Tatiana Mitrova [00:00:03] During this winter. Europe survived quite successfully without Russian gas. That’s really bad news because it looks like Russia has nothing to propose to the European Union in these negotiations. So at least some allied countries are important in this game.
Jason Bordoff [00:00:21] Nearly a year and a half ago, Russia invaded Ukraine, plunging Europe and the world into a protracted energy crisis. Since then, the brutal fighting in Ukraine has turned into a war of attrition, and energy prices have fallen from the eye popping heights they reached in mid 2022. While the immediate crisis may have faded from the headlines. Europe’s energy challenges remain. Electricity and natural gas prices remain at higher than typical levels. Policymakers face the challenge of turning the loss of Russian gas supplies into a long term strategy for energy security and decarbonization. And Europe’s energy crisis has had ripple effects far and wide, including in emerging markets and developing countries struggling to afford energy. How has Europe’s energy outlook evolved over the past year and a half? Our policymakers trying to secure the continent’s fuel supplies. And what does all this mean for the global energy transition? This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show, we turn to two of our own experts here at the Center on Global Energy Policy and Sophie Corbo and Tatiana Mitrova. Anne-Sophie is a global research scholar here at the center where she studies low carbon fuels and natural gas. Her career in the energy industry spans over 20 years, including stints as the head of gas analysis at BP, senior gas analyst at the International Energy Agency and as a research fellow at Caps, Ark. The King Abdullah Petroleum Studies and Research Center in Riyadh. Tatiana is a research fellow here at the center. She’s an expert on Russian energy policy, having previously served as executive director of the Energy Center of the Moscow School of Management, Skolkovo, and as the head of research in the Oil and Gas Department in the Energy Research Institute of the Russian Academy of Sciences. She’s also a visiting professor at Sciences-Po and serves on the board of directors of Schlumberger. I spoke with Anne-Sophie and Tatiana about how Europe’s energy outlook has changed since Russia invaded Ukraine last year. We also discussed global natural gas markets, Russian oil production and how the crisis is affecting Europe’s efforts to decarbonize its energy system. I hope you enjoy our conversation. Tatiana Mitrova Anne-Sophie Corbeau. Welcome back once again to Columbia Energy Exchange. Great to talk to you both.
Anne-Sophie Corbeau [00:02:51] Very nice to be here, Jason.
Tatiana Mitrova [00:02:53] Thank you, Jason.
Jason Bordoff [00:02:54] For regular listeners, this will seem like a repeat episode sometimes. We have reruns in August. This is not a rerun. You’ve just become regular guests here on the podcast because of your deep expertise in Europe, in Russia, in global gas markets. And all of those things have become became top of mind, obviously, when Russia invaded Ukraine and the energy crisis that that ensued. So we’ve had you on regularly to sort of share your thoughts on what was happening during the energy crisis. And I wanted to do that again, because we had we started these conversations with you when these topics were on the front page of every newspaper every day, and now they’re not. And so I actually wanted to have you on because they are not. And so there’s I think, some sense that the energy crisis has passed. Europe had a goal of reducing dependance on Russia, reducing how much gas it used overall. Gas prices obviously are much lower now than they were a year or a year and a half ago. So you sort of here are some people declaring victory. Everything is in a good place now with regard to the impacts of Russia’s invasion on global gas and oil markets, energy markets and with where Europe is. And I’m just wondering if you think that is an accurate assessment or maybe it’s too early to declare victory for for Europe or become complacent. And Sofia, let me start with you.
Anne-Sophie Corbeau [00:04:27] I think it’s too early to become complacent. I mean, that’s definitely sure. Yes, gas prices are much lower. So we are at about 10 to $11 per member to remember that. At the same time last year, we were closer to 6070. We even went to $100 per MMBtu one day. So we are better on that side. However, the markets remain very tight and no voice adjustment to the loss of ocean pipeline gas as come as the expense of well, first of all, paying a lot of billions in order to protect both residential consumers, but also industrials. And also with you seeing very strongly our gas consumption. However, as we are looking forward, there are still a certain number of things that we need to be cautious about in Europe. We need to be cautious about the next winter, how cold it’s going to be. We need to be cautious about how much Russian gas we are still going to continue to get. We are still getting some Russian gas by pipeline. Funny enough, we are still getting Russian gas by pipeline for Ukraine. I mean, which you know, when the war started, you would have thought that would be the first one to go, but actually not. And we need also to be careful about how much LNG supply is available because as we have seen last year, things happen like, you know, Freeport LNG was not available for about seven months. So that’s, you know, quite a bit of loss when you are looking at the global LNG markets. So we are in a better situation in Europe. I think the global gas market are in a slightly better situation. However, for the next two years, we need to be very careful, as I always says of Covid. We arrived in 2025 when a lot of that energy supply is going to hit the market. But between now and what date, we need to be quite careful and we need to continue our efforts, especially in Europe.
Jason Bordoff [00:06:29] Tatiana, do you agree with with that assessment of where? Things are.
Tatiana Mitrova [00:06:34] Yes, absolutely. I would add to that that right now Southern Europe is suffering from incredible heat wave. And we do not know with the climate change, which we are all witnessing right now, what will be the winter. Last winter, Europe was blessed with really, really mild weather, but it’s not guaranteed to be repeated the next time. But speaking about broader issues, you know, actually the very idea of the sanctions and getting out from this energy crisis was related with the attempt to stop the Russian aggression in Ukraine and to create the framework which would undermine Russia’s ability to finance military expenditures. And right now, I am afraid we have to admit some that we’ve got into the phase of a protracted war of attrition between Russia and Ukraine, which unfortunately doesn’t show any signs of being able to stop any soon. Precautions munity. It has demonstrated that actually Russian elites are showing their contradictions and stability. But nevertheless, the Russian economy remains extremely resilient. It is increasing military spending. And though Russian revenues from oil and gas have decreased by nearly 50% compared to a year ago, they are still higher than they were in 2016 2017, which means that the country is okay. It’s not a good shape, but it is surviving and it is adapting very, very fast to its oil and gas export strategy. So actually it is just the first round and we shouldn’t relax and think that everything is over. Russian energy sector and the Russian economy is still quite strong and they can deliver some unpredictable surprises to the West.
Jason Bordoff [00:08:43] You you both put several issues on the on the table I want to come back to, but just help everyone listening, understand kind of just like a data laying the groundwork where we are. Energy prices today in Europe where they were at the worst of the crisis. Natural gas prices. I think TDF is around $10 or something. Where where gas prices are today, where they were at the worst of the crisis. And then you mentioned Russian gas is continuing to flow. You know, what was what was the situation with Europe’s dependance? How much gas was it getting from Russia before the crisis and how much is it getting today? And and where’s that coming from? Maybe answer if you could just provide a little bit of a sense of where things are today.
Anne-Sophie Corbeau [00:09:27] In 2021, we imported about $1, what, 55,000,000,000m³ of Russian gas, both Poland Gas and LNG. So there was 140 BCM of Russian pipeline gas, which is quite a lot for Europe because at that time Europe was roughly a 41,000,000,000 cubic meter market. Russian pipeline gas supplies towards Europe dropped by almost 80,000,000,000m³ in 2022. So, you know, when you are comparing that to the demand in 2021, that’s about 20% less. So that’s quite a significant chunk. And now we are seeing of that in terms of the pipeline gas. So we then wondered what 14, 20, 21 we are at 20,000,000,000m³ of Russian pipeline gas still coming to Europe. The LNG, however, is still flowing in to the greatest dismay of European politicians because we have realized that Russian LNG is actually increasing to Europe. Why? Well, that’s very simple, because European gas prices were quite high in Europe. So, you know, when you have a lot of LNG available, what do you do when you send it to the most interesting market? And the most interesting market was Europe. So obviously Russian gas, which in that and she went to Europe facts of use.
Jason Bordoff [00:10:46] And how much was that Russian LNG and what are the volumes.
Anne-Sophie Corbeau [00:10:50] It it increased to about 19,000,000,000m³. So it increased by roughly five BCM over the past year. Well, between 2021 and 2022.
Jason Bordoff [00:11:02] About the same as the level of pipeline gas. So so.
Anne-Sophie Corbeau [00:11:06] Yes, right now we have almost as much Russian pipeline gas as we have Russian. That energy, which is quite amazing. But of course, this is coming because we have reduced so drastically Russian pipeline gas supplies to Europe. I mean, can you imagine nobody would have ever thought about that in terms of energy security. I think in Europe we will prepare two scenarios, which we are looking at, the closure of the. 22. Ukraine may be queen and Belarus, but nobody would have ever offered that. You would have always avenues being closed and especially, you know, not him. One closed the pipeline for Poland, closed most of the transit for Ukraine, even for, you know, some remains. But, you know, the volumes are 10 to 15,000,000,000m³. So not that much almost closed. So it’s a very long way from the agreed contracts volumes of 40,000,000,000m³ that was agreed between Russia and Ukraine in 2020, in 2019.
Jason Bordoff [00:12:10] And you’re both sitting in Europe just again, to give our listeners a sense of what it feels like for businesses and consumers there. What are our our energy prices relative to the worst of the crisis and and what people were used to before the crisis?
Anne-Sophie Corbeau [00:12:27] So the gas prices, I mean, right now, they have come down the VAT, you know, ten, $11 below may be to you. So what they went was $1 per to you in August last year when the markets were in full panic. But we have been since I think of October or September 20th, 21, above on average, $50 per minute, you and quite often above $50 per MMBtu. So we are better. We are in a better situation. However, you know, if that doesn’t mean that the prices are back to normal because back to normal was like 5 to 6 $7 per MMBtu before the crisis, that would be the prices that we were usually seeing over 2000, 15, 2000, 19.
Jason Bordoff [00:13:15] Yeah. So these are still have an impact on the economy and these relative to historical average, these still feel like high prices to businesses and to consumers.
Anne-Sophie Corbeau [00:13:25] And this is why, you know, consumers are to adapt. I mean, a very important part of why we have survived in all of these crises was also on the demand side. Yes, we have managed to attract additional LNG quite a lot, but a very big part was also reducing gas demand. And this has happened mostly in the residential and industrial sector. So people have played their part. There has been, you know, restrictions in terms of the heating temperatures. There has also been some destruction of industrial gas demand. There have been also some switching to over fuels. So all of these things together, so behavior change, the efficiencies of switching to the fuels, but also the demand destruction have played the part. And this is why, you know, Europe has been able to survive. But now we are still seeing gas demand in Europe declining.
Jason Bordoff [00:14:14] I want to turn to demand in a second and talk about how much demand reduction is kind of voluntary versus involuntary. Tatiana, can you say a word just so people understand? You know, we heard from and Sophie was a lot less Russian gas flowing to Europe, perhaps less a decision of Europeans than of Russia, which was trying to weaponize Europe’s gas dependance and impose economic pain on on Europe. But but not entirely there still you know 20 BCM of pipeline gas, roughly 20 BCM of LNG. Why is that gas still flowing? Russia Why is Russia still supplying it, as Anne-Sophie said, surprisingly, perhaps through Ukraine? And is that going to continue?
Tatiana Mitrova [00:15:04] Yes, it really looks surprising. But actually, if you look at the map and add the final destinations of these gas, you’ll you will find out that the countries receiving this gas are really important for Russia as a potential. Well, I wouldn’t say allies, but at least proponents and other countries, which are to a certain extent supporting Russian position and Russian interests. So we are talking about Hungary, about Austria, about Serbia. So for them, I mean, for Russia, it’s real important, first of all, now to keep at least some exports because otherwise losing 200% of the European gas supplies would mean for Gazprom in particular, significant loss in the revenues. Yeah, initially they thought that Europeans will give up under this pressure. That was plan A, which didn’t work, but there was no plan B, So now they are trying at least to keep the remaining volumes through Ukraine and through Turkey. That’s what what was left. But also it is important to keep at least some windows open, some interactions ongoing, some gas flowing. It was actually several times so that Russian officials were making the. Signals that potentially they are looking at the opportunity to restore gas supplies via a Yamal Europe pipeline. For example, Novak was mentioning aid in early spring. So they are trying to keep it as a tool for potential negotiations because, as I said, Russian government starts to realize that probably this a war for attrition wouldn’t be sustainable for the Russian economy. And they need to have some cards to go into negotiations to achieve some ceasefire, maybe not at the peace agreement, but at least some sort of settlement targeting at lifting sanctions. That’s the main purpose of all these negotiations and as they see. But during this winter, Europe survived, survived quite successfully with or without Russian gas. That’s really bad news because it looks like Russia has nothing to propose to the European Union in these negotiations. So at least some allied countries are important in this game. So that’s the main reason. But also, I think the reason of this huge in a game competition between Gazprom and Novatek, because Gazprom, which used to be the flagship company of the Russian gas sector, is now losing its importance, its influence. And suddenly Novatek comes to the forefront of overtaking Gazprom in the European market. That’s what’s actually happening. And all the very recent news in the end of the last week, there was an announcement that the Russian government is approving the new project of more months challenge led by Novatek. It will add another 20 million tons to Novatek portfolio, building it up together with Yamal LNG and Arctic LNG to to above 6 million tons, which means that Novatek will be much more powerful than Gazprom. Obviously Gazprom is not happy about that and they have for protecting at least some pipeline gas flows to Europe is in core interests of Gazprom.
Jason Bordoff [00:18:59] Very interesting. And just to I think what I heard you say, but tell me if this broad takeaway is correct, to the extent Putin thought cutting off most gas supply and weaponizing Europe’s dependance on Russian gas was a tactical, strategic move that would force Europe to to bend with sanctions or with its support for Ukraine. It sounds like you’re saying you think that’s failed, that’s backfired Europe. What Anne-Sophie said is we may face a bumpy 2 or 3 years. There’s a lot more LNG supply coming in 2025. We’ll see what the next couple of years are like. And there are periods of maybe price spikes depending on weather and some other factors. But Europe can do without. Most Russian gas and that is situation is going to continue. Is that what I heard you say?
Tatiana Mitrova [00:19:51] Yes. And that came as as an absolute surprise to the Russian authorities. They could never imagine that Europe can survive without Russian gas. The whole purpose of building all these pipelines was to tie up Europe and suddenly it turns out that Europe can do quite well even without Russian gas. There were some complaints of some groups of the European politicians, and there are still some signs from time to time that probably they would be keen to go back once the Ukrainian situation is settled. But I think the longer Europe can do without significant volumes of Russian gas, the less there will be a desire to get back to it again.
Jason Bordoff [00:20:38] Tell me, Anne-Sophie, if you agree with that and if so, why? That is what you know, what role demand reduction played, what role alternatives, renewable energy or others played, what role other sources of gas like the United States played, and what that looks like moving forward.
Anne-Sophie Corbeau [00:20:56] Yeah, no, I fully agree with that. You know, I think, you know, I wrote a paper in August last year, which was called, You know, Putin’s Divide and the World Game. And it was perfectly obvious to all of us that Putin was trying to put pressure on the European countries one by one by saying, okay, I’m cutting you, I’m cutting you, and who is going to be cut next? And, you know, countries were like, oh my God, I don’t want to be cut from Russian gas. And this is actually what happened progressively. And he played a very interesting game. But what really helped us is that we had a very mild winter that was, you know, one thing, one volume. Bolton feeling. You know, it’s kind of always very ironic when you are looking at the fact that on the 19th of December, the day that European Commission published and agreed upon the price caps at gas price caps. So whether started to be made. So we never actually had to use these price caps. But we had a very, very mild winter, hence the concerns for the following winter that it might be very cold. That would be a double whammy. Not only would be colder than normal, but much colder than what it was last year because, I mean, you know, 1st of November I was in shops, thieves in Paris, outside. And at the end of the year, there were people in the south of France eating ice creams because it was so might. So we have been lucky. But there was also a part which was, you know, industrial demand reduction. And there was also a part which was in the energy efficiency and also be a value changes. So, you know, when you are looking at all of that together, I would say that about 60% of the guest demand reduction in Europe was coming from both the weather and also industrial guestimate reduction. And so it was coming from all this energy efficiency park. What is important, however, is that the gas demand in the power sector actually increased slightly because we had so many issues with first nuclear power plants and also we have high torque. So we lost a lot in terms of power generation with this box above energies. And that was really what set us back. Of course, there was a fact that France was having issues with its nuclear power plants, both because some of them needed to be, you know, very as a regular checkup of nuclear power plants, but also the fact that we had always caught an issue. So that was one big bulk. But the other big part was the fact that especially in Germany, they were decommissioning and continue to decommission nuclear power plants and more nuclear power plants have been decommission not only in Germany but also in Belgium, actually.
Jason Bordoff [00:23:37] Yeah, it was, you know, was a remarkable statistic when I saw it that despite the significant reduction in European gas demand, the amount they use for electricity generation actually went up because it had to compensate for losses elsewhere like like nuclear is. Tell us what this winter looks like that I think Europe will have very nearly entirely full storage record levels of storage. And if temperatures are even average, I think the projections I’ve seen are things should probably be okay. So what’s your outlook and what would have to happen for there to be another severe crisis this winter?
Anne-Sophie Corbeau [00:24:15] So storage is 84% full right now. I think it is. The problem is that we might have full storage by the end of August, which is kind of unusual. Usually, you know, you have full storage by, you know, end of September, middle of October. I mean, you really want to have full storage when we sell the winter, which is usually in the month of October. That’s who knows the most important thing. But we might have nowhere to put all the gas which is still coming, which is why, you know, some people, including our critics, are caution. I was suggesting, well, maybe we should actually put together into Ukrainian storage because acquaintance took a stick with empty I think it checked this morning and then we had something like 24% full. So there is some room in Ukrainian storage. So that’s the first thing. But the problem is that people should not feel that because guest village is full when everything is going to be okay. I mean, yes, full storage is very important, but that doesn’t ensure that everything is going to be all right. So you need to be careful about, you know, as a weather a very cold winter might actually increase natural gas demand by, you know, something like 20, 30,000,000,000m³, especially when you are comparing against last year. So that’s very important. Then, of course, if you if we are losing the remaining Russian pipeline. Yes, maybe because some politicians are saying that we should, you know, stop importing Russian pipeline gas or Russian LNG like now, there have been a lot of pushes against Russian LNG over the past few months coming from the European Commission, coming from the facilities and from the Spanish minister saying we need to stop importing this Russian energy. I mean, Putin is very well known for retaliation, so it’s very difficult to predict what he could do. So that would be also something. Yes. And then there is whatever is going to happen on the global LNG market. I mean, we are seeing, you know, that energy supply is increasing. Yes, it might increase by 2020 5,000,000,000m³ in 2023 each year. That energy demand. That’s interesting because over the first few months it was actually well, it’s still coming down in Japan and Korea because of the weather, because of nuclear coming. But at the very beginning of the year, there was almost no increase in Chinese LNG imports. And now in June, they started to increase massively. And China is something that really need to watch very carefully because in 2022. We imported an additional 52,000,000,000m³ into you. But to become welcoming of the reduction of Chinese LNG imports. So, you know, we we should we should thank the fact that, you know, Chinese didn’t need that. They didn’t she. That’s very important. And actually.
Jason Bordoff [00:27:12] And they didn’t need it because of weather, because they used coal instead. And coal prices went to record levels and. Is that replicable or do they. Is that not something that can happen again? They will need it. And that’s going to strain global markets and that’s going to strain Europe.
Anne-Sophie Corbeau [00:27:25] This is a very, very good question. It was coming because, you know, the Chinese economy was slowing down, that they were also switching back to core. But of course, we are still increasing in terms of new Ebola nuclear deployment. So all these facts together means facts. You know, for the first time in many, many years, Chinese gas demand dropped. And when you are looking at the priorities in terms of Chinese supply. Then you are first. So domestic gas production, which continue to increase very, very is also Russian gas, which is actually quite cheap, which is ramping up to capacity when there is also the gas which is coming from Central Asia. Okay. That you and I can say a few things about would be Keystone and Kazakhstan, but there was not so much difference of it and then comes yet and she. And yet and she especially is yet and she would dispute that and she was outrageously expensive so nobody was going to buy that because you know usually Chinese very little bit price sensitive it would take the contracted LNG. So all of these things together mean that actually China the need for LNG and some of it they didn’t she was happy to send back to Europe we were trading profit. But now things are changing because as I would before and this is becoming more and more true, China has contracted a lot of attention. So this is going to be their LNG source of first priority would be to service Chinese LNG gas markets, first of all. Second, I mean, the Chinese economy, even for its collectively slow, is coming back. So Chinese gas demand is going to increase. So it’s very likely that we need more LNG, probably going to come back to the levels of 2021. But if we have a very cold winter and both in North East Asia and in Europe fishes when trouble starts, because there will be a lot of people, including the Japanese, are Koreans and the Chinese and the Europeans hunting for Spotted in Chicago. And that will be a repetition of what happened at the very beginning of 2021 when prices literally spiked. That was our first, you know, gas supply alert. But that was way before the whole crisis started. And that for me is it’s a walkies scenario that, you know, we don’t want to see happening because if everybody if the global LNG market is constrained, then you would see prices increasing. You see a lot of an activity and, you know, there would be people who just can’t afford for that. They don’t but do remember one thing, China as more contracted LNG that they used to have. What happened is that before they used to rely on a lot of spotted energy. No, you know, they looked at the market. We understood that. You know, I think a very important dependency on spotted energy is actually not a good strategy. So vehicle to feed a lot of energy, including from the United States, from get from Russia, from everybody, from the industry, we get tools. We have been quite diversifying the energy supply.
Jason Bordoff [00:30:22] Really, really interesting. I have follow up questions on lots of things you’ve both already said. So let me just turn back to a couple of them. Tatyana, you talked about, you know, this was a maybe a strategy or a bet that Putin made that didn’t play out. But you also said that the revenue was still higher than it was and 16, 17, the economy is not great, but doing okay. Just talk about what impact all of this is having on Russia, the impact of economic sanctions, And is that leading to any sense that there would be pressure economically to to to change course? As far as I can tell, the sanctions, at least on oil, have been designed to make sure Russian supplies do not get disrupted because people are worried about oil price spikes. Maybe we can put some pressure on how much revenue they get by. You know, this this price cap, we can talk about that. But what is happening economically there and what impact do you think that will have on Russia’s strategy of energy as a weapon?
Tatiana Mitrova [00:31:25] Well, Russian economy is actually in the positive zone, surprisingly so. There was a decline in 2022, but now it is demonstrating some minor growth, 1 to 2%, which is okay. Yeah. And though, as we’ve discussed, the oil and gas revenues are going down, the non oil and gas revenues are going up, including the GDP created by the military sector, which became a new driver not only for economic development, but also for the internal energy demand, surprisingly. So it is frankly more and more reminding me of this Soviet economic model which has mobilized to which is not focused on the prosperity of the population, but rather on the military complex. But it works. And I would say that this situation seems to be quite sustainable. It can last for many years. That’s the problem. So the level of life of the population, it’s slowly decreasing but not collapsing. The level of dissatisfaction of the population is slowly increasing, but it doesn’t lead people to the streets, to the protests, and it becomes all like a frozen situation and a which. Which is really bad news. Yeah, because it means that there is no really strong desire to settle as fast as possible conflict with Ukraine and on the sanctions side. Yes. So there is some pain. Yes, there are some destruction, but also there is a very high adaptability. Russia managed to redirect its oil flows nearly completely away from oil city countries. So there are still some minor volumes going to Europe through the route of the pipeline, but the seaborne crude is not ending up there. But Russia has replaced this attractive and luxury market with the other markets in China, India, Middle East, Turkey and the the supplies are quite high in agreement with OPEC. Russia is cutting its production. Actually, it’s a very tricky game because these announcements are coinciding with the natural seasonal decline of the production, which happens every year. And frankly, with the booming demand on the domestic market, which has led to the historical record gasoline prices and diesel prices in the Russian market. So for Russian government, it’s a bit of a relief to allow more oil to go to cull down the population on these domestic prices instead of going for exports. And it’s it’s a very thin tactical game that Russia is doing now. It became very experienced in this game during the last eight years since it started to cope with OPEC. And I think it doesn’t actually show the real strategic moves. This strategic move will be to keep further diversification of the exports, to build up a new alternative financial system in order to execute all the transactions, to get money for this oil to increase further the shuttle fleet, which is already becoming quite considerable. So it’s more than 40% of all transportation of Russian seaborne crude, which is provided by the. And it is growing every month. Yeah. Plus, all these new smaller traders registered in Dubai, in Singapore, elsewhere, which have replaced Gunvor and the others. And these new schemes, they are working. So actually, Russia is with its crude oil exports. It’s back to the level of 2021, which was not the best year, but not the worst, frankly. And oh, the discounts, the price discounts which Russia has now, actually, if you look at the customs statistics of China and India, you can see that, yes, the risk like of 15, sometimes 20, sometimes $10 per barrel discount. But actually, it’s not such a catastrophe. So the margins of the Russian oil companies are going down. The budget revenues of the Russian government is going down. But it is still absolutely sustainable. So for me, the problem is that actually the situation is reaching a new balance, new normal. And then it can remain in this position for quite a long time. So the population has accepted it and the elites have accepted it.
Jason Bordoff [00:36:46] Let me ask you quick follow ups and let’s we have so many topics I want to cover and try to just make these sort of clarifications. The I think I heard you say that the recent production cuts from OPEC, Saudi Arabia’s large million barrel a day cut two of them in the last couple of months. And then and then Russia joined in a production and a cut in exports. Mm hmm. That would that was not necessarily a voluntary contribution to help prop up prices, but that was a response to some impacts they were going to see anyway.
Tatiana Mitrova [00:37:20] Yeah, but that’s my guess.
Jason Bordoff [00:37:22] Okay. And what does that mean for how they might cooperate or not moving forward? If we start to see tight markets, markets and deficit prices go up, where there is pressure on OPEC to put supply back on the market? What role does Russia play in that?
Tatiana Mitrova [00:37:40] Yeah, So I think Russia will step forward saying that it is ready to increase its production starting from October-November. It’s absolutely normal. Again, this is a now let’s see most production up. So basically, I assume that that was the plan from the very beginning. Both OPEC and Russia are hoping the Chinese economy, economic recovery will become visible, that the global oil demand will go up, that the fundamentals will start to work finally. Now everybody’s waiting for it. During this pause, they’ve cut supplies, but actually they are hoping that this caused or will not have to last for a long period of time. So tactical pause.
Jason Bordoff [00:38:31] And as prices rise, you start to see Russian prices Urals, the price of Russian crude approach levels at which the price cap that has been put in place by the G-7 says you are not allowed to use Western ships, Western insurance. Would that have an impact on the ability of Russian oil to get to market, or do you think the price cap will start to bite and people will demand to pay less? Or you mentioned the shadow fleet. Is there enough of a so-called shadow fleet that you can do all the export of Russian oil you need to without Western anything?
Tatiana Mitrova [00:39:06] So at the moment it has sailed more than 2,530% of the Russian crude being transported by the Western companies. And the percentage is going down. But it will take time. So indeed to the recent collision when the prices are going through this price cap level. Actually, it has happened already in mid-July. But, you know, it’s not seen in the statistics. It’s not visible yet in the reporting. And so far, it looks that in those locations, in those directions and those markets where it has happened, Russia is using this shadow fleet. It has. And all the intermediaries, not non-Western companies, non-Western shipping and non-Western insurances which allow to keep operations ongoing. If this break of the price cap will occur at all markets at all destinations, then it will become a problem.
Jason Bordoff [00:40:20] Interesting. And last question on this and then Anne-Sophie, I want to come to you. The what are the impacts of all this longer term on Russia’s oil and gas sector and production? Now, all this gas that had been going to Europe, what’s happening to it? Are you shutting it in? Is that damaging wells and the ability to produce in the future the constraints on investment? Is this all meaningfully changing? What Russia’s oil and gas sector will look like a decade from now?
Tatiana Mitrova [00:40:47] Well, I will start from gas, and I would say that probably not the two thirds of Russian gas is consumed domestically. So even this sensible reduction in the export volumes, it has resulted in just 10% reduction of the Russian gas output overall. Unpleasant, but Russia has experienced a similar situation back in 2012. And all the while, Gazprom and the other gas companies. So they know how to do with that. Probably some of the resources and the wells will be lost completely. But given huge resource base, frankly, nobody cares. With oil, it’s a bit different. Russian oil production, I mean, the brownfields, the operational fields that they are in the decline phase. So it will be necessary to drill new areas, to drill new wells in order to replace these declining production. And it requires both money and technologies. So far, Russian oil companies are absolutely fine with that. They had sufficient, you know, capacities of their spare parts to replace the to maintain the Western equipment and so on. They are working more and more with the Chinese equipment and so on. But already in the foreseeable future, in the couple of years, or it will become a sort of constraint, Russian government is allocating quite considerable support for import replacement for this technological support, but also creates some very detailed tax incentives for the specific fields to come on stream, for the specific companies to be successful, like Krosnick. Surprise, surprise. So all in all, I would say that I do not see this a trend of collapsing oil production. It will be not an easy way to sustain it at the current levels up until 2030. It will require, first of all, these technological inputs, replacement force, but also very balanced of a tax system. But so far, I think Russian government is doing quite well with that.
Jason Bordoff [00:43:19] And Sophie, when we first started the having these discussions on this podcast at the height of the crisis, you know, the question everyone was asking was, will this accelerate or decelerate the energy transition? And you’re going to find alternative sources of LNG where you can. But in the long run, you know, people were going to realize that if you drive electric cars, install heat pumps, produce electricity with solar and wind, use green hydrogen. You know, that was that that was just better from an energy security standpoint. I’m curious, when you look back now on what we’ve seen in the last 18 months, what reaction, what response you see from governments and from consumers and from businesses, do you actually see that a major part of the response has been deploying a lot more clean energy? And, you know, obviously we’re talking and you’re sitting in Europe at a moment when Europe is breaking heat record after heat record. Terrible wildfires are ravaging parts of southern Europe. Images of Sicily this morning. You know that urgency of climate combined with the energy crisis. What impact is that having?
Anne-Sophie Corbeau [00:44:28] I mean, yes, people have realized that, you know, you need, for example, to consume energy and more efficiently that you need to save energy. I think people have understood that, you know, cheap energy is not a given. And that was something completely different compared to the period 2000, ten, 2020, where people for energy, cheap energy is available suddenly, you know, and if it was the ability knows you felt that the ability of energy was a given. And that I think changed completely people’s mind is the fact that we have experienced not only this year but also the previous year, extremely high temperature heatwaves. Also lot of fires make people realize that, you know, very definitely a big problem with the climate. And I think they understand that now we have targets. We have. That we bore you targets. But the problem is that these targets are judged by everybody as aspirational. They are simply too optimistic and a problem for everybody who is involved in terms of energy planning is okay. Where exactly are we going to be in 2025, in 2050, and even beyond? Because another problem with the report EU strategy is that it gives you a trajectory up to 2030. But then beyond that, you know, you don’t really know. And if you are not going to be at EU level for every war or for all these energies by 2030, but easy design on those wipe out EU, then where are you going to be? So for example, Och, solar has been growing quite fast, but we are not going to be fast enough to be able to meet. Zoe Ball Youth targets for heat pumps. Yes, we have been growing, but you know, you need to really step up. VS Wolf I think in terms of energy efficiency, no people to understand but you know, where are all the people in order to be able to insulate their houses In France and in Germany, we have a huge debate on gas borders. Actually, I think the greens in Germany have discovered that if you are letting people wait more, you know, you won’t be able to change your gas boiler and we buy your new one, you will have to install a heat bomb. People are like, what’s ahead? And we have exactly the same debate in France. We have an association of protection of consumers, sittings of government. Are you really sure if you want to force people to install heat pump because a heat pump is expensive, You know, I mean, it’s like use thousands and thousands of doors. I mean, we just installed one because, you know, I told my husband, you know, 28 degrees in the apartment. No, don’t go. I can’t do that. But we started from the quality of what insulated apartment cost, €5,000. And I think, you know, we can afford that. But how many people can do that? So people are realizing that, yes, something has to be done, but nobody agrees exactly on how we need to do that. And that is also in the back of people’s minds. I mean, okay, I am ready to do some efforts, but not everything. And this is forcing governments to come back, like I was talking about the gas boilers. But also we have in France, you know, there was a plan to force people with cars where we all accepted how we are deemed to be. No, not possible to drive anymore, to just be allowed to die of doing something ours. And the government has been pushing back, pushing back, pushing back progressively on all these zones of low emissions, a little bit like what has been installed in London. So you see that there is a difference between what policy makers would like to do. And the reality on the ground.
Jason Bordoff [00:48:28] Is that because the policies are not mandatory or there’s not enough money behind them, I mean, Europe spent nearly €1 trillion subsidizing high energy prices and maybe in a severe crisis, you know, you argue that makes sense. But if we could spend something like that trying to make your dependance on volatile sources of imported hydrocarbons lower in the future, that would pay longer term dividends than just subsidizing them in one particular year. Our government’s able willing to put the resources behind the transition that we need to.
Anne-Sophie Corbeau [00:49:02] I think, you know, if it is a problem of money available, there is a problem of forgetting the population. I mean, there is a part of the population which, you know, on the sitting, it comes back is nothing. He’s nothing. They are not putting money aside. And you are asking, we send people to buy an Eevee, which is going to cost, I don’t know, 30 K 40 k. I mean, I’m just looking at the prices. Hello. You may be able to give them, you know, a ten K. I mean at the end of the day if I have to pay 20 K Naw they can’t. It’s as simple as that. You are asking people to pay, you know, for my €5,000 heat pump. No they can’t. They can’t. I mean, unless the government is being paid for them. So this is, you know, it’s a simple reality. And on top of that, also, we may have a workforce problem in terms of installing or with heat pumps, etc.. So, you know, these are you know, there is a difference, I think, and this is for all the governments between the trajectory, what you can do on an Excel model, etc., and the reality on the ground. And this is exactly the same thing that we have we’ve seen all of this years ago. So here’s what people perceive and what policymakers would like to do. And maybe what policymakers want to do is a very good thing. But. For some people it may seem completely and somewhat evil. And that’s a problem that we are facing, though.
Jason Bordoff [00:50:28] In terms of where the you talked about the demand side early on in this conversation and coming back to that demand reduction for gas, voluntary conservation, changing your thermostat, maybe alternatives like like heat pumps or renewables. Part of it has been a reduction in industrial gas demand. And I’m wondering if you could say a word about that and how much industrial gas demand is long term. Are we seeing as this accelerated de-industrialization of certain countries in Europe, or has this been temporary measures where you can shut down some activity and then turn it back on when energy prices are reasonable?
Anne-Sophie Corbeau [00:51:06] It will depend on the type of industry. I’ve been talking to some industrials and they tell me, well, you know, if I turn down now, it’s going to be month before I can restart because my industrial process is such that, you know, if I don’t don, it’s not like on, off, on, off. You know, I mean, some industrials are complicated. So that’s the first thing. Also, you can’t just talk about all industrial like we are not in the same basket. They do not count toxic gas in a similar way. So I talked to many of them. And, you know, many of them told me, look, I have maybe 25% of my gas consumption, which was hedged back in 2020 and then over 25%, which was a little like city hall. And they are hedging on the holding pieces. So I talked to a glass manufacturer last year and he said, we’re fine with no because we are paying €20 per megawatt hour, which is a very nice price for natural gas up to 2023. After that, I don’t know. So it’s very difficult when you don’t know the contractual terms of each industry or to say this one is not going to come back, this one, this is coming back because it depends on how well they work on top things with gas. But definitely what we are seeing is that a certain number of people are wondering about their long term positions in Europe. And this is coming out of the whole discussion about gas availability, about transition to cleaner fuels, including hydrogen. And this is also at the heart of the discussion about reforming the power mechanisms of power price mechanism in Europe industrials, they would like to have, you know, cheap power supplies if possible, also less volatility how they are going to achieve that. This is exactly the discussion that is happening at the highest level. So the power market reform is one of the most important things which is happening in the European politics. Them. But to come back to industry, I mean. Question is competitiveness. You in the United States, you came up with the IEA and of course, this was a huge thing because, you know, suddenly for people in Europe, that means but the counterparty is us, which we are all with you having access to water, TV, cheap gas and other things could have access to cheaper hydrogen supplies. And on top of us, you are creating a cleaner economy. You are fighting for about $70 billion on the table. Well, Europe is putting, you know, I mean, some money down there. But you can see that there is a huge difference when we are comparing the green industrial plan. And I also a very fundamental difference in terms of the mindset in the US, what you are doing is that you are costing more, but making checkbooks into default, into in your home tax form. In Europe you have to ask for funding, etc. and you are preparing a fire which is costing you man hours and hours. This is very complicated and you are going to get the answer in, I don’t know how many months or years. And that’s totally, completely different approach. That’s also why, you know, some industrials are suddenly thinking, well, maybe a two year would go to the United States. And I’m sure when you went to Davos, I’ve not seen, you know, some industrials, you know, going to the European leaders and saying, okay, what can you offer then, going to the US? What can you offer? Okay. So this is a difference going back to the European leaders and saying, okay, this is the difference. Can you actually bridge the gap in terms of tax incentives? And finally, do you remember you know, my paper about hydrogen Is hydrogen trade a pipeline dream? Well, that’s that’s a key difference. That’s a key question. If we are going to import hydrogen, whatever, at twice or three times the price at which it’s produced elsewhere, what’s the point of keeping our energy intensive industry supplied by imported hydrogen in Europe? I don’t see the point. So we need to have a serious discussion about which both of the industrial sectors need to stay, which parts we’d have to go, but how we can still continue to have an edge, you know, maybe with some value added industrial activities or something else. But we need to think deeply about the future of industrial activities in Europe because for how long are we going to support that?
Jason Bordoff [00:55:47] Yeah. And your work has raised interesting questions about if the green hydrogen or ammonia is cheapest to produce somewhere else. Why important to Europe? Why not just move the heavy industry that requires that green hydrogen or ammonia to the places where you can produce it.
Anne-Sophie Corbeau [00:56:00] Cheaply and, you know, countries in Africa? I mean, do you think that we would simply be happy exporting a hydrogen or ammonia? No. They would also be very interested in having industrial developments happening in Africa, because hydrogen is not event business. It’s not an extraction business. It’s a conversion business. So you’re not going you’re.
Jason Bordoff [00:56:21] Already seeing a trend where, you know, people want to own the upstream higher value parts of the value chain and Indonesia’s restrictions on nickel exports and lots of areas, people are countries are doing that. And it raises risks because we need a lot of cooperation and trade and clean energy to get to the goals we need to. We’re almost out of time, and I just wanted to ask you both to reflect on one other thing we talked about early in the crisis and see how you think it has played out in reality, which is the impact this is having on everyone else. So when there is high and volatile energy prices, particularly in the global gas market, that hits emerging market countries like Pakistan, Bangladesh, very, very hard. Even in the U.S., which is now a very important supplier of gas to Europe. When prices go up, you hear political concerns about that and even export restrictions being contemplated. Europe, it seems, was sort of the market of last resort. It was like the swing consumer. When there was extra LNG, it would go to Europe and when there wasn’t, it wouldn’t go there. I’m wondering, it seems like maybe that’s reversed now, where Europe is the place it’s definitely going, and then maybe Asia is the buyer that may or may not be buying it and is more in a swing role. I don’t know if that’s right. Tell me if it is. But what does that mean for volatility in global energy markets? What does it mean for prices in the long term and what impacts will that have on countries outside of Europe and Russia, which we’ve been talking about? Maybe. Tatiana, you could start and then Anne-Sophie?
Tatiana Mitrova [00:57:52] Yeah. Jason I think it’s really becoming a much more tense market and more volatile market simply because redirecting all the flows in one year, reshaping the whole global gas order, it’s really problematic. It would be a stretch even without military conflict. Now, it became it’s a shock for the whole economy. And as usual, the main victims of these shock are the poorest countries which cannot afford to bat for LNG or which are actually what they’ve experienced. Last year when Pakistan, Bangladesh, they were India, they were suffering without LNG supplies because of Asia. LNG was moving to more mature and lucrative markets and it can be repeated at any any certain point, again undermining their interest to natural gas, keeping them with coal, undermining their trust in the, let’s say, well, not global justice, but at least in some ideas of the just transitions transition so the rich countries can afford it, the poorest countries cannot. And as I was mentioning it many times, it is becoming one of the battlefields between Russia and the West, because that’s the point that Russia is using again and again, talking to India, China, Bangladesh, Indonesia, Pakistan, Brazil and the others telling them, guys, we’re we’ll provide you with reliable, cheap energy supplies, with fossil fuels, with nuclear, whatever you need. We can even help you to produce hydrogen. Not like those Western us. And it is I mean, I don’t think that it will form a global anti-Western coalition, but it is something that is really making a transition, which is already quite a bumpy road, but even more difficult. These geopolitics, often a good transition, I’m afraid, will be much more complicated in the next decade.
Jason Bordoff [01:00:05] And Sophie, do you see more volatility ahead if Europe is kind of depending for more more day to day energy use on this imported LNG? And what impacts does that have?
Anne-Sophie Corbeau [01:00:16] Volatility is here to stay. Okay. You will have to live with that. What was really providing a lot of stability on the global gas market was among others was unpaid led gas. You know, we thought there was a flexibility embedded. We are losing that. And other thing which is providing a lot of stability was the fact that you could have quota switching. That is also going to progressively disappear as we are moving towards less call in the power generation mix of the U.S., of Europe and of other countries. So that’s very important. So we are left in terms of the one of the three pillars of your balancing as a global gas market with storage and storage is particularly important in Europe, but very much dystopic in countries like Japan and Korea and not enough in China. So that’s very important. If you combine that with the erratic development of hydro, which has been very volatile over the past few years, we have talks pretty much in every corner of the world, which has of course an impact on the need of for natural gas. If you combine that also with the development of new vegetables, which are intermittent but also vary from one year to another, we had a big surprise in 2021 that it’s absolutely certain that the foot activity is going to increase in global gas markets. Now, in terms of the impact on the stuff that you and I talked about, the demand impact, I’m going to talk about the supply impact. We have seen a lot of final investment decision in LNG over the past few years. A majority of them have been happening in the United States. There has been very little from which the Global South has been benefiting. And it’s probably quite infuriating for them because before 2020, if you had all these people coming from Europe that invented it, that you cannot actually develop your gas field for export because, you know, natural gas, Vicksburg, this is a fossil fuel. Even if you see in order to supply your own market. And then back in 2022, we had the same ministers coming and saying, well, please, can you develop your gas supply, your LNG, so that we can get some LNG. But what developing for your own market is still bad, but you know, we need the gas. We don’t know for how long. We are not really ready to sign long term contracts, but we need a gas. Can you imagine, you know, how it looks from, for example, an African country? I have been to several of them and they were not particularly happy with the Europeans. And we are getting, you know, the same kind of speech. Finally, in terms of the balancing market, I know that everybody has been saying, okay, now Europe is baseload and China is actually providing a balancing. Okay? 2022 was a very particular year, as I mentioned before. So we should not think that what was a sort of marriage of convenience is going to be the basis for a long term relationship. There might be a moment, depending on how everything evolves, where Europe goes back to its role as a balancing market and China being China, you know, they don’t really care what sort of dignity they would give about their own needs. So if they go to gas and they need to get as they would, thinks of gas, forget about being nice with your verse and they do not really of what made Europe such a special place. They do not have the flexibility in terms of pipeline supplies. They do not have so much storage. And yes, very cool to guest switching. But, you know, sometimes it can be also counterbalanced by specific measures happening in the power sector in terms of emissions limitations, etc.. So I would not really compare China to Europe.
Jason Bordoff [01:03:56] And Sophie and Tatiana, as usual. It’s just a fascinating tour de force conversation. Unfortunately, I think we’ll need to have it several more times in the years to come with worse and worse. Heatwaves and severe weather and Russia’s aggression continuing and the geopolitical tensions we’ve started to surface in the transition. Trade, trade, conflict or the reaction from the developing world and and more. It’s really always a pleasure to talk to you and a reminder of why I’m so fortunate to call you both colleagues here at the Center on Global Energy Policy. So thanks for all your great work and expertise and thanks for sharing it with us and our listeners today.
Tatiana Mitrova [01:04:33] Thank you.
Anne-Sophie Corbeau [01:04:34] Thank you.
Jason Bordoff [01:04:38] Thank you again. And Sophie and Tatiana. And thank you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia School of International and Public Affairs. The show is hosted by me, Jason Bordoff and by Bill Loveless. The show is produced by Steven Lacy and earned heartache from Post script Media. Additional support from Akash Lounge, Daniel Prop, Natalie Volk and Lee Roy Campanella engineered the show. For more information about the podcast or the Center on Global Energy Policy, visit us online at Energy Policy, columbia.edu or follow us on social media at Columbia U. Energy. And please, if you feel inclined, give us a rating on Apple Podcasts. It really helps us out. Thanks again for listening. We’ll see you next week.
