Replacing Russian Energy

Replacing Russian Energy

The Russian invasion of the Ukraine has thrust Russia’s energy strategy to the forefront.

Which is more strategically important, oil or natural gas?

  • In terms of dollars, oil and natural gas have about the same economic value. Here is a direct BTU/$ comparison:
  1. Oil = 58,250 BTU/$
  2. NG using Asian price of $16/Tcf = 64,813 BTU/$
  • However, natural gas is used for heating and the generation of electricity, so it has a greater effect on people’s lives. People can’t live without heat and electricity, while the use of oil, i.e., gasoline, merely hits their pocketbook. From the users perspective, natural gas may be more important.

(Germany also imports large quantities of hard coal from Russia after shutting down its unprofitable hard coal mines. Hard coal is used for generating electricity and producing steel. This article assumes that hard coal would be readily available from other countries.)

(Oil refers to crude oil and not products)

Major energy producing and consuming countries fall into three categories:

Those entrapped in Russia’s web, those that have energy to spare, and those that may benefit from the effects of the energy crisis.

Entrapped Nations

All European countries, especially Germany, are trapped in Russia’s web, and are reliant on Russian oil and/or natural gas.

  • Europe imports 27% of its oil and 40% of its natural gas from Russia.

Japan is also trapped. It has few natural resources and must import virtually all its energy, other than nuclear, including, coal, oil and natural gas. 

Japan has invested heavily in Russian oil and natural gas production facilities, especially in Sakhalin Island adjacent to Japan’s northernmost islands. As a result, Japan imports substantial quantities of natural gas from Russia.

  • Japan imports 4% of its oil and 9% of its natural gas from Russia.

Countries with Energy to Spare

The United States has energy to spare as the result of its fracking capabilities and untapped Alaskan resources, but policies to fight climate change have impeded its ability to produce oil and natural gas.

The US war on fossil fuels is made clear by this statement by EPA Administrator Michael S. Regan on March 8, 2022, after the Russian invasion of Ukraine, who said,

“Tackling the climate crisis requires action across all levels of government, and our partnership with states has never been more important to reduce [CO2] emissions and deliver solutions.”

And this from Energy Secretary Granholm on March 9:

“We’re on the cusp of the most important transition human society has ever seen. I hope we’ll look back at 2022 as the year the world took giant steps to improve energy security and tackle climate change.”

The United States has exported LNG to Asia and Europe, but its export capabilities are nearing their limit with a new export facility in Louisiana adding 11 MMT. New export terminals could be built In two or three years, but, new pipelines would also have to be built.

Canada could increase oil exports to the US, but is hampered by Canadian policies to fight climate change and by US policies against pipelines.

Saudi Arabia, a major oil exporter, could increase its oil exports by 2 to 3 million barrels per day, and could, in a year or two, increase exports beyond that level.

Australia is exporting LNG to Asia, but is near its limit to do so.

Qatar exports LNG to Asia, and to a lesser extent Europe.

Countries Benefitting from Energy Crisis

China is likely to benefit by buying Russian oil at discounted prices. This could be the major source of cash available to Russia after other countries stop importing oil from Russia.

Iran could export an additional 3 million barrels per day, over and above what it is exporting clandestinely now, if the JCPA is abandoned or modified.

Venezuela could export oil if US sanctions are lifted.

The following charts provide some insight into LNG export and import capabilities.

LNG Export Capacity 2021 from Statista.

LNG Import Capacity 2021 from Statista.

Summary

Crude Oil

Russia exports around 2.7 MMBD to Europe, around 0.6 million to the United States and around another 0.6 to various other countries. 

This means that approximately 3.5 to 4 MMBD of new supply must be found to offset the embargo on Russian oil.

Chart showing Russian crude oil exports with China importing around half.

Replacing Russian oil could be accomplished fairly quickly, i.e., within six to nine months, if two conditions are met. 

  1. Persuading Saudi Arabia to increase output by 2 to 3 million barrels/day (MMBD), using its existing spare capacity. 

However, recent US actions favorable to Iran have angered Saudi Arabia and other Arab countries who see Iran as an existential threat. 

In addition, OPEC has also recently included Russia as a partner in establishing output quotas, raising the question of whether Saudi Arabia would be willing to abandon OPEC+.

  1. The US could increase its production by approximately 1.5 MMBD if the war on fossil fuels was ended, thereby freeing producers to increase output. Eliminating restrictions on building pipelines, including restoring the Keystone XL pipeline, would help move oil to where it can be processed. 

Without these conditions being met, it will likely take years to offset embargoed Russian oil.

(Longer term, ending the war on fossil fuels would allow the US to increase oil production by more than 3 MMBD in three to four years.)

Natural Gas

Europe’s reliance on natural gas precludes any short-term ability to replace Russian natural gas with new supplies.

New supplies will come primarily from importing LNG into Europe. 

However, The Netherlands could increase its output of natural gas by extending and increasing output from its Groningen fields, one of the largest in the world.

  • Output has been limited, and is scheduled to be halted, because producing natural gas has resulted in subsidence and earthquakes.
  • Groningen could produce considerable quantities of natural gas if The Netherlands government would accept the risk of earthquakes. It currently produces around one-fifth of its output capacity based on earlier output data.
  • It’s difficult to estimate how much the restoration of Groningen output could offset Russian imports.

Permitting Fracking could increase supplies of natural gas, but that is a longer term solution.

It will take at least two years to offset Russian imports with LNG imports, primarily because existing LNG supplies are nearly tapped out. 

New export facilities will take at least two years to construct, assuming there is natural gas available for export. 

Specifically:

  • The US has ample supplies of natural gas that could be exported if new terminals are constructed, and if new pipelines are built to bring the natural gas to the export terminals.
  • Qatar is forecasting it can increase its LNG output from 78 to 126 MMT/day by 2027.

In addition, new import terminals will have to be built in Europe.

Conclusion

Oil supplies could be restored relatively quickly if certain conditions are met. If the conditions are not met, it will take years to offset Russian embargoed oil.

In all probability, it will take at least two years to replace Russian natural gas supplies to Europe.

 

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13 Replies to “Replacing Russian Energy”

  1. Well done analysis. It is unfortunate that the administration continues to place the war on fossil fuels above all other more critical issues that plays into the hands of China and Russia and leaves us with a less reliable supply of electricity.

  2. “In all probability, it will take at least two years
    to replace Russian natural gas supplies to Europe.”

    It will take forever, in my opinion, not two years.
    There is no EU desire to replace Russian gas imports. Even if there was, it would take more than two years. And then EU nations would still be dependent on other nations for their natural gas. Russian gas continues to flow to the EU in spite of extremely harsh economic sanctions on Russia. If the war and those sanctions didn’t stop the flow of gas from Russia, then what do the EU nations have to fear?

    Concerning the conservative desire for energy independence.
    The four major manufacturing nations — Germany, Japan, China and the US — all import lots of oil and natural gas. Yet they are the kings of manufacturing … without energy independence.

    Even if a nation had energy independence, it would almost certainly remain dependent on other nations for many critical products, such as semiconductors from Taiwan, generic drugs from China and India, lithium from South America, cobalt from The Congo, manufactured goods from Asia, etc. American consumers benefit from imports of lower priced goods from Asia, an commodities not available domestically. Many US industries use imported parts and commodities. Complete independence from all other nations is a pipe dream.

    Why should any nation spend a fortune to ramp up domestic oil, gas and coal production when such commodities are available from other nations, at market prices, and the supplies have been reliable. Reliable even during the Ukraine war with unprecedented economic sanctions on Russia?

    The money and labor hours invested in expanding domestic oil, gas and coal production would NOT be available for other uses. Which could range from repairing roads, to finding a cure for cancer. There is an opportunity cost. It’s easy to imagine what investing money and labor to expand domestic energy production would do. But the nation would still remain dependent on other nations for other products and commodities. It’s hard to imagine what could have been done with the same investment of money and labor hours in other ventures. What could have been done is invisible. But a good economic analysis always considers opportunity costs.

    • I’ll address the two primary issues you raised in your comment.
      First, why become energy independent?
      Selfishly, using energy we produce saves us money. Any investment in our energy pays dividends. Importing crude harms our balance of payments and increases our costs.
      Having oil and gas produced in the US improves our national security.
      Again, selfishly, any oil or natural gas we can export allows us to make money. Selling natural gas that we produce for $3.50 /MMBTU for $16.00 / MMBTU is a money maker for the US that creates jobs and improves our standard of living.
      At the same time we can support our allies and help them resist political pressure from those who would harm them and us.
      Investing in developing our energy supplies is a win win for us and free countries.
      I will correct one impression your comment seems to make, and that is we import a lot of oil.

      Here’s the data for 2021:
      US consumed 19,8 million bbl/day in 2021
      Us produced 18.6 MMbbl/day in 2021
      As you can see we are about 1.2 million bbls / day short of being independent in so far as crude is concerned. There will always be imports and exports with the movement of oil and finished products, but those are to adjust for such things as geographic location and variations in the type of crude, i.e., sulfur content, etc.
      As to your second argument, international trade.
      Obviously we can’t produce everything ourselves and mercantilism didn’t work in the past either.
      At the same time we need to have safe and secure supply lines so we need to be smart in the way we go about deciding what to import and what to make ourselves.
      The subject of international trade is complex and goes beyond what my analysis of replacing Russian oil was intended to cover.
      You alluded to a third issue, that of Europe continuing to import Russian natural gas. They will do this for a while unless Russia cuts off the supply, because there is no alternative for the next few years. Europe is also locked into the climate craze which will lead to economic disaster for them if they don’t change thir climate policies. But that’s another subject
      Thanks for your comments.

  3. “US consumed 19.8 million bbl/day in 2021
    US produced 18.6 MMbbl/day in 2021
    As you can see we are about
    1.2 million bbls / day short of being independent”

    That statement in your comment was a deception.
    I’ll assume an inadvertent deception.

    The United States imported about
    7.86 MMb/d of petroleum in 2020,
    which included 5.88 MMb/d of crude oil
    and 1.98 MMb/d of non-crude petroleum
    liquids and refined petroleum products.
    These were the lowest levels of imports
    of total petroleum and of crude oil since 1991.

    That means we were short of energy independence
    by 7.86 MMb/d, not the 1.2 MMb/d you claimed.

    Energy independence would only make sense
    if domestic resources were available and could
    be produced at a cost that would be competitive
    with foreign suppliers. Being competitive requires
    a reasonable rate of return on the investments
    in domestic production (they must be profitable).
    That means the return on the investment must
    be sufficient to cover the initial investment
    in facilities amortized over the life of the investment.

    Once again, there is opportunity cost.
    Any investment in more oil and gas production
    means less money available for any other
    investment. Claiming the investment in
    more oil and gas production is good news,
    even if correct, ignores possibly better news
    from investing the same amount of money
    in other products or services.

    In a free market, fossil fuels production will be
    based on costs and returns, not some generic
    desire for energy independence. The politics
    of the climate change zealots have already
    significantly reduced US-based investments
    in fossil fuels, over the past eight years.
    Which means we will be moving further away
    from energy independence in the future.
    Based more on politics and expectations of the
    Nut Zero “energy transition”, rather than
    estimated returns on investments.

    True energy independence would require no
    imports of oil and gas along with all parts and
    supplies for oil drillers and oil refiners.

    These are all moot points, unfortunately,
    as Biden and his fellow Democrats
    would rather buy oil from unfriendly
    nations, rather than encouraging domestic
    production. The nations one buys oil from
    are important — imports from Canada versus
    imports from Russia are very different.
    To give Biden some credit, he is very
    consistent — wrong on every issue!

    • Thanks for your comments, however, I believe you missed the point derived from the EIA chart which showed that the US was independent at that time.
      The earlier comment “US consumed 19.8 million bbl/day in 2021
      US produced 18.6 MMbbl/day in 2021, showing a 1.2 MMBD shortfall was from a different time period using EIA data.
      You also missed the point that imports were exceeded by exports, again indicating the US was energy independent at that time.
      I stand by the accuracy of my article.

  4. I guess we both agree the US is not energy (petroleum) independent, and Biden is certainly not helping. But we just disagree on how far away from energy independence we were in 2020.

    The US imported imported 7.86 MMb/d of petroleum in 2020, which included 5.88 MMb/d of crude oil, of the 20.5 million barrels of petroleum consumed per day. That means imports were 38.3% of petroleum consumed per day. That is very far from being energy independent.

    Your claim that exports minus imports equals energy independence is not true. If those exports were halted, and used domestically, that would change the situatiion. But that has not happened, and is not happening. So the fact remains that the US imported 38.3% of the petroleum used in 2020. The United States is not oil-independent, and hasn’t been since the early days of oil production.

    Since we do not agree, i assembled a fair and balanced panel to evaluate both arguments. They were all my relatives, and the vote was after I distributed presents, and then had two hours of an open bar for Saint Patrick’s Day. There was a 110% consensus vote that I was right, and you were wrong. I suspect one of ten relatives raised both hands to vote twice. There will be an investigation. After the vote, comments were requested. They were not as productive as I had hoped. One relative actually claimed you were a “bum”, before he passed out from too much beer. So I guess that settles it.

  5. In regards to comparing the value of natural gas to oil based on BTU content, you stated at the start of this article:

    “In terms of dollars, oil has a greater economic impact than natural gas. For example, using the Asian price for LNG of $16/MMBTU, oil is 62 times more valuable than natural gas on a BTU per BTU basis. In other words, oil is more valuable to Russia than natural gas. (It’s over 200 times more valuable than natural gas based on the Henry Hub price of around $4/MMBTU.)”

    Oil has a BTU content of about 5.8MMBTU/B. For $100/B oil this equates to about $17/MMBTU which is about the same as Asian and 4 times the Henry Hub for LNG prices you referenced. How did you arrive at the numbers you cited?

    • By making a mistake.
      I nearly always test my calculations. For some reason I didn’t double check this one.
      The correct relationship is:
      58,250 BTU/$ for oil and,
      64,183 BTU/$
      You are correct, and I thank you for bringing it to my attention so that I could correct my article.

    • Thanks. I saw this. I do not know the details behind the EU and Russian grids so can’t comment on any issues.
      Apparently, EU can only supply a small part of any significant loss of power in the Ukraine. This is important because, in at least two instances, Ukraine’s nuclear power plants are clustered at the same location.

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