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Chiron Responds: Russia's Invasion of Ukraine and the Impact on the Global Energy Industry

Chiron’s Founders Scott Johnson and Jay Krasoff, along with Managing Director Tom McNulty, discuss how Russia’s invasion of Ukraine will impact the energy industry.

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The Ener­gy Indus­try is not just a glob­al busi­ness. It is a busi­ness with sub­stan­tial and mean­ing­ful geopo­lit­i­cal, envi­ron­men­tal, and nation­al secu­ri­ty impacts. The events unfold­ing in Europe cur­rent­ly high­light the impor­tance of sup­ply diver­si­fi­ca­tion. And since Amer­i­ca is among the lead­ing pro­duc­ers of oil and gas, along with Sau­di Ara­bia and Rus­sia, it is from Amer­i­can ener­gy com­pa­nies that much of this cru­cial role needs to be filled. 

Think of this in terms of num­bers. The EU imports more than 95% of the crude oil and petro­le­um prod­ucts that it uses, and more than 25% of this comes from Rus­sia. 35% of the nat­ur­al gas used in cen­tral and west­ern Europe comes from Rus­sia. Of sim­i­lar sig­nif­i­cance, nat­ur­al gas must be the ful­crum mol­e­cule in the ener­gy com­plex dur­ing the Ener­gy Tran­si­tion. It is the clean­est burn­ing and fastest-grow­ing fos­sil fuel, now account­ing for about a quar­ter of glob­al elec­tric­i­ty gen­er­a­tion. Nat­ur­al gas is wide­ly believed to be the only fuel that has a prac­ti­cal abil­i­ty to sub­stan­tial­ly replace coal dur­ing the next two or three decades of the Ener­gy Tran­si­tion, espe­cial­ly in under-devel­oped and ener­gy-poor coun­tries where the need for rapid expan­sion of pow­er gen­er­a­tion will take pri­or­i­ty over zero car­bon until min­i­mum liv­ing stan­dards are achieved. And nat­ur­al gas-fired pow­er plants are capa­ble of pro­duc­ing secure and con­sis­tent base load elec­tric­i­ty while at the same time being able to han­dle peak­ing demand situations. 

Nat­ur­al gas prices in Europe are very vul­ner­a­ble to dis­rup­tions caused by open com­bat that can dam­age pipelines. The announce­ment that the start-up of the com­plet­ed Nord Stream 2 pipeline is to be delayed means that gas vol­umes from it will not reach full vol­ume lev­els until much lat­er in 2022, assum­ing that this con­flict is resolved fair­ly quick­ly. Gas prices in Europe will like­ly be sus­tained at uncom­fort­able high lev­els through all of 2022, and this means that elec­tric pow­er prices will be high­er as well. The sit­u­a­tion is mit­i­gat­ed in some mar­kets where long-term price con­tracts are in place. But keep in mind that peo­ple have to pay for ener­gy, so high­er ener­gy prices will low­er all kinds of dis­cre­tionary spending.

Liqui­fied Nat­ur­al Gas, or LNG, has become a cru­cial sup­ply fac­tor because the tech­nol­o­gy allows for the trans­port and deliv­ery of nat­ur­al gas from source fields to mar­kets that are often far away. It is methane, with some ethane mixed in, and it is cooled to ‑260 degrees Fahren­heit where much greater quan­ti­ties can be car­ried in a lim­it­ed space. Spe­cial­ly designed ships can car­ry this liq­uid form. Last year, the Unit­ed States, Qatar, and Rus­sia account­ed for about 70% of Europe’s total LNG imports, and the Unit­ed States became the largest source of LNG in 2021 at 26%. In Jan­u­ary the Unit­ed States sup­plied more than half of all LNG imports into Europe.

The tra­di­tion­al mod­el for LNG devel­op­ment has to be changed to make the process faster so that the US can export much more of its nat­ur­al gas as LNG to help bal­ance the glob­al gas mar­ket. Ener­gy is a phys­i­cal busi­ness and adding more LNG sup­ply into Europe is not an easy thing to do fast, because there is lim­it­ed import capac­i­ty avail­able now and there is strong com­pe­ti­tion from Asia for the gas. Cur­rent high lev­els of ener­gy costs threat­en the health of glob­al economies and the liveli­hoods of most of the world’s pop­u­la­tion. The Unit­ed States should work to exceed 100 Bcf per day of gas pro­duc­tion as soon as pos­si­ble, both to pro­tect economies and to help dis­place much dirt­i­er forms of ener­gy pro­duc­tion that are oth­er­wise inevitable in the near term. 

As for crude oil, the nature and dura­tion of poten­tial sanc­tions will deter­mine the impact. It might be that Europe could need to find oth­er sup­pli­ers to off­set about 2.5 mmb/​d of crude oil and con­den­sate it gets from Rus­sia and about 1.5 mmb/​d of petro­le­um prod­ucts it gets from Rus­sia. Part of the Druzh­ba pipeline goes through Ukraine and it remains to be seen if it will be shut or dam­aged. Indus­try and gov­ern­ment in the Unit­ed States should aim for 15 mm bpd of crude oil pro­duc­tion to ensure that ener­gy can­not be weaponized. Those who say that we should imme­di­ate­ly reduce our pro­duc­tion should con­sid­er the like­ly impacts in terms of con­flicts, ener­gy depri­va­tion, soar­ing ener­gy prices, and wide­spread suf­fer­ing. As a nation, we can encour­age, sup­port, and even sub­si­dize the Ener­gy Tran­si­tion, but it can­not be done overnight and we should beware of unin­tend­ed consequences.

Glob­al under­in­vest­ment in the tra­di­tion­al ener­gy com­plex can be dan­ger­ous. There is plen­ty of cap­i­tal for old ener­gy and new ener­gy; they can coex­ist for the time being. Cap­i­tal flows into the Ener­gy Com­plex, from exist­ing sources, and from new sources, must accel­er­ate rapid­ly, and Amer­i­can pro­duc­ers of nat­ur­al gas and crude oil should increase their activ­i­ty. Now is not the time to starve the tra­di­tion­al ener­gy busi­ness of cap­i­tal, regard­less of whether it’s a pub­lic For­tune 100 com­pa­ny or a pri­vate mid­dle-mar­ket company. 

Meet Our Authors

Bio photo jay krasoff

Jay Kra­soff

Founder | Managing Director

Mr. Krasoff is a founder of Chiron Financial and is responsible for the strategic direction of the firm and corporate growth.

Bio photo scott johnson

Scott John­son

Founder | Managing Director

Mr. Johnson is a founder of Chiron Financial and has over 30 years of experience in investment banking.

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