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This week in energy: Russia oil price cap, natural gas outlook, nuclear SMRs

February 10, 2023

Authored by RSM Canada LLP

Kirby W. Houle, CPA, CA shared this article

REAL ECONOMY BLOG | February 10, 2023

An image shows two elevated pipelines

In this week’s energy industry analysis, we take a look at the European Union’s latest sanction on Russian oil, the Energy Information Administration’s natural gas outlook, and plans for North America’s first small modular reactor.

The EU’s latest sanction on Russian oil

The European Union on Feb. 5 imposed a sanction prohibiting the import of any Russian oil products. This all-out sanction came alongside G7 countries imposing a price cap on both premium and discounted oil products; products trading at a premium to crude, such as diesel and jet fuel, were capped at $100 per barrel and products trading at a discount to crude, such as fuel oil, were capped at $45 per barrel.

This latest price cap will work the same way as the first one—by relying on shipping and insurance companies to refuse to transport or insure of any crude or oil products with values above the cap.

The largest impact will be the disruption that the EU boycott causes in the diesel market as Europe continues to rely on Russia heavily for diesel to run its industrial economy (about half of Europe’s imports of diesel come from Russia, according to Bloomberg). It’s still too early to discern the ultimate impact of these caps, which come with many implications. Some aspects to consider include:

  • Russia’s reaction—The goal of the EU boycott and G7 price cap is to make a significant dent in Russia’s oil revenue while maintaining global supply, but Russia has made it clear that it will impose countermeasures and find workarounds that make this goal harder to achieve. The Russian government has banned Russian oil exporters from adhering to price caps, further signaling their hard stance to defy the sanctions. Given Russia’s significant role in global energy markets, another consideration is the potential for the country to retaliate. One potential outcome is Russia stopping the flow of its pipeline oil to Europe, currently about 700,000 barrels a day, according to Bloomberg.
  • Price cap effectiveness—The ban on oil products is likely to have more of an impact than the price cap. The cap is likely too high to be relevant as the products currently sell at higher prices. A $100 price cap on diesel will likely mean that the market—rather than the sanction—will continue to set the price, as the product has been selling well above $100 per barrel.
  • Costly workarounds—The EU has to replace the crude oil and oil products that it got from Russia pre-ban. Additionally, Russia will look for other markets to export to outside of the EU. This will mean a major re-shuffle of supply chains, for both crude oil and its products like diesel. For example, Russian diesel once bound for the EU may go to Africa and the EU will look to the Middle East sources to meet demand. Another recent scenario has Russia selling discounted crude into Asia, where it will be refined into diesel and sold to G7 countries, skirting the price cap. While these scenarios do work around the sanctions, they also still somewhat achieve the mission of cutting Russian oil revenues.

While there may be an uptick in prices as the market adjusts to new supply chain and routes, the long-term impact is—in our view—minimal.

EIA natural gas outlook

U.S. natural gas exports are expected to continue to increase through 2023 even as price volatility has continued in recent months. The Energy Information Administration expects “wholesale U.S. natural gas prices during the last quarter of 2022 and the first quarter of 2023 to average more than 40% lower” than in the agency’s October forecast, according to an EIA report released Feb. 7.

Along with growing domestic production and continued price volatility, the EIA identified several market trends in its updated forecast report for the rest of 2023 and into 2024:

  • “Growth in domestic consumption is slowing, particularly as renewable sources displace natural gas used to generate electricity.
  • U.S. natural gas trade remains steady, with high international prices in Asia and Europe supporting exports.
  • Natural gas storage continues to balance supply and demand, reflect longer-term trends, and strongly influence prices.”

With growth in production and slowing growth in domestic consumption, the United States became the largest liquefied natural gas exporter globally last year. These exports have become an important source for Europe amid the ongoing global energy crisis spurred by the Russia/Ukraine war in 2022, considering European countries have historically relied on Russia for natural gas. Additionally, demand from China is also expected to increase along with the reopening of the economy.

As energy companies in North America evaluate natural gas production and exports, price is certainly a consideration. While domestic prices are strongly influenced by supply, demand and seasonal weather patterns, global LNG prices are not as cyclical regarding seasonal weather, though it is an important consideration. Extreme weather plays a more significant role with related facility impacts. Energy companies should closely watch the balance between growing production, domestic consumption and global demand, specifically in Europe in Asia, when making decisions over 2023.

First small modular reactor in North America

News out of Canada in January about the first contract in North America to provide small modular reactors—a form of nuclear power—indicates shifting perceptions over nuclear as an energy source.

SMRs are typically one-fifth the size of traditional nuclear reactors, producing 300 megawatts of electricity or less, which is enough to power approximately 300,000 homes. SMRs can be integral in net-zero road maps as they produce no greenhouse gas emissions, and include features which allow them to operate safely without human intervention. While solar or wind power generation can be intermittent, SMRs are more reliable and consistent, and can easily supply rural areas due to their smaller size and ease of transport. The International Energy Agency estimates that the cost to generate one megawatt of electricity from nuclear power is the lowest of all renewable technologies when considering lifetime operation.

Following the Fukushima nuclear disaster in 2011, a global movement to transition away from nuclear power began. Japan and Germany shut down many of their nuclear power plants, and in Canada, the province of Quebec decommissioned its only plant in 2012. Since then, global supply shortfalls of oil and natural gas have caused Japan to reverse its policy and restart shuttered plants for energy security, and Germany is in search of alternatives after being forced to rely on more coal for power generation than it has in decades. In the United States, the Nuclear Regulatory Commission made an historic announcement last month that it had approved the first SMR design for use in the United States.

Public opinion on nuclear energy has also improved; a poll released by the Angus Reid Institute in January revealed that 57% of Canadians supported further development of nuclear energy in the country, versus 51% in 2021. Canada currently has four nuclear power plants, three in Ontario and one in New Brunswick, and approximately 15% of the nation’s electricity is provided by nuclear generation, ranking sixth globally in total generation. With the world’s second largest reserves of uranium, which is required to fuel reactors, Canada is well-positioned to become a global leader in reducing energy emissions through SMRs.

Considering this first SMR in North America was in part financed by CA$970 million in Canadian federal government funding, companies in the energy space should plan to capitalize on available government incentives to reach net-zero emissions goals.

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This article was written by Anne Slattery, Homan Chung, Alafair Hotze and originally appeared on 2023-02-10 RSM Canada, and is available online at

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