The Frack is Back and Other Impacts of the Russia-Ukraine War

Russia’s invasion of the Ukraine sent shockwaves around the world. Three ways the conflict impacts oil and gas companies.

#1: Increasing energy prices – and worries of dependency – puts fracking back on the agenda

Russia produces approximately 1 out every 10 (12%) barrels of oil globally, according to according to Statista, and it supplied about 43% of Europe’s extra gas imports in 2020. While Western sanctions have so far allowed the flow of fossil fuels from Russia to continue, the conflict has led to dramatic price spikes over concerns about supply availability in the months ahead.

"Russia is the third-largest oil producer and second-largest oil exporter. Given low inventories and dwindling spare capacity, the oil market cannot afford large supply disruptions," said UBS analyst Giovanni Staunovo quoted in a Reuters article. “Supply concerns may also spur oil stockpiling activity, which supports prices.”

The high oil prices is making fracking shale - a process where water, chemicals and sand are injected at pressure into shale deposits to release oil and gas – more economic and a way to reduce dependence on foreign oil supplies.

America has vast reserves of shale oil but it is costly to recover and firms were hit hard by Covid-19, which led to a drop in demand for fuel. Shale oil and gas firms responded by cutting drilling, spending and workers. As oil prices recover and advances in technology allow fracking producers to break even at lower oil price levels, some producers such as Exxon and Chevron have announced plans to increase production.

“Fracking may be America’s most powerful weapon against Russian aggression,” wrote journalist Karl W Smith in a recent Bloomberg op-ed piece.

But don’t expect a dramatic rebound in fracking. According to CNN, shale producers are still scarred by recent downturns and expect to ramp up production slowly. They’ve also been struggling to find the workers and equipment they need to extract shale oil.

“They can’t find people, and can’t find equipment,” said Robert McNally, president of consulting firm Rapidan Energy Group, quoted in the CNN article. “It’s not like they’re available at a premium price. They’re just not available.”

#2: Cancellation of key projects and commercial partnerships with Russian entities

Many western oil companies, including BP, Shell, ExxonMobil and the British Gas owner, Centrica, have responded to Russian aggression in Ukraine by cutting key commercial partnerships with Russian firms.

ExxonMobil, for instance, announced earlier this week that it will discontinue operations at Sakhalin-1, a joint venture with Russian, Japanese and Indian companies. It will also make no new investments in the country.

The Nord Stream 2 gas pipeline, which was supposed to double the amount of natural gas that Russia could deliver directly to the EU, has been built and is operational but Germany responded to the Russian invasion by halting certification of the line.

The construction of the pipeline has been controversial because of concerns that it would increase European reliance on Russian gas. Recent reports suggest that Nord Stream 2 has filed for bankruptcy in the wake of the latest actions, but in a brief statement on its website the company says that it is not in a position to confirm those reports.

#3: Increasing risk of cyber attacks on critical energy infrastructure

Russia has a history of using cyber attacks to advance its political agenda and oil and gas infrastructure is a particularly attractive target.

According to reports in Wired Magazine, for instance, Russian hackers disrupted the Ukrainian electricity grid in 2015 and again in 2016. The attacks left hundreds of thousands of Ukrainians without power or heating.

It also demonstrated the power of malware that “aimed at not just disrupting physical equipment but destroying it, as Stuxnet did in Iran in 2009 and 2010 and the malware Triton was designed to do in a Saudi Arabian oil refinery in 2017.”

Last year, a Russian criminal gang crippled the Colonial oil pipeline. The company, which transports more than 100 million gallons of fuel daily between Houston and New York, shut down the pipeline for several days in response to the attack, leading to panic buying and long fuel lines ups across much of the South Eastern United States.

More recently, the Nord Stream 2 website has also fallen victim to hacking. A statement on the venture’s website states that “we can confirm that we have taken down this website due to serious and continuous attacks from outside.”

Last month America’s Cybersecurity Infrastructure and Security Agency (CISA) warned U.S. companies to prepare for potential Russian cyberattacks. The agency wrote a bulletin that was intended to “to ensure that senior leaders at every organization in the United States are aware of critical cyber risks and take urgent, near-term steps to reduce the likelihood and impact of a potentially damaging compromise.”