The Russia-Ukraine Crisis and the Changing Environment for Global Upstream Investments – Advice Eating

The Russian invasion of Ukraine and the subsequent imposition of sanctions by a number of governments have helped recalibrate the global geopolitical compass, with immediate implications for oil and gas markets and investments. While the war is ongoing and will take years to see its full impact, some early results for surface risks are already emerging.

Market shifts and price dynamics cause immediate costs and benefits
Given Russia’s global importance as an energy producer and Europe as its primary market, a major recalibration of oil and gas demand and supply in that region is an important non-military component of the global response. So far, the measures imposed on Russia are insufficient to hamper general oil and gas trade and shipping, while its oil and gas companies are still able to invest abroad despite funding restrictions. Western companies with announced plans to abandon or halt investments in Russia account for only a small percentage of the country’s oil and gas production and will therefore have a limited impact on Russian production in the short term.

In this context, the Asia-Pacific region, led by China, is proving to be an important, if not complete, offset for expected falls in demand from Russian production. All regions will be hit by price increases and likely slower economic activity and demand growth, while competing producer nations will see opportunities for production and export increases as Europe rebalances its energy procurement.

In the near term, high oil and gas prices are a boon for net exporters, including Russia. Key beneficiaries include Angola, Iraq and Kuwait, where net oil exports as a percentage of GDP are set to rise to well over 50% assuming Brent averages $106/barrel in 2022. Conversely, rising costs for net importers will exacerbate existing inflationary tendencies that can fuel civil instability, electoral delays and threats of regime change, as is already happening in parts of South Asia.

Current and emerging producers benefit from finding new opportunities
Increased prices and new sources of demand will create opportunities for producing countries where resource availability, project economics, investor support, and infrastructure availability are merging with government support.

Gas projects with access to existing infrastructure are in a particularly strong competitive position and offer new opportunities, especially for suppliers in Africa and the Eastern Mediterranean. In some cases, this may prompt producer nations to revive oil and gas licensing and reconsider transition strategies. Given the sluggish development of government policies, the uncertain impact of the energy transition and the perception by producer governments that changes in prices and supply dynamics will be enough to attract investment, changes in fiscal conditions are likely to have a slower impact.

With higher prices, new market opportunities and greater realism about the role of fossil fuels in the energy transition, host governments’ response to the challenges of the current environment will vary depending on the extent and maturity of their resources, their economic opportunities and their structural reliance on hydrocarbons. While country specifics are crucial, the differences between the peer groups of producers are worth noting:
Diversified Producers such as Brazil, Canada, Mexico, Norway, the US and the UK will likely need to weigh their priorities, with energy security potentially changing attitudes towards domestic hydrocarbon production even if longer-term goals for the energy transition remain in place.
net importers such as China, Egypt, India and Tunisia are likely to redouble their existing strategies to maintain and increase production.
Frontier / early stage producers such as Cyprus, Morocco, Mozambique and Namibia, which lack existing export infrastructure, may now find ways to accelerate monetization.
oil addictsin most cases, current or former large producers such as Algeria, Angola, Iraq, Nigeria and Oman, may have a potentially longer window to monetize their remaining reserves, leverage infrastructure and invest in diversification where capacity is available there are plans to plan and execute.
Wealthy petrostates such as Qatar, Saudi Arabia and the United Arab Emirates are likely to maintain and/or accelerate existing strategies to sustain and increase production to monetize remaining resources ahead of a global energy transition.

The specific responses will vary from country to country and will be largely determined by above-ground factors. Above-ground risks of particular relevance in the current situation include:
geopolitical riskespecially in the immediate vicinity of Russia.
Real GDP growth per capitaas oil and gas production and exports fluctuate and higher crude oil and natural gas prices begin to impact consumer spending.
Primary budget balance and risk of transmissionreflecting some of the same factors that affect all economic activity, but with sanctions that add a new dimension to opportunities for capital and exchange controls.
Ministerial/political volatilityas some governments give new priority to energy security, albeit in some cases constrained by the level of Civil Society Riskwhen inflationary pressures increase.
• Include other factors involved export riskgiven recent and forthcoming changes in export policy and infrastructure.

Energy transition efforts are tempered by renewed energy security concerns
The invasion of Ukraine will also have implications for the energy transition, particularly in Europe, where a renewed focus on energy security underscores the need to secure additional fossil fuel stocks in the near term. As indicated above, near-term measures will likely include increased investments in LNG regasification, as well as investments to increase biomethane and renewable hydrogen production and to frontload wind and solar power. In addition, there are signs that some countries are recognizing that nuclear power needs to play a bigger role.
In the United States, the government is likely to redouble efforts to accelerate the energy transition. While the quest to ship additional gas to Europe could ease some near-term restrictions, e.g. B. in relation to new pipelines and even leasing, the climate will remain the priority.
In the rest of the world, increasing security concerns will prove positive for producer countries, which are looking to invest upstream to tackle energy poverty and could facilitate financing. Overall, however, efforts to reduce hydrocarbon consumption combined with elevated prices and supply chain issues are likely to dampen the magnitude of demand growth and increase transitional uncertainties longer term.


To read the report, Oil & Gas Risk Quarterly: Reverberations of the Ukraine Crisis – Overground Risk Implications for the Global Upstream, sign up for free access to the Upstream Oil & Gas Hub.

Posted on May 09, 2022 by Cat HunterDirector, E&P Conditions and Above Ground Risks – North Africa and Levant


David GatesSenior Advisor, IHS Markit


Mariam Al-ShammaDirector, Energy Research and Consulting

This article is published by S&P Global Commodity Insights and not by S&P Global Ratings, a separately managed division of S&P Global.

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