Energy security back on the menu for Asian importers after Russia unrest

The attempted military coup in Russia has resurfaced energy security concerns among Asian oil and gas importers after a brief period of complacency due to softening prices, experts said at the Energy Asia 2023 conference in Malaysia.

The challenge to Russian President Vladimir Putin's authority prompted a rethink on the role of Moscow as a stable hydrocarbon exporter to countries like India and China, and could see companies and governments revive energy diversification and energy security plans that had been put on the backburner, experts said at the event.

"One has to understand the impact that these developments have had on impressions of Russia and Vladimir Putin. Vladimir Putin was always seen as someone who can provide stability and security for the state," Carlos Pascual, senior vice president for Global Energy and International Affairs at S&P Global Commodity Insights, said.

But many questions are being raised about the stability of the Russian state and how that might affect markets, he said.

"If you were an importer of Russian commodities, of Russian crude oil, and you were dependent on those supplies, and you have instability in the political system, how do you assess the stability of supply of those commodities? Could they become more vulnerable?" Pascual said.

He said importers may be asking themselves about Russian supply chains, and its ability to continue to produce hydrocarbons and satisfy contractual obligations. "Russia might have to offer an additional discount in order to be able to sustain interest in the purchase of its commodities," he said.

Geopolitics vs. Economics

Oil and gas prices maintained their composure after the mutiny by Wagner forces, and market participants including banks like Goldman Sachs attributed the lack of volatility to the absence of an imminent threat to trade flows.

Takayuki Ueda, President & CEO of Japan's main exploration and production company Inpex, noted the discrepancy between demand-supply fundamentals and prices.

He said demand from China was gradually rising and markets were expected to be tight until the end of the year due to the Russia-Ukraine war, but the financial side was weak and prices were going down.

"It seems to me there is a difference between the reality of the energy markets, which shows that market is tight, but at the same time people do not think so," Ueda said.

"Russia may like to sell all their natural gas to China or India or some other countries, but I don't know what is going to happen [after the mutiny]," he said, adding that one repercussion could be that countries like China might have to reduce dependence on Russia and tap supplies from elsewhere, tightening global markets.

Daniel Yergin, vice chairman of S&P Global, said at a June 26 press conference that energy markets were preoccupied with waiting for a China rebound and high interest rates. "In other words, right now, the market is being dominated by economics not geopolitics," he said.

Return to energy security

The expected path of escalation in the Russian-Ukraine conflict previously centered around a counteroffensive by Ukraine, a military escalation by Moscow and/or tighter sanctions on Russia's oil and gas exports. Experts now see a new risk associated with internal security issues.

"I have been consistently saying that there is a bullish factor in the market if Russian gas supply were to be further curtailed," Michael Stoppard, Global Gas Strategy Lead and Special Advisor with S&P Global Commodity Insights, said.

"Everyone has been reminded of the importance of energy security. So when you see the threat of civil war in any country, that's obviously very concerning from the point of view of secure supply," he said.

"It has only reconfirmed the push in Europe that's been ongoing for almost 18 months now to diversify supply sources and find new sources of energy supply, both gas and other forms of energy," Stoppard added.

On June 25, Goldman Sachs said in a note to its clients that "civil unrest in Russia over the weekend illustrates the fragility of the current Russian political situation, and the importance of understanding the risks to Russian supply associated with potential domestic upheaval."

The bank pointed out that five major historical supply shocks were caused by domestic upheavals or destruction of oil infrastructure by militaries.

These included a large 5.5 million b/d drop in Russia's oil production, from 11.5 million b/d in 1987 to 6 million b/d in 1996 following the dissolution of the Soviet Union, and four major "exogenous supply shocks" identified by University of Michigan economist Lutz Kilian: the Iranian revolution of 1978-1979, the Iran-Iraq war of 1980-1988, the Gulf war of 1990-1991, and Venezuela's civil unrest of 2002-2003.

"It is of course too early to confidently identify any long-run effects from the most recent developments," the bank said.

"That said, at the margin, the surprising geopolitical developments over the last couple of days likely illustrate the uncertain nature of the current geopolitical global environment. This elevated uncertainty may further support the shift in focus to energy security," it added.