ESG Security in conflict

The crisis in Ukraine, and related sanctions and measures on Russia, have caused significant disruption in the energy market, leading to a shifting global perception of energy security issues. Countries in Europe are particularly dependent on, and so vulnerable to disruption of, Russian oil and gas supplies and Germany and Austria have recently issued ‘early warnings’ as part of their emergency gas supply plans. The implications of the sanctions and measures on Russia have crystallised this issue and added urgency to the need for sustainable energy security. In this note we summarise the latest energy-related measures, review some of the proposed options to secure energy supplies and assess how this may impact the clean energy transition.

Key measures and outcomes so far 

• EU: REPowerEU aims to make Europe independent from Russian fossil fuels well before 2030 and includes shorter-term measures to respond to rising energy prices and replenish gas stocks. Additionally, the EU’s fourth package of restrictive measures contains a wide-ranging ban on new investment in Russia’s energy sector.
• US: The US government has imposed a ban on imports of Russian oil, liquefied natural gas and coal into the United States and prohibitions on new investment in the Russian energy sector, all from 8 March 2022.
• UK: The government has pledged to phase out Russian oil imports by the end of 2022 in addition to sanctions, asset freezes and export controls. A new energy security strategy is expected to be published in early April – reports speculate that the delay is due to different views over nuclear and onshore wind.

On 25 March, the US and EU announced a joint task force aiming to secure additional liquefied natural gas imports for Europe ‘consistent with shared net-zero goals,’ accelerate regulatory procedures for European LNG import infrastructure and reduce gas demand by accelerating deployment of clean energy.  

Security of supply – without Russian oil and gas

Although the EU is most directly affected by the disruption to Russian energy exports, with Russian oil and gas making up 27 and 40 per cent respectively of EU energy imports, the impact is global due to the rise and volatility of oil and gas prices and confidence in the wholesale gas and power markets. As a result, all countries are looking for ways to balance their energy systems more effectively to ensure security of supply without detriment to environmental sustainability.

Fossil fuels

Initial reactions have focused on an increase in fossil fuel extraction and power generation – European countries are planning to de-mothball or extend the lives of their coal-fired power stations and the UK government has commenced a new North Sea licensing round for oil and gas exploration. It has also been suggested that fracking bans may be lifted. Even before the announcement of the US-EU task force, plans for liquefied natural gas import terminals, which can receive gas shipments from any global destination, had already been revived and expedited in Germany and Italy.

These developments could roll back progress made with the energy transition as countries move towards net zero unless the carbon produced can be offset. Retrofitting older power stations with carbon capture and storage technology has not previously been considered economically viable, but it may be felt that, if these are now worthwhile then government support will be required which may push consumer prices up even further.

Since the energy measures were put in place there has been little increase in global oil and gas production as global supply chain issues, lack of experienced staff and worries around market volatility have put off smaller producers. Additional supply so far has come from release of government emergency stocks and other global suppliers, with reports that the US will release further oil from its strategic petroleum reserve.  

Demand reduction

Energy demand reduction, ie a decrease in energy use by the end users, is one of the key strategies to mitigate lower supply and drive towards net zero. The IEA’s new 10-point plans to cut oil and gas use in response to the Ukraine crisis suggests a reduction in business travel, increased car-sharing and turning down thermostats. Whilst well-intentioned, these types of measures have not yet gained widespread public support and would likely need legislative action by governments to be implemented in any meaningful way and to significantly contribute towards net zero targets.

Contracts

Oil and gas contracts have come to fore since the start of the crisis. Unlike larger energy projects, oil and gas supply has not been directly affected by the sanctions, and products continue to flow. However, Putin’s announcement last week that Russia will charge ‘unfriendly countries’ for gas in roubles, when contractual terms generally specify payment in euros or dollars, has raised further concerns for security of supply. The G7 energy ministers responded by stating that agreed contracts for gas deliveries must be respected if they explicitly stipulate payment in euros or dollars. Russia’s hard stance now appears to be softening as the Kremlin told the German Chancellor on 30 March that payment may be able to continue in euros and Gazprombank would convert those euro payments to roubles. Germany and Austria have nonetheless declared an ‘early warning’ in their gas emergency supply plans, urging consumers to cut down on usage.

Buyers of Russian oil and gas will be looking for alternatives on contract expiry (12 per cent of Gazprom’s gas supplies to the EU are due to expire before the end of 2022) and will be considering whether an early exit from longer-term contracts is feasible. OMV, the Austrian utility, who have long-term delivery contracts with Gazprom to 2040, have stated that they are currently prioritising security of supply before doing the legal analysis as to whether early termination is feasible.

Much has been written in the last few weeks about how to deal generally with contracts in light of sanctions and measures against Russia – see our guidance on sanctions precluding performance or payment of a contract and implications for corporate treasury deals.

Initial signs are that energy systems are holding up – the predicted rolling blackouts and outages have not (yet) materialised. But with low gas storage levels, a system shock such as extreme weather in conjunction with volatile markets may prove a difficult test.

Energy security has moved to the top of the agenda, but this must go hand-in-hand with the road to net zero and a clean energy transition.