The war in Ukraine may temporarily derail global efforts towards net zero, as governments scramble to ensure energy security. Long term, however, it has highlighted the importance of energy diversification, and may offer Asian nations the push needed to accelerate the renewables agenda, experts say.
As countries, particularly those in the West, began sanctioning Russia in response to its invasion of Ukraine on February 24, they faced the dilemma of how to replace the 4.7 million barrels per day (mb/d) in crude oil, and 8.9 trillion cubic feet (Tcf) per year in gas, that Russia supplies worldwide. Russia is the world’s third-largest oil producer, after the US and Saudi Arabia. Last year, it exported 262 million short tons of coal, according to statistics provider, Russia Matters.
While over the long term, the Ukraine crisis instigates greater incentive for the development of renewables projects to ensure energy security, in the immediate short term, countries are primarily looking at alternative sources of fossil fuel supply, Myles Mantle, senior counsel within the Global Projects practice at Mayer Brown, told FinanceAsia.
He gave Germany as an example of a nation that has looked to secure additional LNG from suppliers in the US and Middle East, as an immediate reaction to the conflict.
In April, Germany’s government announced its entry into contracts worth around €2.5 billion ($2.78billion) to lease four floating LNG storage and regasification units in the North Sea port of Wilhelmshaven. The move came in addition to two new projects by domestic energy players, RWE and Uniper, representing an approximate total investment of €2.94 billion by the two companies.
“Previously these projects didn't make much sense because imported LNG is so much more expensive than pipeline gas. But if we now think about security of supply, the metrics change, and the more expensive LNG supply looks increasingly attractive,” Mantle explained.
It is less clear how Europe will replace its sources of oil and refined products, Mantle noted. The EU’s proposed total ban has been a point of contention for countries such as Hungary, whose refineries are set up to process Russian exports. Hungary imports 85% of its natural gas and 65% of its oil supply from Russia. Its prime minister, Viktor Orban, has strongly opposed the EU’s proposed oil embargo, calling it an “atomic bomb” for Hungary’s economy.
The above are examples of realignment of supply, which “do not reflect a shift away from renewables back to fossil fuels, but rather compositional changes within the remaining non-renewable energy production,” said Markus Schomer, chief economist at PineBridge Investments. Replacing oil from Russia with oil from other producers has no overall impact, he suggested. However, other moves do imply an increase in fossil fuel production and, consequently, a rise in short-term carbon emissions.
In a Tweet on April 30, India coal minister, Pralhad Joshi, announced that government-owned coal mining company, Coal India, would increase its production by 12% and offtake by 20%. Reversing a general downward trend in India’s use of this fossil fuel, he deemed the pivot necessary to “further India's energy security”.
India, which derives 70% of its electricity from coal, has seen its energy supply woes exacerbated by the country’s hottest spring in over 120 years.
A number of EU countries, including Germany, Poland and the Czech Republic, may also turn to coal as a short-term solution. While plans to phase out coal by 2030 remain in place, the German government has said it could suspend the planned closure of certain coal-fired power stations.
“You could see an increase in emissions in 2022 as a result,” said Gaurav Ganguly, senior director of Economic Research at Moody’s Analytics.
Environmentalists are concerned that surging oil and gas prices may foment the development of fossil fuel projects. The price of crude oil surged 40% to $105 per barrel as the war broke out in February. In May, US LNG producer, Venture Global LNG, announced the final investment decision (FID) for a new $13.2 billion LNG facility south of New Orleans – the first US-based LNG project to reach financial close since August 2019.
“In a high oil and gas price environment, it's easier to get more challenging and expensive-to-develop projects financed and structured because, while the marginal cost is high, any cash flow modelling will show there is still space for a decent return,” explained Mantle, citing examples including offshore platforms and processing vessels.
“In the short run, fossil fuels have clearly become more profitable due to the sizeable increase in the price of oil,” reiterated Ganguly.
Both experts see the higher oil prices resulting in improved bankability, with more fossil fuel projects being given FID sign-off. This is something that may also lead to renewed interest and investment across the exploration sector, explained Haider Ali, associate portfolio manager of Emerging Markets Discovery Equity at T. Rowe Price.
“We are seeing continued recovery of activity in the US shale basins and signs of oil companies securing drill rigs in the international markets.”
However, Mantle stressed the current awareness around ESG and the desire to contribute towards the global energy transition as contrasting past periods of high fossil fuel prices, such as in 2013-2014.
Long term
Due to the build times and investment costs associated with renewable energy projects, countries will remain reliant on fossil fuels in the short and medium term, Moody’s Ganguly said. But long-term plans by governments to meet emissions reduction targets and ramp up the use of renewables in line with the Paris Agreement and COP26-related commitments, have not be abandoned.
In fact, the drive for energy security means that more may be invested in R&D to make technologies such as green hydrogen more viable and to develop an associated value chain, said Ganguly.
Up until now, climate change has been the main driver of the transition towards renewables, but the Russian invasion added to the list of reasons to move away from fossil fuels the desire to achieve a greater degree of energy independence, said PineBridge’s Schomer.
“Greater use of solar, wind, and water as energy sources will allow many more countries to cut imports from places with questionable social and governance records, something that matters more and more in a world driven increasingly by ESG values,” he added.
There may also be renewed interest in nuclear as an energy source.
Asia versus the West
Experts note the difference in focus and sensitivities between Asia and the West when it comes to the war in Ukraine, both in terms of political sanctions and energy policies.
“The West, in the form of NATO, is obviously much closer to the frontline and therefore has reacted much more harshly to the war than some of those in Asia,” said Schomer.
Southeast Asia as a whole has been an aggregate oil importer since the mid-1990s, mainly from the Middle East and Africa. In 2020, it imported around 2.6 mb/d of oil, with Thailand and the Philippines accounting for 40% of this, according to a May 2022 report by the International Energy Agency (IEA). Under current policies, oil imports could increase to 4.6 mb/d in 2030 and 6.2 mb/d in 2050. The region is also on track to become a net gas importer by 2025.
For Southeast Asia, the impact reverberates not only across oil and gas but more importantly coal, explained Priscilla Lu, head of sustainable investments alternatives Asia at DWS.
More than 50% of the coal exports from Russia are destined to Asia, with China representing about 30% of that, according to Russia Matters.
Even prior to the crisis, EU-based energy companies have been generally ahead of the US and Asia in their adoption of ESG considerations. Last year, UK oil and gas giant, BP, announced plans to use capital from its liquidated profitable fossil fuel assets to increase investment in renewable energy projects. The firm does not expect to yield positive returns from the effort until 2025.
Following the invasion, the EU’s European Commission laid out a strategy for energy independence from Russia, known as REPowerEU, proposing investment into green energy, and supplier diversification to source alternative fossil fuels such as LNG, from Qatar and the US.
The Commission also announced plans to increase its 2030 target for renewables – originally outlined in its Fit for 55 green transition plan – from 40% to 45%, with total renewable energy generation capacity aimed at 1,236 GW by 2030.
“In contrast, the response is Asia has been more inward-focussed and self-sustaining,” Lu said.
She noted moves by India and China to increase their purchase of Russian oil and gas, in order to build up reserves while the price of Russian crude is below market average.
The same by smaller Southeast Asian countries may be justifiable, she suggested, given their growth priorities and the perception that, individually, they contribute little to global carbon emissions.
“There is a perception by some that net zero is important, but only for those who can afford it,” she said.
Indonesia is heavily reliant on fossil fuels for transportation and electricity. A member of the Organisation of Petroleum Exporting Countries (OPEC) until 2009, the market was a net exporter of oil during the 1990s, producing around 1.5 mb/d, explained Fabby Tumiwa, strategist and executive director of the Institute for Essential Services Reform (IESR), an Indonesian energy policy and environmental think-tank.
Following decline from the late 1990s, Indonesia’s oil production stood at around 1 mb/d by the mid-2000s. “Right now, we are at around 700,000 mb/d – less than half of what we produced in 1990s,” Tumiwa said.
With its emissions expected to peak by 2030, the country has set a goal to meet carbon neutrality by 2060. But as its economy continues to grow, so too does its demand for oil.
Currently, half of Indonesia’s oil is imported, either as crude or as refined products such as petroleum. Tumiwa explained that government efforts to promote domestic oil production and exploration have failed due to regulatory uncertainty, citing now-defunct oil and gas laws, and a lack of appetite from international oil companies. In light of sharp price rises, the government has also struggled to progress plans to phase out fossil fuel subsidies, which increased from $160 million in January 2021 to $710 million at the start of this year, according to the ISEAS-Yusof Ishak Institute. In May, Indonesia’s Ministry of Finance announced an additional energy handout totalling $23.8 billion.
“Oil prices are very sensitive politically: they affect inflation rates and could dampen the economy’s recovery from Covid-19. The government is aware of this and so decided to subsidise the price of oil. They didn’t want the high oil prices to shock the economy,” Tumiwa said, detailing this threefold subsidy increase as the most acute result of the Ukraine crisis in Indonesia.
“There have been rumours that state-owned companies explored the import of cheap crude oil from Russia, but there was some debate around whether the oil was compatible with [state oil company] Pertamina’s refineries,” he added.
In Asia, reaction to the war has been angled towards the opportunistic purchase of fossil fuels and securing greater supply, Ganguly reiterated.
An analysis by Moody’s Analytics shows that Russian oil and refined product exports to the US and EU fell by 0.7 and 3.5 mb/d between 2021 and June 2022, respectively, while India and China increased their imports of these products by 0.6 and 0.3 mb/d.
That said, the current crisis has cultivated a sense of urgency among emerging Asian nations, highlighting the need to diversify their energy mix to include renewables. Such diversification has become critically important, not so much from a climate change standpoint, said Lu, but from an energy security perspective.
The next global affliction
The Ukraine-Russia conflict has highlighted the global dependence on fossil fuels and demonstrates exactly what happens when there is a disruption across energy markets.
For Europe, it is unlikely that there will be a major long-term impact on efforts towards achieving net zero, even if the region relies upon the short-term use of fossil fuels to plug in the current supply gap.
For Asian nations, however, the geopolitical crisis has emphasised diversification into renewables as paramount, and has raised the issue of energy security. It has also underscored the need to implement a faster transition to net zero in line with the EU’s efforts.
“I’m hoping there's just greater activity in all aspects, but also a desire to play a strong role in the energy transition in a meaningful way,” said Mantle.
For Ganguly, the Ukraine-Russia conflict has brought about a key question that all nations need to consider: what will be the next major shock to disrupt the global economy?
