[Salon] Russia/Ukraine and the real opportunity for MENA energy producers



Russia/Ukraine and the real opportunity for MENA energy producers

Summary: whether the Ukraine crisis justifies the current outbreak of bullishness over oil remains uncertain. But what it almost certainly does do is open up new opportunities for the majority of MENA’s hydrocarbons producers.

We thank Alastair Newton for today's newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service.

It is not difficult to be bullish on oil and gas prices today as a full-blown geopolitical crisis adds its weight to a pre-existing supply/demand imbalance which had already seen Brent crude at seven-year highs. It is not impossible that the bulls will be proved right and that we shall see Brent back at around US$150pb. However, it is worth stepping back a little and taking proper stock of both short- and longer-term prospects for oil and gas.

On the eve of Russia’s invasion of Ukraine our Newsletter set out how Saudi Arabia and the UAE in particular are “continuing to benefit from the high oil prices the crisis has engendered”. As Russia invaded, Brent surged through US$100pb for the first time since 2014. However, although the crisis remains a significant factor underpinning current prices — for gas even more than for oil — Brent has, to date, failed to close the trading day above US$100. Furthermore, there has been no negative impact so far on the flow of either oil or gas.  Nevertheless this morning at 07:00 GMT in the wake of Putin’s declaration putting Russia’s nuclear deterrent on high alert and the implementation of further sanctions  by the West against his regime oil rose to US$103.01 confirming that markets continue (rightly) to judge that a geopolitical risk premium is warranted.


The United States has asked Qatar to help Europe by preparing emergency supplies of natural gas if the Ukraine crisis worsens [photo credit: TRT World]

Right now we cannot be sure how big the premium is or how long it will last. We do not know for sure whether Russia can overcome Ukrainian resistance and, if so, how long it will take; whether energy-related infrastructure in Ukraine will be seriously damaged by the conflict; and whether President Vladimir Putin will retaliate against Western sanctions by cutting in whole or in part gas supplies to Europe (noting that both the EU and US are avoiding sanctions which could directly hit Russian gas exports immediately). Nevertheless, it is possible, in my view, that by, say, the end of March we shall have seen the risk premium ease on both oil and gas, with Brent back closer to (or even below) US$90pb.

Although Washington is likely lobbying in Riyadh and Abu Dhabi for a bigger boost in OPEC+ output to help ease prices, this is one of several reasons why I would be surprised if, when it meets on 2 March, the cartel agreed to increase output by more than 400,000bpd. A second reason is that Russia, which is already struggling to meet its quota, is unlikely to support a change of trajectory — and, for reasons set out in the 23 February Newsletter, I doubt that Riyadh is ready openly to break with Moscow (yet). Thirdly, there is Iran.

For Tehran, being allowed back (legitimately) into oil markets with Brent close to US$100pb is a very appealing carrot indeed. Although it would take time to ramp up output again, Iran has 60-70 million barrels stockpiled which could be fed into markets quickly ( which must look like an equally juicy carrot to the Biden Administration). And there is a bigger carrot still potentially on offer, i.e. international cooperation exploiting the second largest natural gas reserves in the world (after Russia) of over 30 trillion cubic metres. Irrespective of how events unfold in Ukraine, it now appears inevitable that Europe will quickly look to ween itself off energy dependency on Russia, with LNG a vital component in that process. Iran (as well as Algeria, the focus of the Newsletter later this week) can benefit significantly from what would be a big ‘win-win’ (not only for Tehran and Europe but also China), provided the political hurdles are overcome starting with reviving the JCPOA. In short, the Ukraine crisis should increase the seemingly already non-negligible probability of a deal.

Iran is not, of course, an ideal supplier. Quite apart from the nature of the regime in Tehran, there is the possibility that Donald Trump will return to the White House in 2025 and again pull the US out of the JCPOA, as well as taking steps, which would have even bigger consequences for Europe, rooted in his admiration of for the genius of Mr Putin whose territorial ambitions do not end with Ukraine. However, almost any project in the MENA region aimed at substituting for Russia as a gas supplier faces political challenges. Notably, Turkey’s opposition to the East Med pipeline project launched in 2020 and its maritime agreement with Libya underline at least some of the difficulties facing the exploitation of gas reserves in the Levantine Basin (put at around 2-3.5 trillion cubic metres).

Beyond this, we also need to weigh what the  crisis means for decarbonising the global economy. The FT (somewhat hyperbolically) describes it, in a 25 February analysis, as the Ukraine-related “energy shock” with the potential to derail net zero targets. In particular, is the FT right to claim that “fears of inflation and energy security anxieties seem…destined to trump climate policies?” Or, once the immediate dust has settled, is it the case that the crisis will create “an opportunity for politicians to accelerate their green energy plans?” For Europe, much may again depend on MENA hydrocarbon producers, especially if major players in the EU, notably Germany, remain committed to hydrogen as a key component in decarbonising. Initially, this would likely be around ‘blue hydrogen’, i.e. derived from natural gas meaning that, again, there is urgent need for suppliers other than Russia. Thereafter, the drive to ‘green hydrogen’, i.e. using renewably generated electricity to separate hydrogen from water by electrolysis, also stands to benefit countries in the MENA region with access to abundant water (including those not blessed with gas reserves) thanks to their solar (and, in some cases, wind) potential.

This is not to totally deny some personal reservations about hydrogen. But, as things stand today, I cannot rule out the possibility that the Ukraine crisis will significantly boost prospects not only for natural gas producers in MENA but also for long-term energy ties between Europe and the region, with hydrogen constituting a major component.



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