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The Russian invasion and subsequent imposition sanctions by a variety of governments has reset the global geopolitical compass. This had an immediate impact on oil markets and investments. The Russian invasion of Ukraine and subsequent imposition of sanctions by a range of governments have served to reset the global geopolitical compass with an immediate impact on oil and gas markets and investments.Although war is still ongoing and its full consequences will take years to be fully understood, some of the most important outcomes for above ground risk are already crystallizing.
Market shifts and price dynamics can have immediate benefits and costs.
A full-scale rebalancing of oil and gas demand in the region is a key component of the non-military response, given Russia’s global importance as an energy producer and Europe its main market. Russia has not yet been able to impose any measures that would hinder general oil and gasoline trade and shipping. However, its oil companies can still invest abroad, despite financial restrictions. Only a small portion of Russia’s oil and natural gas production is owned by Western companies. Their plans to withdraw or stop investing in Russia will have a limited effect on Russian production in the short term.
The Asia Pacific region, led China, is emerging as a significant, if not complete, offset to the anticipated reductions in Russian production. All regions will be affected equally by price increases and slower growth in economic activity. However, rival producer states will have opportunities to increase their production and exports as Europe rebalances its energy sourcing.
In the near-term, high oil prices and gas prices are a boon to net exporters, including Russia. Angola and Kuwait are major beneficiaries. Their net oil exports as percent of GDP will rise well beyond 50% if Brent averages USD106/barrel. Rising costs for net importers will only exacerbate inflationary trends, which could lead to civil instability, electoral shifts and threats of regime changes, as is happening in South Asia.
Current and potential producers both benefit from the search to find new opportunities
Producer states will have opportunities to benefit from rising prices and new sources for demand if they can combine government support with project economics, resource availability, and infrastructure availability.
Gas projects that have access to existing infrastructure are better positioned to compete. This opens up new markets for East Mediterranean suppliers and African producers. This could lead to producer states reconsidering their transition strategies and renewing oil and gas licenses. Given the slow evolution in government policy, uncertainty surrounding the energy transition, and producer governments’ perceptions that price changes and supply dynamics will attract investment, it is likely that fiscal terms will take longer to materialise.
Higher prices, new market opportunities and greater realism about the role of fossil fuels as part of energy transition will impact how host governments respond to the current environment. This will depend on their resources and economic resources as well as their dependence on hydrocarbons. It is important to note differences between producer peer group members, even though country specifics are crucial.
Diversified producersThe UK, Brazil, Canada and Mexico, as well as the US, will likely need to balance their priorities. This could include shifting attitudes toward domestic hydrocarbon production despite the fact that longer-term energy transition goals are still in place.
Net importersLike Egypt, India, China, and Tunisia, they are likely to double-down on existing strategies to sustain or grow production.
Frontier/early-stage producersMozambique, Namibia, Mozambique, Cyprus and Mozambique are all examples of countries that have no export infrastructure but may be able to find ways to increase monetisation.
Oil dependentsIn most cases, former major producers such as Algeria, Angola and Iraq may have a longer window of opportunity to monetise remaining reserves, leverage infrastructure and invest in diversification, where there is the ability to plan and execute plans.
Wealthy petrostatesQatar, Saudi Arabia, UAE and Saudi Arabia are likely to keep and/or speed up existing strategies to sustain/grow output in an effort monetise remaining resource in advance of a global transition to energy.
The specific responses to these risks will vary from country to country due to above-ground factors. These are some of the above-ground threats that are particularly relevant in the current environment:
Geopolitical riskEspecially in Russia’s immediate neighbour.
Real GDP Growth Per CapitaAs production and exports of oil & gas fluctuate and prices for crude oil and natural gas rise, this can impact consumer spending.
Primary Fiscal BalanceAnd Transfer RiskThe following are some of those same factors that impact overall economic activity. However, sanctions add a new dimension to capital and foreign-exchange control possibilities.
Ministerial/Policy VolatilitySome governments are reprioritizing energy security, although this is constrained in some cases by the level Civil Society RiskAs inflationary pressures rise, so will your income.
Other factors that may be affected include Export RiskGiven recent and upcoming changes to the infrastructure and export policies, this is possible.
Renewing energy security concerns temper energy transition efforts
The Ukraine invasion will also impact energy transition, particularly in Europe. A renewed focus on energy security will highlight the need to ensure additional fossil fuel supplies in a short time. As mentioned above, near-term actions will likely include increased investment in LNG regasification and investment to increase the production biomethane/renewable hydrogen and front-load solar and wind. There are signs that some countries are beginning to recognise that nuclear will play a larger role.
The United States administration is likely to intensify efforts to accelerate the energy transition. Although the desire to supply more gas to Europe may ease some short-term restrictions, such as those around new pipelines or leasing, the climate will still be the priority.
The global rise in security concerns will benefit producing countries looking to attract upstream investment to counter energy poverty. It may also help to ease financing. However, efforts to reduce hydrocarbon consumption combined with high prices and supply chain issues will likely limit demand growth, resulting in greater uncertainty for the longer term.
Editor’s Note:Seeking Alpha editors selected the summary bullets for this article.
