Russia's status as a global commodities heavyweight looms large over the energy sector. International oil companies are scrambling to ensure they don't run afoul of a growing web of sanctions aimed at squeezing the Russian economy. Renewable energy companies are fretting about potential crimps in global supply chains. And domestically, producers of both oil and natural gas are evaluating whether, how much and when it makes sense to ramp up their output amid rising prices and demand.
Here, Law360 breaks down four ways the energy markets could be affected:
Russian Energy Industry Escapes Sanctions — For Now
President Joe Biden and U.S. allies on Thursday announced expanded sanctions targeting Russia's financial institutions and limits on high-tech exports to the country. But the latest wave of sanctions continues to carve out exemptions for any transactions related to energy, such as oil and gas exports, and don't directly target state-owned energy companies like Gazprom or Rosneft.
"We are closely monitoring energy supplies for any disruption," Biden said at a Thursday press conference. "We have been coordinating with major oil-producing and -consuming countries toward our common interest to secure global energy supplies."
Any blockage of Russian oil and gas exports would be a game-changer with profound effects on both the Russian and global economies, experts say. For example, a cessation of the gas trade between Russia and the European Union would shrink the global natural gas supply by the equivalent of one-third of the current global trade of liquefied natural gas, according to Pierre Noël, a Paris-based global research scholar at Columbia University's Center on Global Energy Policy.
"This would trigger a wave of investment across the energy supply chain to compensate," Noël said. "This would be natural gas projects, but it would be other projects such as coal projects, with major impacts on global [greenhouse gas] emissions."
Still, the potential for eventual sanctions on Russian energy exports can't be ruled out, which is why it's worth keeping tabs on any moves from the Organization of the Petroleum Exporting Countries, experts say. Russia has been an ally of the group of OPEC nations known as OPEC+ since 2016, but is not a formal member of the organization.
"If you place sanctions on Russian oil exports, you would likely see a move to get OPEC to really pump up its production," said James Coleman, an energy law professor at Southern Methodist University's Dedman School of Law.
Compliance Concerns for International Oil Companies
The lack of sanctions currently targeting the Russian energy doesn't mean that international oil companies doing business in the region can be assured they're fully complying with the global sanctions regime, experts say.
If anything, indirect sanctions targeting Russian financial institutions and the country's ability to do business in U.S. dollars and other currencies are the bigger worry for oil multinationals, said Jones Walker LLP government relations and energy partner Jim Noe, who represents both oil and gas companies and industry groups.
"There's pretty good traceability of your oil going to your customer, but you certainly need to be more vigilant about where your oil is ending up," Noe said. "I'm cautioning clients about that as we speak."
The more jurisdictions an oil company does business in, the more challenging it becomes to keep track of whether they're complying with all the sanctions on the books, Noe said.
"To the extent that your host county is issuing sanctions that may differ from what's being issued in the U.S., it's just very complicated to monitor your compliance with the sanctions," Noe said. "The majors have major trading operations, [and] that operation is very complicated when you have multiple countries issuing sanctions on multiple companies and individuals."
An Incentive to Increase U.S. Drilling
With natural gas prices surging and global oil prices climbing toward the $100-a-barrel mark Thursday, U.S. drillers that had pulled back on their production and investors that have been leery about funding new operations may be compelled to ramp things up again, experts say.
"This whole thing is going to push a lot of investment in the U.S. and elsewhere into oil and gas to try to stabilize prices and take advantage of high prices," said Jim Krane, an energy studies fellow at Rice University's Baker Institute for Public Policy.
Krane said it could also provide greater incentive for the industry to crack down on venting and flaring of gas from drilling operations, given the potential value for those resources to instead be exported as liquefied natural gas. The U.S. became the leading source of European LNG imports in 2021, according to the U.S. Energy Information Administration.
But increased U.S. drilling won't be of immediate help to European nations in the event of reduced Russian gas imports, experts say. All current U.S. LNG exports are accounted for, and building additional export terminal capacity is a multiyear process.
"You're limited by the facilities that are available," Noe of Jones Walker said. "You can't just turn on the spigot and make up the gap in natural gas. There's not a quick and easy solution or workaround to bring more LNG from the U.S. to Europe."
Renewable Energy Cos. Face Further Supply Chain Squeeze
While much of the crisis' potential energy impact has focused on the oil and gas sector, it could also affect renewable energy development, policy experts say.
Russia is a major producer and exporter of raw materials used to manufacture renewable energy technology and equipment, including aluminum, nickel and cobalt. The U.S. hasn't yet imposed direct sanctions on Russia's metals and mining industry, but global metals prices surged Thursday following Russia's invasion of Ukraine.
"Anything that makes nickel more expensive or less accessible, it's going to hurt battery production, which is going to feed into electric vehicle costs and other technology costs," Krane of the Baker Institute said. "Nickel is a crucial commodity for technology in general, but particularly for the energy transition."
The effects on renewable energy may not be as immediately apparent as effects on oil and gas, especially if developers have already locked up the necessary equipment to build their projects, experts say.
But even if renewable energy costs aren't significantly affected by near-term disruptions in raw material availability, they are still sensitive to near-term supply chain disruptions, Noël of Columbia's CGEP said.
The industry has already seen cost increases due to supply chain disruptions caused by the COVID-19 pandemic, and a rush by nations to build out renewables and nuclear power in order to wean themselves off fossil fuels may aggravate those constraints, Noël said.
"If the crisis has triggered, and even empowered, governments to move even faster on renewables and nuclear, you would see the cost of those [projects] increase, simply because everyone is doing more of the same at the same time," Noël said.
--Editing by Alanna Weissman.
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