The Russia-Ukraine War:Impacts on Energy with Focus on Oil Markets
Bassam Fattouh
Oxford Institute for Energy Studies

IEEJ, March 2023

A Paradigm Shift2020 was a particular tough year for§ USRussian
invasion of Ukraine represents a paradigm shift for energy
shale producers
markets and energy relations with long lasting impacts§ Critical times when world accelerating decarbonization efforts§ Widespread belief that no return to previous order§ Energy markets are searching for a new normal but transition to ‘newnormal’ can be long and bumpy§ Shifts in balance of government priorities with wide implications (tradeoffs, increased government intervention in markets, global dimension)§ Focus on shifts in oil market dynamics and oil relations between theworld’s largest oil producers

SECTION

Assumptions
The energy trilemma and the widerimplications

Energy trilemma in focus§ Energy policy multidimensional(sustainability, security, access andaffordability, competitiveness)

The Energy Trilemma - Balance of policy priority
has shifted, at least in the short term

§ Shift in balance of priorities§ In addition to sustainability, security &affordability key factors shaping policy§ Trade-offs in short-term (inter-fuelsubstitutions and increased GHG
emissions; investment in hydrocarbon
infrastructure to diversify supplies fromdifferent geographies (LNG vs pipelinegas) and diversify energy mix)

Source: OIESEnergy crisis shifting the role of state§ Current
crisis toughcausing
swing away from markets towards greater role of2020
was a particular
year forUS shaleproducers in energy markets
governmentsq

Support packages for consumers/businesses, governments
acquiring assets, windfall taxes/levies, solidarity contributions,price caps and calls for joint purchase gas agreements, calls forredesigning electricity market§ Higher government intervention in energy markets increasing policy
risk and uncertainty facing investors and players§ Impacting operation of energy markets (even mature ones such as oil:Market segmentation, lower transparency, higher cost of optimization)§ How long will this swing continue? Will an admission that net zerotargets are being missed force further government intervention? Have
we reached peak government intervention?
SECTION

Global dimensions§2020
Moreimpacting
was polarizeda particular world
tough yearforclimate
action
US shaleproducers§

Drive to limit dependency on foreignsources of energy and minerals§

Relocation and localization of supply
chains (impacting cost of transition)§Competition in the regulatoryenvironment (IRA)§

Risks of underinvesting inhydrocarbons while challenges inscaling up clean technologies tomeet increase in demand (finance,business models)Source: IMF BlogSECTION

Access to finance§

Wide divergence between Global North and The TrapGlobal South§

Energy crisis making all forms of energymore expensive for many developing
economies affecting affordability andtransition paths§

Access and cost of financing key barrier inmany developing countries to fund cleantechnologies§

Reinforcing trap with decline in resilience
over time and increased political andcurrency risk§

Emphasis from Global South on developing
their hydrocarbon reserves (but restrictions
on finance of hydrocarbon projects)

SECTION

Source: Ameli et al (2021)

Uneven paths
was a particular
tough accelerate
year for§2020Current
crisis mayenergy transition in EU/US but what about
US shaleproducers
the restof the world?

§ Transition could go slower outside Europe and conventional fuels
including coal likely remain part of the energy mix for foreseeable future§ How would the Global North react if there is a realization that climate
targets are not being met fast enough?
§ Use of sticks? Carrots? Both?
§ Different perspectives on CBAM, Inflation Reduction Act, restrictions on
financing of hydrocarbon projects

SECTION

Assumptions
Impacts of Russia-Ukraine war
on oil markets

Russia gas exports to EU fall sharply
2020 was a particular tough year forPipeline
flows to the EU by originUSshale producers

Source: ENTS Transparency Platform, OIESOIL MARKET OVERVIEW

Pipeline flows from Russia to the EU by route

Source: ENTS Transparency Platform, OIESWill oil policy follow?
was crudea particular
toughincreased
year for§ 2020
Russiaexports
US shale producers
year-on-year in 2022 and higher than
pre-war levels

Russia crude oil exports shifts§ February 2023: Russia announced it
would cut its output ‘voluntarily’ by
500,000 b/d in March 2023
§ Whether cut voluntary/inability tomarket crude/avoid offering crude atlarge discounts decision represents achange in policy: For the first time
Russia signalled willingness to use
output cuts and without coordination
with other producers to shape market
expectations
Source: Kpler, OIESSECTION

Russia lost the key European market
2020 wasa particular
toughtoyearfor
Russiacrude
oil exports
EU-27
US shale producers

Russia products exports to EU-27

Source: Kpler

Notes: DPP refers to Dirty Petroleum Products.
Source: Kpler

Russia heavily reliant on China and India
2020 was a particular tough year for
Russiancrude exports to India
USshale producers

Russian crude exports to China

Source: Kpler

BULLISH NARRATIVE

Source: Kpler

Middle East and US enhance position in Europe
2020 was a particular tough year for
EU-27
crude
imports by origin
USshaleproducers

Source: Kpler, OIESOIL MARKET OVERVIEW

EU-27 products imports by origin

Source: Kpler, OIESRussian reshuffle intensifies competition in Asia
2020 was a particular tough year for
Indianimportsof crude by origin
USshaleproducers

Source: Kpler, OIESOIL MARKET OVERVIEW

China imports of crude by origin

Source: Kpler, OIESTrade routes longer and cost of optimization higher
2020 was a particular tough year for
Russiacrude-on-waterby grade
US shaleproducers

Notes: Other grades include Varandey, Novy Port, ARCO, Sak Bl., Yuri Korchagin and Kaliningrad.
Source: Kpler, OIESBULLISH NARRATIVE

Segmentation, price discovery and lower transparency
wasa particular oil
toughyear for(discounted versus non-discounted crudes)§ 2020More
segmentedmarkets
US shale producers§ Disappearance of Urals impaired price discovery process for sour crudes§ Russia increasingly relying on its own fleet and on ‘shadow’ and ‘dark’ fleet;
tracking trade flows have become less transparent§ Increase in use of diversion tactics to hide origin of crude such as STS transfersand blending (alongside trade in sanctioned Iranian and Venezuelan crude)§ Most traditional trading houses have ceased trading Russian crude and products
and replaced by new entities that operate outside G7 restrictions§ Entities with no credit history or trading experience will increasingly play animportant role in developing new supply chains, infrastructures, and trading
routes for Russian oil with little information about their activities

SECTION

Assumptions
The US ResponseUS use of Strategic Petroleum Reserve (SPR)
was Statesa particulartough§ 2020
Unitedused
the year
SPRforas a tool
US shale producers
for managing market balances andexpectations

US SPR releases in 2022

§ In 2022 release of crude from the US
SPR totalled 221 mbbls even though
the expected large disruptions inRussian supplies failed to materialise§ Impact goes beyond physicalvolumes: Use of SPR releases tosignal willingness to put a cap and afloor on the oil price which shapedmarket expectations in 2022
Source: US EIA, OIESSECTIONG7 Price cap
was aits
particular
tough yeara for§ 2020
US andallies imposed
price cap
US shale producers
on Russian crude in attempt toreduce Russia’s oil revenues

Price cap and Urals crude§ Effectiveness of the price cap inachieving its objectives remains
subject to debate as it is difficult toassess the impact of thecounterfactual scenarios with theembargo but without the price cap§ Price cap has elevated uncertainty(and confusion) for oil exporters,shippers, insurers, traders, banks,and even financial players who may
decide to stay outside markets given
the increased uncertainty
OIL MARKET OVERVIEW

Notes: Urals averages fob prices of Urals Primorsk, Urals Ust-Luga, andUrals Med Aframax and Urals Med Suezmax Novorossiysk.
Source: Argus, OIESAssumptions
OPEC+ Response

The OPEC+ Response
2020 was a particular tough year for§ USOctober
2022 decision to cut overall
shale producers

OPEC+ output vs December 2021

production by 2 mb/d sent a clear signalthat it is willing to act proactively andpre-emptively§ Not feasible before as cohesion within
OPEC was weak
§ Took months or even years to negotiate
output cuts
§ OPEC responses always arrived late only
after market balances have weakened
sharply which required OPEC to implement
deeper cuts and for longer periods
Source: IEA, OPEC, OIESSECTION

New OPEC+ dynamics
was a particularfor
§2020
OPEC+
cohesiontoughnowyearstrongerandUS Group
shale producers
can respond in a timelier
manner

OPEC+ actual vs target crude productionin December 2022

§ Strong leadership and oil diplomacy bySaudi Arabia and emphasis on key
principles (compliance, compensation
mechanism, cooperation resulted in
improved outcome in terms of higher
revenues and stronger signals tomarket)§ Most countries producing below theirquotas and at maximum capacity while
few are meeting their targets and arestill below their maximum capacity
Notes: OPEC-10 production is based on OPEC’s secondary sources.
Source: IEA, OPEC, OIESSECTION

Assumptions
Wider implications on oil markets

Russia’s position in oil markets
was losta particularyear for base§ 2020
Russiamost oftoughits customer
US shale producers
with fate of exports being dependent
on few countries located in East ofSuez giving these players more power
to negotiate especially in weak markets

Russia target vs actual production§ Russia unlikely to maintain current
productive capacity (sanctions andloss of access to services of westerncompanies and to high quality
equipment)§ Impacts Russia’s position within
OPEC+ (Russia not meeting its OPEC
targets)
Notes: Crude oil only.
Source: IEA, OPEC, OIESSECTION

Saudi Arabia and UAE plans to increase capacitya particular
toughyear forhave§ 2020
Gulfwascountries
withinOPEC+
US shale producers
ambitious plans to increase productivecapacity and exports potential

Saudi Arabia and UAE production capacity§ Saudi Arabia plans to increase
productive capacity to 13.3 mb/d in2027§ UAE ambitious plan to increase
productive capacity to 5 mb/d in 2027
§ Shift in balance of power towards theGulf producers

Source: IEA, OIESSECTION

Saudi-US relations
was a particular
tough onyearSPRfor to§ 2020
US increased
reliance
US shale producers
manage the market instead of Gulf
spare capacity

US total liquids production and exports§ Diminished ability to influence market
as strategic stocks decline§ US shale behaviour closer to that ofOPEC (maximize returns toshareholders; maximize revenues togovernment)§ Less investment flows and moreinelastic supply curve
Source: IEA, US EIASECTION

China’s position in oil markets
was atoparticular
tough yearfor§ 2020Accesswider varietyof crudes
US shale producers

China oil demand§ Access to discounted crude (Russian,Iranian, Venezuelan)§ Massive crude oil storage facilities§ Increase in refining capacity andincreased products’ export potentialand competition in export markets§ Long term trend to electrify transportand reduce oil demand growth

Source: OIESSECTION

Concluding remarks
2020 was a particular tough year for§US Structuraltransformations in energy markets
shale producers§ Swing towards more government interventions yet to peak impacting
operations of energy markets and increasing policy uncertainty§

Structural shift in crude oil and products trade flows, more segmented oilmarkets, lower transparency, higher volumes of oil in transit, emergence ofnew players and traders, longer trade routes, increased optimization cost,new geopolitical and trade relations§Change in the nature of competition and relations between world’s largest
three players

SECTION

-Armenia conflict:potential escalation
Bassam Fattouh
Director, OIESMarch 2023