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A year of war in Ukraine: how the conflict has changed the energy situation in Europe

Between the very high prices of various hydrocarbons and the embargoes and caps introduced, the invasion of Ukraine had serious consequences for European countries in terms of energy.

While the war in Ukraine now started a year ago, the energy crisis did not, which predates the conflict. However, the latter played an accelerating and amplifying role in energy issues. In detail, the crisis really started over the course of 2021 with a rise in gas prices that suddenly increased fivefold in one year, the latter dragging down electricity prices in its wake. It is in the weeks and months after the invasion of Ukraine that the phenomenon will reach record levels for a completely logical reason.

On the one hand, the world’s leading gas exporter with 17% of world reserves and the third world oil producer with 6.4% of reserves, and on the other one of its main clients that depends 50% on Russia. for their only supply of petroleum products A deterioration in trade relations between these two partners could not be without effect, although there are disparities from country to country. Compared to France, which varied its sources of supply, Germany was much more dependent on Russian gas. The country “followed a strategy of mutual dependence, where investment in oil and gas imports through pipelines achieved lower and more stable prices than imports by sea,” according to Lauri Myllyvirta, an analyst at the Center for Research in Energy and Clean Air ( CREATES). .

Mixed levels of dependence on Russian hydrocarbons

Western countries quickly agreed to a section of sanctions aimed at hitting the Russian economy, obviously through its hydrocarbon exports. The Member States of the European Union have opted for the embargoes and started with coal, then with oil and oil derivatives, each time with a period of several months before the entry into force to allow operators to modify their chain Logistics. In the specific case of gas, it was Russia itself that closed the floodgates, reducing its exports to Europe from 180 to 30 billion cubic meters per year.

Although the European countries easily reached a political consensus, it was necessary to take into account the heterogeneity of the countries’ dependence on Russian oil, particularly vis-à-vis Eastern European countries that benefited from the repeal such as Bulgaria. Various phases of debates and negotiations have attested to this heterogeneity, as Olivier Appert mentions: “On the price cap, there was opposition between the countries around Germany and the countries of southern Europe, the latter defending a lower ceiling on structural measures to review the electricity and gas market, some countries wanted to move quickly in adopting a new system while the countries around Germany were in a status quo logic.

Alternatives that have limited breakage

For most hydrocarbons, European countries have managed to find postponement solutions without which the situation would have been much more dramatic. “Seen from France, there was no impact on supplies thanks to a set of communicating vessels,” explains Olivier Gantois, president of the French Union of Petroleum Industries (UFIP). Additional crude oil was found in the United States and especially in the Middle East. since Asian countries such as India have transferred part of their supply to Russia”. This does not prevent France, like other European countries, from being the victim of an impact on the prices of crude oil and diesel:

As regards gas, European countries rely especially on Norway, which represents an important supplier, although a saturation effect seems imminent, and on other non-European suppliers such as Libya or Algeria. Ultimately, the sustainable substitution solution seems to be liquefied natural gas (LNG) towards which Europe has turned massively, taking advantage of an unexpected effect. “China controlled the LNG market and chose to convert to coal for electricity production, which presented an opportunity for European countries to seize cargoes from the market,” Olivier Appert stresses. The IFRI adviser recalls, however, that LNG presupposes receiving terminals, which Germany has long refused.

In order to limit downstream breaks in the chain, European countries have distinguished themselves by their conceded budget spending to protect companies and individuals from the energy crisis. In total, €330 billion have been put on the table across Europe in 2022, including €60 billion under the French tariff shield if we add up cost estimates for 2023.

And now?

Between oil and gas, price levels appear to have followed similar patterns. After well above $100 a barrel for Brent in late spring, oil prices have started to decline as slowing global demand has brought them back to $80-85 a barrel, which is still a much higher price than before COVID-19. “We will maintain high prices for the duration of the war, anticipates Olivier Gantois. Diesel prices reflect a big difference with crude because Russia was the world’s largest exporter of diesel, which makes markets nervous. According to the president of the UFIP, three large geographic refining areas will respond even better to demand thanks to an excess of diesel compared to local demand: the United States, the Middle East… and India.

On the gas side, prices have also fallen, but remain well above their levels at the beginning of 2021, but could experience a further increase according to Olivier Appert: “There are no prospects for a significant increase in the production capacity of LNG, while Chinese demand will increase.” It is coming back with a lot of strength”. On the other hand, a relaxation of the gas market would be possible by 2025-2026. A forecast shared by Lauri Myllyvirta: “The gas markets it will balance out and could even fall into oversupply in the next 2-4 years, when all the measures adopted to reduce gas consumption, such as the installation of heat pumps and the accelerated deployment of clean energy, take effect.”

An opportunity to reduce energy consumption

This is an idea that regularly arises in the public debate: the war in Ukraine, through the energy crisis that would have amplified and accelerated, would have favored the reduction of consumption. “European decision makers have talked a lot about saving energy, but the main factor that has led to a reduction in consumption in Europe has been high prices”, puts Lauri Myllyvirta into perspective. The CREA analyst, however, welcomes the increase in investment in favor of the energy transition: “Energy consumers and industries have already responded by increasing their investment in solar energy, heat pumps, electric vehicles and ‘other clean solutions ‘.

Olivier Appert, for his part, considers the establishment of the tariff shield contradictory to the energy transition and would have preferred a natural adaptation of consumer behavior. For Olivier Gantois, these behavioral changes could be structural: “Despite the fuel discounts, prices are still around 35 cents more expensive compared to before Covid and this can lead to behavioral changes in the medium and long term. Added to this is a brutal awareness of the dependence of each actor on their energy needs and that security of supply is not guaranteed at all times”.

Author: Timothy Talbi
Source: BFM TV

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