The war in Ukraine impacts the energy transition

Latest insights from new analysis by Wood Mackenzie, a Verisk firm, suggest the war in Ukraine is transforming the outlook for hydrocarbon supply, demand and price as well as the pace and cost of transition energy. While the precise timing and implementation of future bans on imports of Russian raw materials are difficult to predict, a rewrite of energy trade flows is now underway.

With a global economy on the edge and structurally higher energy prices, there is a real risk of losing some of the global supply. Pressure from Europe for more LNG as it seeks to cut the Russian gas pipeline has pushed spot prices to record highs and is supporting strong demand for coal. At the same time, supply chain risks are increasing and inflation is driving up costs across the energy sector.

Wood Mackenzie also found that in this context, and with coal currently more resilient, advancing the energy transition further could be more expensive and potentially more carbon intensive.

Massimo Di-Odoardo, Vice President of Gas and LNG Research at Wood Mackenzie, said: “It is inconceivable that Europe will abandon its diversification strategies and return to significant dependence on Russia”. Assuming Europe bans all Russian commodities by the end of 2024, Wood Mackenzie’s new analysis considers the impact on commodities over the next decade, as well as investment , energy transition and geopolitics.

“While prices will be structurally higher and a ban on Russian gas will be more difficult than a ban on other commodities, ‘the West’ can live without Russian commodity exports and we are already seeing a new balance of trade Rising domestic coal production in China and India will offset declining maritime availability While perhaps the biggest risk to Russian oil production is long-term and relates to loss of access to Western partners, technologies and services.

The Wood Mackenzie research points out that a future Russian gas ban will see competition for LNG intensify as Europe vies with Asia for limited supply growth until around 2026. Of all the hydrocarbons, LNG seems the most compelling investment option over the next few years.

“A huge increase in investment in LNG projects is supported by a rapid increase in European demand for LNG, with US developers already looking to fill the gap,” Di-Odoardo said. “As a result, there is a potential 50 million tpy of new LNG capacity in the United States that will make final investment decisions over the next two years – and that could double if Europe bans imports from of Russia by 2024.”

Di-Odoardo added: “But despite disruptions to Russian exports, global supply chains now emerge as the biggest concern. Rising costs could delay investments in the energy supply needed and delay the pace of clean energy investments needed to meet decarbonization goals.

“The most successful governments, companies and investors will be those who best navigate these complex market conditions to accelerate the energy transition.”

Wood Mackenzie’s latest report highlights the need for a rapid response from governments, investors and businesses:

Governments

Countries with domestic resources of hydrocarbons and critical minerals will need a two-track approach: maximizing the production of their resources in the short term while scaling up investment in low-carbon energy supply to meet the long-term future demand.

Investors

Investments in the energy transition will be more expensive but remain competitive due to rising prices for raw materials and electricity. European renewable energies will increase rapidly. Energy security priorities will ensure that returns remain attractive for hydrocarbons and, increasingly, for critical infrastructure. LNG appears to be the most attractive investment option, but even that could prove time-limited if Europe and other countries accelerate towards net-zero goals.

Companies

Hydrocarbons will be huge moneymakers for some time to come. Attractive opportunities to source low-cost, low-carbon oil and gas from National Oil Companies (NOCs) will continue. But large-scale investments by international oil companies (IOCs) in traditional oil and gas projects, as well as international miners in coal projects, will increasingly be replaced by growing investments in low-carbon energy projects. carbon. Metals could be the next growth areas for cash-rich IOCs.

Some European governments have already accelerated their decarbonization strategies in response to the war. More will follow, along with increased political support for investing in the emerging technologies needed to accelerate the energy transition.

But it is increasing pressure on already strained global supply chains. Renewable energy costs are already being pushed up, although at a slower pace than coal and gas prices. There is also a rush for metals to build electrification, potentially made worse by reduced exports from Russia. The pace of energy transition may be bolder, but it is also becoming more costly.

There is also a risk that an accelerated energy transition will turn out to be more carbon intensive. But Wood Mackenzie’s analysis shows that upward pressures on emissions are likely to be offset by slowing economic growth and a renewed emphasis on low-carbon investment, with CO2 up to 15% emissions by 2035 compared to 2021.

This is cold comfort when emissions can only be reduced by restricting improvements in global prosperity and living standards.

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/16062022/war-in-ukraine-impacting-the-energy-transition/