TOPIC PAGE: War in Ukraine, gas crisis

Updated at 09:00 GMT on 2 June. Please scroll down to see headlines.

The war in Ukraine has caused oil and especially gas price volatility, as restricted flows from Russia to Ukraine caused values to spike to record-breaking levels before collapsing to pre-war levels.

Since December 2022, unseasonably mild winter weather hit demand, reversing gas prices. However millions of tonnes of chemical and fertilizer production remain offline across Europe thanks to the elevated gas prices and poor macro-economic conditions which have impacted demand.

Europe’s energy challenge is immense and put into stark relief by the response to Russia’s war in Ukraine. Cutting the ties that bind EU and non-EU nations to Russian gas and oil will be extremely painful this year and in years to come.

This topic page examines the impact of the Ukraine conflict on oil, gas, fertilizer and chemical markets.

Image credit Vadim Ghirda/AP/Shutterstock

Europe’s energy markets witnessed a year of record prices and extreme volatility in 2021. Russia’s invasion of Ukraine has led to more difficult conditions for global markets since then.

GAS SUMMARY

• Gas storage remains robust in Europe, winter demand fell thanks to mild weather
• Poor downstream demand still affecting industrial production, gas demand
• Record shipments of liquefied natural gas (LNG) to Europe so far in 2022/23
• LNG plus Norwegian, Algerian, Azerbaijani pipeline imports compensate for Russian supply shortfall
• Europe LNG processing operating at full capacity
• Nord Stream I and II pipelines damaged by explosions, zero flows to Europe
• EU implements voluntary 15% cut to consumption

AMMONIA SUMMARY

• Russia supplies 20% of global seaborne ammonia market
• Disrupted supply has pushed up fertilizer and food prices

OIL SUMMARY

• Friendship oil pipeline flows through Ukraine
• Russian oil feeds around a quarter of Europe demand
• Europe seeks to end reliance on Russian crude oil
• EU agrees ban on seaborne imports from 5 December 2022, petroleum products from 5 February 2023
• From 5 December Russian crude oil cargoes will only be insured if subject to price cap

CHEMICALS SUMMARY

• Millions of tonnes of capacity remain offline despite gas cost collapse
• Elevated oil, gas prices dent consumer confidence and demand
• Prospect of recession, more cheap imports from Asia
• Margins, prices under pressure due to collapsed downstream demand

Sanctions and measures against Russian exports of oil and gas have sent shockwaves across the global economy, lifting the cost of living, impacting industrial and agricultural production and potentially leading to social unrest.

How vulnerable are energy and energy-related Russian supplies to disruptions?
Europe has historically depended for close to 40% of its annual gas consumption on Russian supplies, imported via four routes – Ukraine, Belarus-Poland as well as the Nord Stream 1 and TurkStream corridors linking Russia to Germany and Turkey via the Baltic and Black Sea, respectively.

Overall Russian pipeline supplies were limited throughout 2021 and further reduced in 2022. By the end of last year Russian pipeline supplies fell to less than 10% of Europe’s total gas imports compared to 40% in the previous year.

Russian volumes shipped through Ukraine to Europe are now at third of what they should be as part of a five-year transit agreement

Russia has banned exports of gas to several EU countries, and the Nord Stream I and II pipelines have been damaged. In 2022 flows via Yamal and Nord Stream 1 stopped completely.

European petrochemicals players faced even higher gas prices as a result, though these have since collapsed to pre-war levels. Fertilizer companies – where gas can account for 80% of costs – have been forced to curtail production. Chemicals were affected, especially those with high exposure to gas prices through utilities or feedstocks.

If the conflict escalates, Ukraine transit pipelines may come under attack but disruptions could be limited because the infrastructure has been built to grant flexibility, allowing the operator to reroute flows away from potentially damaged segments.

AMMONIA IMPACT
The Togliatti-Azot pipeline, the world’s longest ammonia pipeline stretching 2,471km from the Togliatti Azot plant in Russian Samara Oblast to the Ukrainian Black Sea port of Yuzhny, could be caught up in the cross-fire. Russian ammonia supplies account for around 20% of the global seaborne merchant ammonia market each month.

Around two thirds of those volumes are exported via Yuzhny, with the rest reaching European and global markets via Baltic ports. Ammonia is a prime material for fertilizers, so curtailments could potentially lead to higher food prices and shortages.

Ammonia market players are scrambling to cover positions and assess options as the Russian invasion of Ukraine saw loadings at the key export hub of Yuzhny halted with immediate effect.

Russian nitrogen fertilizer major Togliatti confirmed the suspension of the transit of ammonia to the Black Sea port via pipeline to ensure the safety of people living in the vicinity of the lengthy conduit.

OIL PIPELINES VULNERABLE
Supplies on the world’s longest oil pipeline, the Friendship (Druzhba) pipeline, could be threatened if the conflict leads to tough sanctions. The pipeline carries oil from central Russia 4,000km west to Ukraine and Belarus and runs close to the Belarus-Ukraine border. Russia exports around 5m bbl/day, of which half are exported to Europe, including via this pipeline.

Russian oil accounts for about a quarter of Europe’s consumption, with the Druzhba pipeline carrying close to 1m bbl/day.

Sanctions have been imposed on imports of Russian crude oil and products by sea, but the ban does not include pipeline oil.

Europe consumed most exports of Urals, Russia’s biggest export grade, in 2021 after Saudi Arabia boosted market share in China. Almost 10m tonnes of Urals went through Rotterdam in the first half of last year, up 2m tonnes on 2020.

Germany stands most exposed because it gets 25% of its oil from Russia.

SInce the ban came into place, Russia has successfully switched exports mainly to China and India, though priced at a steep doscount.

CHEMICALS IMPACT
Gas and electricity are important components in the production costs of many chemicals. Surging gas and feedstock prices in Europe have caused big hikes in contract and spot prices. Now millions of tonnes of fertilizer and chemical capacity are offline in Europe.

ICIS has also created an interactive timeline which shows the history of the gas impact since July 2021.

These products have been most badly affected by outages in Europe, with more than half of capacity offline or running at reduced rates in some cases.

Analysis by the ICIS Margin Analytics team shows the products which are most exposed to energy and gas prices in Europe as a feedstock or utility.

Europe is at a competitive disadvantage to other regions and some customers are seeking new sources of lower-priced supply, especially from Asia and the Middle East.

Collapsed demand means that millions of tonnes of European chemicals capacity remains offline despite much lower gas costs.

The conflict in Ukraine has pushed European gas prices back up to record levels, forcing exposed chemical producers to cease production, or add further energy surcharges.

Rising oil prices since late 2021 have already put chemical margins under pressure, and volatility has continued into 2022. As oil and naphtha prices soared, margins for ethylene production based on naphtha went negative for the first time ICIS record began. The are now are swinging wildy in tandem with oil price movements.

Chemical producers are struggling to pass on increasing feedstock and energy costs in Europe. Elevated oil and gas prices also dent downstream consumer confidence and spending, with recession a possibility later in 2022 or 2023.

What contingency plans are being put in place?
Europe prepared for a difficult winter although rising storage fullness levels, falling demand and more import capacity for liquefied natural gas (LNG) have helped it get by, assuming there will not be an extensive cold spell.

As of 6 March, storage facilities across Europe were 54% full compared with just 20% last March.

Some 30bn cubic meters of new capacity were added between September 2022 and March 2023. The capacity includes offshore terminals in the Netherlands, Germany and Estonia/Finland.

Demand has been decreasing by more than 20% in the industrial sector in north-west European countries and by 20-30% for households in Germany, according to official data.

Nevertheless, there is a possibility that Russia may completely stop its gas supplies to Europe via the last two remaining routes – Ukraine and Turkey, which could lop off some 70 cubic meters of Russian gas entering Europe daily.

In such a scenario, the most affected countries would be those in eastern and central Europe, which are landlocked and have been struggling to secure regasified LNG from importing countries.

For oil markets, in case of an attack but no international sanctions, the worst-case scenario would be for approximately 240,000 bbl/day of lost Russian exports via Ukraine.

There are other seaborne routes, including the Russian Black Sea port of Novorossiysk.

Gas rationing – impact on Europe petrochemicals, fertilizers

Embattled European fertilizer and petrochemical producers may be the first in line to cut gas consumption if the region experiences a cold snap in the weather.

Russia, Europe’s largest gas supplier, has been limiting exports to less than a quarter of its deliveries two years ago and may stop them altogether amid its political stand-off with the EU.

Policymakers recommend voluntary reductions but say these would become mandatory in case of a supply emergency jeopardising the bloc’s security.

DEMAND REDUCTION
The EU’s largest consumers include households, accounting for 37% of total demand, electricity and heat generation covering around 30% and industrial consumption accounting for another 30%.

Record high gas prices and an ongoing gas supply crunch over the least year had forced consumers to limit or stop production or seek import substitution globally. The mild winter has alleviated this situation.

FERTILIZERS
The fertilizer sector, one of the most gas-intensive industries, has also been one of the most affected so far as gas can account for up to 80% of production costs. Production has been cut back drastically because it is no longer economic.

PETROCHEMICALS
On the petrochemicals side, there are now deep production cuts for products such as methyl methacrylate (MMA) and melamine which are heavily exposed to natural gas for utilities or as a feedstock.

Producers are making detailed plans for rationing, particularly in Germany, where the chemicals and pharmaceuticals industry uses about 140 TWh per year, or about 15 percent of Germany’s gas consumption.

Gas is mainly used by petrochemicals to generate energy such as electricity and steam as well as to fire furnaces for production complexes such as crackers.

Sites are able to lower operating rates significantly, but they may be forced to close if gas supplies drop so much that production becomes uneconomic or difficult from a technical perspective.

Companies with flexibility are switching from natural gas to liquefied petroleum gas (LPG) or other sources of energy.

Ukraine conflict threatens Europe oil supply, chemicals production

With Russia’s invasion of Ukraine, sanctions could cut supplies of crude oil through the Druzhba pipeline, threatening oil refinery operations and chemicals production at installations in Hungary, Slovakia, Czech Republic, Poland and the former East Germany.

Russian oil supplies up to a quarter of Europe’s crude imports, with refineries in central and eastern Europe, which are attached to the Druzhba pipeline, particularly reliant on these supplies. Any interruption to these supplies could force refineries to reduce operating rates unless they can find alternative supplies.

Analysis of the ICIS Supply & Demand database shows that the countries Druzhba runs through, except for Germany, are reliant on Russian crude oil for more than half of their imports, led by Slovakia which obtained 96% of its supplies from Russia in 2021.

Chemical production downstream of refineries in these countries could be impacted by any reduction in operating rates. The ICIS data forecast that for 2022, 2.79m tonnes of ethylene (11% of total European capacity) and 2.34m tonnes of propylene (12% of total European capacity) are reliant on refineries located along the Druzhba pipeline. While some alternative sources of crude oil could be sourced, it is unlikely normal levels of operations could be maintained.

Michael Connolly, ICIS Principal Analyst Refining said: “Although many have built alternate sources, keeping full operating rates would be difficult for them as they rely on a consistent and reliable source of crude. Most refiners in Europe are aware of the risk of Russian crude and over the past 5-10 years have tried to reduce their dependence, or at least to build some capability to have an alternate supply – it doesn’t mean they would be unaffected, but there should be a little bit of resilience, depending on the site.”

Connolly explained that some land-locked refineries along the Druzhba pipeline have built pipelines to the coast, allowing alternative sources of crude oil to be sourced. However, these pipelines may not have capacity to feed the whole refinery.

A spokesperson for Grupa LOTOS said: “The LOTOS refinery has dealt with suspended supplies by land before. Due to the contamination of Russian oil with chlorines, PERN, the state-owned operator of transmission and storage infrastructure, had to completely discontinue the transmission of crude oil from the eastern direction between 24 April and 9 June 2019.”

He added that scheduling of oil supplies by sea helped to secure volumes sufficient to maintain an unchanged level of throughput and maximise fuel production.

UKRAINE CHEMICALS UNDER THREAT

With Russian forces present in Ukraine, chemical and fertilizer facilities may be threatened by physical damage, interrupted power and gas supplies or logistics disruption.

Kalush cracker closed

Karpatnaftohkhim’s cracker at Kalush has been closed down because of the imposition of martial law in Ukraine. It has capacity (tonnes/year) of 250,000 (ethylene); 117,000 (propylene) 110,000 (LLDPE), 300,000 (PVC), 100,000 (benzene).

Black Sea export hub closed 

Ammonia market players have scrambled to cover positions and assess options as the Russian invasion of Ukraine saw loadings at the key export hub of Yuzhny halted with immediate effect.

Russian nitrogen fertilizer major Togliatti confirmed the suspension of the transit of ammonia to the Black Sea port via pipeline to ensure the safety of people living in the vicinity of the lengthy conduit.

The Samara Oblast-based giant also confirmed the shut down of four of its seven ammonia units, with the other three plants operating at reduced rates.

Russia export disruptions to shift global trade flows, future capacities threatened
Disruptions to Russia’s chemicals and polymers exports will change trade flows, particularly to Europe and Asia, as international sanctions, lack of logistics and even “self-sanctions” limit volumes.

While Russia’s capacities are relatively small on a global scale, they can still have a significant impact on regional markets if these exports are disrupted.

Key Russia exports include methanol, polyethylene (PE), polypropylene (PP), styrene and paraxylene (PX).

Russia has increased exports of high density polyethylene (HDPE) and polypropylene (PP) in particular in 2020 and 2021 as new capacity started up from SIBUR’s ZapSibNeftekhim complex in Tobolsk in 2020.

LATEST HEADLINES

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By Nigel Davis 21-Mar-23 00:49 LONDON (ICIS)–This is by no means an easy time for chemical producers as the industry’s major downstream markets continue to be influenced by the impact on demand of rising costs and higher interest rates.

Europe’s chemical sector shrinks – battered by high costs, poor demand and cheaper imports
By Will Beacham 20-Mar-23 23:10 BARCELONA (ICIS)–Collapsing Q4 profits and losses for European chemical majors, together with low expectations for 2023, show just how badly the sector is still suffering.

Europe markets firm after emergency UBS Credit Suisse purchase
By Tom Brown 20-Mar-23 20:15 LONDON (ICIS)–European markets firmed on Monday after Switzerland-based banking group UBS announced plans to acquire embattled rival Credit Suisse, raising market hopes that banking sector contagion may be limited.

Global weekly spot IPEX down on price declines across regions
By Will Beacham 20-Mar-23 19:11 LONDON (ICIS)–The global weekly spot ICIS Petrochemical Index (IPEX) fell by 2.0% week on week on the back of lower index values across regions.

PODCAST: Asian PP markets grapple with increased supply, lower-than-expected demand in 2023
By Damini Dabholkar 20-Mar-23 19:06 SINGAPORE (ICIS)–Asian polypropylene (PP) markets are being challenged by increasing capacity in 2023, especially in the China market, while demand continues to recover more slowly than expected.

Crude dips to lowest since December 2021 on banking sector turmoil
By James Dennis 20-Mar-23 17:52 SINGAPORE (ICIS)–Crude prices declined on Monday to their lowest levels since December 2021 before recovering on growing financial concerns following equity market losses and instability in the banking sector in Asian trading.

Asia petrochemical shares, oil prices weaken after UBS rescue of Credit Suisse
By Nurluqman Suratman 20-Mar-23 12:43 SINGAPORE (ICIS)–Shares of petrochemical companies in Asia were mostly weaker and crude futures fell on Monday on fears of a banking crisis contagion, as troubled Credit Suisse was rescued by its Swiss rival UBS in a government-backed deal.

INSIGHT: European TiO2 operations at risk, but China may not be the answer
By Heidi Finch 17-Mar-23 17:53 LONDON (ICIS)–While energy costs in Europe are more relaxed  compared with 2022 peaks, the TiO2 marketand the wider chemical industry in Europe are still facing residual economic and demand headwinds. European production is at risk, while China/Asia capacity is increasing.

Asia glycerine demand weighed down by caution after US bank collapse and turmoil
By Helen Yan 17-Mar-23 11:48 SINGAPORE (ICIS)–Asia’s glycerine spot demand has been weighed down by prevailing caution following the collapse of two mid-sized banks in the US and plunging bank stocks in Europe.

INSIGHT: Banking contagion threatens to spread, hit chemicals demand hard
By Joseph Chang 17-Mar-23 05:47 NEW YORK (ICIS)–The failure of two sizeable banks (Silicon Valley Bank, Signature Bank) in the US and the crisis of confidence contagion spreading to other US regional banks and now European financial institutions threatens to significantly tighten lending conditions at the very least, further slowing economic growth and potentially tipping the US and European economies into recession.

Asia naphtha tumbles on tepid demand; crude oil losses
By Melanie Wee 16-Mar-23 12:56 SINGAPORE (ICIS)–Asia naphtha markets are under pressure on the back of fragile demand, while taking cues from global crude oil futures.

INSIGHT: Banking woes rattle US chem shares
By Al Greenwood 16-Mar-23 05:03 HOUSTON (ICIS)–Shares of US-listed chemical companies fell on Wednesday amid concerns about the implications of a string of bank failures.

Topic Page by Aura Sabadus and Will Beacham. Additional reporting by  Richard Ewing and Sophie Udubasceanu. Maps and graphs by Yashas Mudumbai.