The LNG Freeze Limbo: How the US Export Pause is Reshaping Global Gas Dynamics

The Biden administration recently suspended granting permits for new liquified natural gas (LNG) imports, which will likely have major impacts on global energy security, especially for the European Union (EU). The move comes amidst growing protests against the Biden administration over its lacklustre plan to make a swift transition to green energy ecosystems. As per the White House, the decision aims to address domestic health concerns, such as increasing pollution near export facilities. However, the timing of the decision raises serious concerns, especially as the US’ European allies grapple with energy shortages since the Russian invasion of Ukraine 2 years ago. 

The EU has been greatly dependent on LNG exports from the US in dealing with energy shortages following its decision to stop Russian exports. For instance, in the first half of 2023, the US exported more liquefied natural gas than any other country – 11.6 billion cubic feet a day. That same year, 60 per cent of US LNG exports were delivered to Europe and 46 per cent of European imports came from the US. This abrupt decision by President Biden, prioritising domestic concerns over international energy security and stability, is a long term challenge for US allies in Europe, as well as in Asia. 

Despite the EU having fairly dealt with the energy shortages, a potentially long, harsh winter season later this year could further complicate the entire scenario, given the strong correlation between weather and gas prices. Winter conditions are, thus, likely to increase LNG demands, thereby increasing gas prices. Hence, shutting down gas exports to Europe is likely to accelerate geopolitical risks. This would imply diverting economic supply by the EU for Ukraine to deal with the impending energy crisis. 

Many of the developing economies in Asia have traditionally been heavy consumers of coal and fossil fuels, primarily due to a lack of infrastructural capabilities to harness renewable sources of energy. Early LNG developments, especially in South East Asia were spurred on by the 1973 oil shock, which brought the need to diversify away from Middle Eastern oil for power generation. Consisting of many developing economies, countries in Asia wanted to rely on a stable and efficient partner to develop their energy ecosystems running on a fair share of LNG exports. Being the largest exporter of LNG in the world, the US was seen as “the reliable partner.” Hence, the recent announcement by the White House has been taken seriously in Asia, given that it might hinder the progress of capacity expansion projects in the region. 

Moreover, one of the US’ strategic allies in the region, Japan, could be hit extremely hard by the recent development, given that it is the world’s second-largest purchaser of LNG, with a huge proportion of the imports coming from the United States. Several Japanese companies, especially JERA, have been foundation buyers of LNG export projects and this announcement is likely to hinder their business prospects in the present and the future. Moreover, the future implications of the pause are even more disastrous for the other allies of the US, especially smaller countries like the Philippines, which is currently undergoing energy shocks.  The Philippines relies heavily on the electricity and natural gas acquired from the Malampaya gas field. This reserve is expected to run dry in 2027, causing an energy crisis. The nation must now choose between transitioning to renewable energy or continue to rely heavily on the exploration of conventional energy sources which would make them drift further apart from their commitments towards cutting down carbon emissions. The leadership in Manila initially looked to the United States to provide initial relief over its impending energy crisis by importing LNG reserves from the US. However, the latest White House decision will very well make the Philippines’ political leadership exhibit signs of perplexity and look for other alternatives as the Southeast Asian nation continues to grapple with an ongoing energy crisis which is likely to turn worse in the upcoming years. 

While the decision might highlight the US’ decision to deal with environmental concerns and climate change issues, the abruptness of the decision is likely to raise serious doubts among the allies over Washington’s reliability to help them cope with the ongoing energy crisis, made worse by a sluggish global economy in the aftermath of the COVID-19 pandemic. The move is likely to lead its partners to export LNG from other countries, which have a higher profile of emitting carbon emissions than the US. 

This may also prompt countries to rely heavily on the use of coal and fossil fuels, thereby reversing the trend of actively exploring cleaner energy alternatives. With the global community facing an incoming climate emergency, substantial hope was placed on developed, industrialised countries of the north to create a strong base for the developing economies of the global south to make a transition towards cleaner energy ecosystems.

The US, with one of the largest reserves and the largest exporter of LNG, was seen as the “responsible leader” to effect this transition and, at the same time, stand shoulder to shoulder with struggling economies to deal with the contemporary energy shortage predicament. With ongoing geopolitical crises, the perception of the “pause” being indicative of breaking commitments to international partners and allies, cannot be undermined, in a year that is likely to decide the fate, political will, and the “ability to lead home and abroad amidst challenges” of the incumbent US president.

Featured image by Maciej Margas: PGNiG archive, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=90448259

The Central European Grain Import Ban Extension: The Stakes and Market Response

Background

Earlier this year, Poland, Bulgaria, Hungary, and Slovakia, sought unilateral grain import bans from Ukraine, citing the threats that cheaper grain prices were hindering the business and livelihoods of their domestic farmers and agricultural producers. These measures raised concerns from other EU member states, who saw these actions as abandoning a war-torn Ukraine in its hour of need. In April, however, Poland and the other EU member states agreed to lift the ban on Ukrainian imports after a deal was reached by the European Commission to “impose temporary curbs” on Ukrainian grain imports. The measures also covered Romania, who shared the same concerns as the other member states, but never took unilateral action. The measures included curbs on wheat, maize, oilseed, and sunflower, while the commission would investigate whether to extend the curbs to other commodities such as eggs and meat. All 5 countries would also receive 100m Euros from the EU to compensate farmers.

Pressure of Extension

On July 19, Poland, along with Bulgaria, Hungary, Slovakia, and Romania, asked the EU to “extend trade curbs on Ukrainian grain amid concerns that Russia’s blockage of Black Sea shipments could put further pressure on their domestic markets.” Poland has been one of the strongest western supporters for Ukraine in its war against Russia, leading calls for solidarity as well as backing the removal of tariffs on Ukrainian foods. However, Poland is facing a highly contested election later this year, where the current right-wing government will depend on the support of farmers, a “cornerstone of its electorate”. There is likely to be strong resistance against an extension among EU member states, as many of these countries have been hit hard from sanctions on Russia and will see this as Poland and the others looking for special treatment. Diplomats from the EU have expressed their dissatisfaction with the extension, while Polish Prime Minister, Mateusz Morawiecki, has warned Brussels that the 5 countries will extend the band themselves if the EU does not comply, stating “we will be tough, determined and we will certainty defend the Polish farmers.” Last week, Russia ended its Black Sea grain deal. This places more pressure on Ukraine to identify other ways to export their grain. Western leaders have expressed that the end of the deal could exacerbate food insecurity in the global south.

What’s at Stake? 

Regarding whether or not the extension will be approved, there are three important points at stake: The upcoming Fall elections in Poland and Slovakia, denunciation from Ukraine and other EU member countries, and the livelihood of farmers in the Central European region. The import bans, along with Russia’s exit from the Black Sea Deal, have put the livelihoods of Ukrainian farmers in jeopardy. As one farmer stated, “We have some reserves so we can survive for a month or so, but if we can’t sell it’s going to be a disaster.” After 17 months of conflict in Ukraine, which has resulted in economic hardship for the country, farmers would feel the brunt of the extension. On the other hand, an end to the extension would cause negative repercussions to the farmers of the 5 countries who continue to push for the extension of the ban. Poland and Slovakia are scheduled to hold parliamentary elections later this year, with both ruling parties of each country greatly needing the support of their rural farmers. Poland’s Law and Justice Party (PiS) is campaigning for a third consecutive term in power, and the party must secure the votes of Polish farmers if they want to secure a win in the parliamentary elections. A failure to extend a ban on grains from Ukraine could cost the PiS the votes needed to secure their desired win. Other EU member states have become increasingly angry at the 5 countries looking to extend the import ban. German agricultural minister, Cem Özdemir, was angered that the 5 countries wanted to extend the import bans, despite getting €100 million in EU money to compensate their domestic farmers, stating “It’s not acceptable that states receive funds from Brussels as a form of mitigation, and then still close their borders''. Ukrainian President, Volodymyr Zelenskyy commented that "Any extension of the restrictions is absolutely unacceptable and outright non-European. Europe has the institutional capacity to act more rationally than to close a border for a particular product.” At a crucial time for European leaders to continue their unified support for Ukraine, there is little room for division and disagreements, an eventuality that would play into Moscow’s hand. 

Current and Likely Market Response

Before the import ban, it was a difficult task for Ukraine to export grain to traditional markets, in Africa and elsewhere, because of the high cost of transportation. As a result, much of the grain from Ukraine has remained in bordering countries, which initially fueled the anger from the 5 EU countries. On top of that, the initial extension of the Black Sea grain deal by Russia and Turkey reduced the demand for land routes that were set up by the EU for transporting grain. Recently, prices have increased because of Russia’s exit from the Black Sea Grain Initiative and from Russian attacks on Ukrainian shipping facilities. As a result, wheat prices soared to a five-month high, and a 2.6% increase in wheat futures trading in Chicago. In recent months, Ukrainian exports of maize, wheat, and barley to the EU have decreased because of the ban.

Source: Euronews

Though global grain supplies and markets have been sufficient, owing to plentiful harvests in Brazil and Australia, the grain export shortages from Ukraine are likely to create volatility in the price of grain. With few options for exporters, agricultural analyst Michael Magdovitz, says that Ukrainian farmers are likely to place some of their harvest into storage. This will decrease their ability to prepare for next year’s harvest, limiting Ukrainian grain production. Analysts also predict that Russia’s withdrawal from the grain deal could benefit the Russian economy, as a major grain exporter, as it is expected to hit a record high harvest this year. This allows Russia to provide free grain to African countries, who were formerly relying on grain exports from Ukraine. 

In 2014, a study authored by Fellman, Helaine and Nekhay, titled Harvest failures, temporary export restrictions and global food security: the example of limited grain exports from Russia, Ukraine and Kazakhstan, revealed that for countries like Ukraine, who export large amounts of grain, “the introduction of export restrictions could potentially result in decreases of domestic consumer prices to a level even below a situation with normal weather conditions.” The same study also discussed the 2008 export restrictions which resulted in Ukrainian wheat prices decreasing to 30% “below the world market price” and showed signs of “slower growth rate of domestic feed and milling wheat prices in the first half of the marketing year 2010/2011.” Though it might be difficult to compare previous export restrictions to the current import ban on Ukrainian grains, an extension of the ban would clearly spell long term trouble for Ukrainian grain farmers.

EU Rejects US Offer: Unravelling the Steel Tariff Dispute

Background

The US-EU trade dispute over steel and aluminium tariffs has been ongoing for several years, and there is no clear resolution in sight. The dispute began in 2018 when then-US President Donald Trump imposed tariffs on steel and aluminium imports from the EU, citing national security concerns. The EU responded with retaliatory tariffs on US goods including bourbon whiskey, Harley-Davidson motorcycles, and motorboats.

The two sides reached an agreement in October 2021 to end the dispute over steel and aluminium tariffs. The deal was a significant breakthrough. However, there are still significant disagreements between the two sides on how to define "sustainable steel" and how to enforce emissions standards.

Source: Economist Intelligence Unit

The US has proposed allowing club members to set their own emissions standards for steel production. This would give countries with lower emissions standards an unfair advantage, as they would be able to produce steel more cheaply. The EU has rejected this proposal, arguing that it would undermine the integrity of the Global Arrangement on Sustainable Steel and Aluminium (GSA).

Developments

Now, the EU and the US are at an impasse in their negotiations to end the tariffs on steel and aluminium. The EU has rejected a proposed US solution, saying that it is not WTO-compliant and discriminates in favour of domestic producers.

The dispute is also multifaceted. The EU has said that the US proposal would allow countries to set their own emissions standards for steel production, which would give them an unfair advantage. The US has said that its proposal is WTO-compliant and that it is necessary to protect American jobs. The two sides have also been unable to agree on how to define "green steel." The EU wants to include steel produced with EAF and DRI technology, while the US wants to include only steel produced with zero-carbon emissions.

The dispute is fuelled by several factors. One is the lack of a CO2 allowance trading system in the United States. The EU has heavily invested in the carbon border adjustment mechanism (CBAM) to protect its domestic steel industry, which is one of the biggest CO2 emitters in the world. However, the US steel industry is a much cleaner producer by international standards and relies more heavily on Electric Arc Furnace (EAF) and Direct Reduced Iron (DRI) technology than the European Union.

Another factor is the EU's apparent lack of interest in reducing its own steel capacity. The US government has a greater interest in fighting overcapacity, but the EU is more concerned with protecting the jobs of its steelworkers. This is especially true in Germany, one of the world's largest steel producers.

Implications

The outcome of the negotiations between the EU and the US on steel and aluminium tariffs will have a significant impact on the global steel market. The tariffs are 25% on steel and 10% on aluminium from Europe, while EU measures target products such as bourbon whiskey and Harley-Davidson motorcycles. If the two sides reach a deal, it could help to reduce tensions and prevent a trade war. However, if they cannot come to an agreement, the tariffs will go back into effect in October, which could disrupt the global steel market and lead to higher prices for consumers. The dispute is also a test of the strength of the WTO. If the two sides cannot reach a deal, it will be a blow to the WTO and could make it more challenging to resolve future trade disputes

However, the chances of an agreement are slim. The US is demanding that the EU reduce its steel capacity, while the EU is refusing to do so. The US is also concerned about the EU's carbon border adjustment mechanism (CBAM), which could give European steelmakers an unfair advantage. The US presidential elections in 2024 are also likely to make an agreement even more difficult. The current US administration is willing to make concessions to reach a deal, but the next administration may not be as willing. This means that the two sides may be unable to reach a deal before the tariffs go back into effect in October.

On July 20, the EU's trade commissioner reiterated his position that the US cannot resolve its steel dispute with Europe through a deal that discriminates against other countries. This underscores the challenge of finding a compromise to end the standoff. Ultimately, the outcome of the negotiations between the EU and the US on steel and aluminium tariffs is uncertain. If the two sides cannot reach a deal, it could have a significant impact on the global steel market and lead to higher prices for consumers.

An EU Hope: Sourcing Critical Raw Materials from South America

In light of the Russian-Ukraine conflict, European countries have been facing a raw material supply crisis. Disrupted supply chains have significantly contributed to the rise in the price of critical minerals, causing lithium and cobalt to double and other essential energy commodities such as gas to increase 14-fold in price over the span of 3 years. The EU has sought new trade partners to mitigate price rises and reduce their dependence on countries such as China and the US, aiming to secure a sustainable supply chain of critical raw materials. The prime candidates for this venture have been South American countries, a region with cultural and historic ties to the EU. Countries in this region are characterised by an abundance of natural resources and arable land, and their economic reliance on commodity exports provides an incentive to create trade partnerships. As a consequence, recent years have seen efforts to develop bilateral relations and trade in goods and services with the EU.

Recent Developments

The most recent development in the EU’s bid to secure critical raw materials has been intensified cooperation with Argentina. President Alberto Fernández and European Commission head Ursula von der Leyen signed a memorandum on June 13 to expand cooperation between Argentina and the European Union in sustainable value chains of critical raw materials. The goal of the agreement is to guarantee a steady and sustainable supply of commodities needed to ensure the clean energy transition, namely minerals, for European countries. The agreement is collaborative in nature, as the EU plans to invest in research and innovation in Argentina, with a special focus on minimising the climate footprint of extractive activities such as mining. While the EU secures a steady inflow of commodities, Argentina profits from quality job creation, increased sustainability, and economic growth from commodity exports, boosting its staggering economy.

Mercosur

Argentina, along with eleven other South American countries, make up the regional trade bloc Mercado Común del Sur (Mercosur). Trade between the EU and Mercosur is plentiful, with the EU being Mercosur's largest trade and investment partner. As of 2021, the EU exported €45 billion to and imported €43 billion from Mercosur. The EU imports mostly mineral and vegetable commodities and exports machinery, appliances, chemicals, and pharmaceutical products. In 2019, the EU sought to intensify this partnership by establishing a political agreement with decreased trade frictions, namely tariffs for small and medium sized enterprises, creating stable rules for trade and investment, and establishing environmental regulations and policies in all Mercosur countries. This agreement, however, has remained in a provisional stage ever since, as efforts to reach a consensus have been stunted by certain conflicting interests.

Graphical Representation of Main EU Imports from Mercosur from 2011 to 2021 

Source: Eurostat

Cooperation Friction

There are various conflicting interests that prevent this deal from going through. For one, Brazil, Mercosur's largest economy, has plans for intensified cooperation with China, one of its main trade partners. Argentina has also increased cooperation with China in recent years, adding to tensions in EU relations. Brazilian President Luiz Inacio Lula da Silva, the current Mercosur president, has also expressed his disapproval of the proposed agreement. Brazil has had intense deforestation in recent years, and although the current Brazilian presidency has decreased these efforts, policies proposed by the EU in the agreement would interfere with domestic policy and development in their agricultural production. Various clauses prohibit the export of products from deforested areas, demand strict labour laws, and provide public procurement rights to EU and Mercosur companies, limiting the Brazilian government's agricultural and industrial policies and weakening its ability to control domestic production autonomously. Lula has taken a stand against this interference and denounces the agreement for reducing South American countries to indefinite commodity suppliers to Europe. 

Various producers in European countries have also voiced their discontent with the deal. With lower commodity prices arising from reduced tariffs and trade restrictions, farmers and raw material producers in these countries would face extremely low prices and struggle to remain competitive. In France, local farmers fear losing profits as a result of an inflow of cheap imported beef. Despite expressing their interest in creating exceptions for agricultural products, farmers know these provisions would be unpopular with Mercosur producers and are thus unlikely to be included in the agreement. Although these farmers’ influence is not as prominent as that of other actors, protests and disruptions have been a cause for concern in the past. There is the possibility of further aggravating the current clashes over pension reforms, which place the French government in a delicate situation. EU member states could face scrutiny if the pact goes through for neglecting local producers and destroying domestic markets, although this might be a risk governments are willing to take in order to secure energy commodities.

Environmentalist organisations also oppose the agreement. Greenpeace has encouraged protests in Brussels against the "poisonous treaty" that aims to increase trade in environmentally detrimental commodities. A particular disapproval of the lower export prices of pesticides was cited in their protests, along with the more pressing matter of deforestation for cultivation in Brazil. These perspectives are shared by various member states in the EU, and their combined efforts have provided advances in the vein of sustainability. In various dealings, member states such as Austria, France, Ireland, Luxembourg, and Belgium have advocated for enforceable provisions regarding environmental issues, and their veto power places pressure on other member states to comply.

Future Prospects

The EU’s most recent supply acquisition, Argentina, will soon face political change that could affect their cooperation. Unlike Lula, who has three years left in his term, Argentine President Alberto Fernandez will be out of office as of December of this year, and the new government could increase friction in the agreement. Various candidate parties in Argentina have ideologies that differ greatly from Lula’s left-leaning policies, and their contrasting economic plans could decrease both bilateral relations and cooperation in Mercosur. Furthermore, the Mercosur deal, along with the bilateral agreement between Argentina and the EU, stipulates environmental policies and regulations for the country’s extractive activities that could slow their development. With Argentina planning on hastily developing oil and gas extraction in Vaca Muerta, these stipulations could very well be violated and harm both deals with the EU. This applies to many Mercosur countries that rely on primary activities but also want to develop other sectors that may have negative environmental impacts, namely industrial production. With economic growth being the main focus of Mercosur states, it is unlikely that they will accept a deal that would hinder development of any kind.

As seen, the political inclinations and plans for economic development of each Mercosur country have vast implications for the bloc’s ability to close a deal with the EU. With Lula’s rise to power, a change in government policy, in this case a decrease in deforestation, favoured the EU’s intention of creating a clean energy supply chain and reinvigorated expectations for cooperation. Nonetheless, the environmental implications of most Mercosur countries’ production models and their cooperation with countries like Russia and China create distrust between both blocs and stunt advances in the agreement. It seems that the EU’s inability to renegotiate environmental policy due to pressure from environmentalist organisations and specific member states will require a complacent Mercosur to finalise dealings. Although the possibility of splitting the agreement into two different parts exists, thus circumventing sustainability policy, it is unlikely the bloc will follow this path as it would aggravate various member states. Mercosur’s strong conviction for sovereignty will prevent them from accepting the stringent regulations currently proposed by the EU, and the EU’s apparent unwillingness to cede certain stipulations will further aggravate tensions between blocs and cause dealings to remain stagnant. With many South American countries undertaking long-haul projects on agricultural production and extractive activities with potential environmental implications, such as Argentina’s 10-year oil pipeline investment, the agreement will likely continue to face conflicts for the next two to five years. Although Lula promised at the July summit with the EU to deliver a definite proposal that is “easy to accept” soon, his declarations against the last draft’s stringent nature put into question whether this version will comply with the requirements stipulated by the EU. As demand from alternative countries like China grows, Mercosur will be less inclined to accept terms that harm its development, causing dealings to drag on until the EU complies.

EU ban on Russian oil products – what will the fallout be?

On February 5th, 2023, the EU imposed a further price cap on Russian petroleum products. This comes after the decision, in December 2023, to set a threshold price for Russian crude oil shipped by sea at $60 per barrel. In particular, the new price cap will apply to “premium-to-crude” petroleum products, such as diesel, kerosene and gasoline, and “discount-to-crude” petroleum products, like fuel oil and naphtha. The maximum price agreed on by EU leaders for the former is $100 per barrel and the latter, $45 per barrel. The move is being undertaken by the EU and other G7 countries. This spotlight will focus on the fallout of the price caps on oil products. 

Firstly, Russia, which is the second largest oil exporter in the world, will see a decrease in its fiscal revenues in the coming months. Earnings from oil and gas-related taxes and export tariffs accounted for 45 percent of Russia’s federal budget in January 2022. Contrary to embargoes, the price caps implemented by the EU ensure Russian oil products keep flowing into the market, whilst starving Moscow of revenue. In January, Russia’s government revenues decreased by 46 percent compared to last year and government spending surged due to higher military spending. A study by the Centre for Research on Energy and Clean Air reported that Russia is already losing $175 million a day from fossil fuel exports. The new price caps enforced in February will likely reinforce this trend and contribute to the widening Russian deficit, which was $25 billion in January. In response, the Kremlin might increase the shift of its oil product exports to China, India, and Turkey, which collectively now make up 70% of all Russian crude flows by sea and have so far contributed to partly offset the impact of Western sanctions on the Russian economy. At the same time, Moscow might scale up its efforts to bypass price caps imposed by G7 nations through its growing “ghost fleet”, which in January moved more than 9 million barrels of oil. However, these new importers have acquired considerable leverage vis-à-vis Russia. As Adam Smith, former sanctions official with the US Treasury Department, put it “Am I going to buy oil at anything above [the price cap], knowing that’s the only option Russia has?”. This might mean that, even if the Kremlin succeeds in re-orienting its exports of oil products to these new destinations, it will do so at lower prices.

On the other hand, the EU may face a diesel deficit in the coming months. In 2022, Russia accounted for almost half of the EU’s diesel imports, corresponding to around 500,000 barrels per day of the fuel. This will push European countries to try to step up imports of diesel from the US and the Middle East in order to avoid a spike in diesel prices. High fuel prices are politically sensitive and have contributed to high inflation rates across the EU. New trade flows in oil products from these regions could lead to a spike in clean tanker rates, which would increase delivered fuel costs in Europe. Tanker rates from the Middle East to the EU were already close to a three-year high at $60/tonne in January. They are expected to double this year. Moscow has responded to the EU price caps by cutting its oil output by 5 percent, or 500,000 barrels a day. Headline inflation in the eurozone has decreased for the third consecutive month in January but the threat of a rebound in inflation in the near future still looms large.

In such a case, the prospects for an increase in social tensions would become more concrete. Already in September of last year, due to the rising cost of living, protesters in Rome, Milan, and Naples set fire to their energy bills in a coordinated demonstration against escalating prices. In October, thousands of people marched through the streets of France to express their dissatisfaction with the government's inaction regarding the cost of living. In November, Spanish employees rallied together chanting "salary or conflict" in demand of higher wages. However, an increase in salaries would risk pushing up prices even more, thus jeopardising the European Central Bank’s efforts to bring inflation under control.

REPowerEU, Piano Mattei, and the Political Economy of the Mediterranean

From the Phoenicians to the First French Republic, two shores of the Mediterranean have been the cradle for many important ancient civilizations, including the Carthaginians and Ancient Egyptians. Although in modern times the post-war political alignments and government institutions look very different, the evidence of a rich common history can be seen all over Southern Europe and North Africa in the forms of enclaves, architecture, and shared cultural and linguistic norms. Following Giorgia Meloni’s state visits to Algeria and Libya, this spotlight considers how Italy’s Piano Mattei (Mattei plan) can be an opportunity for the rest of the European Union (EU) to successfully implement the REPowerEU energy plan and potentially rekindle trans-Mediterranean trade and cooperation, beyond natural gas and energy markets.

Immigration, Energy Markets, and Fratelli d’Italia: What is Piano Mattei?

In simple terms, Piano Mattei represents Italy’s de facto foreign policy in the Mediterranean under Giorgia Meloni’s tenure as President of the Chamber of Deputies (the official title of the head of the Italian government). The origins of Mattei can be found in Fratelli d’Italia’s (FdI) manifesto for the 2022 Italian general election, which stresses FdI’s belief that Italy must once again become a leader in energy markets. Piano Mattei takes its name from Enrico Mattei – founder of Italy’s state-owned hydrocarbons agency: Ente nazionale idrocarburi (Eni). During his time in the Chamber of Deputies, and later as Chairman of Eni,  Mattei realised that if Italy wanted to include natural gas in its energy mix then Italy needed to cooperate with key exporters. Indeed, Mattei oversaw the signing of various bilateral agreements with many newly-independent states in the MENA region to import natural gas to Italy. Mattei’s work with Eni was also crucial to the construction of the Transmed pipeline, which channels Algerian natural gas to Sicily via Tunisia. The plans for the Transmed pipeline also included the Maghreb-Europe pipeline, which exported Algerian gas to the Iberian Peninsula until last October, when Algiers elected to not renew its export contracts with Morocco over increasing tensions over the Western Sahara conflict. This effectively ceased the flow of  natural gas from Algeria to Iberia. 

Giorgia Meloni formally introduced Piano Mattei last December, during the eighth iteration of the Dialoghi Mediterranei di Roma – a forum on Mediterranean politics hosted by Italy’s Ministry of Foreign Affairs and International Cooperation alongside the Instituto per gli studi di politica internazionale (ISPI), a prominent Italian thinktank. In Meloni’s own words, Piano Mattei is a “virtuous collaboration leading to the growth of the European Union and African nations” guided by the principles of “interdependence, resilience, and cooperation”. Naturally, the namesake “Mattei” suggests that Meloni’s stance is primarily to secure energy supplies for Italy and totally eliminate the dependence on Russian natural gas. On the one hand, however, Meloni’s foreign policy in the Mediterranean also aims to build upon the European Commission’s trade ambitions with the ‘Southern Neighbourhood’: “The long-term objective of the trade partnership between the EU and its Southern Neighbourhood is to promote economic integration in the Euro-Mediterranean area, removing barriers to trade and investment” and the EU’s wider energy policy goals. On the other hand, Associazione Amici dei Bambini – an Italian children’s rights NGO – raises the concern that Meloni’s ambiguous and rhetorical references to immigration in her keynote speech at the Dialoghi Mediterranei di Roma, suggest that perhaps Meloni’s ambitions are centred on delivering campaign promises regarding trans-Mediterranean migration flows. Indeed, Meloni’s lexical and rhetorical ambiguity is often the cause for concern for some analysts (including the author of this spotlight). Whether Meloni intends to use Mattei to further her immigration policies is difficult to ascertain at this stage, and is beyond the scope of this spotlight.

Regardless of how one may interpret the scope or intentions of Mattei, one thing is certain – it can be an opportunity for all of the Mediterranean countries. For Italy (and to a large extent, Meloni) it would be a first step in re-establishing itself as a regional economic powerhouse and help move away from decades’ long economic stagnation. For Algeria and other North African countries, the prospect of increased cooperation and interdependence with the EU is an incentive for investment, potentially beyond natural gas and energy markets. In the two weeks after Meloni’s visit to Algiers on January 24 2023, Eni’s (Euronext Milan) share price increased 4.58 per-cent from €14.18 to €14.83. Year-to-date growth is around the 8 per-cent mark, at time of writing.

Limits for the European Commission and Meloni’s Government

Although a more collaborative and economically interdependent Mediterranean could have the potential to benefit states on either side, Giorgia Meloni and the European Commission need to learn from the past if they are to derive short-term economic benefit as well as long-term regional cohesion. What is meant here by “learning from the past” is that ‘switching’ who is supplying the EU with gas from Russia to Algeria, for example, does not account for the weakness in Europe’s energy strategy before the Russo-Ukrainian War. That is, relying on a weakly-integrated trade partner for a crucial commodity. 

The REPowerEU plan outlines the EU’s energy policy following the Russian invasion of Ukraine. Although the medium to long-term impetus is to increase the role of renewables within the bloc’s energy mix, the short-term imperative includes securing hydrocarbons from non-Russian suppliers. These two foreign policy goals are not necessarily ad diem, and in the context of the Mediterranean, actually involve compromising successful economic interdependence between the EU and its ‘Southern Neighbourhood’.

To contextualise; on January 19 2023 Resolution 2023/2506 was adopted by the European Parliament, calling upon the Kingdom of Morocco to “release all political prisoners'', including the release of Nasser Zefzafi, and to “end of the surveillance of journalists, including via NSO’s Pegasus spyware, and to implement legislation” which protects journalists. Further, increasing collaboration with Algeria (who, as above mentioned, is having its own political standoff with Morocco over Western Sahara) suggests that the short and medium-term ambitions of REPowerEU and Piano Mattei are at odds with the European Parliament’s adoption of Resolution 2023/2506. This is problematic for securing natural gas supplies to Iberia and the westernmost corners of the bloc, but potentially for regional stability in general. If the EU cannot strike the right balance between appeasing Algerian requests and reprimanding Morocco for its treatment of journalists, the prospect of tensions between the two North African states cooling off is not particularly positive. This indirectly impacts the operations of the Maghreb-Europe pipeline, and so on. Indeed, on January 23 2023 the Moroccan parliament “voted unanimously” to reconsider its ties with the European Parliament. 

That said, Morocco-European relations are not exactly at an all time low – in terms of trade and commerce, at least. Trade between the EU and Morocco has increased significantly in the period between 2011 and 2021, and the North African state is the bloc’s 19th largest trading partner. Morocco is also among the top African trading partners for Greece, Italy, Portugal, and Spain. Therefore, there is still space for Morocco-Europe relations to improve within the broader scope of REPowerEU, the European Commission’s ‘Southern Neighbourhood’, and of course, Giorgia Meloni’s Piano Mattei.

Summary: Implications for the Political Economy of the Mediterranean

As the EU gravitates towards North Africa to ‘de-Russify’ its natural gas imports what diplomats and politicians should keep in mind two things: (i) the current tension between Algeria and Morocco, and (ii) diversifying gas imports is not (in the short-term) compatible with holding Morocco politically accountable for its mistreatment of journalists. It is an unlaudable conclusion, of course. But certain international relations theory – namely liberal institutionalism – would defend this claim as the theory emphasises understanding “the role that common goals play in the international system and the ability of international organisations to get states to cooperate,” as opposed to focussing strictly on power relations between states. 

In the case of Mattei as a part of the EU’s ‘Southern Neighbourhood’ strategy, turning to the Mediterranean region means understanding the political tensions of North Africa in order to ensure the best outcomes for REPowerEU and Mattei, as well as avoiding antagonising the Kingdom of Morocco – even if the normative reasons for doing so are justified. Within the EU, the success of Piano Mattei in increasing Algerian gas supplies to Italy and the rest of the Transmed pipeline (which terminates in Slovenia) is intricately linked with REPowerEU’s short-term goals. Thus, as Arturo Varvelli elaborates in his commentary on the issue, Brussels and Rome ought to conduct themselves in a cooperative manner to ensure the success of Mattei and REPowerEU alike. If not, Meloni’s well-documented Euroscepticism could well be weaponised and used against Brussels, which would be a counterproductive outcome for Italy and the EU’s political legitimacy.

On these premises, then, the EU’s ‘Southern Neighbourhood’ strategy should also encompass the goals of REPowerEU to, first of all, secure alternative gas supplies, but also to cosy up to Rome and using the increased demand for non-Russian natural gas to quell Algiers-Rabat tensions. Equally, in pursuing the energy goals of Piano Mattei Giorgia Meloni should also consider using Italy’s diplomatic power to help find a solution that might reopen the Maghreb-Europe pipeline if she desires to obtain a reputation for closing deals and power brokering at the European level. 

Outlook

• Italian-North African gas exploration and trade deals may face significant challenges in the shape of Europe’s green energy transition.

• Meloni will most likely be able to secure the ‘de-Russification’ of Italy’s natural gas supply, but whether this will hamper Rome’s green energy transition remains to be seen.

• Forecasts would suggest that LNG futures prices will not fluctuate sufficiently to dampen the value of natural gas trade between Italy and its partners, Algeria and Libya, in North Africa.

• Whether Meloni aims to cooperate with, or conspire against, the EU’s short and long-term energy policies remains to be seen.

• At the present moment it is very unlikely that Algeria-Morocco relations will improve to the point of reopening gas flows to Iberia via the Maghreb-Europe pipeline. How the situation between both states remains a critical point for the energy policies of Italy and the EU at large.

Image Credits: ROSI Office Systems Inc.

Adding palm-oil to the fire: Malaysia’s proposed ban of palm oil exports to the EU

On 9 January 2023, both Malaysia and Indonesia’s heads of government agreed to work together to “fight discrimination against palm oil”, in a reference to new European Union anti-deforestation legislation. Tangibly, the Malaysian plantation and commodities minister is threatening a wholesale ban on palm oil exports to the EU. Given that Malaysia and Indonesia combine for more than 80 per cent of the world’s palm oil supply and the EU is their third-largest market, the potential ramifications for any such moves would be significant. 

How has an issue over palm oil trade reached such a point? For years, Malaysia and Indonesia have railed against EU import barriers on their palm oil, which they characterise as protectionist in favour of the EU’s domestic vegetable oil sector. The EU’s new law, which is expected to be implemented late 2024, obligates “companies to ensure that a series of products sold in the EU do not come from deforested land anywhere in the world” and is aimed at reducing the EU’s impact on biodiversity loss and global climate change. Whilst no country or commodity is explicitly banned, the new regulation covers palm oil and a number of its derivatives. Currently, both Malaysia and Indonesia have separate lawsuits at the World Trade Organization (WTO) pending over the EU’s palm oil trade restrictions.

Implications

To date, only Malaysia has explicitly threatened to ban palm oil exports to the EU. Were this issue to escalate and Malaysia to impose the suggested ban, it would have several consequences. First and foremost, Malaysia’s palm oil industry and wider economy would be hit; the industry makes up 5 per cent of Malaysian GDP, of which a non-negligeable 9.4 per cent of its exports are bought by the EU. Additionally, an abrupt ban is likely to harm producers who have contracts to sell in the EU. Alternative export destinations could be found, especially in food-importing markets such as the Middle East and North Africa, but these producers would struggle to pivot in the short-term and likely see financial losses. Even greater disruptions would be experienced by the few Malaysian palm oil companies that have established refineries in Europe, necessitating a reorientation in their supply chains. Yet the outlook is not entirely negative; palm oil’s lower cost as compared to its substitutes such as soybean oil or sunflower oil will sustain global demand. Overall the Malaysian export ban to the EU would cause a limited scope of economic damage in the short-term, and would see gradually less impact as time progresses and firms adjust.

The potential implications for the EU are equally significant. Firstly, if Malaysia were to enact an export ban soon, this would likely be in unison with Indonesia as the larger producer. A unilateral Malaysian palm oil export ban to the EU, with new regulations permitting, would simply lead EU imports to shift to Indonesia along with profits - hence Malaysia is seeking bilateral action. A joint ban on exporting to the EU would cut the EU off from around 70 per cent of its palm oil, meaning significant interruptions in processed food or biofuel production. New import regulations, however, will help the EU’s domestic vegetable oil sector, which is something that Malaysia asserts. Especially in biofuel production, oils such as soy, canola, and rapeseed would fill the palm oil gap and increase their respective market shares. This issue is further complicated by the EU and Indonesia seeking an elusive free-trade agreement, with negotiations routinely stalled by the EU’s palm oil regulations. This could be in the EU’s favour as free-trade negotiations would break Indonesian-Malaysian solidarity on the issue. 

Ironically, the EU’s new regulation could also result in greater amounts of deforestation, instead of less. As the EU reduces its palm oil imports through stricter environmental regulations, Malaysian and Indonesian exports would shift even more to the two larger importers in India and China, with less stringent environmental regulations. The EU’s citizens may not be as directly responsible for deforestation, but worldwide deforestation may in fact increase as a result of this policy. 

Market forecast

The immediate reaction from markets was nonplussed. Traders don’t see the threat of an export ban from Malaysia holding. This is reflected in palm oil futures contracts (FCPO: Bursa Malaysia Derivatives Exchange, the benchmark for palm oil), where prices remained stable since the EU’s law was proposed and Malaysia’s threat issued. This means the ban is currently not taken seriously, with Malaysian threats interpreted as a knee-jerk reaction. In any case, firms are anticipating decreased demand from the EU and have been exploring new markets to offset potential European losses. If this Malaysian export ban to the EU were to happen, this would nonetheless pale in comparison to the supply shocks experienced in 2022. A brief ban on all Indonesian palm oil exports globally in April 2022, amidst fears of food shortages and high domestic prices, resulted in record-high global prices. This is a level we are unlikely to see again, as stability returns.

On the supply-side the Malaysian Palm Oil Council expects production to recover in 2023 with estimates of a 3-5 per cent increase, after three years of decline amidst labour shortages linked to COVID-19. This is likely to have a greater impact on global markets instead of a ban or the threat of one, and both Malaysia and Indonesia’s output will continue to climb in the years to come. 

Forecasting the demand side is more uncertain. Short-term projections suggest lower demand due to China’s surge of COVID-19 infections post-Lunar New Year, but this is more symptomatic of the wider Chinese economic reopening which will, on balance, stimulate demand. In the medium-term, the threat of recession facing the global economy will hurt palm oil demand, with a mild recession expected in the first half of 2023 followed by a gentle recovery. A longer-term positive outlook is observed in relation to biodiesel’s potential. Amidst high crude oil prices, the further development of biodiesel utilising palm oil would incite new demand. 

Looking ahead, projections are uncertain given factors such as the Malaysian migrant worker shortage, the Chinese economy reopening, and potential global recession. This is in addition to Malaysia and Indonesia’s unpredictable regulatory environment, where any policy is subject to rapid change. Palm oil exports to the EU are likely to remain a point of contention between the two south-east Asian countries and their European counterparts. Because palm oil forms a significant part of Malaysia and Indonesia’s economies, their respective governments will continue to intervene.

As the two largest producers in this market potential cooperation between Malaysia and Indonesia over an EU export ban must be monitored- acting together would result in greater consequences for EU imports and worldwide prices. While the Malaysian threat to ban exports to the EU may be an empty one, decreased EU palm oil imports will be observed as it shifts towards more sustainable consumption. Combating climate change is the EU’s underlying aim, but this will necessitate a change in trade patterns. 

State of supply: uranium in Europe

Despite being a strategic commodity, uranium has maintained a relatively low profile in the news even as the war in Ukraine continues and Europe’s energy crisis unfolds. This is surprising considering nuclear power, which depends on uranium, contributes roughly 25% of the EU’s total electricity generation. Russia itself has long been a key supplier of uranium and nuclear fuel to the EU, but the future of this relationship is now far from certain. For the moment, Rosatom, Russia’s state-owned and primary vendor of nuclear products, has managed to skirt EU sanctions and continue operating, but how long can this last and what does it mean for nuclear energy in Europe?

In terms of unenriched Uranium ore, Russia is the third largest supplier to the EU. In 2021 it accounted for 19.69% of supply, just behind Kazakhstan at 22.99% and Nigeria at 24.26%. This equates to 2,358 tU (tons of raw Uranium) and roughly €210 million paid to Russian vendors in 2021. However, Russia’s position in third place can be somewhat misleading, according to the World Nuclear Association and other sources, Rosatom owns significant stakes in uranium mining and processing in Kazakhstan. Nigeria has been ramping up its supply of uranium ore in recent years with an increase of 13.7% between 2020 and 2021. Considering the ongoing expansion of mining operations in the country, Nigeria may emerge as a leading supplier for Europe, if output can be maintained. 

Unenriched uranium ore is only half of the equation when it comes to generating nuclear energy. The other key ingredient is refined or enriched uranium, suitable for nuclear fuel production. Europe is dependent on foreign enrichment services. While Europe itself manages some 62% of its enrichment needs, as of 2021, 31% is still sourced from Russian providers. The two primary Russian providers, according to Euratom, are Tenex and TVEL, which are both subsidiaries of Rosatom. Over the past few years, EU domestic enrichment rates have decreased, between 2019 and 2020 alone Euratom marked a 9% decrease in its share. In order to ensure security of supply in this sector, Europe must reverse this trend and look for third country partners. The current non-Russian and non-EU supply of enrichment services amounts to an astonishingly low 7%, a critical failure in market diversification.

The other side to the issue with enriched Uranium supply is the specific fuel configuration for reactors. Of the 103 active nuclear reactors in the EU, 18 are of the Russian designed VVER-440 or VVER-1000 models and depend greatly on fuel supply from TVEL. While many of these reactors are holdovers from original Soviet construction and are set to be phased out in the long term, they still represent an imminent threat. Mitigating this however, the US’s Westinghouse, a leading provider of nuclear infrastructure, is currently expanding its capacity to produce fuel at least for the VVER-1000 models; this has already been successful in Ukraine. 

The situation for Europe’s uranium supply is precarious and the fact Russia’s supply has not yet collapsed, is of little consolation. Nonetheless, there are options on the table and unlike other commodities, uranium has the potential for a diverse supply chain with multiple partners. Two key questions are how long will it take to reorganise these highly complex, infrastructure heavy supply chains and how long will the EU continue its economic relationship with Russia?