(OET) With the lessening of restrictions imposed due to the COVID-19 pandemic, expectations of the oil and gas market’s recovery dominated at the start of 2022 prior to the Ukraine crisis. In the wake of Russia’s war in Ukraine, many industries, including the offshore energy industry, were thrown for a loop, which caused a lot of uncertainty on the global energy scene, resulting in price volatility.
The Ukraine crisis gave rise to widespread, numerous sanctions not only against Russia but also against its companies, oligarchs, and specific people, further impacting the energy market, which had been experiencing a period of instability ever since the war started on 24 February 2022.
On the heels of these sanctions, many companies, oilfield services players and oil and gas giants such as BP, Equinor, Shell, and ExxonMobil decided to bring their businesses in Russia to an end. The distancing from Russia, its companies, and products was also illustrated by the measures put in place by EU governments to reduce their dependence on Russian fossil fuel imports as quickly as possible.
In pursuit of this, the EU moved to phase out all Russian oil imports. As growing energy supply concerns led to increased volatility in oil and gas prices, the EU presented its REPowerEU Plan as a way forward to come to grips with a double urgency, seeking to reduce the EU’s dependency on Russian fossil fuels and fast forward the green transition. In addition, the EU disclosed its plan to ban almost 90 per cent of Russian oil imports by the end of 2022.
In April 2022, the International Energy Agency (IEA) and its members agreed to their second release of oil from emergency reserves in response to the market turmoil caused by Russia’s invasion of Ukraine. This came after the U.S. President, Joe Biden, announced the largest release from the strategic petroleum reserves in American history of 1 million barrels a day for six months, as part of a strategy to lower gas prices at the pump.
Furthermore, the United States and the European Union revealed plans in June 2022 to intensify efforts to ensure energy security and reduce emissions in a bid to ramp up the deployment of clean technologies in line with net-zero goals while pursuing diversification of energy supplies to Europe in a sustainable manner.
Despite the resilience shown by Russia’s upstream sector, which rebounded under pressure caused by sweeping sanctions imposed due to the Ukraine crisis, Rystad Energy, an energy intelligence group, predicted in August 2022 that hard times lie ahead for this country as “the worst is yet to come,” since the European Union’s embargo on imports coupled with domestic economic challenges mean “major hurdles lie ahead.”
Moreover, the European authorities along with many other players believe that four gas leaks on the Nord Stream 1 and 2 pipelines in September – two in Sweden’s EEZ and two in the Danish territory –are the result of sabotage after the Norwegian and Swedish seismic institutes had confirmed that underwater blasts preceded the leaks and the Switzerland-based Nord Stream AG found technogenic craters in early November 2022 at the damaged parts of the Nord Stream gas pipelines during site inspections in the Baltic Sea.
The two pipelines were not in operation at the time of the incident since Russia shut Nord Stream 1 at the end of August and Olaf Scholz, German chancellor, halted the process of certifying Nord Stream 2 earlier in 2022 due to the crisis in Ukraine.
Tackling energy trilemma
As the global energy crisis continued to unfold, pushing energy security to the forefront, Norway’s state-owned energy giant Equinor pondered in its report, released in September 2022, what this would mean for the long-term energy transition outlook and how the industry can overcome the obstacles to reach climate change goals and secure a sustainable energy future.
According to the report, the build-out of renewable capacity across Europe would be accelerated as part of the REPowerEU ambition, with lifetime extensions of coal and nuclear power plants helping to fill the supply gap in the short term while Russian oil and gas would find other outlets than Europe, with increased supply available to the domestic markets and export to Asia.
Equinor presented balancing energy security, affordability and decarbonisation as “the key to a sustainable energy transition” towards 2050, amid the turmoil in global energy markets. The report pointed out that the EU would not abandon its energy transition and climate goals, but these would be “more painful than anticipated” to achieve with Opec+ seeking to continue to wield its market power and sustain high oil prices, thus, cooperation and unity on “addressing climate change could be in jeopardy.”
On the other hand, the U.S. contribution to tackling climate change was seen within this report as “a wild card,” as even with “the positive momentum” of the Inflation Reduction Act, the election of a Republican president in 2024 could “fast overturn” Biden’s policies on climate, energy, trade, and security. In addition, the U.S. global leadership could be hampered in the short term by “internal divisions and isolationist impulses,” as indicated within this report.
Meanwhile, projects like the Baltic Pipe, which reached its full capacity at the end of November 2022, connecting gas systems in Norway, Denmark and Poland, are expected to ensure the security of supply in Europe.
At the start of December 2022, a price cap for seaborne Russian crude oil was announced by the Group of Seven (G7) and Australia, coming on the heels of the EU’s embargo on imports of Russian crude by sea and similar pledges by the United States, Canada, Japan and Britain. At the same time, OPEC+ decided to keep the status quo and its reduced oil output targets.
This was followed by a political agreement at the end of December to put a cap on the price of natural gas in the European Union if it reaches excessive levels that do not reflect world market prices. As the European Commission proposed a windfall tax on fossil fuel companies’ surplus profits, ExxonMobil filed a lawsuit at the General Court of the European Union to annul this.
Chasing the green shift
The turmoil within the global energy market scene in 2022 prompted new initiatives and developments on the energy transition pathway as governments around the world, especially those in Europe, decided to pivot towards renewables in a bid to shield their consumers from high gas prices and inflation. This is demonstrated by the inroads hydrogen made over the past year.
Recently, DNV predicted that the long-term influence of the war in Ukraine on the pace of the energy transition is low compared with the main long-term drivers of change: plunging renewables costs, electrification, and rising carbon prices. This is in line with its previous analysis, which indicated that the war in Ukraine would not derail Europe’s energy transition.
However, the global energy crisis has shaken the foundations of energy security and net-zero commitments, thus, more investments are needed to meet the energy transition goals and solve the energy trilemma, as many countries have been forced to amend some of their carefully orchestrated energy transition plans to strengthen the security of supply.
Many solutions have been proposed to get to grips with this crisis with the one about countries needing all the energy solutions they can get, including oil, gas, solar, wind, nuclear, and hydrogen, dominating the stage throughout 2022.
Bearing this in mind, Wood Mackenzie, an energy intelligence group, released a new report in December 2022, outlining key themes to watch for in the oil and gas industry in 2023. This report forecasts that companies will look to recalibrate strategies and shift capital allocation while governments are expected to mull windfalls and incentives with decarbonisation gaining momentum.
Additionally, oil and gas companies are expected to diversify geographically, into gas and across different asset classes to broaden their risk exposure while green hydrogen will be facing a pivotal year in which the sector needs to sort the hype from reality, underscored Wood Mackenzie.