Putin’s searches for new energy markets as Europe faces oil, gas shortages

Following several sanctions faced by Russia, especially in the energy sector, it is now looking toward alternative markets for its energy exports. With the latest package of sanctions imposed on Russia by the United Kingdom and the European Union on Wednesday, Putin’s plan to control a 20% share of the global LNG market by 2035 seems to be even harder to achieve.

Russian President Vladimir Putin said on Wednesday, April 14, that Moscow will be looking into alternative markets for its energy exports after Western capitals sanctioned Russia over its military operation in Ukraine.

Russia is currently the largest gas exporter, with Europe accounting for more than a third of its market, says the US Energy Information Administration. With the Netherlands deciding to stop pumping oil and gas by 2050 and cutting down on its production last year, Russia emerged as a critical supplier to Europe. The Covid-19 pandemic and the simultaneous lockdown also hit the European and global markets last year, which gave Russia even more sway over Europe.

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Russia’s power over the European market was seen when gas prices suddenly dropped in October 2021, following Putin’s comments on stepping in to “stabilize” the energy market.

This increase in Russia’s influence in the European market led to the West accusing Putin of trying to score geopolitical points in 2021, a charge that the Kremlin has denied, citing that it only stepped in to fill the void in the gas market. After much deliberation, Russia offered to hold talks with the Western leaders on steps to boost gas supply. He went on to blame Europe for the gas crunch due to a lack of planning.

Amid the gas crisis in Europe, Russia had set a target of a 20% share of the gas market by 2035, expanding its annual LNG output to 120 million-140 million tonnes from around 30 million tonnes at present.

This plan was, however, hit by the EU’s fifth package of sanctions against Russia that barred the delivery of goods and technologies required for gas liquefaction. According to experts, this will set Russia back by several years as it figures out how to replace the European technologies using Russian know-how.

The sanctions are also likely to hit Russia’s new projects, such as Novatek’s Arctic LNG-2 and Gazprom’s Baltic LNG at a time when its gas industry was already reeling with the exit of Shell and ExxonMobil.

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The EU, meanwhile, is aiming to cut its dependence on Russian gas by two-thirds this year as retaliation against Russia’s invasion of Ukraine and to counter its growing influence in the market. The EU has set a target to end all Russian fossil fuel imports by 2027.

A 2021 study of Russia’s energy exports showed that Moscow exported 74% of its natural gas to the members of the Organisation for Economic Co-operation and Development in Europe, and 13% each to the Asia and Oceania regions and the rest of the world.

According to the US Energy Information Administration, “In 2021, Russia was the largest natural gas-exporting country in the world, the second-largest crude oil and condensates-exporting country after Saudi Arabia, and the third-largest coal-exporting country behind Indonesia and Australia. Although OECD Europe received most of Russia’s crude oil and natural gas exports last year, countries in Asia and the Oceania region received most of Russia’s coal exports.”

Russia is the world’s third-largest oil producer behind the United States and Saudi Arabia. As the third week of April began, the European Union started drafting proposals to ban the import of oil as part of another sanctions package against Russia. Oil from Moscow forms around a fourth of the EU’s crude imports.

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Although the plans have not been finalized yet, the sanctions could include higher tariffs on Russian oil and a ban on some oil products, said European Commission President Ursula von der Leyen.

While the United States and the UK have imposed a total ban on Russian oil imports, hoping to cut off a significant source of revenue for Moscow, taking a similar decision is harder for Europe due to its high dependence and could push up the already high energy prices.

The dilemma is compounded by the geographical spread of the EU and the vastly varying economic capacities of its 27 members. While larger economies have a chance of cushioning the impact of a Russian oil embargo, smaller economies like Bulgaria and Hungary will not be able to implement such a move as they are nearly 100% dependent on Russian oil.

According to the EIA, Russia is also a significant supplier of crude to Belarus, Romania, and Bulgaria.

EU diplomat Josep Borrell said that in such a situation, European countries were working to cut dependence on Russian oil in their individual capacities.

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In this situation, Germany’s position as the EU’s biggest economy has become pivotal. While offering Ukraine more weapons, German Foreign Minister Annalena Baerbock called for a “coordinated plan to completely phase out fossil fuels” from Russia.

However, although Berlin is calling for a ban on Russian oil, it is not actively supporting an immediate embargo. A survey in Germany showed that around 57% of respondents said that Berlin must continue importing to avoid supply shortages and price spikes.

Germany’s imports have already come down to 25% from 35% before February.

After the US and UK’s bans, European sanctions have surely worried the Kremlin as they could severely hit Russia’s oil revenue as nearly 49% of Russia’s oil exports are sent to OECD countries in Europe. The Asia Oceania region comprises 38% of Russia’s oil exports while the rest of the world comprises only 13%.

The fifth package of EU sanctions against Russia included a ban on coal imports. The import ban on Russian coal will come into effect from mid-August. The impact of the move on Russia is expected to cost the country USD 4.4 billion a year, nearly half of what Europe has been buying from Moscow annually.

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With Russia being the sixth largest producer of coal in the world and only 6% of the EU’s energy imports comprising coal, the impact of the ban on the EU is expected to be cushioned in a few months, with shipments being arranged from Australia, South Africa, and Indonesia.

However, Europe, which is dependent on Russia for 45% of its coal imports, will have to deal with some immediate problems, especially in the steel sector in Germany. Soon after the ban announcement, Germany, the EU’s largest economy, was left scrambling for gas and oil to support its industries. In fact, Germany, which is the main importer of coal from Russia, pressured the EU to push back the ban by four months, said sources.

The delayed ban on coal imports is being seen as the easiest punitive measure against Russia. The sanction is unlikely to greatly affect either side beyond a few months. While Europe can replace its requirements from other coal producers such as the US or India, Russia’s coal imports to Europe, which comprise only 32% of its total coal imports, is likely to be diverted to the Asia Oceania region, which currently buys 53% of Moscow’s export quota.

According to the EIA, “Russia exported more than half of the coal the country produced in 2021. Russia’s coal exports in 2021 increased by 7% to 262 million short tons (MMst). South Korea, Japan, and Taiwan together received about 22% of Russia’s coal exports. One-third of Russia’s coal exports were sent to OECD Europe. Germany, the Netherlands, Turkey, and Poland combined received 24% of all Russia’s coal exports in 2021. Thermal coal, often used for power generation, accounted for 90% of Russia’s coal exports.”

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If the EU cuts down on its Russian imports of oil and gas, Moscow’s clout over Europe is likely to be reduced. But Vladimir Putin’s announcement to look for alternative outlets in the energy sector could be a signal of Russia’s intent to have a significant say in the global market.