Volatility besets global economy, oil and gas markets amid Russia’s war

By Linda Hsieh, Editor & Publisher

If we were hoping that 2022 was going to lead to more “normalcy” in the world and more stability in the oil and gas markets, well… it looks like that’s not going to happen. In the wake of Russia’s invasion of Ukraine in late February, volatility reigns again. 

As this issue of the magazine was going to press in early March, many countries had already announced multiple sanctions against Russia. This included freezing Russian assets and limiting the ability of some Russian banks to operate as part of the international financial system. Canada has also banned the import of Russian oil.

Within the oil and gas industry, we saw BP announcing on 27 February that it would cut its ties with Rosneft, exiting its 19.75% shareholding in the state oil company. Equinor, Shell and ExxonMobil all followed suit, announcing their intentions to exit their own joint ventures in Russia.

“There will be lasting implications for commodities, energy policy and the energy transition,” Wood Mackenzie said in an analysis released on 25 February. It noted that “the world’s dependence on Russia for certain commodities cannot be overstated – from gas, oil, iron, ore, aluminum, platinum group metals and zinc to copper, lead, petrochemicals and fertilizers.”

On the other hand, Russia is also a large consumer of oilfield services. Rystad Energy estimates Russia was responsible for approximately 9% of global service purchases between 2015 to 2021. In the same period, the country also accounted for $175 billion in wells, drilling and seismic activities, along with $88 billion in both subsea and engineering, procurement, construction and installation (EPCI) purchases.

Further, delays and additional costs in the travel of essential oil and gas workers are likely unavoidable. Ukraine’s air space is already closed, impacting all flight routes that cross this space. Many countries – including the entire European Union (EU) – have also banned Russian flights from their airspace.

“Hour by hour, further airlines are pulling their flights from Russian territory,” said Murray Burnett of Munro’s Travel, a company that manages the movement of oil and gas and marine workers. “The logistics of arranging for a crew – which can comprise dozens of workers all based in different countries – to arrive for a crew change at the same time is challenging at the best of time.” Now, adding war on top of existing COVID-19 restrictions will only lead to additional risks and complications.

Impact on natural gas and oil markets

Russia’s invasion is doubtlessly adding pressure to  Europe’s gas market, which was already going through its worst crisis on record, according to WoodMac. The firm’s analysis shows that Russian pipeline imports of natural gas account for a very considerable 38% of EU demand. Therefore, sanctions on that flow would not be pragmatic, and “business as usual” is still the most likely outcome. 

However, even if the flow of Russian gas is not halted, WoodMac believes this conflict will push the EU to rethink the role of natural gas in its decarbonization strategy. “Higher gas prices make a stronger case for renewables, as well as alternative gases such as bio-methane and green hydrogen,” its analysis stated.

When it comes to oil, there have already been slowdowns in Russian crude purchases. WoodMac says it expects further tightening in the supply and demand balance “until payment terms are clarified.” However, they believe the recent upward trend in oil prices (WTI had hit a high of $112 at press time) is likely to ease up soon, unless the world sees a real sustained slowdown in Russia’s crude exports.

Volatility is no good for business, and war is no good for the world. Here’s to hoping for a more peaceful 2022. DC 

Linda Hsieh can be reached at linda.hsieh@iadc.org.