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.
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
Founder | Managing Director
Mr. Krasoff is a founder of Chiron Financial and is responsible for the strategic direction of the firm and corporate growth.
Founder | Managing Director
Mr. Johnson is a founder of Chiron Financial and has over 30 years of experience in investment banking.
Mr. McNulty brings over 25 years of working across the entire commodity and energy value chain.