Click below for Lauerman’s Putin/Ukraine series that ran earlier this year:

Lauerman: President Putin’s Massive Ukrainian Blunder

Lauerman: President Putin’s Massive Ukrainian Blunder, Part 2

Lauerman: President Putin’s Massive Ukrainian Blunder, Part 3

In the two weeks following Russia’s invasion of Ukraine on Feb. 24 the Bulletin published my three-part “President Putin’s Massive Ukrainian Blunder” series.

The invasion has been a massive blunder for President Vladimir Putin in terms of loss of life and maiming of Russian soldiers, the decline of prestige and fighting capability of his country’s military, and lost markets for Russia’s oil and gas exports in the short, medium and long-term.

Putin and his high command severely underestimated Ukrainian resistance to its ‘special military operation,’ partly because it failed to anticipate massive Western military and other support for a democratic country outside the NATO security umbrella. At the same time, Putin and his minions massively overestimated the combat readiness of the Russian armed forces, including its ability to logistically support the largest land invasion in Europe since the Second World War.

The failure to quickly achieve his original war aims, absorbing the predominantly Russian-speaking parts of Ukraine into Russia proper and turning the remainder into a vassal state, may have given Putin a bloody nose. But rather than back down, by all appearances the pugnacious Russian president has simply adjusted his war aim — the annexation of four regions in southeast Ukraine to provide a land bridge between the motherland and Russian-controlled Crimea.

To achieve this more limited goal, Putin is doubling down on his country’s military efforts, targeting civilian infrastructure such as power plants to maximize pain and suffering to the Ukrainian people in the heart of winter, and ramping up the energy weapon in an attempt to diminish Western support for Ukraine, especially in Europe, to force the Ukrainian government to the bargaining table.

Here, in an end of year reprise of the series, I will look at what I got right and wrong about the Ukraine war, the global energy transition, oil and gas prices and implications for the Canadian oil and gas industry to date, and what we should expect for each moving forward.

Spain Plus

In Part 2 of the series I wrote: “The Ukraine War has a high potential of being a long drawn-out and highly destructive affair, much like the 1936-39 Spanish Civil War, with battle lines now drawn between two ideological camps, and possibly even a Spain Plus scenario given lessons learned by the democratic West from it and other acts of appeasement to the fascists in the 1930s … This time around, Western countries are already providing Ukraine with significant amounts of sophisticated and other armaments to prolong the battle against Russian forces — whether it be for conventional warfare now, or guerrilla warfare later — with substantially more to come.”

At the same time, I argued that Western financial and economic sanctions would not make Putin back down on Ukraine for two reasons: Russians tend to be a highly patriotic people, and are much more likely to blame the West for their economic plight than Putin; and China is likely to do everything in its power to help alleviate Russia’s economic suffering in the short, medium and longer term given its long history of sanction-busting to support fellow authoritarian regimes.

On the whole, I appear to have nailed the nature of the Ukraine war in the original series, including the democratic West’s tremendous support for Ukraine and the backing of authoritarian regimes such as China negating the effectiveness of Western economic sanctions against Russia. However, not all democratic countries have explicitly supported Ukraine, with the prime example being India as it continues to purchase more and more Russian oil as sanctions ramp up.

Looking forward, and as mentioned in passing in the introduction, Putin is attempting to force the Ukrainian government to the bargaining table through various means to achieve his new more limited war aim. This has the potential of shortening the duration of the Ukraine war compared to the Spanish Civil War, but it is difficult to see how a Ukrainian government could accept a substantial loss of territory and remain in power (as discussed in relation to the Dirty Deal scenario in Part 2 of the series).

Energy transition

In Part 3 of the series I wrote: “[A] newfound concern about energy security, on top of ongoing climate-related policies, should supercharge the energy transition in the longer term, especially among major oil and gas importing countries and regions — for  example, Germany, the E.U., and Asian countries such as China, Japan and South Korea — since it kills two birds with one stone. But in the shorter term, it’s likely to lead to a resurgence in coal usage and help maintain nuclear’s share of the energy mix, especially in Europe.”

The jury is still out in terms of the impact of the Ukraine war and New Cold War on the global energy transition but the evidence appears to be pointing towards a more rapid one, especially since a lack of affordability for oil and especially natural gas is another key driver for energy policy, something I should have stated explicitly in my three-part series.

In an article published in The Economist on Nov. 5, Fatih Birol, the executive director of the International Energy Agency (IEA), wrote: “Russia’s invasion of Ukraine has changed energy markets and policies around the world, not just for the time being, but for decades to come … driving powerful structural changes that are set to accelerate the transition to clean energy.”

In the executive summary to Renewables 2022, published in early December, the IEA wrote: “The first truly global energy crisis, triggered by Russia’s invasion of Ukraine, has sparked unprecedented momentum for renewables.” The subheading for the section read: “Energy security concerns and new policies lead to largest ever upward revision of IEA’s renewable power forecast.”

The IEA under Birol’s leadership has justifiably been criticized for prioritizing climate change over energy security in its priorities and analysis, until Russia’s invasion of Ukraine that is, but the agency’s outlook for a faster global energy transition is backed by many major governments recently doubling down on clean energy technologies. These include: America’s Inflation Reduction Act; the EU’s Fit for 55 package and rePowereu plan; Japan’s Green Transformation program; and ambitious clean energy targets in China and India.

Oil and gas prices

In Part 1 of the series I wrote: “[W]e should expect much higher oil and gas prices in the shorter term if the West decides to totally freeze Russia out of the SWIFT messaging system due to shortage of supply, and much lower prices sooner than generally anticipated down the road due to a more rapid reduction in global oil and gas consumption.”

To be frank, I was plain wrong to assert that the West may attempt to rip the energy weapon from Russia by strangling its ability to receive payment for oil and gas exports, as previously used against Iran, and “damn the consequences to the European and global economies.”

At the same time, the price of international marker Brent crude may have spiked to almost US$125 per barrel in early March, but it has since fallen to around US$80/bbl due to a slowdown in global economic growth as central banks the world over raise interest rates in an attempt to quell high levels of price inflation.

However, looking forward, analysts at a large number of Wall Street investment banks are predicting crude oil prices to bounce higher next year, primarily due to a structural shortfall in upstream investment in recent years. And according to the IEA, Europe could suffer a natural gas supply-demand shortfall of 27 billion cubic metres in 2023, if imports of Russian gas drop to zero — a distinct possibility as Putin wields his energy weapon — and Chinese LNG demand rebounds to 2021 levels with COVID-related restrictions being loosened.

In addition, Europe’s natural gas crisis could be just getting started, despite sky-high prices causing significant demand destruction on the continent. Brussels-based think tank Bruegel is projecting the European gas market to remain tight until 2026, at which point additional LNG production from recently sanctioned U.S. and Qatari liquefaction plants will be coming online.

Canadian oil and gas industry

In Part 3 of the series I wrote: “In terms of the next several months, the Canadian industry will certainly benefit from high oil and gas prices, but it will not be able to ramp up production much to make up for lost Russian exports for a simple reason — a lack of spare oil and gas production capacity … [O]ver the next several years the Canadian industry has the potential to ramp up oil and gas production, assuming it’s creative … because it will be difficult to justify investments in long-life —30 years plus — production and infrastructure projects, such as new oilsands mines and in situ operations, LNG liquefaction plants and oil and gas pipelines, in our New Cold War world.”

As a result, I argued that fast-decline short-life tight oil resource such as the Duvernay should be a winner in coming years in Canada, especially if combined with crude-by-rail to the U.S. Gulf Coast for shipment overseas or possibly a newbuild export facility at Prince Rupert. In terms of natural gas, I projected a few LNG liquefaction projects on the West Coast to achieve FID, including phase 2 of Shell-led LNG Canada, despite our well-deserved reputation for being extremely slow at moving major energy projects forward.

But based on the major points discussed above, as well as the lack of new FIDs for major Canadian oil and gas projects since the start of the Ukraine war, I stand by the previous conclusion to my series: “In the longer term, all major oil and gas producers will be losers due to the energy security revival and a more rapid energy transition, including Canadian producers. Our oil and gas producers should keep this in mind and pivot, at least to a degree, to take advantage of it.”