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CAPITAL MARKETS

US goes it alone with ban on Russian oil and gas as Europe mulls LNG options

As the US takes action to tighten sanctions on Russia by banning energy imports, Europe is trying to pull together a plan to wean itself off Russian gas through greater use of LNG and renewables.

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Nordstream 2 makes landfall in Germany
Reuters

The US announced on Tuesday a ban on the import of Russian coal, oil and liquified natural gas (LNG) after discussions with European allies in recent days on how to further tighten the coordinated sanctions regime imposed on Russia in the wake of its invasion of Ukraine on February 24, measures that had until now stopped short of disrupting energy supplies.

“We will not be part of subsidising Putin’s war,” said US president Joe Biden, announcing the new policy. The move was being taken on the understanding that many of the US’s European allies “may not be in a position to join us”, he added, noting that the US benefited from being a net exporter of energy.

The UK, meanwhile, announced at the same time that it would phase in a ban on imports of Russian oil and oil products, but not gas.

According to data from the US Energy Information Administration, the US imported 245 million barrels of Russian crude oil and petroleum products in 2021, about 671,000 barrels per day. That accounted for about 8% of all US imports of oil and related products.

The European Union, meanwhile, while not joining the US in banning Russian imports, also unveiled on the same day plans to cut its reliance on Russian gas, saying it could cut imports by two thirds before the end of the year.

We are acutely aware that our decision last week to purchase a cargo of Russian crude oil … was not the right one and we are sorry
Ben van Beurden, Shell

Energy markets, which were already under pressure before the invasion, have been thrown into turmoil by the Ukraine conflict. Even without specific sanctions covering energy, Western counterparties have been shunning Russian crude through a combination of horror at Russia’s actions and a pre-empting of possible sanctions, with a corresponding soaring of Brent and West Texas Intermediate crude prices to levels not seen since 2008, and up more than 60% since the start of 2022.

Shell said on Tuesday that it would no longer buy oil from Russia after being widely criticised for buying at the end of the week before, an action that had brought a furious reaction from Ukraine’s foreign minister Dmytro Kuleba over the weekend.

“We are acutely aware that our decision last week to purchase a cargo of Russian crude oil … was not the right one and we are sorry,” said Shell chief executive Ben van Beurden.

In a bid to provide some security of oil supply in the short term, the International Energy Agency’s (IEA) 31 member countries had announced on March 1 the release of 60 million barrels from their emergency reserves. But replacing Russian supplies of oil and gas in the longer term will be challenging.

It would be a historic mistake to draw the conclusion from this security challenge in saying that this means the Green Deal and Fit-for-55 can go on the backburner
Frans Timmermans, EC

Possible alternative sources of oil include Middle Eastern members of the Opec oil cartel, Venezuela and Iran, but all face severe hurdles. Middle East producers are thought unlikely to have sufficient capacity to fully replace the five million barrels a day exported by Russia, nor the willingness to push production to the maximum and restrict the region’s ability to respond to any further increases in demand later in the year.

Venezuela’s oil is currently the subject of separate sanctions, and in any case production capacity has fallen sharply in recent years. And the prospect of Iranian oil flowing into global markets is dependent on the successful renegotiation of a nuclear agreement struck in 2015 between Iran, Germany and the five permanent members of the United Nations Security Council.

That agreement collapsed after the US withdrew from it in 2018 under the presidency of Donald Trump. While discussions are under way to revive the deal, they are struggling amid a lack of agreement between the parties, which include China and Russia itself. In addition, Iranian oil would likely take months to come on stream even if a new deal were negotiated.

EU tackles gas dependency

Meanwhile, fears for supplies of natural gas to the European Union had already been rising amid retaliatory threats by Russia to cut the Nord Stream 1 pipeline on which the bloc relies for about 40% of its consumption.

PVM ramps up natural gas and LNG brokerage with new European desk


As global energy markets continue to be rocked by Russia’s invasion of Ukraine, one broker has chosen its moment to ramp up its profile in the gas markets. PVM Oil Associates, a unit of the TP Icap group, launched on March 8 a natural gas and liquified natural gas (LNG) brokerage desk.

The move builds on the firm’s leading brokerage position in oil instruments, where it turns over contracts of more than 100 million barrels every day from offices in London, Singapore, New York and Houston.

According to brokers Victoria Adams and Alexandra Nitka, who are leading the new desk, the firm had been planning the launch since the start of 2021. The move was partly driven by the assumption that natural gas and LNG will be important transitional fuels on the path to phase out fossil fuels, being cleaner than alternatives like coal and oil.

But the aftershocks of the conflict in Ukraine have made the issue of increased demand for LNG more relevant than ever.

“LNG really is a transition fuel, being a cleaner option,” says Alex. “But what is happening now could mean that LNG will be even more crucial.”

The firm will be broking contracts including the Dutch Title Transfer Facility (TTF), the German Trading Hub Europe (THE) and the UK’s National Balancing Point (NBP), as well as financial LNG products such as the Japan/Korea Marker (JKM) and the US dollar-denominated TTF.

“We have to think about what clients need, and right now what they need is the minimum of stress,” says Adams. “It’s about helping people to maximise their credit, and helping them minimise the cost of trading with their counterparties.”

The business was traditionally conducted over-the-counter but is increasingly exchange-cleared, which involves more costs.

The new desk will be based in London and Madrid and comprises a team of six. The Madrid presence is a response to Brexit, with the firm keen to be able to service clients from a European Union-based entity.

PVM’s new operation is relatively rare in the industry for being led by women, and Adams says that building the right culture in the team is important.

“This was another big reason to start this project,” she says. “What Alex and I are trying to do is not just hire women but really push the idea of diversity, regardless of gender and educational background.”

Nitka left school at 16 to work as a runner on the Liffe floor, including at Dresdner Kleinwort Wasserstein, before working as a gas broker at Icap for 15 years until 2014 and then re-entering the market in May 2021 at PVM.

Adams worked in gas markets for 10 years at Icap and Tradition until late 2017, and joined PVM at the same time as Nitka.

The options for replacing natural gas supplies to the EU, which imported some 155 billion cubic metres (bcm) of gas from Russia in 2021, are arguably even more limited than for oil, making it imperative that demand be reduced alongside sourcing alternative supply.

On Thursday, the IEA put forward a 10-point plan for the EU to reduce its gas imports from Russia by one third within a year, while remaining in line with the European Green Deal, a plan agreed in 2020 to make the EU climate-neutral by 2050.

The IEA’s plan would involve the EU replacing Russian supplies with pipeline imports from other countries, including Azerbaijan and Norway, as well as increasing substantially its imports of liquid natural gas (LNG) – although it would face stiff competition from Asian bidders for LNG.

Other steps could include minimum gas storage obligations, accelerating wind and solar power projects, as well as ramping up the use of bioenergy and nuclear power and imposing new energy efficiency measures.

Further energy supply alternatives in the short term could come from the replacement of natural gas with oil and coal, although such a step would run counter to the region’s green ambitions. The IEA estimates that if these alternatives were also used, imports of Russian gas to the EU could be more than halved.

For its part, the European Commission proposed on Tuesday a new plan that went further than the IEA, saying that it was now aiming to cut imports of Russian gas by two thirds by the end of 2022 – and replace imports completely by 2030.

The plan – dubbed 'REPowerEU' – is essentially a variant of the IEA’s proposals, involving sourcing new suppliers, ramping up hydrogen energy and making energy-efficiency improvements at the household level.

And in line with the IEA’s recommendations, the EU also said that member countries should fill their gas storage facilities to 90% by October 1 every year.

The EC said that unprecedented LNG supply to the EU in January had ensured security of gas supply for this winter and added that it could import 50bcm more each year from alternative sources such as Qatar, the US, Egypt and West Africa. Additionally, pipe imports from the likes of Azerbaijan, Algeria and Norway could provide another 10bcm.

What could hamper plans to increase LNG imports, however, will be the region’s ability to process those imports, which require regasification before being distributed via pipelines. At the moment Spain has the biggest regasification capacity – where it processes LNG received from Algeria – but it is poorly connected to the rest of the continent.

Frans Timmermans, vice-president of the EC and leading much of its climate work, said on Monday that the bloc must make the transition away from Russian gas while still keeping intact its Green Deal and Fit-for-55, a related aim to cut net greenhouse gas emissions by 55% by 2030.

“It would be a historic mistake to draw the conclusion from this security challenge in saying that this means the Green Deal and Fit-for-55 can go on the backburner,” he told the European Parliament’s Committee on Environment, Public Health and Food Safety. “We had a bit of that two years ago, with Covid. And then soon we discovered that the Green Deal offered some of the fundamental answers we needed to respond to the challenge.”

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