3 questions answered on the Ukraine war’s impact on energy

By Shelby Webb, Carlos Anchondo, David Iaconangelo | 02/22/2023 07:10 AM EST

Russia’s Ukraine invasion influenced everything from hydrogen policies to demand for natural gas.

Pipes at the landfall facilities of Nord Stream 2, Russian President Vladimir Putin, solar panels.

AP Images

Before Russia invaded Ukraine, plans to cut carbon emissions were everywhere.

President Joe Biden took office in 2021 saying he wanted to decarbonize the U.S. electric grid within 15 years.

At the COP 26 climate summit in Scotland, countries pledged to cut fossil fuel use and roll back oil and gas subsidies. Ice storms, wildfires and hurricanes added global urgency to act.


Then, on Feb. 24, 2022, bombs fell in Ukraine as invading troops swept into the Eastern European country.

Rather than facing just the dilemma of how to manage a pending shift to cleaner fuel sources to help stave off the worst impacts of climate change, major nations faced two more immediately pressing issues: energy security and sky-high prices.

“It’s a tri-lemma,” said Amy Chronis, vice chair of U.S. energy and chemicals for Deloitte LLP. “Energy security balanced against the energy transition balanced against price stability.”

Platitudes about pivoting toward renewable energy began to melt in Europe, where countries started to refire coal plants and import natural gas to replace the Russian fossil fuels upon which the continent relied.

Biden and U.S. Energy Secretary Jennifer Granholm called on oil and gas companies to increase production and released 180 million barrels of oil from the nation’s Strategic Petroleum Reserve to combat high gasoline prices.

U.S. exports of liquefied natural gas reached a fever pitch, with companies announcing new export terminals that could take years to materialize.

War in Ukraine — and the subsequent energy crisis — turned national and international conversations about the energy transition on their head. That may not be all bad, according to Chronis.

“You’d like to think there’s a silver lining in everything. The Russian invasion of Ukraine is horrible, but it brought about a new refocusing on the importance of energy security,” Chronis said.

“The idea of balancing energy security, the energy transition and energy price stability for most of the world, they all have to be factors for some time to come,” she added.

Here are three issues to watch as Russia’s war in Ukraine continues to upend the energy sector:

Is the war hurting or helping the clean energy transition?

Immediately following Russia’s invasion last year, plans in the United States and Europe to cut emissions seemed to be on the ropes.

The price of battery minerals surged. European countries, determined to stop buying Russia’s gas, scrambled to keep coal plants online. Biden pressed domestic oil and gas companies to drill more. António Guterres, the United Nations’ secretary-general, begged countries not to abandon green ambitions and relapse into fossil fuel “addiction.”

But since then, political will for clean energy policy has mostly survived Russia’s invasion — at least so far, experts say.

“The first period after the war was about just keeping the lights on, right? … Now it’s getting to be very clear that this is going to be a long-term challenge,” said Jonas Nahm, an assistant professor at Johns Hopkins’ School of Advanced International Studies.

In the European Union, the war compelled the continent’s planners to formulate even stronger climate goals, analysts say. In the past year, E.U. officials have released new strategies that would hasten the continent’s turn toward renewables, hydrogen and other low-carbon technologies.

Last spring, for instance, the European Commission unveiled a major energy plan known as REPowerEU, calling it a recipe to delink from Russian gas (Energywire, May 19, 2022).

The plan called for doubling the European Unions solar capacity by 2025 and doubling the amount of electric heat pump sales by 2027. The continent should import 10 million metric tons of low-carbon hydrogen by 2030, on top of a preexisting target of producing that same amount of the fuel on European territory, according to the plan.

“In Europe, the war made people really, acutely aware of dependence on Russian fossil fuel energy,” said Roger Karapin, a professor of political science at Hunter College in New York who studies climate policy in the United States and Europe. “Definitely, there’s more pressure for a transition to renewables and electrification.”

Some observers of U.S. policy also say the Russian invasion helped set the stage for Congress’ passage of the Inflation Reduction Act, with its unprecedented suite of subsidies for low-carbon energy.

“It was passed after the invasion. And it was passed at the height of high gasoline prices. I don’t think that’s a coincidence,” said Amy Myers Jaffe, director of the Energy, Climate Justice and Sustainability Lab at New York University’s School of Professional Studies.

For both the United States and Europe, electric heat pumps — which can be used instead of natural gas for heating — are likely to benefit from the wartime crisis. European heat pump industry representatives and the International Energy Agency have credited the invasion with spurring growth in heat pump sales by 38 percent last year as the public looks to ditch natural gas during a time of spiking prices. Biden has also granted Defense Production Act authorities to the Energy Department to guarantee contracts for $500 million worth of heat pumps and other clean energy equipment — a measure that responded to a wartime push by electrification advocates.

Yet in the United States and Europe alike, the fallout from Russia’s invasion has spotlighted China’s upper hand as an energy supplierChina is a global production hub for everything from solar panels and electric vehicle batteries and possesses control over extraction of many critical minerals.

Elected officials across the political spectrum, in the United States and Europe, see that reality as a chief obstacle for clean energy goals, since it could make the price of important energy components harder to control and subject to the discretion of a geopolitical rival.

Russia’s invasion “created a conversation about what needs to be done” to make sure Western countries aren’t dependent on a single country for cheap, low-carbon technologies, said Nahm.

In the United States, the Inflation Reduction Act lays out big new subsidies for renewable equipment manufacturing in an attempt to on-shore much of that production, for instance. Its credits for EV buyers are hinged on the automakers’ ability to produce most of those cars’ parts domestically.

The law’s Made-in-America focus has led to run-ins with European officials who fear that major national industries, like carmakers, would be excluded (E&E Daily, Jan. 23). But both sides have started to float international collaborations that would shore up access to clean-tech minerals from sources not connected to China (E&E News PM, Feb. 7).

The European Union’s targets for low-carbon hydrogen are another example of an immense challenge for a continent, said Adithya Bhashyam, a hydrogen analyst at BloombergNEF.

Virtually all of hydrogen made and used in Europe today, like that in the United States, comes from natural gas and releases carbon in significant volumes. The continent consumes up to 10 million metric tons of “dirty” hydrogen per year, according to Bhashyam.

By 2030, the European Union is aiming to produce an identical amount of that fuel with lower-carbon methods — and buy another 10 million metric tons of it from abroad. The most popular method is likely to involve extracting hydrogen from water using electricity, which would be derived mostly from renewable power sources. 

That would allow hydrogen to step in as a major substitute for Russian natural gas, particularly for heavy manufacturing and other sectors considered hard to electrify.

“The war has definitely increased ambition” in Europe — but raised many questions about how to execute on the hydrogen targets, said Bhashyam.

Among those: Can the build-out of renewables — the major energy source for Europe’s new hydrogen — proceed fast enough to reach the targets? Will the “clean” hydrogen really be clean enough? Where will imports come from? And will E.U. nations enact subsidies that can propel mass production of the fuel?

An entire new industry has to appear “in a very short amount of time,” said Bhashyam.

“There’s got to be a mentality of ‘build quick,’” he said.

One liability for emission cuts in the West and elsewhere stems from the renewed use of coal. Europe has so far replaced much of Russia’s gas with LNG from the United States, but in some cases, that has diverted gas supplies bound for Asia, where many countries have chosen to burn more coal instead (Climatewire, Feb. 21).

How has the war shifted U.S. liquefied natural gas, and what’s next?

U.S. LNG exports to Europe surged last year, with the United States sending roughly 74 percent of its LNG to the continent in the first four months of 2022, according to data from the U.S. Energy Information Administration.

Exports to Europe remained high throughout the year, more than doubling in 2022 from the previous year (Climatewire, Feb. 21).

Some LNG cargoes bound for Asia — which has long been a major destination for U.S. shipments — were diverted to Europe as it worked to curb its dependence on Russian fuels (Climatewire, April 1, 2022).

In December, four of the top five countries of destination for U.S. LNG exports were in Europe — with Spain exceeding South Korea, according to an Energy Department report published this month.

Charlie Riedl, executive director for the Center for Liquefied Natural Gas, said he expects the prospect of sending U.S. LNG into Europe to remain “pretty strong,” even if the war in Ukraine were to end.

“I think that every day this war continues on only further ... underscores the importance of diversity in energy supply,” Riedl said in an interview this month.

The war in Ukraine has also clarified where the Biden administration stands on U.S. LNG exports, according to Riedl.

Before the invasion, Riedl said he and others in the LNG space made attempts to engage with the Biden administration in its first two years. He said there were “challenges in having any kind of what I would call substantive conversation or dialogue.”

“Since the invasion, right, there has been regular outreach, engagement … and what I would say is a pretty significant shift in their position on LNG exports,” Riedl said.

A White House spokesperson did not respond this month to questions about a U.S.-E.U. task force on energy security, which was announced in March 2022.

The Biden administration has backed U.S. LNG exports to Europe, saying in November that task force participants surpassed the initiative's commitment to increase LNG supplies to Europe by 15 billion cubic meters in 2022 as compared to 2021.

While some lawmakers on Capitol Hill have voiced concerns about the climate effects of building more domestic LNG infrastructure, other policymakers have said U.S. LNG exports to Europe need to continue.

At a hearing this month of the Senate Energy and Natural Resources Committee, Chair Joe Manchin (D-W.Va.) said the federal government needs to “start balancing lofty climate goals with geopolitical needs if we’re going to remain the superpower of the world, while also making progress on decarbonization.”

During the same hearing, Sens. Jim Risch (R-Idaho) and Lisa Murkowski (R-Alaska) said the world’s relationship with Russia has fundamentally changed.

Some analysts said there’s a risk of stranded assets in Europe as the continent builds out more LNG import infrastructure.

LNG projects have long lead times, said Guy Prince, a senior analyst with the Carbon Tracker Initiative think tank, and require a lot of upfront capital that’s justified on a project running for many years.

“If the world is to make sufficient progress to meet climate targets ... fossil fuel demand will, as a consequence, fall, so these assets will no longer be economic,” Prince said. “And that’s the risk of going too far on LNG."

Giles Farrer, head of gas and LNG asset research at Wood Mackenzie, said European LNG imports increased in 2022 even though there wasn't a surge in global supply.

“The reason European imports jumped was because flows were redirected, so basically Europe was prepared to pay more and we saw less imports of LNG in Asia, which is traditionally the largest market,” Farrer said.

Covid-19 lockdowns also helped to keep a lid on Chinese demand, he said.

In a post this month, one expert said Europe’s future LNG needs are not “straightforward.”

“For European stakeholders, the question is how to ensure security of gas supplies while decarbonizing the energy system,” said Anne-Sophie Corbeau, a global research scholar at the Center on Global Energy Policy at Columbia University.

“As Europe loses its flexibility tools and is exposed to increased volatility on global gas markets, European players may need a more secure supply strategy than just buying on the spot market with little control on prices and quantities,” Corbeau said.

Meanwhile, environmental groups have said industry has taken advantage of the war.

Talia Calnek-Sugin, associate director of legislative and administrative advocacy for the Sierra Club’s Beyond Dirty Fuels Campaign, said the oil and gas industry has “seized the opportunity of the war in Ukraine” to bend the narrative to its advantage.

She said there was a smaller incentive to invest in more LNG facilities before Russia invaded Ukraine.

“I think in the couple of years before the war in Ukraine, it looked like more LNG export facilities would not reach final investment decision," Calnek-Sugin said.

But she added that “as the war and the corresponding European energy crisis … rocked global energy markets, there was both sort of this economic opportunity and a political opportunity that the industry really took advantage of.”

Calnek-Sugin said several LNG facilities under development in the United States would not come online for multiple years.

“These are facilities that are going to be not completed until 2028, 2029, 2030, maybe even later,” Calnek-Sugin said. “These facilities are going to do nothing to aid European partners in the war.”

One group, the Institute for Energy Economics and Financial Analysis (IEEFA), which advocates for speeding up the transition to sustainable energy, said Europe is taking steps to cut its gas consumption, “which could render new LNG import capacity unneeded.”

“In 2023, European gas demand may experience a rebound after last year’s declines,” IEEFA said in a report this month. “But through 2030 EU gas demand could fall by 40% or more, driven by legally binding emissions reduction targets, policy measures to ensure energy security and demand destruction stemming from high prices.”

Will oil and gas prices surge again?

The war caused natural gas and gasoline prices to hit record highs — and experts say they could surge again, although the level of increase likely won’t be as severe in 2022.

The direction of oil prices could create tricky politics for Biden this summer heading into the 2024 election cycle. Natural gas prices, meanwhile, hit consumers on their home heating bills, and are one of the biggest drivers of electricity costs, as the fuel powers nearly 40 percent of the U.S. power generation. High natural gas prices also can make coal more competitive.

Natural gas prices had been ticking up nearly six months before Russian President Vladimir Putin began stacking troops along the Ukrainian border, as demand jumped globally after Covid-19 restrictions waned.

Several unexpected outages at LNG plants and a cold winter in 2022 added to the demand, said Chris Wright, chair and CEO of Liberty Energy.

Prices at the Henry Hub, the U.S. benchmark for natural gas, rose above $5 per metric million British thermal unit on average in September 2021, doubling the average $2 to $3 per mmBtu prices that had defined markets the previous six years, according to the EIA.

Before the war, Russia provided about 40 percent of the European Union’s natural gas needs. After the invasion caused prices to rise, however, European nations and the United States pledged to reduce their dependence on Russia’s fossil fuels.

In March 2022, Biden banned U.S. imports of Russian oil and gas, which accounted for 8 percent of all U.S. petroleum imports, according to the EIA. The European Union said it would cut its imports of Russian gas by two-thirds that same month, and Russia itself began cutting countries off of its gas exports entirely and reducing its flow via the major Nord Stream 1 and 2 pipelines by nearly half by June 2022.

“Russia exploited the problem [of already high prices] that already existed with natural gas,” Wright said. “They took an already very problematic situation with natural gas and made it worse.”

Prices in the Henry Hub spiked to an average of $8.14 per mmBtu by May 2022 as U.S. exports of LNG ramped up to historic levels.

Eugene Kim, research director of the American gas team at Wood Mackenzie, said changes in the European market did not affect US prices for natural gas, however.

“North America has always been an island, whatever happens in North America stays in North America,” Kim said. “Now we are getting increasingly connected via our connection with LNG and interdependencies of the markets that exist now.”

That interdependence is likely here to stay, Kim said, but natural gas prices have started to fall thanks to a confluence of events, including a relatively mild winter in Europe and North America, European countries stockpiling natural gas reserves, and increased natural gas production in the United States.

In January, gas prices had dropped to levels before the war, averaging around $3.27 per mmBtu. But Chronis, of Deloitte, said the markets could still be fraught this year, albeit less so than in 2022.

That will likely be the result of several factors. Global LNG export capacity is only expected to increase by 1.5 percent at the same time gas demand in Asia could spike, thanks in large part to China dramatically cutting back its Covid-19 restrictions for the first time in three years.

“I would say in the short term, the next two years, we expect the market to likely remain tight and prices to remain volatile,” Chronis said. “There are so many uncertainties still in play.”

With gasoline, last year was a “perfect storm,” said Patrick De Haan, head of petroleum analysis with GasBuddy. That perfect storm was a political thorn for Biden, who faced repeated Republican attacks for the high prices and announced the release of more than 180 million barrels of oil from the Strategic Petroleum Reserve in March.

Similar to the pattern with gas, demand for gasoline and oil was already high before the war as much of the global economy began to reopen after the pandemic. Refining capacity, still low following shutdowns that happened during the height of Covid-19, struggled to keep up. Russia invaded Ukraine on top of that, leading to European and U.S. bans on Russian crude imports.

The West Texas Intermediate benchmark cost of crude spiked in two weeks once the invasion began Feb. 24, rising from $92.11 on Feb. 22 to $123.64 on March 8, 2022. The average retail price gasoline of all grades price shot up to a record-shattering high of $5.032 in June.

At that point, oil traders and analysts were quick to forecast that Russian crude exports would be impeded by global import bans, said Tom Kloza, who helped found Oil Price Information Service and now serves as its global head of energy analysis. But that fuel found markets in China, India and other Asian countries, where demand was increasing as Covid-19 restrictions eased.

Still, gasoline and diesel prices remained high in the United States, pushing inflation higher.

Prices have come down since then, but they could rise at the pump again as China reopens and the summer driving season pushes demand higher in the United States, De Haan said.

The “perfect storm should not repeat this year, but this still could be a painful year with prices that could potentially surpass $4 a gallon,” De Haan said.

According to Kloza, “last year the narratives were all incredibly bullish, and we did not see the impingement of Russian crude oil production or exports."

“Now the new narrative is we’re going to see some tempering of Russian crude oil production. They said last week they would cut production by 500,000 barrels a day. I think most people in crude markets believe they couldn’t find partners to take those barrels,” he said.

The ending stock of the Strategic Petroleum Reserve, meanwhile, reached 388.4 million barrels in November 2022 — the lowest level since 1984. The Biden administration announced earlier this year it would begin to buy back reserves, but a 2015 budget law will require it to sell an additional 26 million barrels this year, Kloza said.