As economic sanctions on Russia escalate, there has been an attempt to isolate vital energy exports from the mix. This may be wishful thinking.
US President Joe Biden last week said sanctions against Russia, including cutting off Russian banks and individuals from the global SWIFT transaction system, were “specifically designed to allow energy payments to continue”.
Russia is both the world’s second-largest exporter of crude oil and refined petrol, and the largest exporter of natural gas, mostly via pipelines to western Europe. The European Union and its allies want to put maximum pressure on Russia, but not set off an energy crisis that hurts their own people and plunges the world economy into recession.
Analysts point out that Russia’s war on Ukraine will likely disrupt its gas exports even without sanctions, with Western countries pulling out of relationships with Russian energy companies and the possibility Moscow could withhold supplies in retaliation for other measures.
Trading, shipping and insurance companies are unlikely to take the risk of dealing with Russian cargoes, fearing either physical attack, payment issues because of financial sanctions, the risk of non-delivery, or public and investor backlash for continuing to do business with Russia.
The extent of the upheaval is demonstrated by BP’s announcement this week to sell its 19.75% stake in Russia’s state-owned oil company Rosneft. Shell followed suit by announcing it will exit its joint ventures with Russian gas giant Gazprom, including its 27.5% stake in the Sakhalin-II liquefied natural gas (LNG) facility in East Asia.
What happens to natural gas supplies prices has consequences for Australia, also a relatively major player in the global gas export market. Unlike with petrol prices, however, Australian gas consumers are largely insulated from international volatility.
Russia’s natural gas exports
About 77% of these exports go to European countries and account for about 40% of Europe’s total natural gas consumption. Dependence varies. Nine countries rely on Russia for more than 90% of their gas imports: Bulgaria, Czech Republic, Estonia, Finland, Hungary, Latvia, Romania, Slovakia and Slovenia.
In 2021 slightly less than 10% of Russian gas exports to Europe was transported via Ukraine (through pipelines).
Australia’s gas capabilities
Most of these LNG exports are locked into inflexible long-term contracts. About 36% of exports, however, are sold under flexible spot and short-term contracts. To sell this to Europe would mean selling less to existing customers, which would be difficult given contractual and transportation constraints.
In late January the Morrison government offered to provide extra LNG to “friends and allies” in Europe should Russian supplies be cut. Last week foreign minister Marise Payne said she had been talking to European counterparts about this. But most analysts question the feasibility, at least in the near term.
Australian LNG could be used in “swaps”. These involve swapping an LNG cargo in one part of the world with one closer to where a buyer wants it delivered. This may allow, for example, American LNG to be diverted to Europe, and Australian LNG replacing it in Asia.
But it is still a zero-sum game for the global economy.
Effects on Australian exporters and customers
Australia’s domestic gas prices are about 70% lower than overseas, due to government measures to quarantine Australian customers from international prices and guarantee secure and affordable gas to the country’s east coast market.
- ^ last week said (www.newsandtribune.com)
- ^ 'Just short of nuclear': the latest financial sanctions will cripple Russia's economy (theconversation.com)
- ^ soared last week (www.aljazeera.com)
- ^ even without sanctions (www.reuters.com)
- ^ unlikely to take the risk (www.reuters.com)
- ^ sell its 19.75% stake (www.bp.com)
- ^ exit its joint ventures (www.theguardian.com)
- ^ profound (www.reuters.com)
- ^ What Russia's war means for Australian petrol prices: $2.10 a litre (theconversation.com)
- ^ exports (www.bp.com)
- ^ 22% of international trade (www.bp.com)
- ^ were valued at A$49.1 billion (www.upstreamonline.com)
- ^ more than 99% of Australian LNG (www.bp.com)
- ^ under flexible spot and short-term contracts (giignl.org)
- ^ to “friends and allies” in Europe (www.voanews.com)
- ^ noted by (www.smh.com.au)
- ^ precisely zero (www.smh.com.au)
- ^ How Russia's invasion of Ukraine will ripple through the global economy and affect Australia (theconversation.com)
- ^ higher global prices (www.reuters.com)
- ^ 70% lower (www.minister.industry.gov.au)
- ^ locked in (www.abc.net.au)
- ^ gas prices to rise (www.canberratimes.com.au)
- ^ petrol prices (theconversation.com)
Authors: Vlado Vivoda, Senior Lecturer in Strategic Studies (Australian War College), Deakin University