How Russia’s war could reshape the energy sector

Russia’s invasion of Ukraine not only changed prices at the pump but how commodity oil and natural gas will move around the world for the rest of the decade. Getting replacements for Russian oil and gas exports to Europe could be particularly troublesome.

But, with disruptions come opportunities, and we believe the backlash against Russian expansionism is quietly creating potential long-term investment opportunities in energy, energy services and renewable energy.

How we got here

After Russia invaded Ukraine, European countries began blocking Russian crude oil and refined product imports. We expect the European Union (E.U). to agree on some version of a unified plan before year-end.

In response, Russia weaponized natural gas exports and shut gas pipelines to Bulgaria, Poland, and Finland. The E.U. realizes the rest of Europe could be next and is now debating plans to cut Russian gas imports by two-thirds this year and end Russian fossil fuel imports by 2030. Some E.U. member states have already cut ties, while others are so reliant on Russian natural gas that it could take a decade to end Russian imports.

What it would take to decrease reliance on Russia

1. Replacing pipelines with tanker ships
Oil-and-gas-exporting nations (including the U.S.) need to significantly grow production to fill enough tankers to replace Russia’s pipeline gas. Filling those ships could mean expanding port infrastructure, contracting a rising percentage of the world’s tankers and – eventually – redirecting tankers and boosting deliveries to European markets. In summary, replacing Russian oil and natural gas exports to Europe means replacing pipelines with tanker ships.

Accelerating renewable power development
Even with these new marine imports, Europe will need to increase its internal production and development of energy reserves, as well as reduce its oil and gas consumption. And this still won’t be enough. As a result, energy prices will likely rise. And a world facing higher natural gas prices may opt to accelerate the development of renewable power (wind and solar) to displace natural gas-burning electric generators. This situation would reduce demand and allow global producers to redirect more production for export to European markets.

Long-term investment opportunities

In light of the developments mentioned above, consider the following potential opportunities:

Exploration and production
We expect energy prices to stay elevated while global oil and gas markets adjust to a western world without Russian imports. Increased production should combine with historically high energy prices to boost domestic and European exploration and production industry revenues and profits.

Port infrastructure
The west may need to increase oil and gas production and add additional export facilities that require multi-year construction contracts for new pipelines, terminals, liquefaction, and gasification units. We also believe western producers will inevitably increase production and development, which should increase demand for drilling rigs, rig upgrades, and replacement parts. We could even see a new-built rig upcycle. In this scenario, energy service companies in the marine energy terminal and pipeline construction sectors should benefit.

Renewable energy
Europe also must reduce its dependence on Russian natural gas while the rest of the world seeks to avoid higher prices. We expect the development of wind and solar projects to accelerate. If the pace of construction for wind and solar projects improves, companies in the wind turbine and wind and solar farm construction sectors should benefit. Alternate fuel companies, including hydrogen fuel, could also increase sales during the transition to renewables.

Shipbuilders and marine shipping companies
Shifting tankers from other routes to build European imports reduces the number of tankers for hire in the global oil and gas market. As competition for tankers rises, so will contract costs, especially in supertanker and liquified natural gas (LNG) tanker markets, where vessel supply is already tight.

It takes at least three years to build a tanker. And we believe that every non-Russian shipyard capable of building tankers is currently at capacity through 2023, so we expect tanker markets to become increasingly tight through 2027. While shipbuilders could benefit from the trend, investors may want to remain cautious until new orders materialize: Being a shipowner or operator in the marine tanker business can be treacherous, and as a result, they’re generally high-yield issuers.

Bottom line

In our view, Europe will work towards replacing its Russian energy imports, which could trigger long-term secular growth for natural gas production, marine infrastructure, and import/export terminals — and accelerate new renewable energy projects.

If you’re wondering how these long-term investment opportunities may fit into your portfolio, reach out to your Ameriprise financial advisor. They can make recommendations tailored to your unique financial situation.