Is Russian oil benefiting from the war in Iran?

Arild Moe, research professor at the Fridtjof Nansen Institute, joins Serafima Andreeva to unpack what the wars in Ukraine and the Middle East mean for Russia's Arctic energy sector. They discuss whether Russia is really benefiting from higher oil prices, why the "Arctic dream economy" looks increasingly fragile, the future of Yamal LNG as Europe prepares to phase out Russian gas, and the growing role of the shadow fleet. Drawing on his recent book with Anna Korppoo, "Climate, Hydrocarbons and Sanctions in the Russian Arctic", published with Edward Elgar, Arild explains why long-distance energy supplies are looking more vulnerable, how climate concerns figure into Russian planning (briefly, it turns out), and what rebuilding relations with Russia might eventually require.

Book: https://www.e-elgar.com/shop/gbp/climate-hydrocarbons-sanctions-9781035355501.html

Transcript

SPEAKER_01 0:01

How does the war in Iran affect Russia's economy and Russia's market energy sector? Welcome to the Silver Controller. I'm your host. My name is Servi Mandreva, and today with me we have a guest who is an expert on precisely hydrocarbons in Russia, Maril Moo, Professor Maril Mu, who has also recently written a book, this book right here, about Russian climate hydrocarbons and sanctions in the Russian Arctic, together with uh Anna Corpo. Thank you so much for coming. Thank you. Thank you. So, my first question then to you, Maril, is that the United States war against Iran, it has been called a windfall for Russia in many ways, and that they benefit from it. But does this match what you are seeing in the Russian Arctic energy sector?

SPEAKER_00 0:50

Yes, obviously a lot has been said about this implication for Russia. And there is absolutely some truth in it. We have studied developments in the Russian Arctic and the hydrocarbon sector over some uh over longer term, and of course we were not aware of the war when we concluded the book just late last year. But there is a question if some of the issues we bring up in the book are still very much relevant even with the war going on. But let us take us the short term first. Yes, Russia has benefited since sanctions were partially lifted, not fully, but some sanctions against Russian oil were lifted. Russia was able to sell more oil than it would otherwise have had, and that is quite clear. But I think the interesting question is more the longer term uh impact. Of course, we don't know when the war in the Middle East will end, assuming that it will end in the sort of foreseeable future and that oil flows from that region again will start. I think Russia's position does not necessarily look so much better for the longer term. My point is that the Middle East war has once again exposed the the vulnerability of energy supplies to many countries, and especially long distance supplies. And clearly from Russia and LNG from Russia, they are transported over longer distances. I think some countries will reassess their dependence of such long-term deliveries. They are vulnerable. And we have, of course, also in the same period seen problems for a Russian LNG. I'm thinking about the LNG carrier in the Mediterranean that was attacked and is still just left without crew and without any navigation in that area. Clearly a very dangerous situation. And that could mean that some countries are reassessing their future dependence on long-term supplies from Russia, and that means also the Russian Arctic.

SPEAKER_01 3:01

And in this in this uh recent book, you describe the Russian Arctic dream economy as no longer sustainable. What does this mean?

SPEAKER_00 3:12

When we coined that uh phrase, we had in mind that some of the assumptions for development in the Russian Arctic looked not so realistic. They presuppose a degree of uh external interest and investment that is, I think, quite uh dubious. And they clearly are not taking into account the long longer term impact of climate change. Let us take the first issue. First, the Russian Arctic has been developed as an export-oriented business that goes for both oil and liquid natural gas. And the resource base is impressive, but the investment needs are also extremely high. So you need to have foreign investment to get these projects off the ground. And until before the war, this looks like a quite successful strategy, especially with regard to liquefied natural gas. The question now is whether investors, be them foreign, be them Western, if that is possible, even Asian investors, look at the Russian Arctic the same way. It can be argued that the war in Ukraine and the sanctions that were imposed has made a Russian long-term investment look much less certain. The risk that there could be new conflicts, new sanctions is clearly a very big problem for long-term investors. And then over the longer term, the issue is what about the market for these products? And then the climate change, changes in the international markets, could be uh have a break on the the interest in supplies for from the Arctic.

SPEAKER_01 5:00

I mean the European Union is preparing to ban uh Yamal LNG, but still in the first three months of this year, we have seen that they have paid almost three billion euros to Yamal. And and and what do you see? I mean, we have the war in Ukraine, Russia's war against Ukraine, we have the United States and Israel war against Iran happening at the same time. How do you think that these wars will affect, or if they are prolonged significantly, how will they affect the EU and Russia, you could say, uh, relationship?

SPEAKER_00 5:35

It is clear that the Russian LNG has played a quite important role in in Europe uh over the last years. Uh paradoxically, Russian LNG from uh uh Yamal, Yamal LNG has helped sort of the Russian this the European energy uh supply system by by increased uh deliveries. We used to think that the liquified national gas market globally was evolving so fast that Russian LNG would not any longer be so important in the years ahead. And in European energy planning, LNG from various sources are supposed to take over the niche that uh that Russia has had. And that is still, I think, true. But again, with the reference to what has happened in the Middle East, also in Europe, I believe there will be a reassessment of the role of LNG and the vulnerability of LNG supplements. So you could say that what has happened in the Middle East is giving a premium to gas supplied via pipeline. However, the availability of pipeline gas to Europe is has its limitations. Norway, you can do it from North Africa. But the need to develop domestic energy sources, I think is a major long term effect of what is going on in the Middle East. And that is not only the case in Europe but also elsewhere. Unfortunately, it means at least in the short term, coal in many countries. Over the longer term it could give an impetus to also to more renewables, domestically sourced renewables. In the coming year and next year, when Russian gas is supposed to be f phased out completely, Europe will have a constrained energy supply situation.

SPEAKER_01 7:35

I mean, and if we also go to something that also is affecting both Europe and is coming from Russia or is affecting Russia as well, is uh the state, the current state of the shadow fleet? And things related to that. I mean, you mentioned how the LNG uh carrier Arctic uh metagas uh destroy was destroyed in the Mediterranean in Malach. And what would you say that the current state of these vessels tells us about vulnerabilities? Um, can this be tied to the Arctic in any way, tied to these future projections?

SPEAKER_00 8:09

Yes, the the shadow fleet, which is a quite loose concept. It's not one fleet, it's ships belonging to various owners, not Russian owners, not at least not directly, but serving Russian uh terminals, bringing Russian oil to the markets that uh accept the Russian oil. It has been an exploding business. These these tankers sail and bring oil without the limitations of the price ceiling that has been imposed by Western countries on Russian oil exports. As long as the sanctions are intact, I think that the shadow fleet will continue to play a role. Although there are many measures taken to try to limit the operation of the shadow fleet tankers. The big concern with them is environmental, that they are old, not necessarily super old, but old, and are sailing in uh in ways that are increasing the danger of collisions, turning off their AIS senders, for instance. In addition to the economic aspect of their operations, that they are hiding their identities, changing flag and names and so on, and of course bringing uh Russian oil to markets outside the sanctions. So it has been a quite extraordinary development with these ships now occupying a quite big share of international tanker fleets, and I don't see them disappearing.

SPEAKER_01 9:36

You mentioned the environmental aspect. When you talked about the European Union, you talked about climate. And is there one external factor we cannot avoid in any way, which is more predictable than many wars per se, which you also talk about here? It is the climate crisis and the environmental, you could say, pending disasters that are just waiting to happen, also hitting the Arctic in way harder than many other regions in the world. So when you were writing this book together with Hanna, when you were going through the energy aspect of it, how did you weigh these concerns and how do you foresee that they are affecting the future economy essentially, the future energy sector in Russia?

SPEAKER_00 10:22

We try to understand how this looks from the Russian side, and to what extent the climate concerns play a role in development of the Russian Arctic. To put it briefly, I think we can say that they play a minor role. There is a lot of climate science in Russia, and the climate change in the Arctic is well documented. But the general conclusion is that the changes, particularly the thawing permafrost, can be managed. So that doesn't really change the development plans to any significant extent. I would say climate change is also about the global market changes and how hydrocarbons will be perceived and paid for in the future. And the Russian position is that yes, there is a change going on. There is a transition away from hydrocarbons, slow one. But Russia will be able but there will be a need for hydrocarbons, and and Russia will supply those uh hydrocarbons. So the Russian climate policy is very much about finding or keeping a keeping a room for Russian hydrocarbon uh exports. They don't deny the climate uh change, but they are arguing that they are in the best position to deliver the energy that will be needed.

SPEAKER_01 11:41

But then can I uh ask you a little bit more of an explorative question than based on this thorough research that you have done together on climate in Russia, what keeps you up at night?

SPEAKER_00 11:54

Well, the climate uh crisis is global and it is something that is definitely going to change our world in the coming decades. But exactly how fast and and how is is difficult and it's not happening over one night, it's happening uh more slowly, but still without doubt, it will have enormous uh effect. In the short term, of course, the concern is what is happening inside Russia, combination of economic decline and uh military aggression is is is very very troublesome.

SPEAKER_01 12:24

And if you could provide some form of policy recommendation or any action suggestions based on this fundamental research, what would you say?

SPEAKER_00 12:36

That is a hard one. Depends on whom you are really directing the the policy advis to. In the cas of Europe, I see that kontinud dependens on a kontin development of energy sources that are domesticly sort of at least sorst within within the larger European area. It's going to continue to be a very very high priority. That being said, at some point there will be a need to rebuild the relations with Russia. It will be difficult, it will take time. And I think thinking about that when the war in Ukraine at some time at some point ends will be a big challenge. Where Russia cannot be taken off the map. There will have to be some sort of contact and cooperation. And doing that in the way that does not further aggravate the situation, the political situation in Russia will be a very big challenge.

SPEAKER_01 13:36

Thank you so much, Ariel. Let's hope that the challenges will be adequately addressed. At least I know that many of them are addressed in the book. Thank you so much for coming here and thank you for listening.