Some thoughts on the Ukraine war, the energy transition and implications for MENA oil & gas producers
ONE: RUSSIA’S INVASION OF UKRAINE IS A 9/11 MOMENT
Three months into the war in Ukraine, it is becoming clear that the launch of Vladimir Putin’s ‘special military operation’ is a new 9/11 moment. Not because it is uniquely spectacular – few people will remember where they were and what they were doing when the first Russian tanks crossed the border in the way that the first images of planes hitting the Twin Towers are forever burned into our memories – but because of the world-shaping reaction it has elicited from the United States and its European allies.
The 9/11 attacks sparked a military-security response – the invasion and occupation first of Afghanistan and then of Iraq, and the launch of the so-called ‘global war on terror’ – the consequences of which shaped international relations, global security and the lives of millions in the Middle East and beyond for a generation. The invasion of Ukraine has elicited a political-economic response that is likely to have consequences that are as momentous, and long-lasting.
Whatever the outcome of the war – total collapse of the Russian offensive, partial Russian victory, or, more likely, a festering stalemate – it is now almost impossible to imagine a situation in which the very wide-ranging sanctions imposed on Russia can be wheeled back, at least as long as Vladimir Putin remains in power and quite probably beyond that. The Russian President’s personal commitment to his adventure in Ukraine appears too deep for him to be able ever to sue for peace or admit defeat – and even if he were to, the emerging evidence of extensive Russian warcrimes will be as impossible for the Europeans to ignore as it will be for Moscow to accept.
The forced ‘de-globalisation’ of Russia’s economy brought about by wave after wave of Western sanctions on Russian state institutions, banks, companies, oligarchs and other individuals looks set to last.
The forced ‘de-globalisation’ of Russia’s economy brought about by wave after wave of Western sanctions on Russian state institutions, banks, companies, oligarchs and other individuals therefore looks set to last. With Russian banks now excluded from the SWIFT system, the world’s dominant financial messaging apparatus, Russia has been discussing linking up its alternative Financial Message Transfer System (SPFS) with the SEPAM system built up by Iran after it was blocked from SWIFT in 2012, and there is a real possibility that the two might integrate with China’s Cross-Border Interbank Payment System. Such developments point the way to the consolidation over time of an ‘Eastern’ economic bloc in opposition to the West, to which significant parts of the global South may be attracted.
At the same time, following the exit of the Western oil and gas supermajors from Russia, the European Commission has been working on plans aimed at “rapidly reducing our dependence on Russian fossil fuels”. Russian oil imports are to be phased out, possibly within as little as six months, while the Commission hopes to be able to drive down European imports of Russian natural gas by as much as two thirds by the end of this year. These aims are addressed in the Commission’s wide-ranging “REPowerEU” plans, unveiled this week. REPowerEU leaves no doubt about the fact that such changes are intended to be permanent. The implications for Russia’s economy, for Europe’s energy architecture, and for energy producers outside Europe, are immense.
TWO: THE UKRAINE WAR IS ALREADY AFFECTING THE ENERGY TRANSITION
In April, BlackRock chief executive Larry Fink hailed “a significant long-term opportunity for investors in infrastructure, renewables and clean technology”, arguing that the Ukraine war “will accelerate the shift towards greener sources of energy in many parts of the world over the long term”. With the EU hunting for long-term replacements for Russian oil and gas, while at the same time soaring oil prices are enhancing the competitiveness of renewables, this could be a breakthrough moment for the energy transition, it is argued.
These factors are real enough – but Europe’s immediate response has out of necessity been to turn to LNG imports as a substitute for Russian gas (according to Global Energy Monitor, plans for 22 LNG transport projects worth €6bn have been announced, proposed or revived since February). This in fact is the delicate balancing act faced by REPowerEU: how to reconcile the overarching goal of decarbonising the European economy with the immediate need to secure “adequate alternative gas supplies to cover Europe’s gas demand by diversifying external supplies”, which will require considerable investment in new LNG import terminals, new pipelines and retrofitting existing pipelines – at the risk of baking dependence on LNG imports into Europe’s energy infrastructure for the long term.
As the Western supermajors pull out of Russia, the temptation will be strong to redirect capital and technical resources to upstream operations in other parts of the world, and notably in the Middle East and North Africa
What is more, economic factors cut both ways. Resurgent prices encourage increased production of oil and gas, and make investment in that sector attractive again. As the Western supermajors pull out of Russia, the temptation will be strong to redirect capital and technical resources to upstream operations in other parts of the world, and notably in the Middle East and North Africa (only BP has been clear that it does not intend to compensate for the loss of its Russian assets by increasing capital spending on oil and gas elsewhere).
THREE: NOT ALL MENA OIL & GAS PRODUCERS HAVE EQUALLY STRONG HANDS TO PLAY
MENA oil and gas producers have been deploying differing strategies for adapting to the energy transition.
Saudi Arabia, with the stated aim of becoming the world’s leading producer of green hydrogen, has issued a series of increasingly bold targets for hydrogen and renewables: Neom, a planned new city of over 25,000 km2, is to be entirely carbon-neutral and comprise a factory for the manufacture of hydrogen-powered vehicles and a green hydrogen plant with a daily capacity of 650 tonnes; overall hydrogen production — green at Neom on the Red Sea, and blue (i.e. produced using natural gas with CCUS) on the Gulf – is to reach 2.9m tonnes per year by 2030 and 4m tonnes per year by 2035; solar PV capacity is to be doubled over the next two years; etc.
Such brash pronouncements are typical of Saudi Crown Prince Muhammad Ben Salman’s leadership style – as are their subsequent quiet dilution or abandonment, and there is room for doubt as to whether MBS’ goals will really be met. Indeed, viewing them in the context of Riyadh’s now notorious behind-the-scenes lobbying to have the IPCC’s decarbonisation recommendations gutted in the run-up to last year’s COP26, an uncharitable mind might even suspect at least an element of ‘greenwashing’.
The UAE, realising that its interest lies in getting its considerable associated gas reserves out of the ground while they are still saleable, is going full steam ahead with a number of programmes to boost its production capacity. Abu Dhabi is tabling on a mix of LNG exports (in response to the boost the LNG market has received from the Ukraine war, plans for a new LNG export facility in Fujairah have been upgraded, taking capacity to new 9.6mn tonnes per year) and blue hydrogen, supposedly as a stepping stone to green hydrogen production as the market matures.
Neither the Saudis nor the Emiratis have shown any enthusiasm for jumping on the West’s anti-Russian bandwagon generally speaking. But as aspiring hydrogen exporters, both will be quietly pleased to see Russia progressively blackballed as an energy supplier by the Europeans, insofar as Moscow had been aiming for 20% of the hydrogen market by 2030 (relying notably on nuclear power to produce so-called ‘pink’ hydrogen for export). According to REPowerEU’s targets, the EU should be importing at least 10m tonnes of hydrogen per year by the end of this decade. The UAE and Saudi Arabia will also welcome REPowerEU’s suggestion that the EU should encourage the uptake of hydrogen by subsidise the gap between production cost and sales prices for H2 generated outside the bloc as well as at home.
Qatar, meanwhile, like the UAE, is ramping up its natural gas production capacity. With partners for the North Field East extension due to be announced next week, and the North Field South tender to follow soon, LNG production is set to rise a massive 64% over the next 5 years. Having so far shown less interest in hydrogen than its neighbours, Qatar is betting on LNG serving as the leading transition fuel on the path to decarbonisation for decades to come, and on its own particularly low carbon-intensity production having a competitive advantage in that market (fresh investments are planned in cutting methane leakages, powering facilities with solar energy, and sequestration of carbon dioxide in order to maintain that edge).
As this expansion proceeds, one important question will be how much of Qatar’s new gas production may be made available for gas-hungry Europe. From early on in the Ukraine crisis, Qatar was solicited by Germany’s Green Party Vice-Chancellor Robert Habeck and others seeking alternatives to Russian gas, but had only limited volumes available, the bulk of its LNG production being sold on the basis of long-term contracts to its traditional customers in the Far East. QatarEnergy boss Saad Al-Kaabi has scarcely bothered to hide his Schadenfreude over pleas for help from those who had so recently made a speciality of “demonising” oil and gas companies.
Beyond the Gulf region, Algeria was also sounded out by the Europeans in the wake of the invasion of Ukraine as a potential substitute gas supplier – but like Qatar had relatively little spare capacity immediately available; after a series of exchanges with Rome, its chief European partner, Algiers is now promising to pump an additional 9bn cubic metres of gas via the Transmed pipeline “by 2023-24”.
Algeria is only now beginning to wake up to both the challenges of the energy transition for oil and gas producers and to its renewable energies potential.
Although unsuccessfully courted by the promoters of the Desertec project over ten years ago, Algeria is only now beginning to wake up to both the challenges of the energy transition for oil and gas producers and to its renewable energies potential. Earlier this month, Energy and Mining Minister Mohamed Arkab was tasked by President Tebboune with drawing up a ‘national strategy for the development of hydrogen’. If past experience is anything to go by, however, this may only be the beginning of a rather long and uncertain road – especially given that what Arkab has actually been put in charge of is yet another cumbersome inter-ministerial committee.
FOUR: THE ENERGY TRANSITION IS ALSO A COMMODITIES TRANSITION
In many respects, the energy transition is also a commodities transition. To meet the growing demand for clean energy technologies (solar PV panels, wind turbines, electric motors, rechargeable batteries, etc.), the production of certain minerals, such as graphite, lithium, cobalt and rare earth metals such as molybdenum, could increase by nearly 500% by 2050 according to a World Bank study. The World Bank estimates that over 3bn tonnes of minerals and metals will be needed to deploy wind, solar and geothermal power, as well as energy storage, required for achieving a below 2°C future. According to the International Energy Agency, demand for nickel will grow 19 times over by 2040 if the world makes the effort necessary to meet that goal. And as the IMF has pointed out, under a net zero scenario current copper and platinum supplies are inadequate to satisfy future needs, with a 30-40% gap versus demand.
Here, market forces and geopolitics are aligning to make diversification into mining of vitally important minerals a very attractive proposition for MENA hydrocarbons producers: with metals prices already skyrocketing, in the post-Ukraine world order a question mark hangs over Russia’s exports of cobalt (of which it is the world’s second largest producer), nickel (3rd largest), copper and molybdenum (9th largest for both), and so on.
Not all MENA oil and gas producers have been quick to latch on, however. Saudi Arabia, having had its mining code radically overhauled by a team from Herbert Smith Freehills, showed some flair by hosting an international Future Minerals Forum in January of this year.
Algeria has emerged as an unlikely trailblazer – on paper at least – and it will be interesting to see how that country’s strategy evolves.
Algeria has also emerged as an unlikely trailblazer – on paper at least. The wide-ranging “strategic agreement” signed by Sonatrach and ENI at the end of last year included a pledge to work together on prospecting for lithium. And in a striking new departure, the recently established Higher Energy Council’s attributions include “determining strategy on … the introduction and development of new and renewable energies, while guaranteeing the mineral resources necessary for their development”. It will be interesting to see how that strategy evolves.