TOPIC PAGE: War in Ukraine, gas crisis

Aura Sabadus

04-Aug-2022

Updated at 10:45 GMT on 4 August with latest headlines. Please scroll down to see headlines.

Map of gas-related outages updated at 17:45 GMT on 22 July. 

The war in Ukraine first caused oil price volatility, which increased as surging COVID-19 cases in China led to fresh lockdowns, hitting demand and disrupting supply chains. China is the world’s second biggest economy and largest oil importer.

Now Russia’s decision to reduce flows of natural gas to Europe means the continent has to look forward to a winter of potential rationing, which could hit chemical production. Tightened supply has also sent gas prices soaring, with high costs forcing production cuts, especially in fertilizers.

India is facing a more severe shortage of fertilizers and edible oil amid wide-ranging trade disruptions as the Ukraine war rages on, with financial sanctions tightening on Russia.

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: the actions proposed by the European Commission put that into context.

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 in 2022.

GAS SUMMARY

  • Gas storage low in Europe, winter demand 30% higher than rest of year
  • Record shipments of liquefied natural gas (LNG) to Europe so far in 2022
  • LNG could ease Europe shortages if Russia supplies cut
  • Europe LNG processing operating at full capacity
  • Russia resumed flows through Nord Stream I pipeline, but at reduced levels
  • EU plan calls for a 15% cut to consumption, industry may face much higher reductions

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

CHEMICALS SUMMARY

  • High Europe gas and electricity prices force price hikes, energy surcharges
  • Volatile oil and feedstock prices dent chemical producer margins
  • Elevated oil prices dent consumer confidence and demand
  • CEOs plan now for winter gas rationing
  • BASF says it will have to close Ludwigshafen site if gas supplies fall below 50% for a prolonged period

Europe is heavily reliant on Russian gas and exposed to disruptions in supply,  but Russia is also an important oil exporter and a supplier of fossil fuel products, which find their way to international markets via Ukraine’s ports.

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.

ICIS has taken a broader perspective, asking how vulnerable energy and energy-related supplies are to disruptions, what contingency plans are put in place and what could be expected in the upcoming weeks.

How vulnerable are energy and energy-related Russian supplies to disruptions?
Europe depends 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 since the beginning of this year producer Gazprom has shipped only one-third of the gas that it was expected to deliver to European consumers via Ukraine as part of a five-year transit agreement.

Russia has banned exports of gas to several EU countries, and reduced flows through the Nord Stream I pipeline. European petrochemicals players face even higher gas prices as a result. Fertlizer companies – where gas can account for 80% of costs – have been forced to curtail production.

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.

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.

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. Should sanctions be imposed and exports hindered, Europe will need to secure alternative cargoes from the global market.

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.

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.

Europe is now 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.

The conflict in Ukraine has pushed European gas prices back up to record levels, so some chemical producers may consider ceasing production, or adding further energy surcharges.

Rising oil prices since late 2021 have already put chemical margins under pressure, and this has continued into 2022. As oil and naphtha prices soared, margins for ethylene production based on naphtha went nagative 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 naphtha feedstock and energy costs, especially in Europe. Elevated oil prices also dent downstream consumer confidence and spending.

What contingency plans are being put in place?
US and European officials have been planning for backup LNG supplies. Exports of LNG from Algeria, Qatar, the US and even Australia have been discussed as alternatives. Although Europe imported a record 11bn cubic metres (bcm) of LNG in January alone, half of which were sourced in the US, much of future supplies would depend on price as well as supply and processing capacity.

Europe is proposing to replace 100bn cubic metres (m3) of Russian gas with alternative supplies by the end of the year.

“In this scenario, there would be huge problems unless Europe gets it act together. I estimate that even with new liquified natural gas (LNG) supplies from the US, Norway, and Qatar plus energy efficiency measures and more use of renewables, Europe would still be short by 30-40bn m3,” said ICIS senior energy editor, Aura Sabadus.

Infographic: Which European Countries Depend on Russian Gas? | Statista You will find more infographics at Statista

If the Asian premium were to increase, LNG cargoes would head in that direction, even as seasonal European winter gas demand is on average 30% higher than the rest of the year.

Supply disruptions caused by escalating tensions may lead to a price rebound, incentivising more LNG to return to Europe.

However, European import terminals are already operating at nameplate capacity. A record of 5,000GWh/day was reached in mid-January, according to EU data.

Even if more LNG were to reach European terminals, countries in central and eastern Europe which rely on Russian flows shipped via Ukraine, would struggle to secure imported LNG.

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 as political pressure is mounting to save supplies ahead of a difficult winter.

As 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, Brussels has now issued guidance to reduce demand by 15% between 1 August 2022 – 31 March across member states.

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 have already been forcing industrial consumers to limit or stop production or seek import substitution globally.

Data compiled by ICIS Gas Analytics show that overall year-on-year gas demand has declined by 8.2% in the year to date and by 3.9% for the same period over the 2015-2019 average.

EU proposals for demand reduction released on 20 July indicate the industrial sector may be priority target for major reductions, with three sectors – glass, ceramics and chemicals – consuming half of the sector’s total.

FERTILIZERS
The fertilizer sector, one of the most gas-intensive industries, has also been one of the most affected so far because with gas prices soaring more than five times the long-term average in recent months, the cost to produce ammonia and urea rose to $1,700/tonne and $1,250/tonne respectively.

This is around 60% above the current market price of these key products of the fertilizer sector.

ICIS experts focusing on the fertilizer sector estimate that as much as 40% of urea production may have been cut year on year in Europe, although the information is difficult to confirm since there is no official confirmation on specific output limitations.

PETROCHEMICALS
On the petrochemicals side, there have been no reports of shutdowns or production reductions, but 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.

BASF’s Ludwigshafen site is the world’s largest integrated chemical complex owned by a single company and confirmed to ICIS that it will have to shut down if gas supply collapses by more than half for a sustained period of time.

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.

TotalEnergies and PKN Orlen declined to comment while MOL and PCK have not yet replied to requests for comment.

UKRAINE CHEMICALS UNDER THREAT

With Russian forces advancing across 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.

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US LNG deliveries to the UK in July set to be more profitable than Asian destinations
By Kaja Sillett 16-Jun-22 18:36 LONDON (ICIS)–US LNG deliveries to the UK in July are set to be more profitable than to east Asian destinations, despite the British NBP July’22 contract remaining at a discount to the equivalent ICIS East Asia Index (EAX) price, according to ICIS calculations.

India May exports grow 20.6%; trade deficit widens to $24.3bn
By Priya Jestin 16-Jun-22 17:03 MUMBAI (ICIS)–India’s merchandise exports in May rose by 20.6% year on year to $38.9bn, backed by higher shipments of petroleum products and chemicals, but the country’s trade deficit widened due to high cost of energy imports.

China MEG prices rise on stronger crude market
By Cindy Qiu 16-Jun-22 14:57 SINGAPORE (ICIS)–China’s monoethylene glycol (MEG) prices have been on an uptrend since June, mainly driven by the bullish crude market, as supply-demand fundamentals remain largely unchanged. This has somewhat dampened market players’ confidence in the market outlook.

Asian petrochemicals to rebound in June amid bumpy recovery – ICIS analysts
By Ann Sun 16-Jun-22 12:12 SINGAPORE (ICIS)–Asian petrochemical market is expected to be generally firmer in June given higher crude prices and easing lockdowns in China, according to a latest Price Forecast by ICIS analysts.

Asia BDO weakens on prevailing weak demand, ample supply
By Clive Ong 16-Jun-22 11:32 SINGAPORE (ICIS)–The Asian butanediol (BDO) market remains on a downtrend with regional demand staying lacklustre while ample supply made buyers unhurried. Suppliers concede that buying interest showed limited signs of any revival with further market weakness a possibility.

S Korea truckers’ strike to hit Ulsan petrochemical output; halts port ops
By Nurluqman Suratman 10-Jun-22 18:28 SINGAPORE (ICIS)–The ongoing nationwide strike by unionised truckers in South Korea are forcing several producers in the petrochemical hub of Ulsan to consider production cuts amid logistics disruption.

SE Asia biodiesel market optimism rises on post-lockdown China
By Felicia Loo 10-Jun-22 17:35 SINGAPORE (ICIS)–Market optimism in China to increase imports of southeast Asian palm methyl ester (PME) biodiesel helped bolster market sentiment to some degree amid higher weekly gains in feedstock crude palm oil (CPO) futures.

Asia PET offers reaching level of last historic high on recent upstream price surges
By Hazel Goh 10-Jun-22 12:15 SINGAPORE (ICIS)–Asia polyethylene terephthalate (PET) offers increased in the week and were approaching the level of the last historic high four years ago amid recent Asia upstream price surges.

NE Asia ethylene stays bearish on ample supply, weak demand
By Yeow Pei Lin 10-Jun-22 11:59 SINGAPORE (ICIS)–Northeast Asia’s spot ethylene prices stayed weak due to ample supply amid limited demand for end-June and first-half July arrival cargoes.

India domestic LAB prices rise; China demand improves as lockdowns ease
By Clive Ong 10-Jun-22 11:53 SINGAPORE (ICIS)–India’s domestic prices for linear alkylbenzene (LAB) have spiked on the back of rising costs, but some players expect some headwinds with the monsoon season kicking off.

Oil prices drop more than $1/bbl on partial lockdowns in China
By Nurluqman Suratman 10-Jun-22 11:34 SINGAPORE (ICIS)–Oil prices fell more than $1/bbl on Friday on renewed demand fears after fresh COVID-19 lockdown measures were announced in China, but tight supply concerns capped losses.

S Korea truck drivers go on strike amid rising fuel costs, inflation
By Nurluqman Suratman 08-Jun-22 14:17 SINGAPORE (ICIS)–South Korea’s unionised cargo truck drivers are staging a nationwide, indefinite general strike at ports and container depots across the country in a move which could potentially impact petrochemical-related supply chains and logistics.

East Asia and Pacific growth to slow to 4.4% in 2022 on China deceleration – World Bank
By Nurluqman Suratman 08-Jun-22 11:54 SINGAPORE (ICIS)–Growth in East Asia and the Pacific is projected to slow to 4.4% this year from the 7.2% expansion in 2021, reflecting the marked deceleration in China, the World Bank said late on Tuesday.

Asian PTA prices up on firmer feedstock costs, sustainability uncertain
By Samuel Wong 08-Jun-22 11:51 SINGAPORE (ICIS)–Asian purified terephthalic acid (PTA) prices were supported by costs push because of higher feedstock paraxylene (PX) costs, but long-term sustainability is still a question amid a lack of strong demand growth in the downstream polyester sector.

China May petrochemicals track crude gains; June demand to improve
By Yvonne Shi 08-Jun-22 11:09 SINGAPORE (ICIS)–China’s petrochemical markets largely tracked gains in crude prices in May, accompanied by some improvement in demand as pandemic-related restrictions have started to ease.

Japan’s Q1 GDP revised to smaller contraction of 0.5%
By Nurluqman Suratman 08-Jun-22 11:01 SINGAPORE (ICIS)–Japan’s economy shrank less than initially reported in the first quarter, contracting by an annualised 0.5% instead of the initial 1.0% drop, on the back of improved private consumption, official data showed on Wednesday.

Asia polyester prices gain momentum tracking higher crude, rising cost pressure
By Judith Wang 07-Jun-22 16:27 SINGAPORE (ICIS)–Asia polyester prices gained further momentum as bullish crude futures and rising feedstock prices bolstered spot discussions, while demand has showed some improvement on easing lockdowns in China.

Asia Q3 biodiesel market sentiment to stay weak on poor European demand
By Felicia Loo 07-Jun-22 12:13 SINGAPORE (ICIS)–The third-quarter market sentiment for southeast Asian palm methyl ester (PME) biodiesel is expected to remain weak amid poor buying requirements from Europe, a key importing region for southeast Asian material.

INSIGHT: India cuts raw material import duties to boost local production
By Priya Jestin 07-Jun-22 12:07 MUMBAI (ICIS)–India has cut import duties on some raw materials in the hope of boosting overall domestic production amid surging inflation and rupee weakness.

VIDEO: China PTA plants’ run rates stay low on high production costs
By Winnie Huang 01-Jun-22 18:35 SINGAPORE (ICIS)–Watch industry analyst Lifang Huang discuss China’s purified terephthalic acid (PTA) market amid high production cost.

PODCAST: China LPG prices fluctuate on elevated costs, weak demand
By Candy Nie 01-Jun-22 17:44 SINGAPORE (ICIS)–ICIS analyst Jady Ma and Candy Nie discuss the recent developments and outlook of China’s Liquefied petroleum gas (LPG)  market.

Saudi Aramco’s June LPG contract prices continue downtrend
By Candy Nie 01-Jun-22 15:10 SINGAPORE (ICIS)–Saudi Aramco’s term contract prices (CP) for June-loading liquefied petroleum gas (LPG) continued to edge down and hit a five-month low, the company announced on Tuesday afternoon.

China MTBE cargoes face narrowing arbitrage opportunities into Europe
By Jun Kai Heng 01-Jun-22 14:17 SINGAPORE (ICIS)–The reopening of the Chinese economy in June is expected to pressure arbitrage opportunities into Europe for Chinese methyl tertiary butyl ether (MTBE) cargoes.

S Korea May petrochemical exports rise 14%, total exports up 21.3%
By Nurluqman Suratman 01-Jun-22 12:32 SINGAPORE (ICIS)–South Korea’s petrochemical exports rose by 14% year on year to $5.18bn in May, supporting the overall rise in shipments abroad, official data showed on Wednesday.

Japan’s au Jibun Bank May manufacturing PMI dips to 53.3 on slower output growth
By Nurluqman Suratman 01-Jun-22 11:38 SINGAPORE (ICIS)–au Jibun Bank’s manufacturing purchasing managers’ index (PMI) for Japan slipped to 53.3 in May from 53.5 in April as new orders rose at a slower rate, the Japanese bank said on Wednesday.

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

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