2024 Elections Report: Risks & Opportunities for Commodities Sector
In the ever-evolving landscape of global commodities, the year 2024 stands as a pivotal juncture marked by transformative elections across diverse regions. As nations prepare to cast their ballots, the outcomes hold the power to shape policies and strategies that will significantly influence energy, trade relations, and resource management worldwide.
This report encapsulates the intricate intersections between political shifts and their repercussions on the commodities sector. London Politica’s Global Commodities Watch has made a selection of the most significant countries, and analysed the potential impact of elections based on election programmes, past policies, and scenario planning.
The 2024 BRICS Expansion: Risks & Opportunities
With its 15th summit on August 2023 BRICS gained increased attention. The main focus of the summit was on the potential enlargement of BRICS by admitting new members. During the summit, it was announced that 6 countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - had been invited to join the group, with their official entry into the bloc set to take place in January 2024.
The expansion of BRICS has raised questions regarding the implications for international politics and economics. And while most analysts seem to agree that it means something significant, it remains unclear what exactly. This report, therefore, analyses the potential risks and opportunities of the expansion, with a particular focus on the commodities sector. Our analysis addresses questions regarding the interests of BRICS+ countries, the challenges and opportunities for the bloc itself, and the wider commodities sector.
North African Energy Market Analysis: Algeria
This report serves as an overview of the risks – mainly political, economic, social – in the Algerian energy market. It will look at natural gas, as well as crude oil and green energy. The report is also part of a broader series of analyses on North African energy markets.
Financial turmoil’s fallout for commodity markets
The fallout from last week’s SVB crisis sent worrying signals across global financial markets, and caught crude oil and other commodities in the downdraft. Oil prices tumbled on fears that the crisis would spread, feed into the physical economy, and cause a potential economic slowdown. The events, however, also saw even the most ardent bulls (Goldman Sachs) change their oil price outlooks as hedge funds began buying oil put options.
WTI crude sank below $65 per barrel and Brent was down about 10 per-cent on a weekly basis. The price decline was accentuated by forced selling of speculators who had built up bets on higher prices in recent weeks - assuming that Chinese oil demand would recover and Russian oil exports would wane in response to strengthening sanctions. Russian oil flows, however, proved more resilient than previously thought. Furthermore, swelling oil stocks, signaling weak demand because of the mild winter, could not be ignored by the markets.
Gold (and other precious metals), on the other hand, saw increased demand as investors increasingly sought for a safe haven for their investments. As a result its price rose above $2000 an ounce, for the first time in a year.
The irony of last week’s events is that the Saudi government is now paying the price, after the Saudi National Bank ruled out putting up more cash for Credit Suisse. Not only did Credit Suisse shares plunge, resulting in a UBS takeover and a $1 billion Saudi loss, but also did it trigger a macro meltdown that carried Brent and WTI with it.
Outlook
The ultimate impact on commodity markets will depend on the degree of transnational contagion following the collapse of SVB and UBS' acquisition of Credit Suisse. Spreading of the crisis will likely affect the physical economy and halt demand for oil, resulting in more price declines. Containment, on the other hand, assures traders that the physical economy will be relatively unaffected, allowing prices to gain steadily.
But there are more factors at play. The financial turmoil affected the Fed’s monetary tightening, the effects of which will trickle down into commodity markets, specifically crude oil. Wall Street earlier used the SVB crisis to demand that the Fed does limited or no more monetary tightening, until it is certain that the economy is sound and it won’t accelerate towards recession. Fed officials, on the other hand, argued that they have the tools to handle the SVB contagion and it is more important that the fight against inflation continues with more rate hikes. A hawkish stance on interest rates will raise consumer and manufacturing costs, which will reduce demand for oil and likely result in a price drop.
Inflation, however, showed signs of slowing down with the CPI rising 6 per-cent in February, down from 6.4 per-cent in January. As a result, the Fed increased its rate by 25 basis points, instead of the more hawkish 50 basis points. The Fed, however, did not rule out increasing its rate in the future. In line with the Fed, the BoE also increased its rate by 25 basis points, after its annual inflation rate jumped to 10.4%.
Price declines have also raised the prospect of the U.S. government buying oil to replenish its strategic petroleum reserve (SPR) - a move that could stabilize demand. The White House set a price range of $67-72 per barrel where it would buy back crude oil, and prices are currently below the bottom range. The Biden administration, however, has not committed yet and stated to view the situation day-to-day.
On the OPEC(+) side, Saudi and Russian officials met to discuss the stability of global oil markets. Price declines have raised the prospect of intervention from OPEC+, and news of the Ruso-Saudi meet-up was enough to see oil prices gain some currency and raise beliefs of some kind of intervention.
In the longer-term, price declines could be upset by increasing Chinese demand. On Wednesday, the IEA said that China is expected to drive a two-million-barrel rise in the world’s daily oil demand this year, pushing it to a record 102 million. Expecations in the oil market, however, vary, because the Chinese government set its growth rate target at a modest 5%, signaling a changing economic environment, which could impact oil demand..
Stronger fundamentals ultimately will decide whether oil prices go up to down. The expectation now is that fundamentals will reassert over time, meaning that the banking turmoil impacted commodity markets only in the short-term. Ultimately, however, this rests on the degree of contagion in the financial system. Ongoing developments in the financial system, Fed interest rates, SPR buybacks, OPEC intervention, and Chinese demand, therefore are key events to watch for in the future.
All eyes on Algeria: how natural gas is shaping North-African politics
One country in North-Africa seems to be making the most out of the current energy crisis and a new era in great-power rivalry - Algeria. Great potential has fuelled massive interest in the country’s gas industry and led to a significant increase of gas revenues in the past years. As a consequence, the country is able to spend big, both domestically and abroad, and charter a more active foreign policy. The latter, however, is held under increased scrutiny by parliamentarians and senators across the Atlantic, raising questions about the risks of Algerian gas imports. Another question, which is worth asking, is to what extent Algerian gas potential can be turned into actual export flows.
This analysis will take a deep-dive into 1) the drivers of increased interest and cooperation in Algeria, 2) the outcomes so far, and 3) complications and geopolitical dynamics, after which a small outlook will be presented.
Drivers of increased interest and cooperation in Algeria
Increased interest and cooperation in Algeria and North Africa are partly driven by the war in Ukraine and the need to source new gas supplies. In a bid to curb Russian gas imports, both European and international energy companies are scrambling supplies across the globe. Before the war, Russian natural gas accounted for roughly 45% of EU imports or 155 bcm, whereas it is now standing at roughly 10% of EU imports or 34.4 bcm. That leaves a gap of roughly 120.6 bcm to satisfy demand. And while some supplies may be curbed by lowering demand through the increase of energy efficiency and the usage of other fuels, most will have to be sourced elsewhere.
Algeria, as a source of natural gas, offers much potential. It is Africa’s largest natural gas exporter and in combination with its location, the country could offer an ideal place to source gas. Algeria’s potential has led to increased interests in its gas industry. Other countries in North Africa, including Libya and Egypt, have also received increased interest. Notably, Libya secured an $8 billion exploration deal with Italian energy major Eni.
*Note that the Trans-Saharan and Galsi potential or planned pipelines.
Algerian gas market: Facts and Figures
Reserves: The country holds roughly 1.2% of proven natural gas reserves in the world, accounting for 2,279 bcm.
Production: Its production stands at 100.8 bcm per year.
Exports: In 2021 it exported 55 bcm, 38.9 bcm through pipelines, and 16.1 bcm in the form of LNG. European imports accounted for 49.5 bcm, 34.1 bcm by pipelines, and 15.4 bcm in the form of LNG.
Export capacity: Algeria has a total export capacity of 87,5 bcm: the Maghreb-Europe (GME) pipeline (Algeria-Morocco-Spain) 13.5 bcm, Medgaz (Algeria-Spain) 8 bcm, Transmed (Algeria-Tunisia-Italy) 32 bcm, LNG 34 bcm.
Aside from potential, ambition (on both sides of the Mediterranean) is another reason for interest and cooperation. Interest has come from the EU and several member states, but mostly from Italy. Instead of merely securing gas supplies, Italy aims to become an energy corridor for Algerian gas in Europe. This will boost Italian significance in the European energy market, increasing both transit revenues and investment in its own gas industry. Moreover, Rome seeks to increase its profile in the Mediterranean, mainly to stabilize the region and decrease migration flows. It views both Algeria and its national energy firm Eni as key factors in that aim.
Algeria is also looking for a more active role in the region. For the past years, the country has been emerging from its isolationism, which characterized the rule of president Bouteflika, who was ousted in 2019. With new deals and increased gas revenues it hopes to increase defense and public spending, prop-up its gas industry, which suffered from lack of investment, and stabilize its economy and the region. Aside from economic reasons, therefore, cooperation between the two sides is politically motivated as well.
What has this increased interest and cooperation so far led to?
As a result of increasing gas prices and rising demand, the Algerians have seen their revenues increase massively. Sonatrach, Algeria’s state-owned energy company, reported a massive $50 billion energy export profits in 2022, compared to $34 billion in 2021, and $20 billion in 2020. This will allow for more fiscal space and public spending. In fact, the drafted budget of 2023 is the largest the country has ever seen, increasing 63% from $60 billion in 2022 to $98 billion in 2023. Because of bigger budgets, Algeria will also be able to partly stabilize its neighbors by offering electricity and gas at a discount - something the country is currently discussing with Tunisia and Libya.
The Italian trade looks most promising and has led to multiple deals. Trade between the two countries has doubled from $8 billion in 2021 to $16 billion in 2022, whereas dependence on Algerian gas increased from 30% before the Ukraine war to 40% at the moment. Last year, Eni CEO Claudio Descalzi secured approval from Algeria to increase the gas its exports via pipeline to Italy from 9 bcm to 15 bcm a year in 2023 and 18 bcm in 2024, and last month, Italian Prime Minister Meloni, joined by Descalzi, visited Algeria to build upon that earlier cooperation. Again, two agreements were signed, one with regards to emissions reduction and the other to increase energy export capacity from Algeria to Italy.
The visit and new plans reflected ambitions from both sides. President Tebboune recently announced Algeria’s aim to double gas exports and reach 100 bcm per year and Meloni mentioned a new ‘Mattei plan’ (which refers to Enrico Mattei, founder of Eni, who sought to support African countries' development of their natural resources in order to help the continent maximize its economic growth potential, while facilitating Italian energy security). Furthermore, the Algerian ambassador stated the country’s intention to make Italy a European hub for Algerian gas, whereas Eni CEO Descalzi mentioned the possibility of a north-south axis, connecting the European demand market with the (North) African supply market.
Interest has also led to other plans, potential deals, and rapprochement. Firstly, the EU sees potential and aims to secure Algeria as a long-term strategic partner. Last year, the EU’s energy commissioner visited Algeria as part of “a charm offensive”. Secondly, the Ukraine war and Algeria’s abundance of gas supplies also seems to be the main reason for France’s rapprochement toward Algeria. In addition to this, Slovenia plans to build a pipeline to Hungary to transport Algerian gas as Algeria aims to increase electricity exports to Europe. Algeria’s future as an energy supplier could also go beyond natural gas, as last December German natural gas company VNG signed an MoU with Sonatrach to examine the possibilities for green hydrogen projects. Algeria’s future as a hydrocarbons supplier could also extend beyond Europe as Chevron aims to reach a gas exploration agreement with Algeria and is assessing the country’s shale resources.
Complications & geopolitical dynamics
Translating all that interest and cooperation into more Algerian output, and stable secure supplies for Italy and Europe, on the other hand, is a different story. There are several factors that hamper or complicate the growth of the Algerian gas industry and the potential North-South Axis. Those complications can be divided into two broad groups: (i) industry specific complications and (ii) complex (international) politics.
Industry specific complications
There are specific limitations to the technical feasibility of increasing production. Years of underinvestment, due to corruption, unattractive fiscal terms and a slow bureaucracy, have resulted in less exploration and development of new fields, which roughly take 3-5 years from the exploration phase to production. In combination with decline from maturing fields, this limits industry growth and export potential in the short-term. Internal audits show that Sonatrach can barely mobilize an additional 4 bcm per year, let alone the additional 9 bcm meant for 2024. Doing so will take a bite out of its LNG business, which currently sells for a much higher price. Exploration and development will take time and mostly affect the medium-term in 3-5 years. Furthermore, Algeria has to perform a balancing act between its exports and increasing domestic demand, which is set to grow 50% by 2028.
A North-South axis will require Italy to upgrade its gas network as well. The country will have to establish several energy corridors to demand markets in Europe and expand its domestic gas network, which requires billions of investment. In this light, some analysts point to the fact that claims about such an axis are currently rhetoric and are meant to secure investments that are needed for its own gas industry.
Geopolitics
Geopolitical considerations also may influence gas flows toward Europe. For starters, Algeria has a complicated relationship with Morocco, which according to Algiers, 'occupies’ the Western Sahara. Algeria maintains it is a sovereign territory and in 2021, this row resulted in the suspension of the GME pipeline, which runs through Morocco. While Spanish imports through the Medgaz pipeline increased from 8 bcm to 9 bcm in 2022, the closure of the GME pipeline resulted in an overall decrease of exports to Spain by more than 35%. By using gas (revenues) as a tool of statecraft, Algeria also managed to convince Tunisia in countering Morocco, after handing it economic aid.
The country’s relations with Russia might also complicate gas flows. Its relation encompasses military cooperation, including joint military exercises and weapons purchases. Algeria is the 6th largest importer of weapons in the world and roughly 70% of Algeria’s weapons are sourced from Russia. In 2023, its largest budget draft ever included a rough 130% or $13.5 billion rise in military expenditure and, in November, plans were announced to dramatically increase its acquisition of Russian military equipment in 2023, including stealth aircraft, bombers and fighter jets, and new air defense systems.
With the war in Ukraine, Algeria’s relation with Russia creates a risk of sanctions, with some U.S. senators and EU parliamentarians being particularly vocal on this. As a result of sanction risk, Sonatrach included a clause in its gas contracts, which allows for currency denomination change every 6 months, reflecting warrines of U.S. sanctions and dollar-denominated gas trade. Its recent application to BRICS, will increase the country’s capacity to charter its own foreign policy, without endangering security and trade ties to Beijing and Moscow.
Outlook
Significant rises in Algerian export output, outside of its current commitments, are not likely in the short-term.
Ambitions with regards to a potential North-South axis are largely rhetorical and meant to increase investment and gather broader regional and European-wide support for an energy corridor.
Sanction-risks remain low. Because of Algerian significance to the European gas market, the EU and its member states will likely try to maintain good ties with the North-African country.
The effect of future massive weapons purchases from Russia will likely have a negative effect on relations with the EU, but it is unclear whether that will immediately impact (future) gas flows.
Increasing gas revenues and bigger budgets will decrease the risk of domestic instability. As a consequence, Algeria has the possibility to charter a more active foreign policy - something we are currently already seeing. The main goal of such a foreign policy will be to stabilize its immediate neighborhood.
Risks of the German gas plans
This comprehensive mini-report from the Global Commodities Watch identifies the risks involved with German preparations and plans to curtail Russian gas supplies.
The East African Crude Oil Pipeline controversy
“Insufferable, shallow, egocentric, and wrong” is what Ugandan president Museveni called an EU condemnation of the country’s newest and biggest oil pipeline project, EACOP (The East African Crude Oil Pipeline). The pipeline, which will be developed in congruence with other oil projects in the country, has been an increasing source of controversy over the past months. While supposedly delivering economic benefits, the oil projects also stand in stark contrast with commitments to decrease carbon output. To complicate the matter even further, they also are a source of environmental and human rights concern.
The oil politics involved with EACOP and Ugandan oil do not only reflect the consideration between economic development and green agendas. To a large extent, protest groups have also made it significantly harder for the country to access the capital needed to develop the projects. Their approach, targeting the financial sector, potentially could make it harder to develop other fossil fuel projects in the future. As such EACOP has become a complex question of oil politics involving states, companies, financial institutions and civil society.
Uganda oil development
EACOP will connect the Kingfisher and Tilenga oil fields near Lake Albert (Western Uganda) to the port of Tanga in Tanzania. The reserves in these fields account for 6.5 billion barrels. Once finished, the project will be the longest heated crude oil pipeline in the world, spanning more than 1,400 kilometers, and able to carry 246,000 barrels per day. Due to the waxy properties of the Lake Albert oil, the pipeline needs to be heated to ensure a smooth flow.
Although EACOP Ltd claimed that pipeline construction will cost $4 billion, other sources state it will cost $5 billion. The combined cost of developing EACOP, Kingfisher Field, and Tilenga Field will amount to $10 billion. The shareholders will finance $4 billion and aim to finance the other $6 billion through a 60-40 debt to equity split, with the remaining 60% being funded through loans of financial backers.
TotalEnergies owns a majority stake of 62% in the projects, whereas both countries’ state-owned oil companies, UNOC (Uganda National Oil Company) and TPDC (Tanzania Petroleum Development Cooperation), hold a 15% stake each and CNOOC (China National Offshore Oil Corporation) an 8% stake. CNOOC will operate the Kingfisher field, which will produce 40,000 barrels per day, and Total will operate the Tilenga field, which will produce 190,000 barrels per day. In addition to the pipeline project and development of oil fields, a refinery will be built, which has a right of first call to 60,000 barrels per day.
The potential
The Ugandan government has framed the project as one of economic development. Uganda is projected to earn $1.5-3.5 billion per year, which is similar to 30-75% of its annual tax revenue, and Tanzania is projected to earn almost $1 billion per year. The projects should create approximately 10,000 jobs in both countries and bring $1.7 billion worth of work during its construction phase. Aside from that, cheap reliable power often plays a key role in lifting people out of poverty, which is what oil potentially may do for Uganda.
By becoming an oil-exporting country, it would also turn Uganda into a relevant regional player. As Tanzania is not an oil-producing country it offers the potential to form import-export partnerships with Uganda. There also is a hope that the pipeline-project eventually will reach beyond Tanzania and provide oil to the DRC and South Sudan. According to President Museveni, “it could serve the entire region long-term”.
The controversy
On the other hand, protestors and environmentalists point to the multiple risks that are involved with the projects. The biggest concern is carbon output. The Ugandan government, actually, argues that national oil production may lead to lower emissions, since the country’s current imports need to be trucked in from Kenya, creating high emissions. Similarly, Total claims it is one of the company’s lowest emitting projects. Nevertheless, campaign group STOP EACOP states the project will create 34 megatons carbon emission per year, when you take into account the downstream as well. That is twice the current size of Uganda’s and Tanzania’s emissions combined.
Another concern is the displacement of communities and wildlife. On the humanitarian side, supposed human rights abuse, delayed or insufficient compensation, displacement, increased prices and loss of land are all involved with the project. On the environmental side, 2000 square km of protected wildlife habitats will suffer from the construction of the pipeline and roads. Water sources and wetlands are also at increased risk of oil spillage.
To a certain extent the economic development argument is also being debunked. It is argued that the projected returns are incorrect, since they don’t take into account several factors. First of all, it is claimed that only ⅓ of the reserves are commercially viable. Furthermore, demand markets are undergoing a transition from fossil fuels to renewables. As such, Uganda and Tanzania may not find good returns on their investments. Even if the project were to generate decent returns, campaign groups argue that it will not benefit society, but mostly the country’s elite and that it potentially will worsen corruption.
Condemnation and campaigns
Due to the aforementioned reasons, the EU Parliament passed a resolution that condemned the construction of the pipeline. This in turn led to outrage among the East African countries that pointed to hypocrisy and double standards. According to them, Africa has a right to use and export their natural endowments as Western countries have done for hundreds of years.
Yet the EU wasn’t the only actor disapproving of the project. Major financial institutions have committed not to finance the project, due to campaigns from opposition groups. These groups aim to chip the 60% of funds that the project requires, which comes from major financial institutions. By tracking the banks that are mostly likely to finance the projects, they were able to pitch the risks, create pressure and ask them to make commitments. This approach has led to commitments from banks such as JPMorgan, Morgan Stanley, Citigroup, Wells Fargo, Barclays and Crédit Suisse. Certainly it does not make finance impossible, but rather harder and more expensive.
Risks and outlook
So far not a single metre of the pipeline has been built. That is not to say the project is on hold. The Kingfisher oil rig is in place and the Tilenga rig is on the move, marking the starting phase of project development.
On the one hand, the oil projects have a huge potential for economic development and if successful, it will improve Uganda’s standing in the region. On the other hand, there are significant downsides, such as displacement, environmental impact, and carbon emissions. The EU statement and commitment from financial institutions certainly places the project into bad light and makes it harder to secure funding. However, it will not be impossible and the gap left might be filled by Chinese and African banks, which in European eyes might be something to consider.
The Energy Charter Treaty is breaking up. Here’s why:
Last week, France announced its plans to withdraw from the Energy Charter Treaty. This decision followed similar announcements of countries such as the Netherlands, Spain and Poland to withdraw as well. The treaty has been decreasing in importance and could even be argued to be problematic. Yet, the question remains why these decisions have been made now and what the risks will be for France, other countries, companies, and energy (security) in general.
The Treaty
The Energy Charter Treaty (ECT) was initially designed to promote energy cooperation between Eastern and Western Europe, after the Cold War. It is a multilateral agreement, ratified by 53 countries, solely dedicated to the energy sector. The ECT allows for a common energy market and offers a forum to discuss energy-related issues. It also provides guarantees to energy companies with regards to their foreign investments, mainly compensation in the face of regulatory or policy changes.
Nowadays, the ECT’s role extends beyond east–west cooperation. Rather it is aimed at stimulating FDI and trade in the energy sector globally (at least between all its signatories). Its objectives are to contribute to energy geopolitics, energy security, and to overcome economic divisions. It does so through 1) binding provisions, related to investment protection, free trade, freedom of transit and a mechanism for dispute resolution and 2) non-binding provisions related to environmental protection and the promotion of energy efficiency.
The importance of the ECT, however, has decreased significantly over the years. Firstly, because of Russia’s withdrawal from the provisional application in 2009. As the country remained Europe’s main supplier of energy products throughout the years, it marked a certain obsolescence for the treaty that was specifically designed for energy cooperation.
Secondly, because of the rise of new global, regional, and bilateral treaties and partnerships. It has led to a fundamental question of what will happen to the ECT’s trade provisions, once all ECT members accede to the WTO. Does it become obsolete or will the risk of overlap create tension between the treaties during certain instances? It is not clear which norms will prevail, as there exists no explicit hierarchy.
Thirdly, the ECT failed in attracting FDI into non-EU countries. As such, it failed in one of its main policy objectives. Moreover, the main reason behind FDI in Europe had little to do with ECT provisions. Rather EU energy policies seemed to be the driving forces of FDI in EU member states, suggesting that the ECT’s impact there had been rather limited.
France’s decision
Yet the main reason behind the withdrawal plans of France and other countries is not the ECT’s decreasing importance, although that may have played a role in it. Rather, it has to do with some problematic aspects of the treaty, namely its dispute settlement mechanism. According to a report, this made the treaty a particularly attractive tool for foreign investors. It is one of its main fallacies. While it protects investors against states, it does not protect states against investors, specifically when they fail to meet contractual obligations. This one-sided guarantee has been controversial.
More importantly, however, are climate considerations. Although plans lie on the table to modernise the ECT’s agenda, it would not include phasing out fossil fuels. This in turn would mean that by 2050 at least one third of the remaining global carbon budget would still be protected by the ECT. Moreover, energy corporations would be incentivised to use the dispute settlement mechanisms as new national plans threaten their industry. Therefore, climate activists argue that governments will delay or even cancel their plans for fear of legal action. In other words, the dispute settlement mechanism provided will lead to “a regulatory chill effect”. Ironically, energy demand reduction is not protected by the ECT. For governments it marks the contradicting nature between their green plans and the ECT.
Following this, it seemed logical that France withdrew from the treaty. As French President Emmanuel Macron said last week: "we have decided to withdraw from the Energy Charter Treaty, first because it's in line with the positions we've taken, notably the Paris Accord and what it implies.” Yet, the Paris Accord was adopted almost seven years ago and the contradictions were well known years beforehand. So why now?
The reason seems to be strategic. With the need to find alternatives to Russian gas, France seems to be well aware of the opportunities that lie ahead. Combined with plans to speed up renewable energy developments, its withdrawal from the ECT marks a new energy strategy that should attract investors to France’s ‘green’ energy sector.
What are the risks?
Withdrawing from the treaty is not without consequences. France and other countries that have decided to leave will remain vulnerable to litigation for 20 years. This is a part of the ECT’s sunset clause. While the European Commission has proposed to limit that clause to 10 years, that will only apply to signatory countries. Hence, the Netherlands will opt for a third way, where they will sign the reformed treaty and then pull out. France has indicated to do the same.
Less protection for fossil fuel investments, however, will also lead to less incentives to invest. Hence, in the long-term foreign investments in the sector are likely to decrease. This is in line with decarbonisation plans, but the impact for energy security will be questionable. If renewable energy plans fail to deliver the needed supplies, the fossil fuel sector might not be able to supply them immediately as well. Inevitably, this will lead to tight markets and high prices, both for renewables and non-renewables.
There also is a geopolitical risk involved with leaving the treaty. It will create a vacuum, where other countries might be able to jump in. A major withdrawal from France and other countries might open up the door to China, according to some analysts. If China accedes, it will benefit from the treaty and it will be able to accelerate its BRI project on the Silk road. Hence, the decision of France and other countries might have consequences that go beyond a break-up with the protection of fossil fuel investments.
Energy insecurity in Pakistan
Since the Russian invasion of Ukraine, European countries have rushed to the global LNG markets to replace their main source of gas imports. Europe has almost secured its gas supplies, at least in the short-term, but in the process have driven up global LNG prices considerably. The average price for the Asian benchmark spot, for example, has risen 140% compared to 2021. As a consequence, Europe’s success has had major consequences for developing countries that are reliant on LNG, including Pakistan.
Pakistan has mostly been unable to outbid European countries on the international LNG market. Moreover, traders are worried that the cash-strapped nation might not be able to make future payments. As such, its invitation last month for bidding on a long-term contract, that was supposed to procure one LNG cargo per month, was left unresponded. Due to its inability to secure new LNG supplies, demand in Pakistan has fallen by 19% respectively, compared to 2021. Spot imports have fallen even further by a staggering 73%.
Outbidding, however, is not the only problem. Commodity traders have defaulted on their deliveries to make higher profits elsewhere. In the case of Pakistan, both Gunvor and Eni failed to deliver the contractually obligated volumes earlier this year. Most of its long-term contracts contain break-clauses, which require traders to pay a penalty. With record prices, however, traders are able to make a larger profit selling elsewhere, even when facing a penalty. This has led Pakistan to place emergency tenders, which according to IEEFA estimates has cost the country an additional US$58.57 million per cargo.
Increasing LNG prices are a blow to the country and exacerbate energy insecurity. The Pakistani economy is already under considerable pressure with high inflation and is still recovering from the massive floods earlier this year which affected more than 30 million people. Last month, it received a bailout from the IMF worth $1.17 billion. Moreover, according to some estimates, growing LNG imports could raise the country’s import bill to more than $32 billion in 2030, compared to $2.6 billion in 2021. It marks the financial unsustainability of the Pakistani LNG imports.
Pakistan’s responses
So far, the government has taken several actions to limit the consequences of its LNG shortage. The country has already upped its oil-fired power generation five-fold, which unfortunately has not been enough to prevent power outages. On top of that, it has introduced electricity conservation measures in June and announced plans to ensure gas supplies through LPG imports. Pakistan also increased its coal imports, most notably from neighbor Afghanistan. Some estimate that Afghan coal exports to Pakistan have more than doubled in 2022. In the period from July till September, however, that increase was equal to 484% compared to that same period in 2021.
Meanwhile, the Pakistani government has been in discussion with Russia regarding fuel imports and finance. Like India, the Pakistanis have shown interest in buying oil and gas from Russia at a discount. Russia and Pakistan have also reaffirmed commitment to construct the Pakstream pipeline, which connects the port cities of Karachi and Gwadar to Lahore. Some analysts believe the initial involvement of Russia in this pipeline project was to strengthen the Pakistani gas sector and increase its demand, in the process diverting Middle Eastern LNG supplies away from Europe. With current prices and decreasing Pakistani demand, this logic seems flawed. Rather, a better gas infrastructure would allow for additional Russian LNG to be imported by the South Asian country.
With LNG and other energy prices at record highs, Pakistan has suffered as a consequence. It has led to difficulty procuring new gas supplies and problems regarding its “assured'' long-term contracts. The country has suffered power outages and has had to be bailed out by the IMF.. While increasing its oil and coal usage, interest to import gas and invest in the sector, together with Russia, remains. Betting on Russian investments and imports, however, remains risky business.
Wheat supply in a de-globalising world
International sanction regimes are disrupting supply chains across the world. In this research paper, analysts from London Politica’s Global Commodities Watch (GCW) provide an overview of the major stakeholders, critical infrastructure, trade routes, supply and demand side risks, and forecasted trends for wheat.
Pipeline sabotage? Nord Stream and the politicisation of critical infrastructure
On September 26 and 27, gas leaks and explosions were reported on the Nord stream 1 and 2 pipelines. These occurred in Baltic Sea international waters, near the Danish island of Bornholm. Although neither of the pipelines was active at the moment, the amount of gas leakage was still significant. The timing, significance, and location of the leaks has led some to speculate that it was sabotage and that Russia deliberately attacked the pipelines.
So far, however, Western governments and officials have refrained from pointing fingers directly to Russia. As NATO secretary general Jens Stoltenberg argued: “This is something that is extremely important to get all the facts on the table, and therefore this is something we’ll look closely into in the coming hours and days”. It has however highlighted the importance of critical infrastructure and its role in the current stand-off between the West and Russia.
So what consequences did the leakage and supposed ‘sabotage’ have?
Economic consequences
The damage to Nord Stream coincided with news that new arbitrations over payments might lead to Russian sanctions against Naftogaz, Ukraine’s largest oil and gas companies. Consequently, benchmark futures of natural gas jumped 22%, the highest increase in over three weeks. Markets seem to have taken into consideration that now that pipelines have been damaged, the EU can’t request for them to be opened in case of an emergency. Nevertheless, with storage sites nearly at full capacity, heightened LNG imports, and mild weather forecasts for October, markets remained relatively calm.
Environmental
The environmental impact has been significant. Gazprom estimated that 0.8 bcm was released at the leaks. That number is almost equal to 1% of annual UK natural gas consumption, or 3% of its annual emissions. Were both pipelines actually active, the impact could have been much worse.
Political
After Danish and Swedish authorities launched investigations, suspicions of sabotage strengthened. In a statement by the Swedish security police, they said there were “detonations”. And in a joint letter to the UNSC, they stated that leaks were probably caused by an “explosive load of several hundred kilos”. President Biden argued the leaks were a deliberate act of sabotage as well. Meanwhile, Russian president Putin claimed the US and its allies were behind the attack.
The main logic behind a potential sabotage from the Russian side would be intimidation. Both in the Baltic Sea and the Atlantic, lots of critical infrastructure, such as pipelines or IT-cables, lie on the seabed. The attack on Nord Stream therefore would be a showcase for what Russia could do to other critical infrastructure. Ultimately, however, it would also mean that Russia has lost its element of leverage with gas.
As a consequence, EU energy ministers discussed the issue and European countries stepped up military patrols. In the North Sea, Germany, the UK, and France helped Norway in a show of force to increase security and patrol near energy sites. This was also a consequence of several unidentified drones being spotted near the sites. In the Mediterranean, Italy increased patrols near its pipelines which connect North Africa to Europe.
Risks
If this event turns out to be Russian sabotage, it adds a dimension to the conflict between the West and Russia. Although that conflict consisted of economic warfare and aspects of hybrid-warfare, physical attacks (on critical infrastructure) were absent. It begs the question whether we have entered a new phase of the war.
The risk, however, of physical attacks on other critical infrastructure remains limited. It is important to highlight that no gas flows were disrupted, because of Nord Stream’s inactivity. Combined with the ambiguity that was left about the perpetrator of the attacks, damage could be done without any consequences. This grey-zone aggression has been part of Russia’s playbook for years. Nevertheless, Russia knows the significance of physical attacks on other active pipelines would be far greater, and are more likely to trigger an article 4 or 5 response from NATO, even where proof is hard to ascertain. This limits the risk of physical attacks on other critical infrastructure.
The risks of 1) cyber attacks on critical infrastructure and 2) physical attacks on pipelines running through Ukraine, on the other hand, are greater, because it is more likely that Russia can maintain ambiguity there. It demonstrates the vulnerability of critical infrastructure and the difficulty of responding to coordinated attacks.
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