.

Oil: not everything is so bad

The effect of the current crisis has demonstrated the fragility of international logistics chains of hydrocarbon supplies and the importance of Russia as a leading exporter of energy resources to world markets. Despite the fact that the Russian economy occupies only a two percent share of global GDP, it accounts for about 20% of global energy trade.

In the summer of 2022, the European Union decided to ban oil imports from Russia to EU countries from December 5, 2022 (with the temporary exception of raw materials supplied via the Druzhba pipeline), as well as petroleum products from February 5, 2023. During the second and third quarters of 2022, India, China and Turkey actively purchased volumes of Russian oil redirected from the European market, but at a significant discount to world quotations. Since December, when a complete ban on EU imports of Russian oil came into force, the Russian Federation has been making additional efforts to diversify its oil export flows.

At the same time, 2022 turned out to be a positive year for the Russian oil industry from a financial point of view. Thus, revenues from the oil and gas industry for 11 months of 2022 exceeded the same indicator in 2021 by almost 2.5 times. This is due to an increase in oil prices, as well as an increase in supplies during the year ahead of sanctions, which will take full effect only from 2023. In fact, the next two to three years will show how the domestic oil industry will be able to adapt to the sanctions regime.

In 2022, the unity of the oil–producing countries participating in the OPEC+ deal was demonstrated. In October 2022, they agreed to extend the agreement until the end of 2023 and reduce production quotas by 2 million barrels per day (until mid-2023).

There was also an attempt to build a cartel on the buyers' side: the G7 member states were able to form a unified approach to setting a price ceiling for oil from Russia. The OPEC countries are certainly suspicious of this initiative, since, in fact, this practice can be extended to other participants in the energy market.

At the moment, the volume of abandonment of Russian oil is closer to the optimistic scenario and amounts to 2.4 million barrels per day (including petroleum products). However, if we talk about forecasts, much depends on how the embargo on petroleum products will develop. On the one hand, companies have already learned to find non-standard solutions in a year, on the other hand, unlike oil, there are much more logistical and other restrictions in the trade of petroleum products.

Gas: the price rally is growing

An even more significant crisis was observed in the gas market. By the end of 2022, the price for it at the TTF hub in the Netherlands – the main price benchmark of the European gas market – amounted to $1,400 -1,500 per thousand cubic meters, which is almost three times higher than in 2021, 13 times higher than in 2020, and six times higher than the average for a decade (2011-2020, before the start of the current price rally). By the end of the year, the price of spot LNG in the Asia-Pacific region is approximately at the same level (calculated according to the JKM index), except that the difference from previous years will be slightly less radical due to the historically existing "Asian premium". At the same time, the impact of the gas crisis on Asian countries turned out to be less serious than in Europe due to the fact that historically Asia imports most of the "blue fuel" under long–term contracts linked to oil.

Even in the United States, the world's largest gas producer, domestic gas prices (the main benchmark for wholesale prices is the Henry Hub site) have doubled compared to 2021. This was due to an increase in LNG exports, the pricing of which is directly influenced by trends in other markets. Such prices are very high for the American market. With the exception of an abnormal surge in quotations in the winter of 2021, the last time prices in the United States were at this level was in 2008 – at the very beginning of the "shale revolution".

As a result of the 2022 gas crisis, the world's largest international blue fuel trade channel, the supply chain between Russia and Europe that has been formed for more than half a century, was actually severed. Most of the LNG volumes from the spot market were sent to Europe, and the largest importer of LNG in 2021, China, lost the palm to Japan due to the high cost of this energy resource and, in general, a decrease in demand against the background of anti–liquid restrictions.

Separately, the initiative to introduce a gas price ceiling should be noted. It is too early to judge the effectiveness and significance of this measure, but the emerging trend towards new approaches to regulating relations between buyers and suppliers of energy resources certainly requires more attention in 2023.

Quo vadis?

It is important to understand that in the current situation, when prices for energy, metals, and agricultural products have increased significantly, we can expect a slowdown in the economy, which means a reduction in energy consumption, including oil.

At the same time, the main severity of the consequences of the crisis – both for the global economy and for the Russian economy – will begin to be felt only in the coming year. For example, the eurozone economy grew actively in the first half of 2022 against the background of the lifting of coronavirus restrictions, and only in the second half of the year there was a decline.

According to the International Monetary Fund estimates from October 2022, the eurozone economy grew by 3.1% in 2022 (while growth was only 1% in the fourth quarter), and in 2023 these dynamics will not exceed 0.5%. Moreover, for the EU's leading economy, Germany, growth is projected at 1.5% this year, and next year both Germany and Italy will demonstrate negative economic development rates. Industrial production in most European countries, according to Eurostat, increased from September 2021 to September 2022 (it decreased only in the Baltic States and did not change in Italy). However, the main burden of the economic burden will fall on Europe only in 2023.

The leaders of economic growth traditionally remain the developing countries of Asia and the Middle East. At the same time, it is obvious that the economies of the Middle East countries improved their performance against the background of a price rally in the commodity markets, and the large energy importing countries did not meet their earlier growth forecasts. Thus, forecasts for the dynamics of China's GDP have deteriorated significantly.

High price volatility and rising inflation are a systemic challenge for the fuel and energy sector – new projects are becoming more expensive, and investment decisions are being postponed, as investors are not ready to accept the current level of uncertainty.

Of course, the consequences of the economic sanctions imposed against Russia after the start of a special military operation in Ukraine are also serious. According to IMF estimates, the Russian economy lost 3.4% of GDP in 2022, and will lose another 2.1% of GDP in 2023. The estimates of the Ministry of Economic Development of the Russian Federation are softer – minus 2.9% of GDP in 2022 and minus 0.8% in 2023.

And what about the climate?

The year 2022 has also become a historic one for international climate policy. Faced with economic and energy shocks, the world's largest emitters of greenhouse gases (GHGs), such as China, the United States, the European Union, and India, have changed their approaches to the problem of climate change. In particular, at the UN climate summit in Sharm el-Sheikh, the countries failed to agree on the gradual abandonment of all types of fossil fuels, despite serious debates on this issue. And the wording about reaching a peak in emissions by 2025 was not included in the final decisions.

At the same time, record production and commissioning of renewable energy capacities are observed. This is due to the fact that such projects become effective even in the absence of subsidies. In addition, renewable energy sources do not require regular energy supplies and are less susceptible to risks of disruption of logistics chains due to geopolitical contradictions.

The US and EU governments continue to introduce legislative measures to support low-carbon solutions. In particular, the new law adopted in the USA (Inflation reduction act) contains a significant "green component". In turn, the EU approved the introduction of a cross-border carbon tax, despite the resistance of a number of industry associations. China continues to increase renewable energy capacity, and India has officially announced a more ambitious action plan to reduce emissions (nationally provided contribution, ONUV) – both in terms of specific greenhouse gas emissions and the share of low-carbon energy in the energy mix.

The energy crisis makes low-carbon transformation possible in developing countries only if external financing is obtained. In the meantime, these countries are focusing on overcoming energy poverty, which has worsened against the background of the energy crisis.

But despite the crisis phenomena in the global fuel and energy sector, the energy transition continues. According to the International Energy Agency, 2,400 GW of renewable energy capacity will be introduced in the world in 2022-2027, and by 2025 they will generate more energy than coal-fired power units. This will make renewable energy the main source of electricity in the world.

Thus, we enter 2023 with the following "baseline conditions":

- All energy resources have become significantly more expensive, and energy poverty issues are becoming more acute in many regions of the world;

- Energy security and the availability of energy resources are becoming tactical priorities for most countries and companies;

high volatility and uncertainty constrain investment decisions on new projects;

- Cartels of energy buyers are emerging;

- The energy transfer is accelerating, but it is becoming less equitable.

- But there is also good news for the Russian fuel and energy sector.

But there is also good news for the Russian fuel and energy sector.

First, contrary to the forecasts of many analysts, the industry was able to quickly adapt to unprecedented pressure and demonstrate resilience in the new environment.

Secondly, opportunities for new trade and technology partnerships are opening up.

Thirdly, innovative development competencies come to the fore. Of course, the transformation will not be easy, but we are confident that intra- and inter-industry cooperation and investments in human capital will allow us all to pass the test strip with dignity.