Daily on Energy: The limits of Russia’s energy pivot
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RUSSIA’S PROSPECTS FOR REPLACING WESTERN ENERGY DEMAND: Russia isn’t having a whole lot of trouble selling energy that, without the war and sanctions, might have gone to the West.
At the same time, its prospects of replacing its top import market in Europe is a long shot, has inherent infrastructure limitations, and depends a lot on how much China is willing to tether itself to its erratic neighbor.
Who’s buying: Research published earlier this week by Europe-based Center for Research on Energy and Clean Air lays out who bought Russian oil and gas, and how much, in the first 100 days of the war.
The Europeans bought plenty. Russia’s top five buyers, in terms of euros spent, included three EU members: Germany, Italy, and the Netherlands.
Outside of Europe: India, China, United Arab Emirates, and Saudi Arabia all increased their imports over the same period, taking advantage of discounted volumes. India alone bought 18% of Russia’s exports, according to CREA.
China, which according to the Kremlin recognized the “legitimacy of Russia’s actions” in a call between Xi Jinping and Vladimir Putin today, is seen as a prime alternative to Western buyers, but whether it becomes one depends on what it’s willing to invest, says CREA analyst Lauri Myllyvirta†
“The only way that China could replace Europe as a buyer would be by building a lot of infrastructure to transport oil and gas into the Pacific or directly into China,” Myllyvirta told Jeremy.
Myllyvirta said Russia is “pretty much hitting the limits” on how much energy it can divert because most of its energy infrastructure faces Europe.
Shipping more oil to India and the Middle East by sea, rather than to Europe by pipeline, is also adding costs to Russia and could limit Russia’s earnings, or even make selling oil that way much less profitable, in a lower price environment.
The geopolitical dynamic of the war, which has shown Russia’s willingness to declare new payment rules to supply agreements and shut off energy to those who don’t comply, also makes things less palatable for those who might pick up Europe’s share, he said.
“I definitely can’t imagine Chinese leaders looking at Europe right now and saying we want to be in that position of being heavily reliant on Russia and potentially being blackmailed by Russia in the future,” Myllyvirta said.
“I think in a way, by using energy to blackmail Europe, Russia has obviously burned bridges to Europe but also to other markets.”
Welcome to Daily on Energy, written by Washington Examiner Energy and Environment Writers Jeremy Beaman †@jeremywbeaman) and Breanne Deppisch †@breanne_dep† Email firstname.lastname@example.org or email@example.com for tips, suggestions, calendar items, and anything else. If a friend sent this to you and you’d like to sign up, click here. If signing up doesn’t work, shoot us an email, and we’ll add you to our list.
PUERTO RICO ANNOUNCES 45-DAY GAS TAX SUSPENSION: Puerto Rico Gov. Pedro Pierluisic signed a measure yesterday to halt gas and diesel taxes for 45 days, seeking to alleviate costs for drivers as fuel prices continue to rise to record highs.
The US territory’s gas tax currently stands at 16 cents per gallon. Yesterday’s decision comes as officials said they expect prices on the island to reach $6 per gallon in the coming months.
In order to make up for the lost tax revenue, Pierluisi said an additional $25 million will be added to the government’s general fund.
GAZPROM CUTS GAS FLOW TO ITALY: Gazprom has cut its gas flow to Italy by 15%, Italian state-owned supplier, Eni, said this morning—a surprising move that comes just one day after the Russian state-owned gas giant also slashed capacity to Germany by 40%.
Italy is the second-largest consumer of Russian gas, just behind Germany, and both countries agreed to comply with Moscow’s demands earlier this year to pay for their gas supplies in rubles.
Eni said Gazprom has not yet provided a reason for its cutoff. Meanwhile, Gazprom yesterday blamed its reduced capacity to Germany on technical issues at an entry point to the Nord Stream 1 pipeline— taking aim at Siemens, a German-owned engineering company, for failing to return gas-pumping units on time.
“Right now, gas supplies into Nord Stream can be ensured at as much as 100 million cubic meters per day,” compared to the initial number of 167 mcm per day, Gazprom said in a statement.
But that assertion was dismissed by German Economic Minister Robert Habeck, who told reporters: “We have established, in close consultation with the European Commission, that the maintenance problems are not related to the sanctions.”
The reductions by Russia have sparked renewed fears of supply disruption to the bloc—as well as suggestions that the move is politically motivated.
Habeck, for his part, accused Moscow of trying to “unsettle” markets.
Speaking to reporters earlier today, Habeck suggested the cutoffs might be a political strategy: “This is not the beginning, but a continuation of a trend of a step-by-step operation as gas flows to different countries are cut,” he said.
The news also touched off a spike in European natural gas benchmarks, which settled 16% higher yesterday.
“Gazprom’s decision to further cut capacity on Nord Stream 1 will have seismic ramifications for the European and global gas market,” Tom Marzec-Manser, the head of gas analytics at the London-based intelligence firm ICIS, told Bloomberg† “It will be increasingly hard for storages to be refilled ahead of the winter. The key question now is for how long these lower Russian flows will persist.”
BIDEN TARGETS REFINERIES — AND ASKS FOR THEIR HELP: President Joe Biden criticized oil refiners’ large profit margins in letters to seven of them sent yesterday and made public today, and asked them to do more to increase output now that gasoline prices are above $5 per gallon on average nationwide.
“With prices for your product where they are today, you have ample market incentive to take these actions, and I recognize that some of you have already begun to do so,” he told refiners, also calling their profits “not acceptable.”
Biden, whose White House recently reached out to refiners to inquire about what’s going on in the industry, recognized the shortage of refining capacity as a problem.
Refiners and other oil industry players, including the Saudis, have frequently pointed to a shortage of global refining capacity as a primary contributor to high prices.
Insert ’emergency’: Biden told refiners he is considering using emergency authorities to increase refinery output, although the letters didn’t indicate how.
He also said he is directing Energy Secretary Jennifer Granholm to convene an emergency meeting of the National Petroleum Council, a body of industry leaders and analysts that advises the secretary, to talk about solutions.
The last time around: The last meeting of the National Petroleum Council was in December. Granholm used it to promise the industry that a crude oil export ban, which a number of congressional Democrats had asked for, was officially off the table.
She also asked the industry to operate more rigs and increase production, in something of a first for the administration.
DEMOCRATS PROMOTE OIL WINDFALL TAX PROPOSAL: Democrats leading the push for an oil windfall profits tax in Congress are out ginning up support for their proposals, which they are promoting as a way to redistribute energy companies’ Ukraine-war-boosted profits to help consumers pay for more than just gasoline.
sen. Sheldon Whitehousewho introduced windfall tax legislation in March a few weeks after the war in Ukraine began, disputed the notion that oil prices are set on a global basis, as oil companies have frequently said to explain why they’re so high.
“Oil companies set oil prices,” Whitehouse said on a call with reporters this morning. “The prices that Americans are seeing at the pump are not the fault of the local gas station owner. They’re being gouged just as much as anybody else.”
Whitehouse said further that his bill, which would return windfall tax revenue to consumers in the form of rebates, would allow people to use the money for groceries, childcare, or a new set of tires, and not just to pay for fuel.
“The benefits of our excess profits clawback shouldn’t go back to the pump. When the benefits are only available at the pump, it makes people hostage to the pump,” he said.
Rep. Ro Khanna introduced a companion windfall tax bill. House Democrats haven’t voted on the proposal, although they have passed anti-price gouging legislation.
Environmental and other liberal groups have pushed Democrats to go further than that proposal, though, and to impose the windfall tax, which some estimates suggest could raise up to $40 billion.
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THURSDAY | JUNE 16
3 p.m. 1201 Pennsylvania Ave. Citizens for Responsible Energy Solutions (CRES) will hold a forum examining the SEC climate disclosure rule and role of US plastics in global climate mitigation. A networking reception will follow. Find out more and register here†