Global fuel market already turned volatile when the world economy started gathering momentum with the ease of COVID pandemic. The outbreak of the Ukraine war added fuel to the fire. Leading energy market watchdogs rightly predicted seismic consequences however the war played out. Before 26 February, geopolitics and global trade were about ‘the West’ versus China; now it’s the West versus Russia and China. We are aware of Russian dominance of fuel supply to Europe in particular and the fuel hungry global market in general. We are also aware that it is almost impossible for most countries to sustain staying away from Russian fuel longer. LNG from the USA, Qatar, Australia or increased supply from Norway or elsewhere cannot effectively replace Russian gas. Neither can western allies persuade the rest of the world to turn away from Russian energy supply. As a consequence, the global market price is remaining sky-high and is ringing alarm bells for countries like Bangladesh growing increasingly dependent on imported fuel. Some reports evidence that import dependency increased from 20% in 2009 to 40% in 2022. Some say it may exceed even 90% going business-as-usual.
There is another side of the coin. Russia’s vision of limiting expansion of NATO is not also working, as Sweden and Finland are almost ready to join the bloc. The re-election of Emmanuel Macron for another term in France may push NATO to shift from Russia’s energy supply. But for the time being Russia has lost almost nothing from energy supply. China, India would continue importing Russia’s fuel and may even work out trading in currency other than the US dollar. Russia has already suspended pipeline gas supply to Poland and Bulgaria for not agreeing to pay in Rouble. Russia has identified some countries not friendly with Russia and has announced a deadline after which they will suspend gas supply if not paid in Rouble. A recent report evidenced that since the outbreak of the war, Germany was the highest buyer of the Russian fuel. Price of coal, crude and gas in the global market still remains sky-high. With no signs of war ending soon, it is highly unlikely that the price of fuel in the global market would get back to pre-COVID levels in the foreseeable future.
Against the backdrop, the policymakers have to balance the energy trilemma: sustainability, security and affordability. Energy security must be high on the priority list for underdeveloped and developing economies. World has already realised that LNG cannot immediately replace Russian pipeline supply of gas to Europe. One is price, then comes lack of infrastructure over the LNG value chain. Moreover, changing the paradigm of fuel choice from fossil fuels to green energy may not encourage investors in making huge risk investments in LNG infrastructure. US shell gas may not support catering the needs of LNG to Europe for a long time, neither can Qatar or Australia meet the demand after all existing commitments to China, Japan, Korea and India. In future it may happen that countries like Bangladesh even with required money may not find LNG suppliers to buy from. These must be factored in the power and energy system integrated master plan of Bangladesh. The fuel mix must be smarter, balanced with special emphasis to optimum utilization of own fuel resources. Major drive must be launched to exploit all options of green and clean energy development and energy efficiency.
Countries having potential for expanding their own gas and oil utilization must expedite exploration. The UK looking seriously into North Sea resources is an example. Sustainability is another aspect that may boost energy security. Even for achieving the pledges made in NDCs, most countries need doubling down low carbon energy supply. Demand side management through phasing out fuel inefficient energy generation or replacing these with efficient usage must also get priority.
Affordability is also a major challenge. Countries have also committed to SDG7 targets of ensuring quality supply of modern power and energy to all at affordable prices by 2030. Most countries have already increased subsidies in some form or other to manage price spirals of electricity and fuel for the end users. But soon it may get out of manageable proportions.
COVID and War Infused New Life to Fossil Fuel
Many countries were moving away from fossil fuel. Europe started relying more and more on solar and wind. But the COVID aftermath and now the war has given a stark reminder that the global community still relies almost 80% on oil, gas and coal. Many predicted that fossil fuel may get out of sight gradually after 2030. But now war has turned things upside down. High price of fossil fuel will of course accelerate the shift to low carbon energy and EV’s.
Natural gas prices are believed to stay high until 2026. Europe still is on a mission to minimize reliance on Russian gas. But unfortunately no source in the next 3-4 can ensure supply of 150 Bcm that Russia supplies to Europe through pipeline. It is to be seen how long can Poland, Germany and the UK keep turning their back to coal?
The high price of gas and LNG has started bringing focus back on coal. Maybe not the dirty ash coal, but superior quality less sulphur, less ash, high heating value coal using ultra-super critical technology.
But thermal coal is less influential than it was in the power system and load factors are already close to being maxed out. Gas-to-coal switching has supported carbon prices in the EU and UK emissions trading system (ETS) after a wobble at the start of the war. Our view remains that carbon market development lifts the ETS price to over US$100/t by 2030.
What should Bangladesh Do to Absorb Fuel Price Shock?
Bangladesh is not a big player yet in the fuel import market. It still relies about 50% on its own gas. But the proven reserve continues depleting with no real possibility of replenishing significantly over the short term. It has also limited existing infrastructure for importing LNG and coal. Neither it can absorb price shock or expose its booming energy using industries to supply disruptions. It is time for Bangladesh to seriously review the possibility of exploiting coal reserves. Allout endeavours must be also directed towards expediting petroleum resources exploitation. Bangladesh must also do everything possible to reduce reliance on gas at least until some major new gas is discovered and monetized. Wherever there is opportunity for using alternative fuel, gas must not be used there. From the end 2025, the situation may be different as coal and nuclear electricity may provide base load for 7,000MW. The challenges between now and 2025 must be met through reducing waste and improving efficiency.
Impacts of Ukraine War on Power Sector
High gas prices have caused higher generation costs of gas-based power. Europe expects higher power prices over the next three to four years. Beyond 2026 power generation may drop to comfortable levels as additional gas supply would come to the market. Some countries have started going for onshore and offshore wind, and solar. Few countries are investing in hydrogen energy. Nuclear power generation is under active consideration again in the UK and France. There will be a boom in infrastructure investment – interconnection, transmission and distribution – to support the changing characteristics of the power generation mix. Growth in flexible resources, such as battery storage, will also be critical to balance the increasingly variable nature of production.
Conclusion
Developed economies can sustain the shock for a while for the higher buying capacity of the consumers but the effects of war would hurt the LDCs and developing economies most. Some countries can negotiate better deals with Russia for petroleum products and gas. The US dollar may not remain the only trading currency as Russia is already insisting on payment in Rouble. India is negotiating to buy fuel with Indian Rupee. The situation would sooner or later boomerang on Western allies if the war prolongs. Russia would never be in a food and fuel crisis. Its fuel sales have not been reduced even marginally. Some EU countries continue buying Russian gas and paying for it. Bangladesh must plan its energy future shifting focus on domestic primary fuel and renewable energy. Bangladesh should also widen sources for fuel import. The SPM project upon commissioning would increase capacity for crude import. Operation of Matarbari port would facilitate setting up of Land Based LNG and LPG terminals by 2028. A second refinery may be set up through a public-private JV. Instead of investing in a highly ambitious underground railway, if possible, a Coal Transfer Terminal can be set up at Matarbari and at least 2-3 more coal power plants can be considered at Matarbari-Moheshkhali hub. Something needs to be done out of the box and soon.
