All roads lead to Africa: Opportunities and risks of the Trans African Highway network
In the build up to Nigeria’s next presidential elections due on 25 February 2023, the ruling All Progressives Congress (APC) party has suggested a suspension of spending limits in the budgetary process in its manifesto. According to presidential candidate Bola Tinubu, this would allow the government to “hire millions of unemployed Nigerians to modernise national infrastructure”, arguing that “a truly national highway system must be built to make road transportation faster, cheaper, and safer”. In the past, Minister for Public Works and Housing Babatunde Fashola has highlighted that these efforts transcend Nigeria’s borders, notably with the completion of the Trans–West African Coastal Highway (TAH 7): “We’re trying to deliver a better life for five countries and over 40 million people who use that corridor, almost on a daily basis. [...] The future is bright, this is an important investment for the people of Africa to achieve the objective of the Africa Union (AU) to create a trans-African highway.’’
Source: The Trans African Highway network, Wikimedia Commons, 2007.
The opportunities
This reinvigorated optimism for transnational transportation across the continent is embodied in the Trans African Highway (TAH) network, developed by the United Nations Economic Commission for Africa (UNECA), the African Development Bank (ADB), and the AU in conjunction with regional organisations. Financing is also supported by foreign development funds. The pursuit of such projects is vital to the development of African countries. In fact, the IMF estimates that around 40 per cent of the continent’s population lives in a landlocked country. Yet considering the high economic dependence of most African states on commodity exports and the low levels of intracontinental trade ー extra-African merchandise exports represented 86.6 per cent of total exports in goods from Africa in 2019 ー access to global shipping routes is vital. The completion of the TAH network coincides with the gradual setting up of the African Continental Free Trade Agreement (AfCFTA) which seeks to create a free trade zone encompassing all African Union states (bar Erythrea) and lift 30 million people out of extreme poverty by increasing intercontinental trade. UNECA highlights that the operationalisation of the AfCFTA will stimulate demand for land transportation and “double road freight from 201 to 403 million tonnes”.
The risks
Besides these potential opportunities, the gargantuan TAH network presents several economic, political, environmental, social and security risks. Economically speaking, the main risk source is the difficulty for developing countries to cover the high costs of maintenance. According to the World Bank, lack of maintenance can have aggravating socio-economic consequences: “poorly maintained roads constrain mobility, significantly raise vehicle operating costs, increase accident rates and their associated human and property costs, and aggravate isolation, poverty, poor health, and illiteracy in rural communities”. Furthermore, the South African National Road Agency estimates that “repair costs rise to six times maintenance costs after three years of neglect and to 18 times after five years of neglect”.
Politically speaking, an important risk source to the success of TAHs is the potential lack of cooperation of neighbouring states. Diplomatic leverage may be found in increasing bureaucratic processes at border crossings to cause congestion and delays ー although this risk may decrease in the long term as the AfCFTA is gradually implemented and imposes lighter border controls.
Environmentally and socially speaking, risk sources mostly emanate from rural areas. TAH projects may have to provide environmental mitigation and compensation for any ecological damage caused during construction phases, as well as go through long and complex acquisition processes due to tribal land ownership rules.
Finally, from a security perspective, the risk of land route disruptions and damage to infrastructure is extremely high in regions where conflict may arise, as is the case for the Ethiopian portion of TAH 4 which runs past the country’s war-torn northern regions.
Overall, the TAH network will undoubtedly help with African development through intracontinental trade. Yet, making this development sustainable for the decades to come will be a challenging feat Africans are already fully aware of: in the AfCFTA Secretariat's own words, “economic integration is not an event. It’s a process”.
Africa in the “white gold” rush
The global supply of lithium ore has become an increasingly tangible bottleneck as many countries move towards a green transition. The International Energy Agency (IEA) predicted that the world could face a shortage of this key resource as early as 2025, as demand continues to grow. The increasing popularity of electric vehicles (EVs), which saw sales double in 2021, as well as other products which require lithium batteries, have been primary factors in this supply crunch.
Demand for lithium (lithium carbonate in this case) has driven high prices, which also nearly doubled in 2022, over $70,000 a tonne, and put pressure on the mining industry to increase production. This has led to heightened competition over this strategic resource and a rush to explore new reserves. An emerging arena in this competition has been Sub-Saharan Africa which has the potential to become a major player in lithium production, behind already established producers in South America and Australia. This region does, however, pose a unique set of challenges for lithium production in terms of infrastructure as well as a diverse and risk prone political constellation.
Within the region there are several countries which have already been tapped as potential producers or have already developed some degree of extraction capacity. Among these are Mali, Ghana, the DRC, Zimbabwe, Namibia and South Africa, at this stage most of these countries are at some stage of exploration, development or pre-production, currently only Zimbabwean mines are fully operational.
The political instability in some of these countries is a primary concern in the future of lithium production. Mali stands out in this regard with the withdrawal of the French intervention force in 2022, after nearly 10 years, and the ensuing power vacuum. In other countries such as the DRC political risk has been largely tied to corruption in governance which limits competition potential as well as human rights and environmental concerns which emerged around cobalt mining.
Zimbabwe offers a perspective into the most developed lithium operation in the region. In early 2022, Zimbabwe’s fully operational Bitka mine was acquired by the Chinese Sinomine Resource Group. Also in 2022, Premier African Minerals, the owners of the pre-production stage Zulu mine, concluded a $35 million deal with Suzhou TA&A Ultra Clean Technology Co. which was set to see first shipments in early 2023. This was followed by a similar $422 million acquisition of Zimbabwe's second pre-production mine Arcadia by China’s Zhejiang Huayou Cobalt.
Zimbabwe’s government responded to this mining boom by banning raw lithium exports stating that “No lithium bearing ores, or unbeneficiated lithium whatsoever, shall be exported from Zimbabwe to another country.” This move is intended to keep raw ore processing within the country, and despite initial appearances will not apply to the Chinese operation, whose facilities already produce lithium concentrates. Yet, this policy does demonstrate the active role that the government is able to play in the market, and their willingness to harness this economic windfall.
Even the most developed lithium mining operations in the region must pay close attention to the political situation unfolding around them. As competition over this strategic resource becomes more acute, the role of soft power will likely play a key role in negotiating favourable terms and preferential treatment in the exploitation of lithium reserves.
Critical Raw Materials - The Geopolitical risk of supply chain dependencies
The Covid-19 pandemic coupled with the war in Ukraine have led to major structural changes and shifts in the global economy, leading to debates about the possible end of globalisation. These major changes in geoeconomics have shaken the international liberal order, enhancing pre existing challenges such as dependencies with strategic rivals for critical raw materials and rare earth elements. This article highlights the geopolitical risks of supply chain dependencies for rare earth elements in three steps. It will investigate which elements and materials are considered to be strategic and why. It will then analyse the interdependencies between extraction and mining countries, with a specific focus on China. It will conclude with a reflection on the main risks and trade-offs of these geopolitical supply chain dependencies.
Critical Raw Materials (CRMs), Rare Earth elements (REEs) – a group of seventeen metallic elements – and critical minerals – non-fuel mineral or mineral material – are considered crucial for strategic industries, such as technologies used in the digitisation process, the energy transition and the defence industry. They are used in the construction of wind turbines and solar panels, advanced electronics, batteries for electric storage, cars, the development of technologies and components of fighter jets. Geopolitical shifts, such as the acceleration in the digitisation process, the energy transition, coupled with the war in Ukraine may cause supply shortages or additional vulnerabilities to supply chains. These shifts pose challenges such as finding alternative suppliers and alleviating dangerous dependencies.
To better understand the importance of these supply chains, it is worth investigating two examples of strategic sectors that require critical raw materials: the energy sector and the defence industry.
The energy transition
Climate change is at the top of the agenda for several international organisations and countries around the world. The dangers we face due to increasing temperatures and the consequences of this phenomenon for the environment, human beings, and the cascade social, political and economic effects, has increased the urgency for alternatives. Population growth over the past decades has led to the increase in the demand for energy and consequently to the rise of oil, natural gas and electricity prices, together with a further depletion of natural resources and raw materials. Higher energy prices, exacerbated even more by the current war in Ukraine and the politicisation of natural resources by Russia, urges new alternatives such as renewables and an acceleration in the transition towards the so-called green sources of energy. However, in order to produce renewables such as wind turbines, solar panels, or electric batteries for cars, CRM’s such as lithium, cobalt, tungsten, nickel or platinum are needed. These critical raw materials are scarce in supply, unevenly distributed, expensive to extract, and paradoxically even toxic for the environment. Moreover, in most cases the majority of these sources are located in countries whose political situation may be defined as unstable, characterised by autocratic governments or both: 50% of the world’s supply of cobalt, for example, is located in the Democratic Republic of Congo and 40% of manganese in South Africa. China, moreover, will be analysed deeper in the subsequent section and is by far the country that controls most of the world’s extraction and processing capacities for raw materials.
Defence Industry
In the defence industry there are multiple critical raw and rare earth materials used in the production of satellites communications, aeronautics, military surveillance systems and fighter jets’ components, such as lithium for batteries. Due to their significant roles for national security, they are listed among the 50 critical and strategic materials and minerals for the United States. As for the energy transition, the risk for the defence industry lies in the dependency of the supply chain from countries that are either unstable or strategic rivals: countries that because of their domestic political and social situations may increase the market volatility, soar prices, or simply use their leverage for supply cut-offs or hybrid attacks on domestic production lines. Niger, for example, is an important exporter of uranium, however, its domestic and neighbouring unstable political context makes it an unreliable partner. A disruption in the supply chain of a critical raw or mineral material may, indeed, undermine the production, reparation or modernisation of military equipment, as it already happened with the interruption of F-35 fighter jets deliveries due to cobalt sourcing problems. Fighter jets, like the F-35, require around 417 kg of rare earth materials for critical components such as electrical power systems and magnets. F-35s deliveries were suspended as the company’s producer, Lockheed Martin, realised the magnet used in the Honeywell-made turbomachine — an engine component that provides power to its engine-mounted generator — was made with cobalt and samarium alloy coming from China.
China
Critical rare earth, minerals and raw materials are unevenly distributed, which makes powers such as the United States and Europe obliged to rely on foreign and overseas countries — China, Australia, Canada, Russia, Africa or Central Asia. Yet, there is one country above all others, that has the most power and control over extraction, processing, export and with an almost monopoly of the refining process of CRM (90%), this is China. One of the biggest Chinese rare earth extraction, mining and refining companies, for example, is the China Northern Rare Earth Group High-Tech Co Ltd (Northern Rare Earth), whose headquarter is in Inner Mongolia Baotou, and is specialised in rare oxide and magnetic materials. The almost Chinese monopoly over the refining capacities of rare earth materials is of crucial strategic importance. The bottleneck on rare earths is, in fact, the concentration and purity of natural deposits and the need to refine mined minerals with energy-intensive processes. A recent study by Benchmark Mineral Intelligence shows, indeed, how China’s power and control over the production of lithium ion batteries for electric vehicles, for example, relies for 80% just on the refining process (Figure 1).
Figure 1: “Where does China’s dominance lie in the lithium ion battery to EV supply chain?”
Source: Benchmark Mineral Intelligence
In 2010 a European Commission sponsored study group identified 41 critical raw materials, of which 14 were considered of high supply risk and high economic importance, among which there were antimony, beryllium, cobalt, fluorspar, gallium, germanium, graphite, indium, magnesium, niobium, Platinum Group Metals (PGMs), Rare Earth Elements (REs), tantalum, and tungsten.
To assess the concentration in commodity markets the index used is the one developed by the economists O. C. Herfindahl and Albert O. Hirschman. The Herfindahl-Hirschman Index (HHI) is defined as the sum of the squares of the fraction of market share controlled by the 50 largest entities producing a particular product. The maximum value of this index is unity, and the US department of Justice established that between 0.15 and 0.25 the concentration is considered as moderate; above 0.25 it is, instead, highly concentrated. China’s global market position with regards to these critical materials is of particular importance as it produces more than 12 of the 41 critical materials identified by the European Commission, 9 of which of high supply risk.
China’s rise in market share of critical materials’ global production has sharply increased in the past few decades, leading the country to acquire a dominant strategic position. This outcome is the result of three main factors: the country’s large resource base; the Chinese government's long-term emphasis on strategic raw materials, rare earth, minerals and magnets for the “Made in China 2025” strategy; and finally, China’s ability to produce raw materials at a lower cost. China is the largest battery producer: dominating battery material separation and processing, component manufacturing, and controlling the downstream end of mineral processing and rare earth magnets, all critical elements necessary for the energy transition. This is a part of the global strategy adopted by China and best exemplified in the Belt and Road Initiative (BRI): gaining control of material production outside of China, imposing production quotas or restrictions to exports, leading to higher prices and volatility. To further consolidate its dominant role and power in the CRM’s domain, China has, moreover, recently established the China Rare Earth Group Co. Ltd: merging three state-owned rare earths entities. This megafirm, based in South China, accounts for around 62% of the country’s heavy rare earths supplies and it will enable the country to increase its competitiveness and pricing power, triggering dangerous consequences for the world supply chain.
The geopolitical risk of this dependency is twofold. On one hand, there is the confrontational nature of China, who as a power, could potentially restrict exports during a dispute or simply due to domestic production needs, thus causing a spike in prices. On the other hand, the risk is determined by the deep interdependence between Western powers and China for scarce, rare and critical materials. Indeed, between 2017 and 2020 the USA has imported around 76% of rare elements from China (Figure 1), whereas Europe 98%.
Figure 2: Major import sources of nonfuel mineral commodities for which the United States was greater than 50% net import reliant in 2021
Source: US Department of the Interior, US Geological Survey, Mineral Commodities Summary 2022
Furthermore, a report presented by the Government Accountability Office in 2010 shed light on the dominant role of China at all levels of the supply chain for Rare Earth Elements (REE). China produces 95% of raw materials, 97% of oxides, and 90% of metal alloys, and holds 37% of REE world reserves. From a military perspective, the high concentration of raw materials production by a strategic rival is incredibly threatening in case of a military confrontation due to the potential disruption to weapons systems production.
Risks and trade-offs
It is noticeable from the previous analysis how the concentration of CRM’s supply in the hands of just one global actor immediately increases the risks of interdependence. Countries with large market shares in the supply of one critical material can distort its production, increase market vulnerability and the volatility of prices, causing strategic disruptions.
Two possible solutions could limit the supply chain risks for critical raw materials and rare earth resources: on one hand finding new suppliers, on the other increasing controls of market shares. The first one is diversification: many resource-rich countries have been neglected in the recent multinational Minerals Security Partnership in June 2022 agreement, such as Vietnam, Chile, Argentina, Indonesia, the Philippines, Brazil, Cuba, Papua New Guinea, Madagascar and Mozambique could all be candidates for critical mineral production. However, despite trying to diversify and finding possible alternative suppliers, some rare earth materials are scarce and finite in nature. The second alternative, therefore, may be to increase partnerships and international cooperation, rather than isolationism, through multinational systems and controls over excessive market shares of a single commodity by one country. The United States, for example, has already released joint statements and signed agreements with multiple countries on critical material supply chains, security of dual-use technology, and mutual supply of defence goods and services. In this direction goes also the recent establishment of a transatlantic supply chain for rare earth metals spanning from Canada to Norway and Sweden. The mining will be performed in Canada’s Northwest territory, by the company Vital Metals, the only one in North America not selling to China. The long-term and strategic goal, therefore, is to avoid China or any dependence on it for the supply chain.
In conclusion, there is a double trade-off for policymakers. On one hand, the pervasiveness of Chinese presence and control of so many critical raw materials, rare earth, mineral and magnet sources, makes it difficult to tackle a politically strategic and rising rival power, while depending on it for critical supply chains. On the other hand, but also interconnected, the trade-off is between China and climate change. The energy transition, necessary to defeat climate change, requires technology and CRM that comes from China’s production. Therefore, is it possible for Western countries, such as the United States and the European Union, to counter the Chinese rise while having such risky supply chain dependencies?
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.
Indonesia and the possibility of Russian oil
In an interview given to the Financial Times in September 2022 Indonesian President Joko Widodo, said his country needs to look at “all of the options” as it contemplates buying cheap Russian oil to deal with rising energy costs. This extraordinary measure would be the first time in six years that Indonesia imports any oil from Russia. As it concerns south-east Asia’s largest economy, the potential ramifications are significant.
Why is Indonesia’s government considering this?
Amidst the global inflationary environment, the Indonesian government recently cut its fuel subsidy by 30%, therefore increasing consumer fuel prices by a large margin. The higher price of oil since Russia’s invasion of Ukraine means the Indonesian government has spent ever greater amounts for the benefit of consumers. In order to control this swelling subsidy budget Widodo took the unpopular decision to decrease government support for fuel, leading to a series of demonstrations and protests.
With conflicting aims of limiting the increase in budget expenditure on the one hand whilst responding to public opinion for lower prices at the pump on the other hand, it is no small wonder the Indonesian government is considering buying cheaper oil. Jokowi says “there is a duty for [the] government to find various sources to meet the energy needs of the people”. Moscow offering discounted oil at 30% lower than the international market rate has therefore become an attractive solution.
Russia is left with no choice but to sell cheaper oil due to western sanctions, a situation which will worsen if and when the much-rumoured G7 price cap on oil is implemented. From December 5th onwards the EU and the UK will impose a price cap on Russian oil shipped by tankers or else prohibit their transport. This move is already giving India and other significant importers of Russian oil leverage in negotiating oil price discounts, an advantage Indonesia would benefit from.
Are there alternatives?
Yet alternative options do exist. In particular the sale of State-Owned Enterprises (SOEs) could fill the hole left in the Indonesian government’s energy budget. Partially privatising the government oil group Pertamina is being mulled, with the firm’s geothermal branch expecting its IPO before the end of the year. With its $606 billion SOE sector equivalent to half the country’s gross domestic product, the fiscal incentives for such actions are strong.
The government is also attempting to upgrade ageing refineries, in particular through a controversial partnership with Russian state energy company Rosneft. One of the projects, the Tubang Oil Refinery and Petrochemical Complex, is expected to cost $24 billion and will increase Indonesia’s crude refining capacity by 300,000 barrels a day. In the context of Russia’s invasion of Ukraine, continued dealing with Russian SOEs poses its own complications in navigating western sanctions.
Risks and Outlook
The foremost risk with purchasing Russian oil comes from American warnings of sanctions for those involved in buying Russian oil using western services. With 80 per cent of global trade denominated in US Dollars, this could be difficult to avoid. The mere threat of such sanctions would affect the appetite of international investors, crucially regarding Indonesian government bonds. In the context of monetary tightening, this is a strong deterrent.
Yet the Indonesian government might follow the Indian model. Russia has recently become India’s largest supplier of oil, as India cashes in on the considerable price discounts offered. Yellen, the American treasury secretary, indicated that the US would allow purchases to continue as India negotiates even steeper discounts due to the western price cap. Monitoring the Indian case could prove fruitful as a bellwether for economic success and international reactions. However, the Indian government is less dependent on international investors' bond buying to fund its budget deficit meaning Indonesia’s risk exposure towards this is of greater importance
The Indonesian government will carefully study these options. Partially listing SOEs or increasing domestic refined supply may not make up the government’s budgetary hole without large-scale changes to the local economy. In the short term, Indonesia handing over its G20 presidency and shortly assuming the ASEAN one may factor into its decision.
In the long term, this temptation of Russian oil will remain. There are clear economic benefits to this by solving the conflicting aims of limiting budget expenditure while keeping consumer prices low. Furthermore, the United States’ tacit green light on buying Russian oil towards similarly developing countries minimises the chances of international reprimands.
This is reinforced by arguments often used against European countries to not buy Russian oil or gas holding little relevance in Indonesia. Notions of ‘supporting Putin’s war’ are of little geopolitical relevance to Indonesia if grain flows from Ukraine stay constant.
The likelihood that Indonesia will begin buying Russian oil is low. The scale of risks involved, particularly regarding sanctions, will dissuade the Indonesian government. The spate of interviews given in September from Indonesia's energy minister and President were likely moves to test the waters among investors and the international community. This decision is of course subject to rapid change given Indonesia’s unpredictable regulatory environment where policies can change on a dime.
The dilemma faced by Indonesia means that south-east Asia’s largest economy is firmly in the camp of countries calling for a rapid resolution to the Russia-Ukraine conflict.
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.
Providing for the Peninsula
This collaborative research paper by London Politica’s Global Commodities Watch and Ukraine Watch sheds light on the critical infrastructure for the supply of Russian water, fuel and military equipment through and for Crimea and investigates how these may be affected by pressure from Ukrainian forces in the months to come.
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.
Russia attacks Ukrainian Energy Infrastructure
Ukrainian energy infrastructure has suffered immense attacks by Russia since its invasion of Ukraine in February 2022. Since Ukraine’s attack on 8 October on Kerch Bridge, which links Russia to annexed Crimea, Vladimir Putin has increased its air strikes against Ukraine’s energy infrastructure. This follows Russia’s capture of the Zaporizhzhia nuclear power station in Ukraine and recent attacks on the Nord Stream natural gas pipeline in the Baltic Sea, which supplies energy from Russia to Europe. According to the UK Ministry of Defence, Russia likely intends “to cause widespread damage to Ukraine’s energy distribution network”, especially as winter approaches. As of October 2022, nearly 40% of energy infrastructure has been damaged or destroyed and Ukrainians have been urged to stockpile on emergency essentials such as water, blankets, and socks.
As part of a wave of strikes since 10 October, Russian missiles have damaged the offices of Ukraine’s electric transmission company energy in Kyiv, as well as eight energy facilities in Lviv, Burshtyn, Ladyzhyn, Kryvyi Rih, Konotop, and Kyiv. The upswing in Russian military operations directed at Ukrainian energy infrastructure has and will continue to have substantial geopolitical consequences and contribute to increased tension in strategic relationships. President Zelensky claims the increased attacks are aimed at initiating a refugee exodus, especially as winter creeps closer and greater heating is required to keep households warm; the realisation of this aim will, without doubt, further burden the strained energy systems of EU countries that choose to host Ukrainian refugees. The likely increase in emigration from Ukraine into neighbouring EU countries, and even Russia, will reduce civilian resistance to Russian operations geared towards the annexation of Ukraine. With resistance warfare having been key to Ukraine’s defences in certain regions, emigration out of Ukraine will inflate Russia’s chances of success.
The weapons used in these attacks are of particular importance for analysing the conflict's geopolitical consequences. The employment of Iranian air-to-surface missiles, the Shahed-136, and the possible deployment of the Fateh-110 and Zolfaghar, short-range surface-to-surface ballistic missiles has been highlighted recently; the provision of weapons and the Russo-Iranian partnership will further antagonise Western powers and solidify the growing East-West rivalry in current geopolitics. With fresh EU sanctions placed on Iranian entities and officials, the chances of a revived JCPOA agreement, commonly known as the "Iran nuclear deal", continue to look bleak. The EU had been pushing for the revival of the deal struck in 2015. This has rapidly changed following the current civilian uprising in Iran, supply of weapons to Russia and the reluctance of the US to further negotiate. The hope the EU held for Iran rejoining the energy market and the lower oil prices this could have led to has been lost.
To combat Russian airstrikes, Ukraine has officially requested Israeli expertise in air defence, including the Iron Dome and Iron Beam. The request creates a dilemma for Israeli officials and could create new tensions in its relationship with both the West and Russia. Israeli officials must conduct a cost-benefit analysis. There is the benefit of testing the technology and gathering information on its functionality against Iranian weapons but the Israeli government must also consider the Jewish population in Russia, the Russian diaspora in Israel as well as the current Iranian position in Syria. There is a current threat of the Jewish Agency that facilitates the immigration of Jews to Israel in Russia being shut down. It would make it very tough for Jews in Russia to immigrate to Israel if they wish. That is especially important in the present as some Russian youths are searching for ways to escape being enlisted. There are also fears of further Russian involvement in Syria in support of Iran if diplomatic ties between Russia and Israel become strained, including Russia’s current neutrality towards Israeli attacks.
Will Inflation Destroy the Credibility of the U.S. Dollar?
The US Dollar is widely considered as an indispensable part of international trade. It’s the pillar of the Bretton Woods system. Since the end of WWII, the U.S. Dollar emerged as a standard medium of exchange for international trade, which was only further entrenched after the collapse of the Soviet Union, the fall of the Iron Curtain and end of the Cold War. The Bretton Woods system came to an end after the termination of the convertibility of the Dollar to Gold in 1971, rendering the Dollar a fiat currency. In recent years, the U.S. economy has been losing the dominance it once had in its share of global GDP.
The COVID-19 pandemic acted as a catalyst for this changing dynamic. The most important factor for a financial powerhouse is the entity's share in the world as a reserve currency. Historically, the Dutch East India Company made the Guilder an important player in global trade, a position which was then passed to the British Pound Sterling, followed by the U.S. Dollar. The pandemic and the reckless money printing by the Federal Reserve will and has caused irreversible damage to the U.S. economy.
The critical reason for the Dollar's importance as a reserve currency is because of the confidence investors, bankers and traders put in it. It is the standard currency for conducting almost all transactions, as mentioned earlier. Right now, the Dollar is the best performing currency relative to global foreign exchange rates. This can be attributed to a variety of geopolitical risks within the global economy such as China’s zero Covid policy and its troubled real estate sector. These events have driven investors to safe-haven investments. The problem is, what happens if the very value of this medium of exchange is under threat? There will be an erosion of faith in the currency. If these volatilities are to be realised, it would cause an exodus of investments away from the Dollar, propelled by behavioural economics and high frequency trading that could lead to its value crashing. It should be noted this is an extreme scenario. A key reason for considering the possibility of Dollar ‘hyperinflation’ is the money printing of the past 24 months, which has inserted a staggering 80% of all Dollars ever created into circulation. Inflation is not instantaneous, it takes months, sometimes even years. A cause for this delay is the lack of ‘monetary velocity’. Monetary velocity is the rate of transactions that occur within an economy, put more simply, the amount of money that changes hands. The pandemic abruptly halted this monetary velocity, but this was only temporary. We now see inflation rates of over 8%. The White House blames this on the Russia-Ukraine war. The war has indeed exacerbated the rise in commodities prices and even inflation to an extent but this trend preceded the invasion. Even with the Federal Reserve raising interest rates, it is not nearly enough to retract funds already in circulation.
In the coming months, inflation is most definitely set to worsen and there is the possibility of the US economy slipping into recession. Although bears often have an alarmist tendency of screaming ‘perpetual crisis’, upcoming quarters are not viewed with a positive outlook.
The Chinese Renminbi had been referred to as a competitor that could topple the status the Dollar currently holds. This is questionable. Although the Chinese economy is the closest competitor to the United States, this cannot be said for foreign exchange dominance. The Renminbi does not possess nearly the same level of investor confidence that the Dollar does. The currency's volatility is also problematic with Beijing restricting convertibility for its citizens and diaspora. In the long run, the prospects look a lot more decentralised, meaning instead of the Dollar being completely replaced, there is a higher probability of a basket of currencies emerging that could include alternative currencies such as Renminbi and the Euro.
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?
Potash 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 potash.
Potash is a fertiliser, essential for increasing agricultural yields and feeding the growing population of the world.
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.
China’s push for hydrogen energy: The power of ambition for green infrastructure
In March 2022, China announced its target to produce approximately 200,000 tonnes per year of green hydrogen and at least 50,000 hydrogen-fuelled vehicles by 2025 to supplement its target of reaching net-zero carbon emissions by 2060. This comes after a huge push for hydrogen use during the 2022 Winter Olympics in Beijing. With China being the world’s largest producer of hydrogen at 33 million tonnes annually—80% being grey or blue hydrogen, widespread usage of green hydrogen is anticipated for China’s energy infrastructure.
In understanding hydrogen, there are three main forms: grey, blue, and green. Grey hydrogen is generated using fossil fuels and other high carbon-emitting sources and blue hydrogen is produced using low carbon-emitting sources such as steam methane reformation with Carbon Capture, Usage and Storage (CCUS) or other fossil fuels with CCUS. On the other hand, green hydrogen is made through the electrolysis of renewable energy sources and emits no carbon emissions.
The success of China’s move towards green hydrogen will depend on whether it can geographically connect its renewable-rich regions in the western provinces to the high hydrogen demand areas on the coast in China’s eastern provinces, as well as efficiently and cost-effectively store hydrogen during periods of high production yet low demand for green hydrogen energy. For example, while energy supply of hydrogen produced from solar energy sources usually outweighs demand during the summer months, energy demand rises during winter months due to higher electricity needs—such as for heating—and lower solar energy generation on account of shorter days during the winter. For this reason, green hydrogen energy storage is crucial to meet mismatched demand and supply periods.
In terms of transportation, hydrogen can be transported in a variety of ways depending on the transportation distance. For shorter distances, retrofitted pipelines for high-pressure gases or natural gas blending are the best options. Currently, China has two pure hydrogen pipelines in place—although both are under 500 kilometres—and one hydrogen-natural gas blending pilot project. For longer distances, hydrogen could be shipped in the form of ammonia, gas tanks, liquefied, or through retrofitted subsea transmission pipelines. However, converting hydrogen to ammonia or cryogenic liquid is still extremely expensive and nascent in terms of technology, especially as liquid hydrogen technology is only used in China’s aerospace and defence sectors. This also poses a problem for hydrogen storage in the form of liquid.
Another option is underground storage within depleted oil and gas reservoirs, salt caverns, or aquifers. However, China’s natural storage options are limited; thus, there is large scale investment into developing underground gas storage across China. Hydrogen can also be stored through gaseous storage and tube trailer technologies; however, steel containers used in China for hydrogen storage have a lower pressure capacity than that used in Europe, North America, Japan, and South Korea. Hydrogen regulations must therefore be amended to improve China’s competitive hydrogen storage ability.
While challenges for transportation and storage persist, ambition for green hydrogen energy usage across China is growing. The country now has more than 250 hydrogen refuelling stations, making it the country with the highest number of hydrogen refuelling stations globally. Moreover, investments are being poured into green hydrogen infrastructure and technology solutions in China. There is no doubt that in due time, China will be a key player in the global hydrogen industry.
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.
Saudi Arabia threatens to cut oil production as a response to US/Iran Deal
Last week, Saudi Arabia’s Energy Minister Abdulaziz bin Salman threatened to cut oil production through OPEC+ in response to the recently volatile markets, which, according to him, stray away from the ‘fundamentals.’ However, according to analysts, the move may be aimed at the US which is slowly on its way to revive the 2015 nuclear deal with Iran from which the US withdrew in 2018 under former President Trump.
Saudi Arabia - the world's top crude oil exporter - wields strong leverage in OPEC and OPEC+, and there are two main reasons for its recent threats. Firstly, after cutting production of oil since the onset of the Covid pandemic, OPEC+ has been increasing production for two years now. Still, the organisation has not been meeting its targets each month by million barrels. In July, OPEC+ missed its target by 2.9 million barrels a day. Secondly, the potential revival of the Iranian nuclear deal poses an economic and security risk to Saudi Arabia, as it would invite Iranian oil back into the world’s markets. The Saudis might fear that lifting the current sanctions would allow Iran to use its new profits in funding terrorist activities - similar to what Israel fears. Moreover, Riyadh likely plans to put a price floor of $100 per barrel - something which would be hard to achieve if the sanctions on Iran were to be lifted. According to the Financial Times, ‘A new nuclear deal could restore as much as 1.3mn barrels a day of Iranian oil exports — equivalent to about 5 per cent of Opec’s total supply — easing traders’ fears of shortages as Europe tightens sanctions on Russian crude shipments.’ Although Iran would not raise output immediately, as it would need to revive parts of its oil industry, it does have large reserves stored at sea ready to release as soon as possible.
If the nuclear deal goes through, markets could experience further volatility, which has already been heavy. Since June, the cost of a barrel of oil has slid by $25. Moreover, Saudi Arabia’s threats alone have stirred movements in the markets, where the price of Brent crude oil rose from $94 a barrel on Monday, August 22 to $102 a barrel on Thursday, August 25. Regardless of the outcome, oil markets can expect further activity driven purely by insecurity.
Commodity Report 2022: A Strategic Assessment of Key Commodity Markets
A comprehensive political risk and market report focusing on 16 of the world’s most critical raw resources and how geopolitical competition is impacting them;
Energy- Oil, natural gas, coal, uranium, green hydrogen
Metals- Lithium, copper, iron ore, Rare Earth Metals, Alumnium
Agriculture- Rice, wheat, corn, cotton, coffee, soybeans