Prof. ST Hsieh
Director, US-China Energy Industry Forum
February 26, 2022
Military war in Ukraine has been going on for four days, it is heart ranching to watch the carnages on the battle ground and so many innocent people are displaced from their homes. Certainly, the bloodshed will have to be concluded sometimes soon, the sooner the better. End of killings, however, does not mean peace, because it will take time to heal. Normally, it will take generations to easy the pains or anguish against each other!
Further, the pain and hurt of the miliary actions are not limited to the battle ground sacrifices, in fact, the world also suffers. One of the root causes of this confrontation is energy security. Even before the war action was initiated, global energy market had been shaky already. Now as the war path is uncertain, Europe is facing significant potential economic sufferings due to energy insecurity induced by this war. Europe is a major global trading block along with the US and China. So, it is sure that there are more losers than winners in this Ukraine war.
Further, this Ukraine war will end up with a new global order. It is impossible to speculate now the specifics of this new order as which nation or power block will gain more influence or which nation will lose influence. But it is absolutely clear that energy security will be the center piece of the new global order.
European Industry Faces Shrink or Shut Decisions on Energy Pain
William Wilkes Sat, February 26, 2022, 9:00 PM
(Bloomberg) — Europe’s biggest industrial firms have been banking on spring to bring down soaring energy costs. Those hopes faded this week as Russian tanks rolled into Ukraine.
Smelters and chemical factories across Europe were already struggling before the invasion sparked another jump in gas and electricity prices. Now, a growing list of companies including Europe’s biggest chemicals maker BASF SE are warning the energy crisis will keep hacking away at their bottom lines for the foreseeable future.
“Energy prices will stay at a high level and they won’t go back to normal soon,” said Martin Brudermueller, BASF’s chief executive officer.
BASF already took an 800-million euro ($900 million) hit from rising gas prices in the fourth quarter, and the situation could worsen if the U.S. and Europe broaden sanctions against Russia, which supplies more than 40% of the European Union’s natural gas.
“It would be very difficult to replace Russian gas with liquefied natural gas from elsewhere,” Brudermueller said.
BASF isn’t alone. The energy-intensive metals industry is also struggling. Aluminium Dunkerque Industries France, Europe’s largest aluminum smelter, had planned to ramp up curtailed production after the French government helped shoulder as much as 80% of the cost burden. But the renewed surge in prices following Russia’s invasion of Ukraine has put the plan on ice, a labor union official said.
Meanwhile, Germany’s Trimet Aluminium SE said manufacturing the metal isn’t economical at present energy prices. And building-materials giant HeidelbergCement AG on Thursday warned that profits are likely to suffer from rising energy costs over the coming months.
European energy prices surged in the autumn, tipping smaller firms across the continent toward bankruptcy and prompting others to temporarily cut production at unprofitable factories. The continent’s larger industrial firms typically purchase their energy in monthly tranches, a strategy that initially enabled them to absorb the price shocks and more gradually pass them to consumers.
While mild weather eased gas prices off record highs hit Dec. 21, benchmark month-ahead prices have traded at nearly four times the five-year average of 90 euros per megawatt hour over the past five months.
Gas prices have been highly volatile since Russia’s invasion. Benchmark month-ahead contracts surged 60% to an intraday high of 143 euros per megawatt hour Thursday, before falling back to trade around 90 euros per megawatt hour late Friday.
Wolfgang Hahn, owner of Energy Consulting GmbH that gives energy advisory services to 2,500 companies in Germany, said there’s growing concern about energy supplies later in the year.
“Many companies are already looking forward to next autumn and winter and are wondering whether the gas storage facilities will be filled again,” Hahn said. They’re also worried “whether an appropriate alternative to Russian gas will be found, or whether gas imports from Russia will be completely interrupted.”
In the days since hostilities began in Ukraine, prices have spiked for forward contracts for warmer months when consumers typically use less energy to power and heat their homes. The impact of sanctions, Germany’s decision to halt the Nord Stream 2 pipeline, and uncertainty around Russian gas supplies that flow through Ukraine are expected to keep prices elevated over the coming months.
“Firm supplies through Ukraine and NS2 are needed to balance the European gas market and rebuild depleted storage levels,” Rystad Energy analysts said in a note. “The suspension of NS2 wipes out all hope of this and will likely create a prolonged supply deficit and high prices in the European gas market.”
Goldman Sachs Inc. analysts said prolonged price increases will force some industrial producers to shrink or shutter.
“We now believe price-induced industrial demand destruction will be required in the second half of the year to balance the European gas market,” the analysts wrote in a note.
Companies are asking governments for help. France has already moved to relieve gas costs for consumers and Prime Minister Jean Castex froze gas tariffs in November until the end of 2022, with the government pledging to compensate suppliers with loans until prices recede. Italy has also slashed taxes on gas consumption.
Germany, which imports more than half of its natural gas from Russia and has the highest industrial electricity prices in the EU, has yet to step in.
A spokesman for Germany’s chemical industry association, the VCI, said the country’s energy-intensive companies were watching developments in the Ukraine with concern and renewed calls to lower gas and electricity taxes to the lowest possible minimum under European law.
UPDATE 1-JKM LNG price for April jumps 28% as Ukraine conflict escalates
Marwa Rashad Fri, February 25, 2022, 1:53 AM
By Marwa Rashad
LONDON, Feb 25 (Reuters) – The benchmark Japan-Korea-Marker (JKM) price for liquefied natural gas (LNG) jumped nearly 28% on Friday on fears of disruption to global energy and commodities after Russia’s invasion of Ukraine.
The JKM LNG price for April delivery rose by 27.8% to $37.01/mmbtu from Thursday’s levels, a two-month high.
Germany on Tuesday halted certification of the Nord Stream 2 gas pipeline project which would double Russia’s pipeline export capacity via the Baltic Sea to Germany.
The Russian invasion of Ukraine and the halt of Nord Stream 2 pipeline prompted concern about European gas supply and gas prices jumped by between 50% and 60% on Thursday.
Europe, which has been increasing its use of LNG, is expected to seek as many cargoes as possible, competing with top-importing region Asia.
However, global supply of LNG is tight and most of the volumes of big producers such as Qatar are locked into long-term contracts mostly to Asian buyers.
“If Europe decides to get rid of Russian natural gas and looks for LNG, this will put the global energy market into turmoil, because no producer has that much spare capacity to offset the Russian volumes to Europe,” an industry source said.
Exceptions to U.S. curbs on Russia seen weakening impact
Karen Freifeld Fri, February 25, 2022, 4:20 PM
(Reuters) – U.S. curbs on exports to Russia for invading Ukraine look tough at first glance, but exemptions on everything from mobile phones to airplane parts coupled with the difficulty of policing shipments suggest a softer economic blow.
The restrictions imposed on Thursday, and similar measures being adopted by the European Union, the United Kingdom, Japan, New Zealand, Canada and other countries, are meant to hurt Russia over time.
But numerous exceptions weaken the new 86-page U.S. rule.
“When you really parse this out, this is not a full-scale embargo by any means,” said Washington trade lawyer Doug Jacobson.
“There are a lot of carveouts,” he noted, such as cellphones for Russian civilians, certain oil field equipment, and aircraft parts necessary for flight safety.
Peter Harrell, on the White House National Security Council, said a month ago the United States would spare the average Russian from penalties and instead degrade Russia’s key industries and cost its military. The restrictions are based on who will use the technology, as well as the items.
In announcing the curbs on Thursday, U.S. President Joe Biden said that “between our actions and those of our allies and partners, we estimate that we will cut off more than half of Russia’s high-tech imports.”
The impact relies on multilateral cooperation and a dramatic expansion of the so-called Foreign Direct Product Rule, forcing companies that make tech items in other countries with U.S. tools to seek licenses from the United States before shipping to Russia.
Certain partner countries planning to adopt similar measures, however, are not subject to the new U.S. foreign direct product measures.
U.S. exports to Russia were less than $5 billion in 2020, according to Commerce Department statistics, but a senior Commerce official said the historic multilateral cooperation means that more than $50 billion in key inputs to Russia may be restricted.
The measures allow for exports of consumer items such as humanitarian goods and household electronics. Consumer communications devices, like cellphones and certain laptops, are permitted as long as they are not sent to entities that support the military, Russian government employees or certain affiliates.
Blocking access to all consumer technology would undermine the work of Russians opposing Putin’s repression, the senior Commerce Department official said. It would also hurt independent media.
“You can make a good argument that a better strategy would have been to do a much broader blanket thing, and if that hurts the average Russian, that’s OK,” said William Reinsch, a former Commerce Department official.
The rule’s complexities are a double-edged sword, Reinsch said. “The more complicated you make it, the harder it is to comply on the part of businesses.”
But few large companies depend on the Russian market and some exporters may just cut off Russia because it is too complicated, he added.
“It’s simpler for a company to say we’re going to have nothing to do with it. Stop all sales.”
One chipmaker said it had halted all supplies to Russia while figuring out which exports would violate the rules.
Enforcement may be tough. For example, it is hard to track a semiconductor made with U.S. technology in one country if it is later sent to a Russian company that supports the military through an intermediary, said Cordell Hull, another former Commerce official.
“The U.S. government will need to use every source available to it to ensure compliance with the rule.”
The Commerce Department plans to use its special agents, export control officers posted overseas, and analytic and investigative resources to identify violators, the senior official said.
Much depends on the cooperation and expertise of foreign manufacturers, along with physical inspections by non-U.S. enforcement authorities.
(Reporting by Karen Freifeld; Additional reporting by Alex Alper in Washington; Editing by Richard Chang)