Russia-Ukraine crisis exposes need to expedite energy transition in EU

By Nuran Erkul Kaya

ISTANBUL (AA) - Western countries need to avail of the display of unity seen in Europe in support of Ukraine and unite to hasten energy efficiency measures and further deploy clean technologies to reduce dependence on oil and gas exports, experts told Anadolu Agency.

Although oil and gas exports have been excluded from sanctions against Russia, it does not mean that this will always be the case if events in the Russia-Ukraine crisis worsens.

According to Maria Pastukhova, a senior policy advisor at E3G, in an exclusive interview, what is more, severe than inclusion or exclusion of several sectors of the economy from SWIFT transactions is the sanction that has started in the strategic reserves of the Central Bank of Russia.

This sanction, she said, means that foreign reserves are now partly frozen and the only basic inflow of foreign currency in Russia's Central Bank is through oil and gas exports.

Therefore, oil and gas exports have now become more critical for the Russian economy since approximately half of the Russian central bank's reserves are frozen.

However, after Russia attacked Ukraine, it is getting more difficult for Russian oil to find customers. Russia has also seen the exodus of oil and gas majors from the country, including ExxonMobil, bp, Shell, and Equinor. TotalEnergies also agreed to no longer invest in new projects in the country.

The daily payments from the EU, UK, and US for Russian gas and oil exports are calculated to be in the region of $500 million.

The EU, US, UK, Canada, and the EU Commission agreed to remove several Russian banks from the SWIFT banking system as Russia continued bombing Ukraine.

However, Pastukhova says that as Russia has developed its transaction information system called SPFS and has also been increasingly using the Chinese system, many possibilities to use other transaction modes are available.

She argued that without SWIFT, commodity prices may rise but she considers that it is not a dramatic measure.

"It actually makes Russia now much more dependent on oil and gas exports and on the developments of the global oil and gas prices. If we see gas prices decrease again, then it means much less for foreign currency for the Central Bank of Russia and much less ability to act. So, this is probably a much more important sanction piece than the SWIFT," she said.

She does not envisage that sanctions will be placed on Russia's oil and gas exports through SWIFT or economic sanctions anytime soon unless there are more drastic developments in the crisis.

"Targeting oil and gas exports, both via SWIFT or directly banning significantly harms, of course, the Russian economy which is very dependent on these revenues. Still, about one-third of the state revenue comes from oil and gas exports," she said.

She warned that sanctions on oil and gas exports will not only impact Russia but also European economies that are still highly dependent on imports of Russian oil and gas, which are continuing.

Russia is the third-largest producer of oil behind the US and Saudi Arabia, and the largest overall exporter once products are included. It exports about 5 million barrels a day of crude, or about 12% of global trade, and around 2.85 million barrels per day of products, or about 15% of global trade.

The EU's gas imports from Russia account for around 40% of its total gas needs.

Data shows gas exports of Russia's Gazprom to the EU via Ukraine stood at 74.4 million cubic meters on Jan. 1.

However, exports surged on Feb. 24 when Russia started to attack Ukraine. While Gazprom exported 62 million cubic meters of gas on Feb. 23 via Ukraine, this volume rose to 110 million cubic meters on Feb. 25 and 109 million cubic meters on Feb. 26.

Gazprom's gas transmission to the EU via Ukraine runs at an average of 100 million cubic meters per day, Gazprom spokesman Sergey Kupriyanov said in a statement on Feb. 28.

According to the Institute of International Finance (IIF), the EU's gas dependence on Russia substantially limits the Union's foreign policy options as far as the conflict at Ukraine's eastern border is concerned.

"While any sanctions affecting the free exchange of goods such as direct measures imposed on exports or restrictions on Russian institutions' access to global payments systems are a challenge for Europe in the best of times, current record-high natural gas prices only exacerbate the problem," the IIF said in a recent analysis.

European Commissioner for Energy, Kadri Simson, said early this week that the EU could get through the winter safely with gas storage capacity at around 30%. However, she urged for early planning now for a sufficient level of gas storage ahead of the next heating season.

"We will reach the end of this winter with an exceptionally low level of gas storage. If current trends continue, our latest projection of storage for April is 18%, compared to over 30% in the previous years," she said.

The IIF said in the medium run, due to several issues, including extraction constraints, infrastructure shortcomings, and political factors, demand-side measures would be inevitable.

Charles Moore, Ember's Europe lead, advised that the EU work out the areas in which it can move faster to ensure fossil fuels are being reduced as quickly as possible.

“Key elements will be more clean energy, more clean energy production, reducing demand for energy efficiency and switching from fossil gas in heating in homes to electricity via the installation of heat pumps," Moore said.

Despite the EU’s clean energy transition on a broad scale, Moore stressed the urgency to move quickly towards this goal.

He said reducing energy demand with energy efficiency in homes, coupled with the replacement of heating with heat pumps looks like the best and quickest option.

".. Everything now needs to move much faster. We have seen incredible European Union unity over the last weeks with the events in Ukraine and there will likely be the political consensus and urgency that has been missing on the energy transition in Europe for a long time," he said.

Pastukhova also echoed the importance of efficient solutions to reduce gas demand in the short term.

Regarding the option of building new gas pipelines in Europe to reduce Russian dependency, she said she does not expect that Europe will do so as a long-term solution.

"Building pipelines takes even longer and we have seen in the recent months how the dependency on fossil gas imports can really harm the energy security and the resilience of the economy of the EU. I think it is clear for now for the decisions makers such infrastructure will not be a solution in terms of boosting energy resilience and might be an additional liability to the EU," she said.

She cited ramping up the renewable generation capacity and underlying power grid infrastructure in the EU as a better solution and advocated for support measures such as boosting the flexibility of the power grid and encouraging consumers to become “prosumers” - a portmanteau of the words producer and consumer, referring to a customer connected to the distribution system that owns a means to generate electricity.

"Basically, addressing energy resource use more sparingly will be key to the transition, and this needs a major shift in finance to efficiency solutions," she concluded.