War in Ukraine:
View on\\Energy Impact
BCG Global Advantage and Energy Practice Areas
Prepared: 17 March 2022

Prepared: 17 March 2022

Introduction to this document

Russia's invasion of Ukraine has led to a serious
humanitarian crisis. BCG condemns this attack
and the violence that is killing, wounding, anddisplacing so many people.

It is the duty of political, societal, and businessleaders to navigate through this crisis. The intent
of this document is to inform discussions on
the energy impact of the war in Ukraine.

The top priority in moments like these must be thesafety and security of people. Corporates,
governments, and non-for-profit organizations
should focus on supporting the people in Ukraine,
Russia, Europe, and globally affected (physicallyand mentally).

The situation surrounding Ukraine is dynamic andrapidly evolving - this document reflects
information and analysis as of 17 March 2022.
It is not intended as a prediction of future eventsand is shared only as a resource for BCG and client
conversations.

Copyright © 2022 by Boston Consulting Group. All rights reserved.

The war in Ukraine is above all a politicaland humanitarian crisis…

2

ENERGY IMPACT
Global energy supplies were already limited before Russia invaded Ukraine. Now,
sanctions on Russia—a leading exporter of natural gas, oil, and coal—and uncertainty
over the risks ahead are throwing energy markets into greater turmoil. Many buyers andtraders are unwilling to deal in Russian oil due to the risks. Major energy producers are

BCG Executive
Perspectives
IN THIS DOCUMENT

pulling out of Russia altogether. The invasion is already raising energy costs for
consumers and industries such as steel, chemicals, and transportation. The secondorder effects—on supply chains, consumer prices, agriculture, and beyond—will likely
intensify.
Many energy importers are trying to reduce their reliance on Russia. But that transition
will be challenging. Europe, which depends heavily on Russian natural gas, plans to
reduce its consumption of Russian gas by two-thirds by the end of 2023. But its current
gas reserves are at historic lows. Supplies of non-Russian liquefied natural gas (LNG)
are tight, and the infrastructure needed to transport it is insufficient. Even if timelines
for adding new wind, solar, and nuclear capacity on the continent accelerate, it will takeyears for this capacity to come online.
As they seek to mitigate the immediate fallout, companies must review their energysupply footprints and investments. They may also need to rethink their strategies for thetransition from fossil fuels. Governments will need to reassess their energy security andclimate goals.

Prepared: 17 March 2022

AGENDA

Deep-dive: First view of impact on Energy
Context and current situation
Impact on energy supply
Implications: consumers, companies & governments

Copyright © 2022 by Boston Consulting Group. All rights reserved.

War in Ukraine:
Impact on Energy

4Prepared: 17 March 2022

Prior to the war, global energy already "tight" with inflationary pressures
Inflationary pressures on price prior to the war

Global Energy Demand

192 174 191

147 143 148

Natural gas

300

154 142 154

Oil

90

Coal

2019

2020

90

95

Electricity

2021

Inventories substantially below pre-COVID levels
Global O&G inventories

5,761

Natural gas (1,000 m3 LNG)

Jan 2020

1,210

980

Jan 21

Jan 22Insufficient investment: reducing capex in last 5y
Global upstream O&G Capex ($B)
-5%
410

450

441

2017

2018

2019

Price increases prior to the war

200

+309%

100
0
150

Oil, Brent ($ per bbl)
+57%

100

4,515

4,095
1,440

Oil (1,000 BBLs)

Natural Gas, TTF ($ per mmbtu)

309

341

2020

2021

Start of war
in Ukraine

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Strong demand recovery from COVID began in 2020

50
0

500
400
300
200
100
0

Coal (Rotterdam, $/Tonne)

01/01/2020

Note: LNG: liquid natural gas; BBL: Barrel, TTF: Title Transfer Facility, mmbtu: Million British thermal units
Source: IEA, GIE Aggregated LNG Storage Inventory, Reuters, Bloomberg, IEF, IHS Markit, Yahoo, Trading Economics, BCG Analysis+88%

01/01/2021

01/01/2022

5

Prepared: 17 March 2022

Russia plays important role in global energy, the war heightens supply risks% global supply/exports

Gas

RussiaSupply 16.6%

Exports

25.3%

Oil Supply
12.3%
Exports 12.0%% supply from Russia

Others

83.4%

74.7%

87.7%
88.0%

Second globally behind US
Main exporter in Europe;
Norway second

World’s 3rd largest oil producer(after US, Saudi Arabia)
World’s largest oil exporter

Coal
Supply 5.2%

Exports

17.8%

Russia supply by end market

94.8%

82.2%

World’s 2nd largest coalreserves, 6th largest producer
3rd largest coal exporter

Finland
Bulgaria
PolandHungary
Germany
TurkeyItaly
FranceNetherlands
Finland
Bulgaria
Hungary
PolandItaly
Germany
TurkeyFrance
Italy
FranceFinlandTurkeyPolandGermany
Hungary
Bulgaria

Source: International Energy Agency, BP Statistical Review; Eurostat, Bruegel, IHS Markit, S&P Capital IQ, BCG analysis

100%
99%
81%
78%

Price volatity (% wk/wk change) Start of war
in Ukraine
Gas TTF

100
50

54%
44%
33%

Gas Henry
hub (US)

0
-50

8%
5%
78%
56%
51%
51%

100
50
Crude oil (Brent)

26%
23%

0

6%
2%

-50
36%
28%
24%
22%
15%
14%

8%
4%

Increased volatility

100

Coal
API2 ARA50
0-50

03. 10. 17. 24. 31. 07. 14. 21. 28. 07.

Jan '22

Feb '22Mar '22

16

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Russia's role in global energy market

Prepared: 17 March 2022

AGENDA

Deep-dive: First view of impact on Energy
Context and current situation

Impact on energy supply
Implications: consumers, companies & governments

Copyright © 2022 by Boston Consulting Group. All rights reserved.

War in Ukraine:
Impact on Energy

7Prepared: 17 March 2022

Pricing - Oil | Significant crude and oil volatility, with the market pricing inrisk of long-term disruption of Russian flows…has caused global volatility across oil markers and relative premiums
Start of war in Ukraine

1

Geopolitical risk: uncertainties aroundthe evolution of the conflict

Global Crude Oil Volatility Index

0

+47%

60

Liquidity pressure due to sanctions on

2 Russia - increases hedging and margin calls
3

Unwillingness of most buyers & traders
to take Russian oil given supply chain risks

50

-10

40

-20

30

Jan 2022

4

Reputational risk prompting major oil
producers to exit/reduce Russia exposure

Discount of Russian Ural crude(relative to price of Brent barrel as base)

Feb

Mar

Sources: EIA, Company filings and press releases; Refinitiv, Refinitiv Eikon, Reuters, UK Government, Government of Canada, The White House, CME, BCG Analysis%-30
Jan 2022

Russian
Ural
crude
price
discount

Feb

Mar

$

Start of War in Ukraine

8

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Disruptions to Russian Energy sector…

Prepared: 17 March 2022

Pricing - Gas | Low European storage levels forcing a response to ensure
security of supply, markets pricing in future risk of disruption
Europeand Asia… leading to surges in prices in Europe, with Asian LNG1
prices closely following (competing to secure supply)

European gas storage utilization (%)

LNG price ($/mmbtu3)

100

100

80

80

60

60

40

40

20

20

0
Jan

Mar

May
2022

Jul

Sep

Nov

0
2020

5 yr avg

EU's consideration of 90%+ storage filling requirement tocreate immediate buying pressure

Start ofwar inUkraine2021
Asian spot LNG

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Historically-low gas inventories in Europe, with the EU
considering imposing forced filling requirements…

2022
TTF2 (Europe)

Currently spikes are not rooted in adverse supply impacts, butinstead driven by need to increase/buffer inventories

1. Liquid Natural Gas; 2. Title Transfer Facility, a virtual trading point for natural gas in the Netherlands; 3. mmbtu = Metric Million British Thermal Unit (unit of heat)
Source: AGSI, EnergyScan, Reuters John Kemp, Forbes, Council of the European Union, European Commission, Euronews, Italian Government, BCG Analysis

9Prepared: 17 March 2022

Supply shock – Oil | Full shutdown of Russian oil exports unlikely given global
importance and energy transition timescale

Full shutdown of Russian oil exports unlikely given high risk…

…and years-long 'energy transition' project timelines

Global Scenarios for Oil & Liquids Production, QBtu1

Indicative timeline range (number of years for new mid-sized projects ineach energy transition/renewables capacity area)2200

Actuals prior to the war in Ukraine
Current scenarios prior to war in Ukraine
Global production without Russia

Nuclear Power
Coal power

4

Transmission
Lines

150

2010

2020

Shutdown would risk large global supply shock, price surges & demand
destruction – thus risk of leakage of Russian crude to market

104

Onshore wind2

Solar PV

2

20

10

3

Offshore wind

Difficult to replace
Russia's 12% of global
supply overnight

100

50
2000

13

8
5
4

Shorter timelines contingent onstrong government & regulator
support (e.g., reducing
planning, permitting andfinancing timelines)

2030
Average total timeline3

Potential shorter timeline4

1. Quadrillion British thermal units (the amount of energy required to raise one pound of water one degree Fahrenheit); Notes: Scenarios include BP, Shell, and IEA; 2. Timeline ranges are based on pre-Ukraine estimations for new projects (notprojects where work is under way). 3. Average total timeline is indicative average based on average-size projects in the space. Time can vary based on scale and scope; 4. Potential shorter timelines assumes speeding up of planning, permitting
and financing stages, yet execution stage of these projects unlikely to be able to be reduced significantly; Sources: Wood and Mackenzie, Feb 2022; Resources for the Future Global Energy Outlook; Kpler; Refinitiv Eikon

10

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250

Prepared: 17 March 2022

Supply shock – Gas | EU reliance on Russian gas increases its vulnerability,
fueling an accelerated push for alternatives

RePowerEU: EU have launched plans to
reduce Russian gas import dependence

66%

Target levers for reduction of Russian gas dependence
Billion cubic meters equivalent
Fossil fueldiversification

target reduction in Russian
natural gas supply by end of 2023

Energy efficiency &Renewables

Requires strong coordination to realize, givenrisks (e.g., intense competition for LNG from
Asia, pace of Net-Zero transition)

10
150

4

14

2

3

Copyright © 2022 by Boston Consulting Group. All rights reserved.

50

20
47

90%

Long-term reduction target of gas
consumption requires front-loadingof already aggressive plans

Russianimports
currently

LNG
diversification

Pipeline Biomethane Energy
Heat
Solar PV Renewable Russian
diversiefficiency
pump
decentral- energy
imports
ficationmeasures deployment lization acceleration Post
RePowerEU

Source: IEA, Oxford Institute for Energy Studies, ENTSOG Transparency Platform, Eurostat, Gas Infrastructure Europe, Rystad, Aurora, Broker reports, BCG analysis

11Prepared: 17 March 2022

Supply-shock - Gas Market | EU plans technically possible, but challenging
to realize in the available time horizon
Demand Risks

Renewable Energy bottlenecks

LNG market is already tight

Demand increase – winter risk

Growth in renewable development will create
supply-chain pressure & risk of worse inflation

Competitive pricing between EU & APAC for LNG
Higher logistics costs, as LNG supply will most
likely come from the US and Qatar

Current plans based on “normal” winter seasons,not considering risks of colder winter and higher
energy demand

Transmission system operators' risks

Financing across gas purchases

Difficulty for oil and gas transport network to
fully accommodate growth demand without
risking its integrity$90bn required to fill gas storages this year

Further, $700+ bn financing required forrenewable energy plan

France nuclear capacity andutilization constraints
EU plans rely on French capacity at/above
current level. However, no capacity step change
is expected till 2030s

Note: LNG = Liquid Natural Gas; Source: The Wall Street Journal, Mar. 2022 Forbes, Feb.2022, BCG experience and analyses

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Supply Risks

12

Prepared: 17 March 2022

AGENDA

Context and current situation
Impact on energy supply
Implications: consumers, companies & governments

Copyright © 2022 by Boston Consulting Group. All rights reserved.

War in Ukraine:
Impact on Energy

Deep-dive: First view of impact on Energy

13Prepared: 17 March 2022

Consumers
Energy is outsized driver of
inflation currently: 7% of CPI1
yet account for 24% of inflation2
Rising energy prices reducing
discretionary spend
Subsidies increasingly likely, where
not already in place

Companies

Governments

High energy-intensity industries (e.g.,steel, cement, chemicals, fertilizers,
travel, freight) experience cost increases
presenting risk to profitability

Extend of government actions vary
– focus on energy security (esp. EU)

Businesses assessing impact andensuring continuity of business-criticaloperations

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Energy market pricing and supply shocks make products more expensive
to produce and buy, as governments seek to improve energy security

Emphasis on reducing pricepressures, stockpiling, diversifying
energy supply
Will impact speed of transition to
renewables – impact varied by country

Mid-to-long-term, likely positive
impact on climate goals – yet need tode-average impact by country
1. US Bureau of labor statistics; 2. in Feb 2022; BCG macroeconomic analysis; Source: BCG analysis and experience14

Prepared: 17 March 2022

Consumers | High energy prices impacting total demand - but governments
likely to support consumers and small businesses

Brent crude oil price(left axis, $/bbl)

Consumer sentiment index(right axis, Q1 1966=100)

160

120

120

90

80

60

40

30

0
2005 2007 2009 2011 2013 2015 2017 2019 2021

0

Governments responding with direct subsidies• €0.17 per liter reduction in tax on fuel• €0.11 per liter of diesel from April 1• Value added tax on electricity cut from 21% to 9% from July 1• Expected to unveil full measures• Mandated EDF to only adjust tariffs by 4%• Already spent €20bn to moderate gas and power costs• Proposals of a “crisis discount” (fuel subsidy)• If approved, gas prices cut €0.20+ per liter

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Higher oil & gas prices impacting consumer demand• Imposed prices caps on some basic foods, fuel and mortgages,
extending a cap already in place on household energy

Consumers likely to reduce discretionary spend:•

30% say rising gas will greatly affect their decision to travel1•

59% likely to change lifestyle if gasoline price rises by ~20%2• Several states considering reducing or suspending gas tax –bills already proposed and are being voted on soon

1. Survey of 1,000 consumers over the age of 18 by Longwoods International regarding next 6mos ; 2. According to survey conducted by American Automotive Association; Other Source: BCG Center of Macroeconomics Forbes (Mar. 10 2022); The WallStreet Journal (Mar.15, 2022); ABC News (Mar.15, 2022); Reuters (Mar 15 2022); Dutch News (Mar.11, 2022); Reuters, Mar 2022 Euro news (March 10, 2022), Financial Times (Feb 18 2022)15

Prepared: 17 March 2022

Steel

Chemicals & fertilizers

CementAir Travel & Freight

Shipping Freight

Higher costs in energy will
increase steel prices

Ammonia - for which 72-85%
of cost is natural gas3–
and other chemicals are
critical for production –already significant priceincreases

Higher costs in energy will
increase cement prices

Jet fuel prices up 27%
month over month5, likely todrive cargo rates up

Bunker (marine fuel) up
84% vs. last year6. where fuelrepresents ~45% of total
cost for shipping

Energy represents 10-20%
of total costs in steel
production in EU (varies byregion and year) 1

Construction, auto, rail,
shipbuilding, machinery,
metal, equipment impact

Energy is 10-30% of total
cement costs, depending
on region and year4,

Global food supplies,
chemical factories, auto,
etc. will be negatively
impacted by input prices &less supply

Construction andinfrastructure impacted

Airspace closures leading tofewer, longer (more fuelconsuming) flights

Logistics and consumer
travel cost impacted
Shifts in air networks tooptimize aircraft utilization
as travel spending reduce

Further cost increases due
to delays (lane closures, &reshuffling of trade flows)

Most traded goods
affected, especially long-haulfreight7
Route re-configurations forcapacity optimization

Further inflationary pressures, erosion of margins & conservative capex are likely as energy prices remain high
1. OECD (link) 3. USDA (link) 4. cement (link) 5. IATA: Europe-Asia, Asia-North America most heavily hit by airspace closure, Based on CTKs (cargo ton kilometers) over the past 12 months
6. Freightwaves: Ship fuel spikes to historic $1,000/ton mark as war fallout worsens, 7. OECD (link), BCG Analysis

16

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Second-order impact

First-order impact

Companies | High energy-intensity industries will experiencethe largest cost impact

Prepared: 17 March 2022

Companies | Assess first- and second-order impact, devise mitigationplans and build resilience in the mid term

Short-term

Partner closely across value
chain to improve transparency.
Assess reputational & operational
impact (incl. suppliers of suppliers)

Source: BCG analysis and experience

Assess second-order impact foryour customers. Prioritize
impacted customers and develop
differentiated mitigations plans

Understand investment shifts
and capital implications (e.g.
RePowerEU) in your industry –balance planning and flexibility

Review climate goals, assess
impact, develop a mitigation planby country – as governments
accelerate or decelerate transition
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Assess exposure and risks to
input costs, ensure operational
business continuity

Mid-to-long-term

Build agility in scenario
planning to assess similar
external shocks and their impact(e.g., network level 'digital twins')

17

Prepared: 17 March 2022

Governments | Key levers should be utilized to respond to energy crisis
based on individual nation's position

Governments exposed to risk differently…

… and response highly dependent on country's position

60%

More
heavilyreliant on
Russia

NL
IT

UK
BE

40%

Lithuania
HR

IE
ES
20% PT

HungaryGR
FR

RO

Slovakia

Germany
AustriaNO

Less susceptible to supply shocks; equally to price increasesLessreliant on Potential steps:• Implement short-term fiscal stimulus, subsidies, price caps
RussiaLatvia

DK
Czech Rep.

PolandBulgaria• Invest in renewables for longer term price reduction – andsupport of other less advanced countries in the space

Finland
0%

0%

20%

40%

60%

More susceptible to supply shocks and market volatility
Potential steps:• Stockpiling energy resources• Identifying new short-term suppliers (e.g., LNG from US)• Potential delay of coal & nuclear power decommissioning• Investing in renewables for longer term independence

80%

Russian Gas Imports as % of domestic consumption1

Lowestimpact100%
HighestimpactReducing regulatory hurdles, permitting periods, legal procedures needed to increase speed of supply increases
Note: TJ = terajoule; AT = Austria, BE = Belgium, DK = Denmark, ES = Spain, FR = France, GR = Greece, IE = Ireland, IT = Italy, HR = Croatia, NL= Netherland, NO = Norway, PT = Portugal, RO = Romania, UK = United Kingdom;
Source: Eurostat, Supply, transformation, and consumption of gas; Primary Energy Consumption; Imports of natural gas by partner country, Reuters. Also, Forbes, Washington Post, Council of the European Union, the Wall Street Journal, European
Commission, Euronews, Italian Government. ENTSOG, Bruegel 1. Imports which are consumed within a country (which are not traded beyond country border)

18
28

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Share of Gas in Total Energy Consumption

500,000 TJ

Prepared: 17 March 2022

Governments | EU and key member-states are implementing concrete
policies to reduce short-term and long-term dependence on Russia
Short-term

Enact short-term measures(subsidies, tax cuts) to shelter
vulnerable electricity consumers

Diversify & increaseenergy supply

Increase efficiency,
reduce demand

Enact minimum gas storage
obligations

Accelerate energy efficiency inindustry and in heating pumps

Accelerate the deployment of new
renewable projects

Identify alternative sources

Encourage a temporary thermostat
lowering and highway slowdowns –to reduce energy usage

Step up efforts to diversify anddecarbonize sources of power system• RePowerEU advised turning
down thermostats 1°C to reduce
electricity demand• Plans to expand renewable capacity& legislate full supply fromrenewables by 2035

Maximize generation from lowemissions sources: e.g., bioenergy
Stockpile energy resources• Capped energy bill price increases
to 4%, significantly under market

Expand renewablecapacity• Increasing gas imports from
Algeria and Azerbaijan andincreasing use of LNG terminals

Source: Reuters, Forbes, Washington Post, Council of the European Union, the Wall Street Journal, European Commission, Euronews, Italian Government

Enable renewables for energy
independence

19

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Implement fiscal
stimulus & price caps

Mid-to-long-term

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