The Interconnection Between Russia’s Arctic Strategy and EU’s Industrial Policies
Liquified Natural Gas (LNG) was on the top of the energy affairs agenda at the Group of Seven (G7) Summit in Germany in 2022.
- The G7 rejected demands from Russia that countries pay for natural gas exports in Russian rubles, after Russia’s President Vladimir Putin announced that “unfriendly” countries should respect Russia’s banking regulations in the future. By threatening to convert natural gas contract to rubles, European utilities companies are weary of an emerging energy emergency ahead of the 2022 winter season.
- The G7 not only agreed to a plan that would put a price cap on Russian oil imports, the Group of Seven also formulated its joint statement to reflect both the climate change policies and the current concerns over the global energy crisis. Notably, the joint statement called for increased production of LNG and nuclear power sources, while adhering to a “fully or predominately decarbonized” global economy by 2035. Although the G7 continued to lambast coal production, they noted that LNG needed investments to address global energy needs.
All of this activity in the LNG sector is critical as governments prepare for their energy supplies for the upcoming winter season. It’s also a signal to the world that companies are searching for new sources of energy during such volatile times for the oil and gas markets.
On 5 September 2022, French President Emmanuel Macron announced to the public in Paris that the so-called France-Spain Midcat pipeline project should not go forward, indicating that current pipeline are only operating at about half capacity.
According to Spanish Energy Minister Teresa Ribera a gas pipeline from Portugal, through Spain, could be built in less than one year for the benefit of France, Spain and other European energy consumers. Calling it a “new interconnection” German Chancellor Olaf Scholz agreed that the pipeline would be beneficial to Europe’s energy supply dilemmas.
This is essentially an issue of increasing liquified natural gas (LNG) imports to Europe. With the capacity of Portugal to receive LNG at its terminals on the coastline, it is a perfect way for France to receive more imports of LNG. However, this plan has been in the works since 2019 as the Spanish grid operator Enagas called for the pipeline to be abandoned.
LNG in the Global Context
On 12 September 2022 it was reported by TradeWinds that China’s top shipbuilder, based in Jiangsu Province, was awarded a license enabling it to build new LNG carrier capacity with some new technological components.
The license agreement was made with Singapore-based GTT with the purpose to use membrane technologies owned by GTT.
Upon the agreement between the two companies, chief executive of Yangzijiang, Ren Letian, said: “The awarded license will enable us to make strategic inroads into the large LNG carrier market, which we previously have not been able to penetrate into…This is a landmark achievement, and we are proud to be the first private shipyard in China to obtain the license.”
According to Llyod’s List Yangzijiang is the only privately-owned shipbuilder in China to recieve such a lucrative opportunity to expand on LNG carrier capacity.
Yangzijiang also has some major shipbuilding projects in the pipeline:
- “TIGER MAANSHAN” — a shipbuilding construction project classified by the China Classification Society (CCS)
- Tianyang Green Ship Technology (T-GET) — a manufacturing plant for LNG fuel tankers through a joint-venture of Yangzijiang and Mitsui Shipbuilding Company
- Tiger Longkou — the world’s largest dual-fuel LNG tank carrier constructed by Yangzijiang for Hong Kong’s Tiger Gas
Notwithstanding the potential liabilities from African energy supply in the future, the Chinese LNG carriers are a potential savior for the European energy demand in the near-term.
An uptick in liquified natural gas (LNG) demand revealed some new activity in the energy sector during the peak of oil and gas demand this summer. This included competition for LNG tankers among the world’s largest energy companies — TotalEnergies, Shell, China Unipec — to stock up on LNG supplies ahead of the winter season in 2022.
Because of this trend the price of LNG carriers is rising to the highest levels in 10 years, at around $120,000 a day, as LNG import demand is expected to grow higher and higher for developed countries.
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.
Analysts however believe that the European Union (EU) hasn’t done enough to meet these challenges. Writing for Oil Price Irina Slav noted that French and German industries have been too late to develop LNG development plans and production capacity, such as terminals, while environmental regulations were also likely to stall upcoming LNG projects in Canada.
That’s why theres so much focus on Africa now. One of the concerns is how geopolitics and international events are going to affect the global energy outlook and prospects in the context of Africa.
For instance, Algeria and Morocco have both announced plans to source more gas reserves to the benefit of TotalEnergies, Eni and USA exporters. But underlying political and territorial issues between those two countries are inevitably going to be a major problem. Algeria cut off Morocco’s access to its gas pipeline in 2021 after Morocco announced that it would develop LNG terminal capacity.
Upstream has been writing about energy companies that are exploring Africa’s potential for LNG pipeline infrastructure as an alternative to Russia and Persian Gulf producers. Siva Prasad of Rystad Energy said “Asian and European importers will need to consider African priorities as they develop projects, as many African producers are focusing on supplying energy locally as well as to intra-African markets, along with catering to global markets.”
Prime examples include a a proposed natural gas pipeline from Tanzania to Zambia.
Russia’s Proposed Metal Merger
Norilsk Nickel «Норникеля» is a Class 1 nickel producer and the world’s largest producer of the base metal. The company is also Europe’s largest supply of nickel, which has deterred the European Union (EU) from applying sanctions on the company and its affiliates. But it didn’t stop the United Kingdom (UK) from sanctioning Nornickel executive Vladimir Potanine on 29 June 2022.
Potanine responded after the sanctions were announed by the UK goverment with this statement:
We have a fairly huge volume of mutual relations with UK banks and UK entities that arranged loans for us. Therefore, we are analyzing now the extent of the effect on the company. We definitely understand there will be no negative impact on its stability but certain loans will probably have to be repaid in advance.
Due to sanctions Nornickel is seeking to merge with Rusal «Русала» in what has been heralded by Potanine as a “national champion” to defend Russia’s nickel industry against the economic impact of sanctions from USA and EU as a result of the war in Ukraine.
According to Reuters, the metal merger has the potential to reach a revenue of $30 billion due to the two companies’ exposure to palladium, nickel and aluminum. These three metals are crucial to the global economy as the world strives for Energy Transition and a more commodity-centric investor marketplace.
It was reported by several sources that the sanctioned Nornickel executive, Vladimir Potanin, must step down as an executive of the company in order the the Nornickel-Rusal merger to be successfully completed.
Mining.com then reported on 22 July 2022 that the London Metals Exchange (LME) announced publicly that it would not immediately ban the prosposed metal merger and would instead carry out an investigation of the sanctions.
An LME spokesperson issued this statement to S&P Global Platts, “We are looking into the detail of the sanctions and what it may mean for the LME, its participants and Norilsk brands.” But this hasn’t affected the UK government’s position on sanctioning one of Russia’s richest persons.
Potanin continues to amass wealth as he supports Putin’s regime, acquiring PJSC ROSBANK, and shares in JSC Tinkoff Bank in the period since Russia’s invasion of Ukraine. As long as Putin continues his abhorrent assault on Ukraine, we will use sanctions to weaken the Russian war machine. Today’s sanctions show that nothing and no one is off the table, including Putin’s inner circle.
To understand the significance of this massive metal merger, however, requires an in-depth look at how geopolitics and commodities coalesce into a country’s overall strategy.
In the case of Russia, combating sanctions is a key part of the country’s economic development in the future. This metal merger intends to succeed in the strategy of combining two large (national) companies into one massive entity controlled by the Russian state itself.
These metals are becoming so valuable to the global economy that Russia (plus others) must carefully consider how its industries will avoid sanctions from the United States and European Union. Avoiding the massive blow from sanctions due to its invasion of Ukraine would be a high achievement in their overall strategy to defend Russia’s nationalist policies.
However, the company would be forced to reconsider its supply chains in the aftermath of sanctions as a broad base of Russian industries have been hit with sanctions from the United States and European Union. For instance, Argus Media reported that Nornickel has considered re-structuring its logistical partners by sending more shipment through the Middle East and North Africa (MENA), an area which is critical to the sustainability of Russian exports through the eastern corridor.
The talks about reconfiguring supply routes has come in tandem with one of the Russia’s strategic dilemmas: the Arctic Strategy. Russia’s Northern Sea Route (part of the Arctic Strategy) seeks to increase exports via transshipments of products through North African ports that will reach Asian markets that have a high demand for the base metals of nickel, aluminum and copper, where Nornickel and Rusal could increase production from plants on the Kola Peninsula and in Monchegorsk of the Murmansk region on the Arctic Ocean.
Major Investments in Oil and Coal Production
Oil is also on the radar as of late. Warren Buffet has won regulatory approval to buy up to 50% of shares in the Houston-based oil and gas production company Occidental Petroleum. Analysts have reported on this story with fervor, but this prospect has been in the works since 2019.
There’s been a major comeback for the unsung heroes of the commodity markets: thermal coal and crude oil.
ExxonMobil’s offshore oil discovery in Guyana began exporting crude oil to European markets — around 49% — in 2022 — up from 16% in 2021.
Glencore’s thermal coal production has witnessed massive profits to the tune of $8.9billion in H1 2022.
Of course, this is all occuring under the backdrop of the Russian-Ukraine war which has put oil and gas supply and demand at the crux of sanctions on Russia and the geopolitics of global energy, fertilizers and metals.
Moreover, oil prices are likely to resume at higher levels due to Russia’s invasion of Ukraine and the ongoing sanctions on Russia’s energy sector.
In the event that OPEC+ comes to an agreement over production and supply targets, it may be too late to make a difference on prices overall, as Americans and Europeans will continue paying for higher prices.
This is a lesson that many people tend to ignore.
On the news of Russia taking over the Sakhalin-2 Project, the effects on LNG production will have an impact on global supplies; therefore, Russia has once again disrupted energy supplies in a big way — Russia already disrupted oil supplies from the Caspian Pipeline Consortium (CPC) in Kazakhstan.
What’s Likely To Happen Next?
Russia’s President Vladimir Putin has not necessarily strengthened the European Union’s solidarity, but the Russian Federation leader has strengthened his own countries’ industrial policies in spite of United States and European Union sanctions.
The Eastern Economic Forum (EEF) is definitely a way for Russian Federation President Vladimir Putin to flaunt the foreign policy goals and bring together a coalition of countries that submit to Russia’s power.
Many people will probably judge this forum as irrelevant due to the actors that are present, but in fact, both Myanmar’s military junta leader and China’s foreign policy minister were in attendance.
However, since Russia’s industrial policies now favor deeper collaboration with China and the Asia-Pacific region, this forum is very important in understanding how Russia’s strategy to combat the sanctions from United States and European Union. Bcause it is the region with the fastest growing industrial base economies in the world, this means more raw materials are needed for economic development of those countries. Energy security is paramount to these countries’ global domestic product (GDP) growth.
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.
Moreover, the China-Russia relationship is not only a cause of concern for the United States and European Union but also enhances the narrative around geopolitics and commodities: a paradigm shift whereby global commodities are at the forefront of geopolitics and ESG corporate frameworks.
The strategic dilemmas for both China and Russia reveal that advancements and achievements in the new Space Race are a top priority for their geopolitical objectives vis-a-vis the United States and European Union.
The competition for this new Space Race allows for China and Russia to use this adversarial geopolitical scenario as a political tool of information to use against the United States and European Union, to the effect of bolstering “anti-Western” values of their domestic populations. While both countries seek to dominate the production and supply of raw materials, of which those commodities are directly linked to the aerospace industry, and therefore are susceptible to geopolitical tensions. The evidence of this trend is apparent in legal cases revolving around food security and energy dependence.
