Crimea Annexation by Russia: Changing Energy Geopolitics

Geopolitics is the battle for space and power played out in a geographical setting. Just as there are military geopolitics, diplomatic geopolitics and economic geopolitics, there is also energy geopolitics. For natural resources and the trade routes that bring those resources to consumers is central to the study of geography. Of all natural resources, Crude oil and Natural gas has always remained the core of the discussion. Crimea annexation by Russia is a classic example of how Energy factors plays crucial role in shaping the global geopolitics.

The annexation of Crimea by the Russian Federation is a disputed diplomatic process that began after the Autonomous Republic of Crimea and the city of Sevastopol unilaterally declared their independence from Ukraine.  The regions joined together as a single nation afterwards and requested accession to Russia, in accordance with a referendum that reflected such desire. Russia granted the request almost immediately by signing an adoption treaty with the newly formed nation. The accessions, however, were ratified separately: one for Crimea as a republic and another for Sevastopol as a federal city, resulting in the establishment of two new federal subjects of Russia. Ukraine, however, disputes the treaty, as it does not recognize the independence of Crimea and Sevastopol or the accession itself as legitimate

Lucrative E&P Prospects in Crimea: Reason behind the Annexation

One of the speculated reasons behind this annexation is the prospective oil and gas resources of Crimea. The Skifska gas field, a license block which lies to the southwest of Crimea in the Black Sea, is estimated to hold up to 8.8 trillion cubic feet in natural gas and condensate resources.  It was awarded in 2012 to a consortium consisting of Royal Dutch Shell, ExxonMobil, Petrom and Nadra. With exploration due to begin in 2015, the block is expected to produce 177 bcm of gas per year. Eastern coast of Crimea is also expected to be prospective. The area includes a license for the Subbotina block, where an oil discovery has been made, as well as licenses for the Pry Kerch block, where several oil and gas prospects have been identified. Eni had been made operator of this eastern Crimean area with a 50 percent stake, while other partners included EDF (5 percent) and Ukrainian state-owned companies. The question now is, what will be future of these assets. After this annexation, there are market speculations suggesting that Crimean oil and gas assets will be managed by Russian companies such as Gazprom OAO. How these things will shape up is yet to be seen.

Changing Routes of Energy: Repercussion of the Annexation

Crimean crisis is going to have huge impact on the existing trade routes of crude oil and gas. Till now, around 60 percent of crude oil imports and 30 percent of Natural gas imports of Europe are met form Russian supplies. Europe will now have to look for new options to meet its energy requirement and decrease its energy dependence on Russia. Russia has also started exploring new export alternatives.  China has agreed to buy more than $350 billion of Russian crude in coming years. The U.S., even after the shale boom, needs to import 40 percent of its crude oil, leaving it vulnerable to global market dynamics. The U.S. imported 167.5 million barrels of crude oil and petroleum products from Russia in 2013.

Figure: Major Trade Movement of Crude Oil in 2012 (million tonnes)

The figure titled “Major Trade Movement of Crude Oil in 2012” highlights the major trade routes of crude oil in 2012. As is evident from the figure, Europe imports 286.5 million tons of crude oil from Russia. Around 26.4 million tons of crude oil requirement of US come from Russia. Also, of the total crude oil export from Russia, around 83 percent is exported to US and Europe. All these regions have now started to look for

new trade alternatives.

New Trade Routes Alternatives

Owing to this annexation, Europe will have to start looking for new options for sourcing its crude oil and natural gas and decrease its dependency on Russia for its energy requirement. One of the best option would be to improve its own infrastructure such as interconnectivity of existing pipelines, increase gas storage and increased transparency in the system. Few of the gas sourcing options that Europe can evaluate are North African gas; Central Asian gas or LNG imports from US. In North Africa, new political leadership and vast reserves means that some countries like Algeria, Libya and Egypt have the potential to become some of the largest suppliers to Europe. Central Asia also has huge reserves of natural gas however transporting that gas to Europe would require expensive and lengthy pipelines through multiple countries. One of the most favorable sourcing options is LNG imports from US. However, the U.S. Energy Department has so far only approved seven applications out of more than 20, and only one has final approval from the Federal Energy Regulatory Commission. The soonest any company will export LNG from the U.S. is 2015. LNG already represents about 25 percent of European natural gas imports, up from 15 percent in 2010. There are 22 LNG import terminals around Europe, with Poland, Lithuania and Estonia building new terminals that could distribute imported LNG around Northern and Eastern Europe.

Russia has also started evaluating new options for exporting Russian gas. Russia is planning to enter into a deal with China for sale of its gas. This Russia-China gas deal has been in the works for over 10 years, however, owing to some price conflicts, it didn’t reach closure. Recently, there are speculations, that the deal will be closed in May 2014, during the visit of Russian President to China. Also, Russia and China are in talks to develop alternative-energy projects in Crimea.

Changing Energy Geopolitics of 2014

There has been huge change in the global energy dynamics since the Shale Gas revolution in US. It has played an important role in transforming US from net importer to net exported of Natural gas in the global trade environment. Over the period, OPEC is also slowly losing its hold on the global oil market. In its annual World Oil Outlook, OPEC said it expected global demand for its crude oil to average 29.2 million barrels per day (bpd) in 2018, down 1.1 million bpd from 2013, because of increasing supply outside the 12-member group.  Things are changing and this Annexation of Crimea by Russia is also going to play a vital role in this changing dynamic of world oil and gas trade.

                               

       InfralineEnergy Oil & Gas Knowledgebase Team