Russia Sanctions Dovetail With Industrial Policies & Energy Cooperation

This story is an extension of what I previously wrote about Divergent and Convergent Scenarios For Global Commodities During the Russia-Ukraine Conflict.

If you haven’t been following the energy markets this year, then you have missed out on a lot of content about market volatility and geopolitical trends.

This story is specifically looking at how sanctions on Russia are bringing global commodities to the forefront of geopolitics, and thus revealing the changes to industrial polices among the world’s core areas and critical producers. If you want more content about the countries affected by the Russia-Ukraine conflict then read more of what I published about Russia’s impact in the publication Areas & Producers.

At a political level, Russia intends to transform its industrial policies in a way that favors the “anti-West” rhetoric; from a geographical point of view, raw materials are located in vulnerable areas where supply chains are being disrupted by sanctions. This is why Russia must expand its “sovereignty” over global commodities.

This is Russia’s geopolitical objective within the context of global commodities, hence the critical nature of the China-Russia relationship. China basically has the same geopolitical objective within the context of global commodities, which is why the two countries could seek to dominate raw materials in some of the world’s most vulnerable areas.

If you ask me, though, it seems like the world is still desperate for the commodities that have been lambasted as a tool of influence for adversarial governments, bringing in some key concepts about the effect of foreign policy aims: For which commodities? Against Whom?

In this scenario of the world, it’s a pretty scary place to live in, since the demand for raw materials, commodities and energy are producing effects in the foreign policy area of many countries today, including in both developing and developed areas — I’ve already written extensively about the illustrations of this theory from the perspective of how countries and corporations are formulating industrial policies around oil and gas while preparing for the Energy Transition in the future.

These strategies are being carried out under the backdrop of increasingly volatile global markets and diverging geopolitical trends, which have put global commodities at the forefront of geopolitics. For instance, the of future industrial production revolves around future facing commodities which means that industrial policies are also being regulated by Environment, Social, Governance (ESG) framework with respect to global commodities.

Let me paint a picture for you. First, the G-7 announced an oil price cap on Russian oil, which went into effect on December 5. Then, OPEC+ announced that it would cut its oil production output by 2 million bpd in October. This news came on the heels of United States President Biden’s visit to Saudi Arabia to try to amend differences in the strategy relationship between the US and Saudi Arabia.

Another point of contention is in shale oil production in the US. According to Hess CEO, John Hess, “OPEC is back in the driver’s seat.” He framed this statement under the backdrop of declining shale oil production in the US, which, according to John Kemp, had transformed the availability and price of oil in global markets from 2009–2019. In 2022, however, it is expected that U.S. production of shale oil would only rise slightly to +0.7 million bpd.

Energy experts wholly agree with CEOs that OPEC is back in the driver’s seat in terms of the global oil supplies and energy market prices linked to OPEC production capacity.

While other companies seek to profit handsomely from the G7’s oil price cap of Russian seaborne exports of oil and the European Union’s embargo of Russian crude oil and petroleum products, such as ExxonMobil, as the giant U.S. oil and gas producer and retailer now wants to lean on the risks associated with European dependency on Russia for its vital natural gas imports.

No doubt, in Q3 2022 alone, XOM’s earnings surged to $18.7 billion. So it’s not like the company doesen’t have the amount of capital to invest in natural gas production capacity.

But natural gas production is linked to developments in Liquified Natural Gas (LNG) infrastructure investments and technologies. Take France’s TotalEnergies as an example.

On April 11, 2022, it was announced that a “heads of agreement” (HOA) was signed by TotalEnergies (Total) with Sempra Infrastucture, Mitsui & Co. ltd and Japan LNG Investment. Sempra Infrastructure owns 50.2% of the project while Total, Mitsui and Japan LNG Investment each own 16.6%.

According to TotalEnergies’ Chairman and CEO Patrick Pouyanné: “The expansion of Cameron LNG will contribute to our LNG growth strategy by investing in low-cost, long-term competitive LNG projects with lower GHG emissions.” This statement from the CEO was given to the public as a way to justify expansion of the Cameron LNG project located in Louisiana, USA.

This HOA is significant because the companies agreed to jointly increase production capacity to more than 6.75 mn tonnes per year (tpy). They also agreed to add a fourth train to improve on debottlenecking of the plant. Moreover, the project is seen as a way boost exports of USA LNG in the wake of recent events by Russia to affect Europe’s energy supply.

If Norway’s Equinor took the initiaive to help and solve Europe’s energy crisis, then it seems France’s TotalEnergies is striving to take the lead in promoting Europe’s energy transition. The HOA is an indicator of how seriously the company is taking its ambitions to push Europe forward on the energy transition.

Per OilPrice.com, the French supermajor is the world’s largest exporter of USA LNG and the second-largest LNG trader.

With the final investment decison on the Cameron LNG project to come in 2023, Russia’s invasion of Ukraine has raised concerns of how more exports of USA LNG can be carried out in the present. On March 25, 2022, a deal between the USA and European Union (EU) was initiated for the USA to increase deliveries of LNG to EU markets in the amount of 15 billion cubic meters. This circumstance reveals how critical USA LNG is to the EU’s energy supply mix.

TotalEnergies has been in business with USA LNG since September 2016 when the company acquired 75% of the Barnett Shale assets in North Texas from Oklahoma City-based Chesapeake Energy. Due to declining production, the Barnett shale assets are set to bottom out around 2028. What’s important here is that the production capacity at Total’s Barnett shale fields will allow the company to regasify its natural gas reserves into LNG at Cameron, in order to transport and export the natural gas from USA to Europe, Asia and African markets.

TotalEnergies is also launching North America’s first Cabon Capture & Storage (CCS) project at the Hackberry Carbon Sequestration (HCS) project. According to Thomas Maurisse, senior vice president LNG at TotalEnergies:

We are pleased to join forces with our partners to significantly reduce CO2 emissions at Cameron LNG export terminal, thus enabling us to supply our customers with low-carbon LNG, a key fuel for the energy transition and a valuable asset for diversifying Europe’s energy supply

It’s essential to point out that even when the largest companies are pushing for ways to successfuly carry out Energy Transition around the globe, that committments to natural gas production and exports via LNG will continue to grow over time. TotalEnergies even highlighted in its 2021 Energy Outlook that natural gas and renewable energy sources would play complementary roles to achieving the energy transition toward Net Zero.

While sanctions from the United States (US) and European Union (EU) have sought to bring down Russia’s crude oil export revenues via a Russian oil price cap agreed to by the G-7 this year, the Russian exports of LNG to European countries is going up. Just look at the data provided by S&P Global Platts.

Meanwhile, US Crude oil production and exports are growing, too. Hitting record highs of crude oil and refined oil products, according to Energy Information Administration data.

US crude oil exports were boosted by high demand for crude oil imports in Asia. China, India and South Korea notably have been the largest importers in Asia, boosting inventories ahead of the December 5 deadline when the oil price cap against Russia is to go into effect.

It came as a big surprise to some when the US government announced on 28 November 2022 that it would lift sanctions against Venezuela’s oil extraction operations, to the benefit of Chevron and other oil producers. Talks between the United States and Venezuela have been ongoing in Mexico City, Mexico, about putting together a humanitarian spending plan with support from the Venezuelan government. Read a full report from experts at the Atlantic Council.

French President Emmanuel Macron visited American President Joe Biden at the White House for a two-day visit on 30 November 2022 and 1 December 2022. Although the meeting was filled with political niceities, the agenda was also full of concerns about the war in Ukraine and the Biden Administration’s Infation Reduction Act (IRA). When asked why he chose President Macron as his first state visit at the White House, President Biden replied: “Because he is my friend.” Read the full briefing on Politico.

What does this heads-of-state meeting have to do with global commodities? It should be pointed out that Macron hosted Venezulean government leaders ahead of Biden’s oil sanction’s lift against the country at the Paris Peace Forum on 11 November 2022. The United States and France both have a mutual interest in protecting investments for global oil supplies, as a slew of agreements have been carried out all over the world, where American and French producers share oil exploration and production (E&P) arrangements, such as in Algeria, as more and more E&P projects expand throughout the Middle East and North Africa (MENA) region.

For example, on 21 November 2022, Italian-based oil and gas company Saipem spoke wutg reporters of the Oil & Gas Middle East at the ADIPEC conference held in Abu Dahbi, United Arab Emirates (UAE). The recently-appointed CEO of Saipem told the reporters that the company is increasing tenders and bids on offshore and onshore oil and gas production. The company is known for its engineering and construction (EPC) expertise. Saipem has been making offers for projects throughout the year, including a $4.5 billion deal with Qatargas for two offshore gas compression complexes in Qatar and three EPC contracts in Angola for one onshore and two offshore projects with an overall value of approximately $900 million.

Saipem CEO Alessandro Puliti was appointed since August-September 2022 to lead the company’s push into renewables and offshore/onshore oil and gas contracts. He formally served as the company’s le poste de directeur général.

The news at the producers level precisely dovetails with developments in offshore oil and gas developments on the African continent — particularly in the areas of Nigeria, Angola and Mozambique.

Both Nigeria and Angola have been two of Africa’s principal oil and gas producers. The latest offshore oil discovery off the coast of Luanda on 8 November 2022 was heralded by Greece Prime Minister Kyriakos Mitsotakis as solution for “our country’s energy security and Europe’s.”

It was reported by OilPrice.com that this discovery in Angola represents the biggest fossil fuel discovery on the African continent since Occidental Petroleum’s and Eni’s natural gas discovery at the offshore basin of Rovuma, Mozambique in 2010. This discovery consequently put Mozambique into the position as one of Africa’s LNG powerhouses.

This is why the announcement of Nigeria’s first floating liquified natual gas (FLNG) facility is such as big deal for Africa’s and Europe’s energy supply crises. With the country’s geographical distribution advantages, it will have the opportunity to export LNG to intra-African markets, as well as to European markets.

According to Reuters, the North American energy sector expects higher spending in 2023 due to rising budgets and capital allocation of the world’s largest oil and gas companies. Check out the data on ExxonMobil, Chevron, Canadian Natural Resources Ltd., and others. Resource World put out a Coal production update in October 2022, which revealed an uptick in coal production in North America and other areas around the world.

Meanwhile, the European Union (EU) courageously announced that it was formulating a Market Correction Mechanism on 22 November 2022. Since November, the proposal to set a price cap on natural gas prices via the Title Transer Facility (TTF) gas price benchmark has been one of the hotly contested issues within the EU. The Agency for the Cooperation of Energy Regulators (ACER) is responsible for monitoring the price correction mechanism and any safeguards that would be put in place against price and market volatility.

It was finally announced on 19 December 2022 that the natural gas price cap would go into effect in Feburary 2023. Euronews said that the price cap on natural gas “is aimed at curbing energy prices as the bloc reels from a crisis exacerbated by Russia’s decision to stop supplying the EU with fossil fuels to retaliate against sanctions over its war in Ukraine.”

The price cap aims to halt prices from going above €180 per megawatt-hour during at least three consecutive trading days.

After finalizing the legislation, Jozef Sikela, the Czech minister of Industry and Trade, said: “We have succeeded in finding an important agreement that will shield citizens from skyrocketing energy prices…from risks to security of supply and financial markets stability.” The agreement was met according to the EU’s “qualified majority” rule, by which 55% voted in favor of the natural gas price cap.

Criticism has not only come from EU countries such as Hungary, but also from the American trading exchange platform Intercontinenal Exchange (ICE), which voiced its opposition to the EU’s gas price cap on the grounds that: “Our customer outreach and internal risk assessment suggest that the mere presence of a cap, significantly increases the probability of the cap being triggered.”

That’s where the safeguards come into play. According to the European Commission (EC), market regulators have the authority to suspend the price cap mechanism in the event of high-risk market volatility in energy prices and supplies.

Proponents of the ICE’s arguments against the gas price cap probably have not taken into consideration what is happening beyond the European continent. The Black Sea has been a major focus during the Russia-Ukraine conflict. Oil supplies from the Caspian Pipeline Consortium (CPC) were disrupted by Russia to the detriment of Kazakhstan’s oil export revenues. And of course, the Nord Stream 2 pipeline, which serves as a classic example of a new era of adversarial geopolitics — where maritime areas are at the focal point of geopolitical trends.

In these cases, sanctions on Russia have caused divergent and convergent scenarios for global commodities during the Russia-Ukraine conflict.

These geopolitical trends haven’t caused the EU to stop cooperating with countries for pipeline infrastructure and renewable energy projects. A memoradum of understanding (MOU) was signed by Hungary, Romania, Azerbaijan and Georgia, to potentially develop a new source of energy for the EU. It’s a project that will send natural gas from Azerbaijan to Romania via an undersea electricity connector in the Black Sea.

EU President von der Leyen stated that this project was directly tied to Europe’s shift away from its dependency on Russia’s oil and gas supplies.

Since the beginning of Russia’s war, we have decided to turn our back on Russian fossil fuels and to diversify towards reliable energy partners, like the partners here around the table. And it is working. The European Union has been able to compensate the cuts in Russian pipeline gas.

These statements provide furth evidence to what I have argued previously about the Nord Stream 2 pipeline. In response to Michael Gorecki’s writing in Transatlantic Perspectives about the Nord Stream 2 pipeline, I said that I disagreed with the idea of abandoning the pipeline altogether. The politicization of the pipeline should not be intensified, otherwise, it is likely to serve as a symbol of the Russia-Ukraine conflict for decades to come.

Energy pipelines are serving as a means for EU cooperation with other countries, while also ensuring energy supplies to the European markets. That’s how sanctions on Russia dovetail with industrial policies and energy cooperation.

I’ll be publishing The Weekend Brief (TWB) regularly touching on aspects of the global markets (including stock markets) which are at the nexus of tech, industrials and global commodities. Please follow the publication Areas & Producers to read more content about the future of core areas and critical producers of the global economy.

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