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Impact on Markets due to the US-Qatar Arrangement to provide Gas to Europe

Shivangi Varshney

Major Conflicts Between Russia and Ukraine


In the past, Russia Seized Crimea and took the region from Ukraine. Markets were taken by surprise, as was everyone else and uncertainty surrounded the events. The recent anticipations, by the Western countries, of Russia invading Ukraine, have triggered serious concerns amongst nations worldwide. The friction between Russia and Ukraine traces back to the Orange Revolution when Ukraine ousted its pro-Russian president, Viktor Yanukovych, through mass protests. The protesters’ objective was to establish a pro-European government. This would also help Ukraine win stronger relations and alliances with the EU. In response, Russia seized and annexed the Crimean Peninsula in southern Ukraine in 2014 to ensure a safe distance from foreign territories.


The tensions aggravated to such an extent that more than 14,000 people died fighting in Ukraine’s eastern region Donbas, and at least two million people had been forced to flee their homes. (Russian News Agency, 2021). Such incidents increase volatility in the markets since conflicts disrupt the available resource distribution amongst nations, liquified natural gas (LNG) in this case. Moreover, the people that escape to other countries can cause disturbances in the labour markets by increasing the competition per job opportunity and reducing the overall available employment to labour ratio causing disturbances in respective economies. The Donbas region was one of the main industrial areas in Ukraine. It served as one of the most important industrial hubs of Ukraine and its labour markets were greatly impacted since the unrest movements were situated in Donbas.


Russia accuses Ukraine of failing to honour the 2015 peace deal and criticised the West for not encouraging Ukrainian compliance. Russia sees Ukraine’s aspirations to join NATO as a security concern for Russian security. To ensure territorial safety, it is an obvious decision for Russia to maintain the maximum possible defence on shared borders to maintain sufficient distance from the West countries and NATO allies. This will enforce better shock absorption for Russia in case of an attack from the western neighbouring countries. These frictions have led to the polarisation of nations. Russia may leverage its alliance with Belarus, in case of war against Ukraine. Ukraine on the other hand has the support of the three Baltic Republics, along with the EU, and NATO members.


In 2021 Russia produced a total of more than 510 BCM (billion cubic metres) of gas marking a 10-year high in the country’s gas output. (Reuters, 2021). Currently, Russian gas exports to Europe account for approximately 35% of Europe’s natural gas (Susana Twidale,2021). Most comes through pipelines including Yamal-Europe, which crosses Belarus and Poland to Germany, Nord Stream 1, which goes directly to Germany via the Baltic Sea, and via Ukraine. (Reuters, 2022). Ukraine mainly exports raw materials (iron, steel, mining products, agricultural products), chemical products, and machinery to Europe (European Commission, 2021). Further, Russia exports mineral fuels and oils worth approximately 221 billion U.S. dollars (Statista, 2021) across the world.


Gas Production and Export statistics of Qatar


In case if Russia invades Ukraine, then the supply and distribution of the key export and import resource of the stakeholder countries shall face severe disruption. Especially, since Europe imports a significant amount i.e, 35% of its total store of gas from Russia, seeking aid from other countries shall be inevitable.


Qatar is one of the leading producers of gas in the world. In 2020, natural gas production in Qatar amounted to around 171.3 BCM (Statista, 2021). The country’s exports increased from the previous number of 143 BCM for Dec 2019 to 143.7 BCM in Dec 2020 (CEIC, 2021), which is approximately 84% of Qatar’s total produce. It recently made a series of LNG sales agreements with Asian buyers, including China, Pakistan, and Bangladesh. Asia is Qatar's largest LNG market, accounting for around two-thirds of its 2020 exports (The Arab Gulf State Institute in Washington,11). 75% of Qatar’s gas exports go to North-East Asian countries (the peninsular, 9)



As per the NATO Secretary General Jens Stoltenberg, pre-war-like conditions have been triggered by Russia’s ‘unprovoked military build-up near Ukraine’s borders.’ (Euronews, 2021). Russia has consistently declined any intention of invading Ukraine. However, the act of Russia assembling its forces near the shared borders with Ukraine has become a matter of geopolitical concern. Many countries such as the US, view this as a red flag and are taking active measures to combat the anticipated repercussions. This has increased risks and challenges associated with the resource distribution especially for gas supply in Europe thereby adversely affecting the Energy Markets.


Impact on the Markets


National and International lockdowns due to the outbreak of the coronavirus pandemic in 2020, led to suppressed demand for gas in countries including Europe. As a consequence of this, the export volumes of gas from Russia to Europe were reduced significantly. This arrangement could not be fully reversed when lockdowns were lifted and the demand for the resources rebounded, inevitably leading to high gas prices especially in Europe.

As a response to the scenario where Russia executes its invasion of Ukraine, Germany may keep delaying the transfer of gas through the Nord Stream 2 gas pipeline from Russia. This pipeline is crucial for Germany as it is projected to increase gas imports to Europe. SEB commodities analyst Bjarne Schieldrop anticipates that if the invasion is sanctioned then the gas exports from Russia to Europe West would be significantly impacted due to the compromised state of not only Ukraine but also Belarus. (SEB,2021). This in turn will cause the gas prices to exceed or rise as high as Q4 2021 levels.


Source: Refinitiv Datastream / Karin Strohecker


The gas market is directly related to the oil markets as well. This is therefore inevitable that the Oil markets will also be affected due to curbs or disruptions. Ukraine facilitates Russian oil to Slovakia, Hungary and the Czech Republic. Ukraine's transit of Russian crude for export to the bloc was 11.9 MMT (million metric tonnes) in 2021, down from 12.3 MMT in 2020 (Robert Perkins, 2022). According to JPMorgan’s analysis, it can be inferred that the tensions risked a "material spike" in oil prices and noted that a rise to $150 a barrel would reduce global GDP growth to just 0.9% annualised in the first half of the year, while more than doubling inflation to 7.2%. (Karin Strohecker, 2022).

The US is proactively taking measures to ensure that the EU enforces tighter economic sanctions on Russia in order to discourage the invasion of Ukraine. To achieve this the U.S has negotiated with Qatar to provide gas supply for the EU which is already amidst the crisis for gas as a resource and is facing record prices. This has led to a price increase in the commodity and energy markets especially gas; since Qatar will be required to increase its production of LNG to help with combatting the shortages if the tensions turn into conflicts. This becomes further challenging since Qatar already has understanding with other countries and exports gas to them. This will lead to an increase in prices of the commodity markets especially gas since the demand is likely to overshoot the supply by far. One would argue that since Qatar aims to increase the production of gas to support the EU, the gas prices must decrease or stay under control. However, it is important to consider the increase in capital expenditure that will be required to enhance the pre-existing facilities and/or lay down new infrastructure to achieve the goal of increase in gas production. Thereby, leading to increase in overall gas prices.


Challenges Qatar Will Face providing Gas for Europe




Source: Bloomberg


Qatar extensively participates in the production of liquefied natural gas. We can see in the graph above that the major gas supply for the U.K and Italy comes from Qatar. In fact, the country is one of the world’s largest exporters of liquefied natural gas and seems to be producing the resource at the country’s maximum production capacity. Most of its cargoes are sent to Asia under long-term contracts signed. Qatar signed these contracts before the rise of geopolitical tensions caused by anticipation/conjecture of Russian invasion of Ukraine. Qatar does not see itself in a position to break the contract even if it is at the cost of political rewards of having better overall relations with the US.


However, Qatar is making active efforts to help Europe’s gas supply situation and has spent approximately $30 billion to increase its gas production output capacity by 50% (Simone Foxman, Ben Bartenstein and Jennifer Jacobs, 2022). This could significantly soften the blow to Europe’s impacted liquefied natural gas supply in case if Russia decides to attack and invade Ukraine. The major challenge that surrounds this project is that it will be able to start providing for the additional gas supply yield only by the end of the year 2025. This implies that there will be a significant gas supply crunch in Europe as an outcome of the economic sanctions that the EU will have to enforce on Russia if it proceeds with the invasion of Ukraine in the next four years. In such a scenario Qatar could possibly send most of the LNG to Europe that Qatar Energy sells on the spot market. But the risk associated with this solution is that the volumes provided on these spot markets would be too small to make much difference to combat the issue of gas supply shortage.


The limited production capacity of Qatar can also be noted from the fact that the country managed to ship only six cargoes to northwest Europe last month even when prices there reached records indicating a lucrative market for spot LNG suppliers. This was in fact the region’s biggest market, since mid-December, according to ship-tracking data compiled by Bloomberg. (Simone Foxman, Ben Bartenstein and Jennifer Jacobs, 2022).


“We are maxed out,” Al-Kaabi said at the time, adding that Qatar’s LNG exports were around 80 million tons a year. “We’re producing what we can.” Qatar’s energy minister, Saad Al-Kaabi, expressed his concerns about the production capacity and requirements. He claims that Qatar is unable to pump more gas to help with controlling the rise in the LNG prices due to the economic rebound from the coronavirus pandemic. (Andrew Mills, 2021).

Europe experiences high demands for gas supply. Around 40% of the European households are connected to the gas network and approximately 21.5% of the EU's primary energy consumption is dominated by gas. (ACER, 2022). Further, Europe experiences high gas consumption also due to the presence of energy heavy industries. It is of paramount importance to Europe to have access to gas supply. This urge will cause the EU to further the economic sanctions on Russia.

In conclusion, if the push of the invasion turns into a shove leading to a military operation, then as per the above-mentioned metrics and analysis the financial markets shall face grave disruptions. This is attributed to the fact that the disbalance in the supply-chain of resources in countries (impacted by the conflict) will create pressure on other countries to meet the production and supply demand. This impacted supply chain will negatively influence the foreign exchange markets and the GDPs of stakeholder economies creating a worldwide economic imbalance. A high volatility in gas prices may also pose challenges on the Purchasing Power Parities (PPP) of energy as a consequence of the hit taken by the FX markets.


BIBLIOGRAPHY



Karin Strohecker. (2022) How a Russian-Ukraine conflict might hit global markets. https://www.reuters.com/markets/europe/how-russian-ukraine-conflict-might-hit-global-markets-2022-01-25/


Joesph Nasr and Sarah Marsh. (2022) Analysis: In Ukraine crisis, Germany faces tough decisions over gas pipeline. https://www.reuters.com/world/europe/ukraine-crisis-germany-faces-tough-decisions-over-gas-pipeline-2022-01-20/

Swati Verma. (2022) Oil hits 7-year peak on political risks, supply crunch. https://www.reuters.com/business/energy/oil-rises-headed-sixth-weekly-gain-amid-supply-concerns-2022-01-28/



N. Sonnichsen. (2021) Natural gas production in Qatar from 1989 to 2020. https://www.statista.com/statistics/265336/natural-gas-production-in-qatar/


CIEC. (2021) Qatar Natural Gas: Exports. https://www.ceicdata.com/en/indicator/qatar/natural-gas-exports


Sachin Kumar. (2020) 75% of Qatar’s gas exports go to NE Asian countries https://thepeninsulaqatar.com/article/25/10/2020/75-of-Qatar%E2%80%99s-gas-exports-go-to-NE-Asian-countries [Accessed 25th January 2022]

10)Kate Dourian. (2021) Qatar Petroleum Comes of Age as it Assumes Sole LNG Ownership. https://agsiw.org/qatar-petroleum-comes-of-age-as-it-assumes-sole-lng-ownership/


Nina Chestney. (2022) Factbox: What are Europe's options in case of Russian gas disruption? https://www.reuters.com/business/energy/what-are-europes-options-case-russian-gas-disruption-2022-01-27/




Jane Clinton. (2022) Why did Russia annex Crimea? What happened when Putin invaded in 2014 and how Nato reacted to annexation https://inews.co.uk/news/world/russia-annex-crimea-why-putin-invaded-2014-what-happened-nato-annexation-explained-1424682



Reuters. (2021) Russia's Gazprom sees its 2021 gas output up by 55 bcm. https://www.reuters.com/business/energy/russias-gazprom-sees-its-2021-gas-output-up-by-55-bcm-2021-08-31/


Nina Chestney. (2022) Factbox: What are Europe's options in case of Russian gas disruption?. https://www.reuters.com/business/energy/what-are-europes-options-case-russian-gas-disruption-2022-01-27/


Euronews. (2021) Russian military build-up near Ukraine is 'unprovoked and unexplained': NATO chief.https://www.euronews.com/2021/11/30/russian-military-build-up-near-ukraine-is-unprovoked-and-unexplained-nato-chief


SEB. (2021) OPEC+ meeting: An increase of only 0.4 m bl/d will be close to shocking. https://research.sebgroup.com/macro-ficc/reports/19551


Andrew Mills. (2021) Qatar can't help red hot gas markets as production at maximum. https://www.reuters.com/world/middle-east/qatar-energy-minister-kaabi-unhappy-with-high-gas-prices-2021-10-11/


Russian News Agency. (2021) About 14,000 people killed during conflict in Donbass, top Ukrainian diplomat says. https://tass.com/world/1289095


ACER. (2022) Gas factsheet. https://www.acer.europa.eu/gas-factsheet


Susana Twidale. (2021) Explainer: Why Russian exports hold sway over European and British gas prices. https://www.reuters.com/business/energy/why-russian-exports-hold-sway-over-european-british-gas-prices-2021-11-03/












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1 Comment


Muskan Varshney
Muskan Varshney
Feb 22, 2022

Useful Insight!

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