President Vladimir Putin's decision to invade Ukraine is backfiring on Russia's energy industry -- the core of the country's economy -- as Europe doubles down on efforts to diversify away from Russian oil and natural gas and Western firms flee the country.
Over the past two weeks, Germany, Europe's largest economy, has shelved a new gas pipeline from Russia, announced plans to build ports for super-chilled gas from other countries, and raised the possibility of extending the use of nuclear and coal-fired power plants.
Meanwhile, BP, Shell, and ExxonMobil, three of the largest Western energy companies, have all announced they are pulling out of multibillion-dollar energy projects in Russia while France's TotalEnergies said it would halt new investments.
As European countries move to cut back on Russian supplies, the exodus of Western cash and know-how will inevitably lead to the delay or cancelation of energy projects in the country, impacting future output, analysts have warned.
"I think this is the beginning of the end of Russia as an energy superpower," Nikos Tsafos, an energy analyst at the Center for Strategic and International Studies, said on the Washington-based think tank's podcast published on March 1.
Russia's potential loss of gas sales into the European market will not be fully made up for by increased exports to China, he said.
Russia is the world's third-largest oil producer and second-largest natural-gas producer and has a strong position in Europe, where it accounts for 25 percent of the oil and 30 to 40 percent of the gas supply. Overall, Moscow has been a reliable energy supplier to Europe since the Soviet era, despite the period of Cold War confrontation, the collapse of communism, wars, and recessions.
Its relationship with Berlin has been particularly tight over the years. Germany has viewed Russian natural gas as a bridge in its energy transition from coal and nuclear to solar and wind power.
Despite persistent U.S. protests, Berlin stood its ground and moved ahead with Nord Stream 2, the Kremlin-backed pipeline that would double Germany's imports of Russian gas. Putin's unprovoked invasion of Ukraine has fundamentally ruptured those energy bonds with Europe and Germany, in particular.
German Chancellor Olaf Scholz said this week the country would "change course" to overcome Russian energy dependence and halted the $11 billion pipeline, which was expected to be launched later this year. "Rightly or wrongly, there's a view in Europe that says, if we do not consume hydrocarbons Russia's ability to do this will diminish," he said, referring to Russian aggression. "That is a widely, widely held view in Europe."
"This relationship has been through a lot and yet something broke over the last week. The tolerance that Europeans have for depending on Russia has just changed overnight," Tsafos said.
Putin has been the driving force of Russian energy policy since the turn of the century, even taking part in price negotiations with governments and helping cut deals with foreign investors.
Little-known before the late 1990s, Putin became president in 2000 and consolidated power, enjoying popularity as world oil prices rose and surging domestic production fattened budget coffers.
He soon brought much of the private domestic oil industry under state ownership -- including by bankrupting Yukos and jailing its billionaire owner, Mikhail Khodorkovsky -- and fought off oligarch efforts to dismantle the state's monopoly on pipeline exports.
Putin has used Russia's dominant position in natural gas in Europe as political leverage, including to keep former Soviet states like Ukraine and Moldova within his sphere of influence.
Putin's move to punish Ukraine in 2006 and 2009 with higher gas prices for its Westward-leaning policies led to the first export disruptions from Russia to Europe. His offer of cheap loans and gas to Ukrainian President Viktor Yanukovych in 2013 to prevent Kyiv from signing an economic Association Agreement with the EU sparked protests that drove Yanukovych from power.
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Putin responded by seizing the Crimean Peninsula and fomenting a separatist war in eastern Ukraine, pushing the West to slap sanctions on Russia for the first time.
The invasion of Ukraine on February 24, which started a devastating war, prompted the United States, the EU, and others to impose devastating sanctions on Russia's financial and technology sectors.
Though Western governments created exceptions for Russian energy, a host of firms -- from banks and trading houses to insurance companies and shippers -- are still turning down transactions with Russian oil and liquefied natural gas amid concerns over the risks involved, including possible reputational damage.
Surgutneftegaz, one of Russia's largest oil producers, failed three times in the past week to find buyers for 6.4 million barrels of oil despite a tight market that has pushed prices to eight-year highs. Russian oil producers are selling their output at a discount as large as $18 a barrel, according to Energy Intelligence, an industry publication.
As a result, oil exports from Russia could fall by 1 million barrels per day (bpd) through June, Rystad Energy, an Oslo-based research firm, said on March 3. That would deprive the country of about $12 billion in revenue over that period based on current oil prices of more than $100 a barrel. Russia exports about 7 million barrels of oil and oil products a day.
Russian oil companies could be forced to cut production because the country doesn't have enough storage to hold the oil it is struggling to sell, Rystad Energy analyst Louise Dickson told RFE/RL.
Arctic Dreams Dead?
The sanctions, though, will also have longer-term effects on Russian oil production and sales.
State oil giant Rosneft, headed by close Putin associate Igor Sechin, is developing the massive Vostok Oil project in the Arctic that was expected to produce and export as much as 2 million bpd by 2030.
Vostok is the biggest oil project to be undertaken in Russia since the fall of the Soviet Union. To finance its development -- which will require tens of billions of dollars -- Rosneft last year sold stakes in the project to foreign global-commodities traders. Rosneft is now likely to struggle with securing financing and technology for Vostok's development as Western firms exit.
Overall, Western oil-field-service companies have orders representing about a quarter of all oil and gas investments in Russia, according to Rystad. "Should those contractors leave the country, it will undoubtedly cause delays and disruptions to ongoing operations," the research firm said. Rystad said Vostok "will be slowed and some Russian projects might be canceled altogether."
Russia could also face problems upgrading its oil refineries due to Western technology sanctions, Dickson said. Russia exports more than 2 million bpd of oil products.
Europe is moving quickly now on its energy-diversification plans amid concerns Russia could cut gas supplies as the "economic war" -- as some EU officials have called it -- deepens.
Denmark has already given approval for construction of a pipeline to bring Norwegian gas to Poland after permission was suspended last year. Poland relies on Russia's Gazprom for about half of its gas needs.
In the coming week, the EU will propose measures to expand renewable energy at a faster pace to replace Russian gas. "We need to get independent from Russian gas, oil, and coal. Our resolve to go forward in this case is stronger than ever," European Commission President Ursula von der Leyen said on March 3.
Richard Morningstar, a former U.S. special envoy for Eurasian energy and an analyst at the Atlantic Council, a think tank, told RFE/RL that as part of a strategy to diversify from Russia, European states should reconsider their plans to shut down nuclear power plants. Germany is scheduled to shut down its remaining nuclear power plants by the end of this year, while Belgium is targeting 2025.
Morningstar said Europe should also take steps to enhance energy efficiency in addition to sourcing gas from other suppliers. "Energy efficiency in both short and long term is going to be tremendously important. Europe understands that it has to take serious action," he said, calling Putin's war a "wake-up call" for diversification.
Political crises have motivated developed countries to change their fuel sources in the past, Tsafos said, pointing to the oil crisis of the 1970s. During the 1973 Arab-Israel War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo on countries that supported Israel, causing prices to quadruple and hurting the global economy.
Tsafos said governments in developed economies began to perceive oil as a "fundamentally unsafe and unstable commodity" and cut its role in their fuel supply, turning more to coal and nuclear power.
The same could happen to Russian energy. "Whatever the energy landscape looks like in Europe over the next 30 years, the appetite to integrate Russia into that market right now is zero," he said.
Less 'Geopolitical Punch'
Rystad says Europe could replace most imported Russian gas this year with liquefied natural gas (LNG) and other energy sources including coal, nuclear, and hydropower, though it said such a switch would be expensive and ambitious.
Russia exported 155 billion cubic meters (bcm) of natural gas last year to Europe by pipeline from its fields in Western Siberia.
If Europe succeeds in significantly cutting Russian gas imports in the coming years, Moscow will be in a tough position because it has no other market for that gas, analysts say.
The West Siberian fields are not connected by pipeline to China, a fast-growing gas market. Russia is seeking to build a new pipeline that would carry 50 bcm from the West Siberian fields to China by 2030. Russia currently supplies just 10 bcm to China by pipeline from fields in Eastern Siberia, though that is expected to increase to 38 bcm by 2025.
Russia would potentially lose not just export volumes but some of its global influence amid such a reorientation of exports.
"Selling energy to Asia doesn't give the same sort of geopolitical punch that selling energy to Europe does. It is an alternative, but it's a second-best alternative for Russia," Rystad said.