How disrupted Russian gas supplies will hit global and Australian prices

As economic sanctions on Russia escalate, there has been an attempt to isolate vital energy exports from the mix. This may be wishful thinking.

US President Joe Biden last week said^[1] sanctions against Russia, including cutting off Russian banks and individuals from the global SWIFT transaction system, were “specifically designed to allow energy payments to continue”.

Read more: 'Just short of nuclear': the latest financial sanctions will cripple Russia's economy^[2]

But prices on futures contracts for natural gas in Europe soared last week^[3]. While they have settled down since, internationally the market is volatile and uncertain.

Russia is both the world’s second-largest exporter of crude oil and refined petrol, and the largest exporter of natural gas, mostly via pipelines to western Europe. The European Union and its allies want to put maximum pressure on Russia, but not set off an energy crisis that hurts their own people and plunges the world economy into recession.

Analysts point out that Russia’s war on Ukraine will likely disrupt its gas exports even without sanctions^[4], with Western countries pulling out of relationships with Russian energy companies and the possibility Moscow could withhold supplies in retaliation for other measures.

Trading, shipping and insurance companies are unlikely to take the risk^[5] of dealing with Russian cargoes, fearing either physical attack, payment issues because of financial sanctions, the risk of non-delivery, or public and investor backlash for continuing to do business with Russia.

The extent of the upheaval is demonstrated by BP’s announcement this week to sell its 19.75% stake^[6] in Russia’s state-owned oil company Rosneft. Shell followed suit by announcing it will exit its joint ventures^[7] with Russian gas giant Gazprom, including its 27.5% stake in the Sakhalin-II liquefied natural gas (LNG) facility in East Asia.

These actions – unprecedented by global energy companies – demonstrate how profound^[8] effects may be.

What happens to natural gas supplies prices has consequences for Australia, also a relatively major player in the global gas export market. Unlike with petrol prices, however, Australian gas consumers are largely insulated from international volatility.

Read more: What Russia's war means for Australian petrol prices: $2.10 a litre^[9]

Russia’s natural gas exports

Natural gas is traded internationally by pipeline or shipped as LNG. Russia’s exports^[10] account for 26% of international pipeline trade and 8% of LNG trade.

About 77% of these exports go to European countries and account for about 40% of Europe’s total natural gas consumption. Dependence varies. Nine countries rely on Russia for more than 90% of their gas imports: Bulgaria, Czech Republic, Estonia, Finland, Hungary, Latvia, Romania, Slovakia and Slovenia.

In 2021 slightly less than 10% of Russian gas exports to Europe was transported via Ukraine (through pipelines).

Australia’s gas capabilities

Australia is the world’s fifth biggest natural gas exporter. It exclusively exports natural gas as LNG, and is now the world’s largest LNG exporter, accounting for 22% of international trade^[11].

In 2021, Australian LNG exports were valued at A$49.1 billion^[12], or more than 10% of Australia’s total export revenues.

Historically, more than 99% of Australian LNG^[13] has been exported to Asia, mainly China, Japan and South Korea.

Most of these LNG exports are locked into inflexible long-term contracts. About 36% of exports, however, are sold under flexible spot and short-term contracts^[14]. To sell this to Europe would mean selling less to existing customers, which would be difficult given contractual and transportation constraints.

In late January the Morrison government offered to provide extra LNG to “friends and allies” in Europe^[15] should Russian supplies be cut. Last week foreign minister Marise Payne said she had been talking to European counterparts about this. But most analysts question the feasibility, at least in the near term.

As noted by^[16] Graeme Bethune, the head of Adelaide consultancy EnergyQuest, “Australian LNG is produced by private companies, and the government doesn’t decide where it goes”.

According to Credit Suisse analyst Saul Kavonic, there is “precisely zero^[17]” capacity for Australia to boost LNG deliveries to Europe in the short term.

Australian LNG could be used in “swaps”. These involve swapping an LNG cargo in one part of the world with one closer to where a buyer wants it delivered. This may allow, for example, American LNG to be diverted to Europe, and Australian LNG replacing it in Asia.

But it is still a zero-sum game for the global economy.

Read more: How Russia's invasion of Ukraine will ripple through the global economy and affect Australia^[18]

Effects on Australian exporters and customers

Australian LNG exporters will benefit from higher global prices^[19]. The good news for Australian consumers is that those higher prices largely won’t flow through to domestic prices.

Australia’s domestic gas prices are about 70% lower^[20] than overseas, due to government measures to quarantine Australian customers from international prices and guarantee secure and affordable gas to the country’s east coast market.

Most Australian gas buyers have long-term supplies locked in^[21].

This is why the head of the Australian Competition and Consumer Commission does not expect gas prices to rise^[22], unlike petrol prices^[23].

References

1. ^{^} last week said (www.newsandtribune.com)
2. ^{^} 'Just short of nuclear': the latest financial sanctions will cripple Russia's economy (theconversation.com)
3. ^{^} soared last week (www.aljazeera.com)
4. ^{^} even without sanctions (www.reuters.com)
5. ^{^} unlikely to take the risk (www.reuters.com)
6. ^{^} sell its 19.75% stake (www.bp.com)
7. ^{^} exit its joint ventures (www.theguardian.com)
8. ^{^} profound (www.reuters.com)
9. ^{^} What Russia's war means for Australian petrol prices: $2.10 a litre (theconversation.com)
10. ^{^} exports (www.bp.com)
11. ^{^} 22% of international trade (www.bp.com)
12. ^{^} were valued at A$49.1 billion (www.upstreamonline.com)
13. ^{^} more than 99% of Australian LNG (www.bp.com)
14. ^{^} under flexible spot and short-term contracts (giignl.org)
15. ^{^} to “friends and allies” in Europe (www.voanews.com)
16. ^{^} noted by (www.smh.com.au)
17. ^{^} precisely zero (www.smh.com.au)
18. ^{^} How Russia's invasion of Ukraine will ripple through the global economy and affect Australia (theconversation.com)
19. ^{^} higher global prices (www.reuters.com)
20. ^{^} 70% lower (www.minister.industry.gov.au)
21. ^{^} locked in (www.abc.net.au)
22. ^{^} gas prices to rise (www.canberratimes.com.au)
23. ^{^} petrol prices (theconversation.com)