Business | General

Oil markets warily wait for Crimea developments

But the Ukraine crises has not yet significantly impacted the oil market though it has the potential to do so

  • By Saadallah Al Fathi, Special to Gulf News
  • Published: 12:36 March 9, 2014
  • Gulf News

The oil market, as far as prices are concerned, never fails to find problem spots to support it. But the Ukraine crises has not yet significantly impacted the oil market though it has the potential to do so.

The reason why price changes are relatively mute is because energy flows have not been affected by the crisis so far. But there is to be a referendum for the Crimean people to decide if they want to join Russia or stay as an autonomous region within Ukraine. This could be a prelude to a further stirring of problems in Ukraine, especially in the east and south of the country.

In this case, the West led by the US is expected to generate a counter-position and calls for sanctions against Russia already fill the air. Russia has threatened to counter the sanctions by actions of its own such as using other currencies as reserves, and therefore dumping a lot of dollars on the market and reducing or cancelling Russia’s position with respect to US treasury bonds.

They have interests in other European markets and Russian companies and individuals can also have a bearing on developments there. But I am not an expert on these things and I do not know where they will lead the antagonists and the rest of the world with them.

But can the West, and especially Europe, really implement sanctions against Russian oil and gas? The Western media talks the least about these sanctions because they know that as much as Russia will suffer if sanctions are implemented, the West — and especially Europe — will not escape unscathed.

Biggest energy supplier to Europe

Preventing Russian exports from reaching the markets will undoubtedly send oil prices sky-high. Russian oil exports are close to 4.5 million barrels a day in crude with the majority going to Europe. Gas exports to Europe from Russia are about 155 billion cubic meters a year in 2013. Therefore, Russia is the biggest energy supplier to Europe overall.

Russia is dependent on these exports as they generate huge revenues for it and it is unlikely that it will cut supplies to the West. And the West cannot afford extremely high oil prices if they attempt such sanctions by themselves.

There is no alternative to this oil as reserve production capacity in Opec is probably close to 2 million barrels a day only and it remains to be seen how much of that can be brought quickly on stream.

The only thing to watch is how the situation with Ukraine is to develop. We know that Russia has cut gas supplies to the Ukraine more than once. But that was never intended to deny supplies to its customers in the rest of Europe.

To the best of my understanding, Ukraine is obligated to pass these supplies to Europe. But in practice, this was not the case as Ukraine first satisfied its own needs and passed the rest. Currently, Ukraine owes a lot of money to the Russians in back payment and the Russians are demanding settlement of these.

Substituting volume

The discount on gas prices which is due to end by the beginning of April is unlikely to be extended. Ukraine imports about 25 billion cubic meters a year of gas from Russia on top of its own production which is close to that too. There is no way it can substitute this volume from somewhere else.

The talk about reversing some pipelines from the West to feed Ukraine is just not feasible at least in the short run as it requires so may engineering changes to the networks and compressor stations. It will also eat up all the gas reserves in Western Europe and force the continent to increase its imports from other sources and perhaps even from Russia itself.

It is to be noted that Russian gas is delivered to Europe through 12 pipelines, of which three were direct pipelines (to Finland, Estonia and Latvia), four through Belarus (to Lithuania and Poland) and five through Ukraine (to Slovakia, Romania, Hungary and Poland). In 2011, two additional pipelines through the Baltic Sea were commissioned to deliver gas directly to Western Europe.

Therefore, if the Ukrainian route is affected, there may be some spare capacity in other pipelines to reduce the impact. At the same time, the current situation will add urgency to Russia’s effort to finish the South Stream Pipeline to bypass Ukraine.

The only way to avoid the spillover of this crisis is for the West to help Ukraine quickly by settling its debt with Russia and also encourage Ukraine to have good relations with its neighbour.

— The writer is former head of the Energy Studies Department in Opec Secretariat in Vienna.

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