Energy and the War in Ukraine

An expert in energy geopolitics discusses the war in Ukraine and its implications for European energy security and decarbonization. The episode was recorded in front of a live audience.

Anna Mikulska, lecturer in Russian and East European Studies at the University of Pennsylvania and an expert in European energy geopolitics, discusses the history of escalating energy tensions between Russia, Ukraine and the EU prior to Russia’s invasion of Ukraine on February 24. In the episode, which was recorded in front of a live audience at UPenn’s Kleinman Center for Energy Policy, Mikulska explores the EU’s dependency on Russian natural gas and options for alternative sources of energy supply including LNG. She also considers the prospects for an extended period of high energy prices going forward, and how the war may alter Europe’s path toward its aggressive decarbonization targets for the end of this decade.

Andy Stone: Welcome to the Energy Policy Now Podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. This is a special episode of Energy Policy Now, which was recorded in front of a live audience in the forum of the Kleinman Center during Energy Week here on the Penn campus. The topic is energy and the war in Ukraine. Today’s guest is Anna Mikulska. Anna is a lecturer in Russian and Eastern European studies here at the University of Pennsylvania, and she is also a nonresident fellow in energy studies at the Baker Institute at Rice University. She is also an expert in European energy geopolitics. The following is our live conversation. It was recorded on Thursday, April the 7th.

Welcome to the Kleinman Center and welcome to Energy Week here at Penn. As well as welcome to this live recording of the Energy Policy Now podcast. I’m Andy Stone, host of the podcast. I’m here with our guest, Anna Mikulska, who is a lecturer in Russian and East European studies here at Penn, and she is also our resident expert on global geopolitics of energy. So, looking forward to this conversation today. One thing I’d like to say, this conversation today is going to be technical. It’s going to be somewhat political obviously. But I want to acknowledge the human tragedy that’s going on right now in Ukraine, and just say that everyone’s hearts is out for the people of Ukraine. We are thinking of you right now.

So, to get started, everyone in this room probably knows that Russia is a key player in the global energy system, key supplier of fossil fuels, natural gas, primarily as well as a major supplier of oil and of coal. It is also a key supplier, the key external supplier to Europe, the European Union. So, with that said, I think to get started with this conversation today, I’d like to create a baseline.

I’d like to take a step back about six weeks and look at what the European energy environment looked like at the point before the war began before February 24th. What was the baseline at that point? And to me, it seems like they were kind of two themes running through the European energy system at that time. One is extremely high and unprecedented energy prices partly tied to the recovery from the Covid pandemic, number one. Number two is an intensified and accelerated focus on decarbonization that’s rooted in the European Green Deal, Europe’s goals of reducing emissions by over half by the year 2030. And I think that these major themes also created potential vulnerabilities for the European Union as we went into the conflict about six weeks ago. To start with you, Anna, I want to ask if you would give us that level set. Where was the European energy system at that point and what vulnerabilities might have been created? Again, it’s great to have you here.

Anna Mikulska: Well, thank you so much for having me. Although the occasion of the topic is actually quite disturbing because as we speak, as you’ve mentioned, people are dying in Ukraine and escaping the country. But before all that happened really, 2021 had been a very interesting year for European energy, particularly for a European natural gas and electricity, because the prices have rose to astronomical levels, some that haven’t been ever seen. And that goes both for gas and for electricity, coal as well, since coal is often exchangeable with gas, and oil also. And this is all tied to their post-Covid recovery. First in Asia and later in Europe as well. These regions started competing for sources of energy. At the same time, there have been some confluence of factors that really created additional difficulties. So, the wind in the North Sea that would supply quite a lot of European electricity was a record low. Literally within the whole entire history recorded, in that point, it was the lowest levels of wind.

And that meant that during the summer of 2021, you actually ended having to use more gas that otherwise could have been put for the winter heating season into storage. You had some outages across the world of energy infrastructure, and there was actually also an outage within the Russian system. Both Europe and Russia were hit by a very cold winter, so the winter 2021 was cold, which meant more gas was used to heat houses for a longer period of time. It was actually longer. It went all into April. Again, when you were supposed to be already filling the storage for the next winter, there was still withdrawing from the storage to support both heating as well as electricity generation because of low winds. Also, low hydro. Turkey has experienced drought, so it ended up using more other energy including gas to support its electricity.

All the way back to Brazil. Brazil was also experiencing drought, and instead of using their hydro, they ended up bringing more LNG, mostly from the US. So, what you end up having is you end up having actually shortage of LNG across the markets. Asia preparing itself for winter, really not giving up to anybody in terms of price.  Europe needing gas and LNG for its own, to support its own economies and recover from Covid at the same time. That goes now to Gazprom. Gazprom hasn’t been willing. It wasn’t willing. It hasn’t been willing really to support European recovery or the additional need that Europe had beyond what it was in Gazprom’s contracts. So, what we have heard from Gazprom again and again was, look, we are reliable suppliers. We have sent you the gas that we were contracted, and you’ve got all of that gas. We are not permitted to send more. We don’t have to sell on spot additional gas. And we really need to fill up our storage. Maybe November 1st we might be able to sell more, but that’s just maybe.

At that moment, storage in Europe was at much lower levels that normally in the 70s, 75 percent. Whereas, normally, it would be that 85/95 percent. So that average would be very much, much, lower.  Europe started becoming quite anxious because if a cold winter would come in with low influx of gas from Russia as Europe was seeing, it could create in parts of Europe, at least, issues like the fact that people could not heat their houses. So, the prices went off of the roof and of 2021 storage was still low. Now, the interesting part, and that goes now to Gazprom and storage. So, Gazprom kept talking about how a reliable partner it is and how it provides for all the gas that it contracted. Pointing to the fact, look, that’s why you should have a long contract with us. You stopped those long contracts but look what it got you. Not only this, but you should also make sure that the new pipeline that we just built from Washington starts working, even though maybe it doesn’t comply with your European legislation and regulation. That was kind of August.

All at the same time, Gazprom Instead of sending the gas, the contracted gas from Russia, Gazprom was actually withdrawing from storage in Europe that it controlled. So, literally, as Gazprom was talking about how reliable provider of gas the company is, it was creating that situation of lower levels of storage of gas in Europe and bumping up the price.

Stone: You think that was deliberate from the Kremlin when that was happening? Was that culminated?

Mikulska: I think it was definitely something that was thought through. It was not necessarily a long-term plan that was developed a year or two later. It almost fell into Putin’s lap. The whole situation is a confluence of factors in the natural gas markets that Putin was very eager to use and has used it. And here it’s important to say I kind of used gas from Russia and Putin interchangeably because it is interchangeable and it’s something that Gazprom has kept saying we are a commercial company. But truly, the way they are organized is really that they have grown out of the Soviet Gas Ministry, and that’s how they still are being organized. Just think about very recent announcement by Putin that gas needs to be paid with rubles. It wasn’t the CEO of Gazprom that announced that, it was the political part of the establishment. So, again, very much like a ministry rather than a company.

Stone: Well, I want to ask you about that, and we’ll jump ahead of there a little bit about requiring payment in rubles. Is Russia really in a position to make such a demand? I mean, Russia, there’s an interplay. Right here is an interplay. Europe needs Russian energy. Russia needs income from the sale of energy to Europe. Can Russia really do that and get away with it?

Mikulska: They’ve tried, and they were met with a resounding no.

Stone: I think Hungary said that they would do it. 

Mikulska: Yeah. Well, Hungary is kind of committed to Russia unfortunately on many levels. It’s actually not gas, they are building actually Russian sponsored nuclear power plant. So, there is a lot going on with Hungary, but really there was a resounding no. We’re not going to pay with rubles.  Putin, I think at this moment, he might have already expected that this is what’s going to happen. But he didn’t expect that the world and particularly the Western alliance will unite against him the way we’ve had, really. So, but that did not prevent the fact that the prices of gas jumped up. So, it’s just kind of the disturbance in the market that this created. It probably was worth something to Putin had he been successful in bringing ruble as the currency for Gazprom?

That could actually be a really big deal because it would go around the sanctions that have been imposed on the central bank since the ruble is not very popular currency. The companies would have to go buy rubles from central bank that now was sanctioned and then that would circumvent the sanctions. But obviously, that did not happen. And it seems that now the situation is that the companies have to have two accounts, one in euros, one in rubble in Gazprom bank, which was not sanctioned, and they pay with euros. Those euros are then later converted through the other accounts by Gazprom bank into rubles, so they do not actually have to deal with the central bank.

Stone: Yeah, I’d like to take a step back for just a moment and put some quantification to how dependent Europe is, the EU is on Russian energy. So, I think 40 percent of European gas comes from Russia. I think 58 percent in Germany. The thing that really stands out about this is, I guess, looking into this whole conflict as it was building up, there were maybe two camps. There were the optimists and there was the pessimists. And the optimists who said, “You know what, we are interconnected over this energy with Europe, Russia, and that’s going to prevent any conflict from happening. We’re both too important to each other.” On the other side, you have the pessimist saying, “Look, Russia’s going to go ahead and use its energy as a weapon.” And it has done that in the past, right? Shut off Ukraine’s energy supply in the middle of the winter in 2006.

Mikulska: Actually, the end of the winter. End of the winter is much worse than the middle of the winter because that’s when you are low on storage.

Stone: Low on storage to start out with, right? So, all of this is already in place, and what hits me about it is how poorly prepared Europe seems to have been for what happened. Maybe Germany for most of all. I want to get your thoughts on that.

Mikulska: Yeah. So, you are right. You’re talking about the pessimists and optimists. I talk about the Western Europe versus Central Eastern Europe and Eastern Europe in general because that’s where the bifurcation really occurred. Western Europe has dealt with Russian gas for a very long time. The first Russian gas came in 1969 to Austria, based on several set of deals. In 1970 commercial gas from Russia came to Germany in the midst of Cold War, really. It was really based on the need, truly the need of both. Europe needed gas and it saw gas as the more geopolitically secure option compared to oil. I think 1973, the OPEC embargo on oil, right? So why would we use oil to heat our houses or produce electricity? It’s not secure geopolitically. OPEC is dealing with it. Let’s buy more secure gas in Russia. Well, it worked for them for a while, right? Because we really did not have any issues with Russian gas flowing to Western Europe throughout the entire Cold War.

Germany, in particular, has expanded and really built a lot of utility ties with Russia. So, Gazprom has had joint ventures with German companies.  Russian companies were present within the German market. As I’ve mentioned, Gazprom still until very recently which there was an overtake by some of the storage, but it controlled a lot of storage in Germany. Approximately one third of it, which is a lot.  In fact, some of the companies had common training sessions with Gazprom’s. So, it was not only on the political level which there has been a bit of connection there. Talking about Gerhard Schroeder and SPD which is currently actually in power, which has significant ties with the Russian political sphere and Russian energy sphere. But this developed, and nothing happened until after Cold War. Because when you think about it, what was supposed to happen? Ukraine was part of the Soviet Union. They did not have any say in how the gas goes and where it goes and how much they paid and so on.

Poland was part of the Soviet sphere of influence. So, they also were sitting still. But now that those countries have got their own independence, things changed, and those countries started demanding things like payments. They started having to deal with Russia, but also, they had to make sure that their sovereign against Russia. And Ukraine is especially the big example because Russia always wanted to have influence in Ukraine, and gas provided this influence in many ways. For Ukraine, currently, Moldova very similar situation where Russia would provide the gas to Ukraine at a very low value, sometimes like one third or even less than what everybody else was paying in. Even then in Poland, in Germany, in Italy and so on. It would also allow Ukraine to accumulate debt. So that’s another kind of carrot that Russia was giving, right?

Stone: Wasn’t that the source cut off in 2006?

Mikulska: So that’s what happened. And whenever Ukraine wanted to do something that Russia wouldn’t like, Gazprom would say, “Oh, we are a really commercial company. We need that gas to be paid at the market level.” Obviously, it was impossible for Ukraine to pay at the market level and in an instant because they were not used to, or they were not prepared for those prices. We want the debts to be paid off. It’s our money, right? Once of a sudden. And it has become an issue. That’s when Russia decided, let’s go ahead and decrease the pressure in the pipeline. So, the cut off is a special way of saying we will still send gas to Germany, Poland or wherever else is going, but we decrease the pressure of gas in the pipeline. So, there’s going to be not enough gas for Ukraine to take. And that was 2005, 2006, 2008, 2009 winters. What happened though is, Ukraine would siphon some of that gas that was not going there, arguing that this is needed for maintenance. But this contributed to a shortage of gas in Europe, and in some countries like Bulgaria, actually, people did not have enough gas to heat their houses during those winters.

So that was an issue that led Europe to rethink their energy security. And that’s where the bifurcation in thinking was. The Western Europe, especially Germany, they kept saying — with Gazprom really behind it also a similar idea, Ukraine is not a reliable transit territory. Well, kind of wasn’t because they kept having issues. But whose fault is it?

Stone: Who engineered the situation?

Mikulska: This situation was engineered as such that whether or not there would be a problem, that transit, right? And at the time when it was most convenient for Russia, obviously. So, they were saying, “Well, you know what? We need another route out of supply. We need diversity of routes of supply that will encourage energy security.” Whereas, this Eastern Europe, central and Eastern Europe, particularly Poland, Lithuania and other countries as well, Czech, Slovakia to some extent, they were saying, “Look, you cannot just have Russia supply your energy. You have to get some other sources of energy.” So, it’s not only the diversification of Russia supply, but also diversification of suppliers. And those regions actually have pushed for it. If you ever look at the map of pipelines in Europe, look at the 2010/2014 timing and you will see how different they are when they go through from Russia through Eastern Europe, we’ll see those parallel lines they’re not connected to each other. They just cross those territories. They are there to support the western part and part of the gas ends up in those countries that are being transit territories like Ukraine, Poland, Belarus, Czech and so on.

And then as soon as those pipelines hit Western Europe, Germany, they become a net almost like a web of pipelines. They’re being interconnected. And there are more connections to more suppliers. So Western Europe has always had more suppliers. They had Iberian, Norway and Iberian Peninsula has a huge amount of LNG capacity. Unfortunately, not very well connected to the rest of the continent. So that’s one big issue. But in central eastern Europe, those countries knew what’s going on. They haven’t been dependent on Russia for a very long time, and they know what it could mean. So, they were saying, “Well, you really need to think about this. You cannot just put all your eggs in one basket. You cannot really rely on Russia because Russia is great with fussing what looks like commercial actions at the time when is the most convenient.” And so, when you actually consider their background information, those commercial actions are not so commercial anymore. So, you cut off gas at the end of cold winter or you ask for money at the end of cold winter knowing that somebody cannot pay you.

Stone: So, the countries in Eastern Europe are aware of this. Obviously, Russia was setting this up so they could selectively cut off supply to any of these countries, but then the network would still make sure that everybody in Europe was served — in Western Europe essentially?

Mikulska: Western Europe had more supply from others. And still it was much easier to balance the market when there is interconnections. But that’s why central and eastern Europe has really pushed for more interconnections. New terminals were established in 2014 [Inaudible] in Lithuania, 2015 in Poland — I think 2015 in Poland. LNG terminal just started working last year in Croatia and more interconnections, including interconnection that is either about to start working or already has in between Poland and Lithuania, which is actually very important for what was recent announced. So, recently, if anybody follows, Lithuania announced that they will not bring any more Russian gas. Hundred percent, they will be able to live with other guests. This is because they do have their own regasification terminal for LNG they can bring from somewhere else.

That terminal capacity is large enough to actually support all three Baltic republics. All three vertical publics have worked over the last several years to decrease their reliance on natural gas. In addition, this new interconnection connects Poland and Lithuania, both of those terminals. So, this is the first land interconnection between Baltic Republic and Europe ever in terms of gas. And now there is a better way in which they can balance the market. They also connected to Finland, but Finland’s very small user of natural gas.

Stone: What’s interesting looking at Western Europe, Germany has had some LNG regasification projects on the books for a while now. They’ve noted that they’re going to go for it, I think, with two, potentially four of those. The EU is now saying that it’s going to cut its dependance significantly, I think, by two thirds on Russian gas within the next couple of years. I think the question before that, and it’s just kind of a hypothetical that I don’t want to dwell on it too long. But is there a likelihood or a chance that Russia at this point would just cut off the supply?

Mikulska: I mean, you cannot exclude any type of action that Russia couldn’t do. I mean, what Russia is doing in Ukraine is unimaginable. They’re still doing this. So, I think gas is much less of an issue really than killing civilians and destroying cities. Although, for Russia, gas means money, right? Gas, oil, coal, all this Russia is exporting to Europe and other countries, of course. But Europe is their main market, and this brings money. So, this can finance whatever Russia is doing in Ukraine and beyond. And this is kind of that moral struggle that the leaders, the European leaders and generally the Western leaders have with what to do. Now, we’ve heard that call might be that first kind of resource that Europe is willing to give up. From Russia, the next would-be oil and gas. I’d argue that oil probably easier to replace. It always will be expensive. But gas, it’s a little bit more difficult because — not impossible, though, because it needs infrastructure. So, oil, you put it on a tanker, you deliver it and put it through the pipelines, and it flows.

With natural gas, it’s either the pipeline or these are interconnections that Europe has with Russia. The other one is Azeri gas, but that’s not as much as there is. There’s also, of course, Algeria and then Norway. These already exist. But what’s with the additional capacity? It’s the LNG that could come. We know that there is going to be competition with Asia for LNG. That’s one. I have looked with my colleagues at the Baker Institute at the issue, and what we really see is there even might be enough gas to send to Europe. But is there going to be enough infrastructure in Europe to actually deliver this gas where it needs to be delivered, right? Because as I’ve mentioned, for example, Iberian Peninsula. So, Europe has approximately 200 bcm of gas, a capacity of LNG capacity. To compare, this is approximately what Russia sends to Europe every year. So, you know on the surface of this, one two one. Win-win. Well, no. 130 bcm of that gas of the LNG capacity intake is in Iberian Peninsula, which is very weakly connected to the rest of the of the continent.

That means you cannot really send all of that where it needs to be sent. In addition, Germany, as you noted, was the biggest customer of Russia in Europe. It would bring at least 90 sometimes bcm of gas from — and actually from 55 through the pipeline that’s going underneath the Baltic Sea, it could have gone up to 110. But now potentially nothing if Russia would cut off that access. And there is no LNG terminals there yet. The three that were planned for years, and there would never kind of got enough approval was [Inaudible]. All of them are now under consideration, but they won’t be brought online until years from now. I think [Inaudible] is in 2026. It’s not tomorrow or two months from now. So, Europe is really looking at the issue of making of ability to balance that market and provide secure supply of energy at the same time.

So, one way which, again, my colleagues actually came up with, we’ve been thinking about is the floating LNG terminals, right? So, regasification units, which could be extremely helpful. You can actually install them within months, so they could be ready for next winter. And if so, approximately eight to 10 would be available and could provide between 45 to 80 bcm of gas that could be stationed where, for example, Nord Stream two was supposed to be entering and reclassified into those pipelines. Other ports are in actually Holland in gasification units and pipelines that exist by the Groningen field that’s being relinquished.

Stone: Well, energy security is really the big issue here, right?

Mikulska: Yeah.

Stone: And as you just pointed out, time is of the essence. We’re coming out of the cold period this year, so there’s going to be less gas demand for home heating. Once you go into next fall can you get those reserves, the storage filled up? And if you’re building terrestrial infrastructure, those projects take a long time. If you can talk about the floating LNG, that’s quicker. And I think there was a very interesting little nugget of data I wanted to bring up. Data that was in the F.T. Martin Wolf, was the chief economics commentator, wrote about this recently, and he said that if you took away all Russian gas and tried to replace it right now, you’d still be 30 percent short for the continent. That’s what he said 30 percent short in total supply. If you were able to get supply from Qatar to the United States, that was kind of the number that I saw. And he said that that 30 percent decrease would, in the case of Germany, lead to at least two percent decline in GDP. An extra thousand dollars a year in energy prices. And you had mentioned in earlier conversation we had your mother, who lives in Poland, has experienced this energy price situation firsthand, right?

Mikulska: Yeah. I mean, the prices of gas are extremely high, as you know, $1000 a month gas bill. So, gas bills that people have to pay and that’s huge. When we looked at the at the issue of, well, could we replace Russian gas in Europe in the paper that I wrote with my colleagues that we actually thought there is a way of replacing it, probably some rationing would have to go in. But you could still bring more gas from Algeria. You could start actually getting more gas from Groningen field instead of kind of, phasing it out, you could bring actually more. And actually, that government has supported it, at least in short term. You actually could also run the Regus facilities at higher than capacity level, and they have been run at higher than capacity level. We actually had the data and we looked that looked at the data. So, there is looking at just capacity is often not enough in many ways. So, for this winter, it would be even, it was kind of doable. The problem with next winter is that you need to put a lot of gas into the storage, and you will end up with having to compete for LNG with Asia, which is usually highly motivated to fill up its storage because countries like Japan and Korea have no other way but bringing LNG to fill up the store. They do not have connections via pipelines.

Stone: So, are we entering a period then of extended elevated natural gas prices because of the global competition?

Mikulska: So globally, yes, in U.S., it’s going to be not as big of a deal. So approximately only 10 percent of US production is exported, and not much more will be because of constraints on infrastructure. There’s just no there’s currently there is whatever LNG infrastructure exists, there is nothing new that’s going to happen until 2023, 2024, mostly. So, we kind of, I think the EIA says we can U.S. will be able to send out 13.9 MCM per day maximum till end of 2022. And that’s it. So, the gas prices cannot go more up because there’s just going to be a production that’s going to be there and we cannot just send more gas. What could increase prices in the U.S. for gas is the regional lack of pipeline capacity. And if you end up with cold winter in northeast well you will end up with high prices because there’s going to be not enough pipeline to bring gas. And then you might end up actually have to compete for LNG with Europe and Asia because you will need to bring LNG to the Boston Harbor. And that’s when the prices will go up. But it’s not because of the global competition between Europe and Asia. And I guess that’s where we will see potentially some work that’s going to be done through the American administration and through the Western allies of trying to manage the scale of the issue. Is there going to be something like an agreement where Asian countries will be willing to forego some of its purchases or to send some of cargoes that otherwise would have gone there to Europe to avoid the situation of price war, but also avoid the situation when Europe and its economy is failing completely. Although, I mean, European economy is going to be hit. It has been hit already. There is already a lot of industry and commercial activity that’s not happening because prices of gas are so expensive and some of the gas was being curtailed for the industry, just to make sure that it’s going to be enough of gas for heating the houses during winter.

Stone: I’d like to go ahead and shift the conversation for a moment here to the issue of decarbonization. So, this is all a major distraction for Europe. It is a continent generally is investing, it sounds like, or considering investing in new gas infrastructure, regasification infrastructure in the case of Germany. And I think one of the questions that comes to mind is probably the two-part question is one what is the impact on the trajectory towards Europe’s 2030 goal and beyond going to be on this? And number two, if we are seeing and this is a great irony here. So, the continent is leading on decarbonization, if it’s if its targets at the same time now it’s forced to invest in fossil fuel infrastructure. Does that lead us to a point where we’re going to have lock in? Based around the infrastructure and two, and this is kind of a question the race as well is what is the response of, let’s say, the gas industry going to be in investing in a continent that is set on getting out of fossil fuels with the thought that this may be temporary? We’re going to end up with stranded assets because they want to get out of gas eventually anyways.

Mikulska: So, yeah, it’s kind of really complicated. Yeah, it is complicated. But one way actually to address those issues that are actually those floating LNG units because they can be brought for a short period of time, and they can be taken away after several years without much of an investment needed. It’s like 50 to 100 million dollars investment to set them up versus hundreds and hundreds of millions of building new LNG terminals that will actually would be grandfathered in. But there’s also other things like we keep talking about climate action as if it was 100 percent renewable energy, but climate action would be to decarbonize. And you can decarbonize the thing you can decarbonize in many other ways as well. And I think what will happen is that Europe might need to think of how to decarbonize while using fossil fuels because it’s not so easy to get rid of that. If anything, that if anything, we were shown by the pandemic, by the high prices of energy and by the current invasion is that it’s not easy to get rid of fossil fuels in an instant. And even in a developed world which already has much more renewables than the developing world, for example. And what I feel is that this experience, it will make it easier for the developed world to level with the developing world because the climate action will meet energy security dimension which the developing world has been really talking about throughout the entire, throughout the last decade. Truly, Glasgow has been kind of one of the best examples where we’ve seen the developer saying, well, you know, we might be using coal because it’s a secure source of energy and our main goal is to develop. And we will need a secure, easy way to access cheap energy, and it often might be coal.

Stone: So, you’re saying the interests in the decarbonization pathway in Europe and the rest of the world might be more aligned now?

Mikulska: I think so. I think there might be actually more. And I think I mean it in a very positive way because if we look at all options for decarbonization, we might actually come up with something that otherwise we might have not even seen. Instead of looking at a tunnel vision, we are looking at a whole set of different solutions, which different countries might apply differently. So, we know, and we knew that the developing world Asia in particular, will be using coal into the 2050s. And this is where the additional demand for energy will be coming from. This is where the population growth is going to be coming from. This is where economic growth is going to be coming from and that’s what additional demand for energy is going to come from. It’s not going to come from Europe, it’s not going to come from the US. So, if this additional energy that’s being used there it’s actually developed from dirty fossil fuel use, well, that’s not going to do any good to any of us. It doesn’t matter how hard and how much we decarbonize. It’s all diffused. And that’s something that now I think Europe will have to think about because they will need to provide energy, period and energy, but also cheap energy for their population. Cheap air.

Their population can take quite high prices, but maybe not as high as they currently are, and they might be. So how can we adjust it? We already saw five days into that invasion, five days into the invasion Germany, known for its energy vendor reform, switching to renewable, closing nuclear or getting rid of coal. By this in an invasion day they actually announced, Olaf Scholz announced that we will in order to provide energy security for our population, we will use all possible energy sources, including nuclear and coal. You change within five days out of the Russian invasion. So, if the countries that have money, like the developed countries, EU, US, Australia, Canada, all the countries start thinking about, well, how can we help the development? And how can we decarbonize in the best way possible? And if they actually bring in money into this, bring in more research into this something that the developing world might not have been able to, could not afford. Then we might actually come up with a lot of good technology that will not only help Europe decarbonize, US decarbonize, but also will help decarbonize the developing world in a way that will also support the economic development there.

Stone: What I hear here is that this war is causing potentially a major rethink in Europe, potentially on what resources are going to be available for its decarbonization path. And I’m also thinking I’m hearing here that if more thought, effort needs to be put into cleaning up fossil fuels, potentially if that investment is made in Europe, that investment could also benefit other places. Obviously, the same issues exist as always. None of these technologies are scalable. The investments are going to be huge, and we need them now. Not some point down the future, but that’s very, very interesting. I want to jump for a moment somewhere completely off and I want to go to Russia. What this all means for Russia. Okay is Russia. Essentially, and I think it is, but maybe this is a rhetorical question, creating demand destruction for its main exports, its energy exports. And if so. What does this mean for its geopolitical leverage in 2, 5 10 years?

Mikulska: When in 1973, when the embargo hit that it was actually demand destruction for oil. I mean, including in Europe, gas became the more important part houses and produced electricity. And that’s 2014. There was already after Russia invaded Ukraine and took over in Crimea. There was already some part of demand destruction there. And this is even more significant. I really cannot imagine the situation in any short to medium term, where Europe would be fine with kind of bringing in more Russian energy than it needs, or it has to have. Instead, it will be scaling it down. And what it means is Russia will need to look somewhere else. We already know that a lot of companies, Western companies backed out from Russia energy companies. BP was the first one that kind of took out its 20 percent stake in Rosneft, the Russian state oil company, and said, well, we’re kind of forfeiting it. Just left it on the table, Shell and Exxon have announced that they will back out from the Zak Salih one and two. They just need time, particularly Exxon, because they actually are operating the LNG terminals. Yes, they are backing out, but they need time because also its environment is actually very environmentally susceptible. So, the backing out. It’s not an easy task also bringing out all the crew and all this type of thing, but we know that companies are backing out a lot of companies backed out already in 2014.

But what we’ve seen is that mostly in financing, we’ve seen this that Chinese capital took over. And that’s what kind of the usual reaction to what’s happening now, and kind of consensus is that we will see a lot of investment coming in from China in particular, potentially some from India, maybe other Asian countries as well. But China is going to be the one that’s going to kind of really look into Russian energy. And Russia has been pivoting to Asia, especially China, for a long time now, at least 15 years. Russia wanted a direct pipeline to China to send gas. It actually, China agreed to it after sanctions on Russia were imposed in 2014. But it wasn’t the route that Russia wanted. It was a route that it’s now known as Power of Siberia one, and it actually takes gas from fields that are completely landlocked and ongoing to, going to China. So, it’s really kind of just a one-way delivery to China. There is nobody else that can be using those fields because there’s just one pipeline that was built. But Russia really wanted. Russia wanted a pipeline that they call Power of Siberia two. Now that would go from the same fields that Europe is being fed with. The gas Europe is being fed and China wasn’t eager of that because I mean, it would give Russia the arbitrage opportunity and potentially geopolitical benefits now that Europe is in most likely going to be backing out and not meeting those fields, we probably will see China more interested in this pipeline.

Stone: I have to say China has to be watching what’s going on. And they’re saying, Russia, not a very reliable energy trade partner or whatever it may be. We don’t want to get too hooked on their energy. And looking at the statistics, I mean, Russia provides a very small percentage of the gas that goes to China at this point. They’re not big.

Mikulska: They tend to.

Stone: It’s nothing like the influence or the connection they have with Europe. And it may never be.

Mikulska: It may never be, but China’s energy policy has been on diversification of energy sources, both in terms of countries where they bring it from, but also type of sources. So, China is using LNG, is using piped gas, is using coal, developing coal is using electricity, of course, borrowed from renewable power as well. So, all of the above, and that’s kind of the way of making sure that they are not reliant on one statistic, but they might be actually quite eager of using Russia because Russia is in the position. It’s not in a position of strength here right now, and it won’t be. So, I’ve heard some of my colleagues saying, well, I’m actually concerned about Russia becoming a vassal country to China because literally this is going to be the one country that can take it LNG and that can bring in some capital. And this is something that we all should be actually concerned because before Russia has invaded Ukraine, our utmost concern was not Russia was China. If China is propped up with a cheap energy coming from a country that’s not necessarily that friendly but will do whatever it needs to do because it has no other choice, well then it is becoming an issue. And what else Russia can add to Chinese growth in power in terms of geopolitics? Is also a question.

Stone: It’s a completely different conversation we could be having here. But it seems to me a very weakened Russian state is probably not the greatest thing for security, from anybody’s perspective.

Mikulska: That’s right.

Stone: Anna, thanks for your insights. Let me ask you one more question. It’s kind of a crystal ball question. What do you think Europe’s energy system is going to look like in half a decade or a decade from now? How is it going to have diverged from where we thought it was going two months ago?

Mikulska: I don’t think anybody knows that. That probably depends on the next great invention. Are we going to invent the battery? Two months from now that can actually collect whatever energy you need and use renewables and just forget about fossil fuels or whatever else? Or are we going to figure out direct capture from air of CO2? And then don’t worry, how much fossil fuels are we using at all. Because then it doesn’t matter if we can do that. So, the next invention can completely change on how our energy transition is going to proceed. I mean, think about the U.S., which was a major LNG importer, setting up as major gas and LNG importer and within several years and shale revolution. And now it is the largest LNG exporter and one of the biggest exporters of oil and gas.

Stone: As you said a few moments ago, it’s going to be a lot more investment potentially and a lot of different options because all the options need be on the table it sounds like.

Mikulska: I’d hope so. I definitely hope so.

Stone: Anna, thanks very much for talking.

Mikulska: Thank you so much. Thank you for having me. Thank you.

Stone: Thank you all for coming.

Thanks for listening to this episode of Energy Policy now. Today’s guest was Anna Mikulska, lecturer in Russian and Eastern European Studies at the University of Pennsylvania. Keep up to date on more energy policy conversations and research by following the Kleinman Center on Twitter. And to register for upcoming in-person and virtual events from the center, visit our website. Our address is kleinmanenergy.upenn.edu. Thanks for listening to Energy Policy Now and have a great day.


Anna Mikulska

Senior Fellow
Anna Mikulska is an expert on European energy markets and energy policy. She is a senior fellow at the Kleinman Center and a fellow in energy studies at Rice University’s Baker Institute for Public Policy.

Andy Stone

Energy Policy Now Host and Producer
Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.