‘Largely Replaceable’: Putin’s Energy Is Expendable After All

As expected, the US and the EU announced a political accord aimed at freeing Europe from dependence on Russian gas, a pact Joe Biden and Ursula von der Leyen pitched as an epochal shift.

“The United States will work with international partners and strive to ensure additional LNG volumes for the EU market of at least 15 billion cubic meters in 2022, with expected increases going forward,” the White House said, in a factsheet. The European Commission, in turn, will look to secure demand for 50 billion cubic meters of additional US LNG until “at least 2030.”

Benchmark European gas futures dropped double-digits, extending Thursday’s decline.

Both the US and the EU pledged to “immediately” make recommendations for reducing aggregate gas demand. Planning and approval of renewable projects will be “expedited” and strategic cooperation enhanced.

At the same time, Germany plans to cut imports of Russian gas near zero within two years, and may halve oil imports from Russia within months. By the end of 2022, Russian gas may account for less than a third of Germany’s imports, down from more than 60% (figure below). Germany will stop buying Russian coal altogether by early summer.

“By the middle of the year, Russian oil imports to Germany are expected to be halved,” Spiegel said, quoting a memo attributed to the economy ministry. “By the end of the year, we aim to be almost independent [and] by autumn, Germany can be independent of Russian coal.”

Later, Economy Minister Robert Habeck essentially confirmed the plans, citing progress on LNG terminals. Although Germany still believes “an immediate embargo would have too serious economic and social consequences,” according to the ministry memo, Habeck called Russian gas “largely replaceable.”

Germany is considering a trio of floating LNG terminals and “currently examining possible locations on the North Sea and Baltic Sea where these can be used in the short term,” the ministry memo went on to detail, suggesting that “in some cases,” the facilities could be ready for the winter of 2022/23.

Gazprom shares plunged in Moscow amid the deluge of headlines. More broadly, Russian equities fell in their second day of tightly-controlled trading following a month-long halt. Gazprom’s Friday losses wiped out a Thursday re-opening bounce (figure below).

Putin instructed the sovereign wealth fund to buy local shares in order to prevent a collapse. Short selling isn’t allowed and foreigners aren’t permitted to exit positions. Only 33 of 50 stocks are open for (truncated) trading.

There was no immediate word on who the “international partners” cited by the White House in the fact sheet on the gas accord are, but Germany recently engaged Qatar. One imagines the US won’t have much patience when it comes to suppliers who exhibit anything like recalcitrance. It sounds as though the Biden administration is done “asking” when it comes to sourcing additional energy supplies.

Of course, strong-arm tactics won’t solve logistical problems, and as Bloomberg noted Friday, “the additional imports from the US will take time to start, with Europe constrained by the current regassification capacity, number of terminals and interconnectors.” US gas exporters will meet German buyers in Berlin next week. One way or another, Europe intends to replace some 65% of Russian gas imports in 2022.

Frankly, I’m not inclined to explore “the other side” of the story if that means embarking on a quest to explain why Putin is “holding the cards” or insist that Europe will forever be hostage to the whims of an autocrat due to the necessity of importing energy the world needs to phase out anyway.

The fact is, Putin has succeeded in doing what millions of climate activists, scientists and Progressive politicians the world over have so far failed to do. He lit a fire under efforts to cut dependence on fossil fuels not just over the long-term, but over the medium-term too.

In the near-term, his efforts to hold Europe hostage instead kickstarted a mad dash to reduce demand for Russia’s most important exports to zero. Here again, the stark reality for Russia is that the US produces quite a bit of energy itself. Americans aren’t going to freeze. Although replacing Russian gas in Europe won’t be easy, there are plenty of sellers in the world. All of them need dollars and euros. Some of them need US weapons and security guarantees. And a few of them have their domestic currencies pegged to the greenback.

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14 thoughts on “‘Largely Replaceable’: Putin’s Energy Is Expendable After All

  1. March exports of Russian crude are largely unchanged vs prior months.

    Jpm has a shut in estimate of 1m/day vs earlier estimates of 3.5m/day.

    US LNG already exporting at capacity. An increase of supply for Europe will need to come at the expense of another current trade partner.

    If Russian oil/product export data for April doesn’t show a significant drop off we’ll know just how ‘replaceable’ it is.

    1. I’m exhausted with this kind of thing. It’s detached from reality. If push comes to shove, Treasury can threaten any nation importing Russian energy with OFAC sanctions and that’d be the end of it. Just ask Iran. At the same time, Biden could tell the Sunni monarchies that they’ll either step up, or else Washington will cut them loose, where that means curtailing their access to USDs (thereby immediately breaking their currency pegs, which would eventually curtail their capacity to offer the domestic subsidies that keep the populace pacified) and leaving them to confront the IRGC on their own, with no additional US weapons and no US security guarantees. You think Beijing is going to arm them against Iran? Not if we’re talking about the same Iran that’s a staunch geostrategic ally of Xi’s. This is, was and always will be, a matter of how far Putin pushes the envelope and how aggressive the White House (any White House — this isn’t about Joe Biden) is willing to be in order to get what it wants. I’m no fan of Donald Trump, but remember what happened when he instructed Riyadh to pump more oil? They pumped more oil. By November of that year, oil prices collapsed because OPEC misread the situation and got played by a reality TV show host. That episode exposed the farcical nature of arguments about “leverage.” There is only one country that has any leverage at the end of the day: The US. I’m no super-patriot over here, but that’s just the long and the short of it. None of this is really “optional.” It’s a polite charade that only lasts until the US Treasury decides to stop being polite. If you doubt that, go diversify half your portfolio into RUB assets and let me know how it goes in a few years. Nobody is hostage to Vladimir Putin and his dilapidated gas station economy. He’ll be out of power within 24 months. Either that, or Russia will turn into Venezuela.

      1. Out of power within 24 months. We’ll keep tabs on that one… Might go down as well as last years predictions of a housing market collapse.

        KSA has an estimated 1 m/d spare capacity. Opec on the whole (excluding iran) maybe 2.
        If we’re talking the balance of 2022 and possibly 2023, they can’t pump what they can’t pump.

        All of the things you state are possible (except the part about opec being able to entirely replace Russian barrels). They are obviously incredibly unlikely to occur, as proved by the continued reticence of government here and across the pond.

        As an aside, Russian gas flow to Europe is higher now than prewar.

        1. “As an aside, Russian gas flow to Europe is higher now than prewar.”

          So, who’s the one with the leverage in that equation? Hint: It’s not the guy who keeps sending the gas despite being robbed of $335 billion in hard currency reserves, cut off from SWIFT and threatened with economic ruin.

          If you rob me of $335 billion and take steps that are almost guaranteed to impoverish my people, I’m not doing any more business with you under any circumstances if I have even a shred of dignity or leverage left.

          That’s my last comment on this article.

          1. “If push comes to shove, Treasury can threaten any nation importing Russian energy with OFAC sanctions and that’d be the end of it“

            So push hasn’t come to shove already.

            Russia has done exactly what we feared/expected every step of the way.

            If Russia drops chemical weapons on the bombed out remains of Ukrainian cities and the citizens huddling in basements, will that constitute ‘push coming to shove’?

            If not, what will that say about ‘leverage’?

        2. In case it’s not clear, I fully support a harsher approach, akin to what you’ve mentioned (perhaps without such a line in the sand toward KSA).

          It would be a dream come true to have Putin out of power in 24 months. I’m prepared for disappointment, however, and am continually dejected by the non measures employed toward Russian energy.

        3. H & F – The variables in your conversation include the necessary element of prediction, not unlike all of our politics and economies. I use economic data to assess the financial landscape and the wherewithal of a company to flourish and grow before I invest. I use a similar approach in regard to politic parties and how I cast my vote.

          All I can say about this conversation is that there are genuine, rational points on either side. But there are also intangibles. For instance, the European economies may not be able to switch to other sources of LNG as quickly as they wish, the US may not be able to deliver as quickly, etcetera. There are lots of variables that could slow the execution of this plan.

          But there are some wildcards. How urgently do the Russians want to make Putin go away? And how will they make that happen? Putin has demoralized his own military and alienated all but a few colleagues in his own government. The only question in my mind, whether or not the war persists, is how long he will last.

  2. The standard deviations of oil and gas prices are extremely high. That is because they are price inelastic goods with long development windows. That is especially true true in the short term as a result. But that is slowly changing with the advent of renewables and fracking as marginal supply sources. Russia’s position is deteriorating militarily and politically by the day. I am sure there is a ton of discussion going on in China among the elite policy makers about shifting away from Russia to a more neutral stance vis a vis the western democracies. Biden has a lot of levers he can pull to make sure Europe is weaned off Russian energy- and lets face it, Europe is on board with that even more than the US is at this point. You can bet Energy Transfer is going to have the ability to start the Lake Charles LNG facility now to process and export NGLs. And renewables are going to take off as well.

  3. Sunny side here. Perhaps Vlad will be satisfied that he has, once and for all, given the world it’s first true Climate Czar. It’s not quite a cobbled back together Soviet Union, but maybe it’s enough for his legacy.

  4. Agree with H’s take and it’s actually refreshing to see this view expressed. Across the financial blogosphere and commentariat, it’s become cool to be hyper cynical and critical of the West, its leaders and liberal democracies more broadly (either to distance themselves from the MSM or to sell a particular narrative). Even if there isn’t outright praise of autocrats, commentators will still argue ‘they [Russia, Saudi Arabia, China, etc.] hold all the cards’, that their people ‘are used to suffering’, while we’re weak, and that our own political dysfunction makes us powerless. I think many will be surprised what the West is actually capable of geopolitically when push comes to shove.

  5. I had dinner last night with a chemical engineer for Shell Oil, who then became a trader for Shell Oil. This is what I was told:
    A tanker gets filled with Russian oil. That tanker heads to sea and it might head to sea with a buyer in place or it might still be owned by the Russian producer. It does not matter, I was told. While the tanker full of Russian oil is at sea, it might be traded multiple times based on the type of crude, not on the original driller. Due to the “fungibility” of oil, what was originally Russian oil, might then be Chinese oil, then Iranian oil, then Venezuelan oil before it is finally traded to a US firm that directs the tanker to Houston.
    By the time it gets to Houston, all they know is what type of crude it is.
    I know nothing about oil trading- so I hesitated in posting this due to the possibility that I misunderstood or I was only told a partial truth. However, the point about the fungibility of oil made sense to me.
    It is not impossible to slow Putin down, but it isn’t going to be easy.

    1. I know less than nothing about oil trading but I find it hard to believe that a ship’s manifest would not include a port of origin. The https://www.marineinsight.com/maritime-law/what-is-a-cargo-manifest-in-shipping/ website has information that indicates to me that shipments originating from Russia would be detectable. I suppose that the Russian oil could be transferred to another tanker at sea or in a friendly port, but that’s edgy even for an oil company.

    2. There are two concepts that generally apply to international trade — country of origin (i.e., exporting country) and substantial transformation. Mere transshipment is not supposed to change the country of origin. For the country of origin to change, the good must be substantially transformed — i.e., changed to a significant degree (and usually proscribed by specification or value-added rules). But all groups of products have different tests — for steel, it might be that a slab must be rolled into plate — and I am not familiar with the specific rules that apply to petroleum.

      But I would add that despite these rules, blatant transshipment does occur in many products (especially to evade unfair trade duties) and also that oil is not really completely fungible (quite a bit of geological variation among grades), notwithstanding the fact that it is a globally traded commodity.

  6. Russia is appx 10% of global crude supply; an amount exceeding near-term global spare oil capacity. Russia’s primary oil customer is Europe; for some European countries, Russia is the large majority of their supply.

    Globally doing without Russian oil in the near-term is unrealistic. More realistic is for Russia to switch to selling primarily to China, India, and other countries not participating in sanctions, for CNY, INR, and other non-USD/EUR currencies, at a significant discount to global price. While Europe and other sanctions-participating countries switch to other oil sources – ME, NorAm, LatAm.

    Even switching will be very difficult. Transportation and refining infrastructure is not quickly changeable. E.g. German and E. European refineries are set up to get oil from Russia via pipeline to the east, not to get oil from tanker terminals to the west, and terminals and pipelines are not built overnight. E.g. some tanker companies are unwilling to transport oil from Russia to China, and overland pipeline capacity is, again, not a snap-the-finger thing.

    Europe cutting Russian oil imports in half by year-end is extremely ambitious. I would guess it’s doable, as the EU has been studying this hard rather than (hopefully) picking a number from thin air.

    Europe cutting Russian gas imports in half this year is also extremely ambitious. LNG supply, terminal capacity, and pipeline links are all severe constraints. I wonder if it is doable, but I hope so.

    Suppose Putin decided to cut Europe off at the pass, by halting oil and gas exports to Europe. He’d lose his main USD/EUR source, but the list of things Russia can buy with USD/EUR is rapidly shrinking anyway and Russia’s financial system and market economy is already crumbling. He’d be able to plunge Europe into a chaotic and severe recession, almost overnight.

    The best time to do this might be after declaring victory in Ukraine, secure Donbas and land bridge to Crimea, pull forces from elsewhere back to fortify those areas, unilaterally declare “Mission Accomplished” (flight suit on carrier photo-op). Next step for Putin will be to get sanctions lifted. With the shelling of Ukrainian civilians stopped, will Europeans remain as committed to de-Russification? How about when they don’t have heat, fuel, or jobs?

    The US can promise more energy supply to Europe, but the Federal govt has no control over the energy industry. It cannot tell XOM to increase production or LNG to divert shipments from Asia. The Biden administration’s relationship with oil & gas is chillier than with MBS. The Democratic calls for windfall profits taxes etc are not helping – more Bernie grandstanding.

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