The Russia-Ukraine crisis and the shifting environment for global upstream investment
The Russian invasion of Ukraine and the subsequent imposition of
sanctions by a range of governments have served to reset the global
geopolitical compass, with an immediate impact on oil and gas
markets and investments. While the war is continuing and full
implications will take years to emerge, some early outcomes for
above-ground risk are already crystalising.
Market shifts and price dynamics create immediate costs and
benefits
Given Russia's global significance as an energy producer and Europe
as its main market, a full-scale recalibration of oil and gas
demand and supply in that region is a key non-military component of
the global response. So far measures imposed on Russia fall short
of impeding general oil and gas trade and shipping, while its oil
and gas companies can still invest overseas, despite restrictions
on finance. Western companies with announced plans to exit or halt
investments in Russia account for only a small percentage of the
country's oil and gas output and will therefore have a limited
impact on Russian production in the near term.
In this context, the Asia Pacific region, led by China, is emerging as an important if less than complete offset to anticipated cuts in demand for Russian production. All regions will be affected by increases in prices and likely slower growth in economic activity and demand while rival producer states will see opportunities for increases in production and exports as Europe re-balances its energy sourcing.
Near-term, high oil and gas prices represent a boon for net exporters, including Russia. Major beneficiaries include Angola, Iraq, and Kuwait, in which net oil exports as a percent of GDP will rise to well over 50%, assuming that Brent averages USD106/barrel in 2022. Conversely, rising costs for net importers will exacerbate existing inflationary trends that may foment civil instability, electoral shifts, and threats of regime change, as is already happening in parts of South Asia.
Current and aspiring producers benefit from the search
for new opportunities
Elevated prices and new sources of demand will create opportunities
for producer states where resource availability, project economics,
investor support, and infrastructure availability coalesce with
government backing.
Gas projects with access to existing infrastructure are in a particularly strong position to compete, lending new opportunities to African and East Mediterranean suppliers in particular. In some cases, this may persuade producer states to revive oil and gas licensing and rethink transition strategies. Changes to fiscal terms are likely to be slower to materialise, given the sluggish evolution of government policy, the uncertain impact of the energy transition, and producer government perceptions that changes in prices and supply dynamics will be sufficient to attract investment.
With higher prices, new market opportunities, and greater
realism regarding the role of fossil fuels in energy transition,
how host governments respond to the challenges of the current
environment will vary depending on the scale and maturity of their
resources, their economic wherewithal, and their structural
dependence on hydrocarbons. While country specifics are critical,
differences between producer peer groups are worth noting:
• Diversified producers like Brazil, Canada,
Mexico, Norway, the US, and the UK are likely to have to balance
priorities, with energy security perhaps shifting attitudes to
domestic hydrocarbon production even if longer-term energy
transition objectives remain in place.
• Net importers like China, Egypt, India, and
Tunisia are likely to double down on existing strategies to sustain
and grow production.
• Frontier / early-stage producers like Cyprus,
Morocco, Mozambique, and Namibia, with no existing export
infrastructure, may now find opportunities to accelerate
monetisation.
• Oil dependents, in most cases current or former
major producers like Algeria, Angola, Iraq, Nigeria, and Oman, may
find themselves with a potentially longer window of opportunity to
monetise their remaining reserves, leverage infrastructure, and
invest in diversification where there is the capacity to plan and
execute plans.
• Wealthy petrostates like Qatar, Saudi Arabia,
and the UAE are likely to maintain and/or accelerate existing
strategies to sustain and grow output in an effort to monetise
remaining resources in advance of a global energy transition.
Specific responses will vary by country, shaped in large part by
above-ground factors. Above-ground risks with particular relevance
in the current situation include:
• Geopolitical Risk, notably in Russia's immediate
neighbourhood.
• Real Per Capita GDP Growth, as production and
exports of oil and gas fluctuate and higher prices for crude and
natural gas begin to affect consumer spending.
• Primary Fiscal Balance and Transfer
Risk, reflecting some of the same factors that affect
overall economic activity but with sanctions adding a new dimension
to the possibilities for capital and foreign-exchange
controls.
• Ministerial/Policy Volatility, as some
governments re-prioritise energy security, albeit constrained in
cases by the level of Civil Society Risk, as
inflationary pressures increase.
• Other affected factors include Export Risk,
given recent and forthcoming changes to export policies and
infrastructure.
Energy transition efforts tempered by renewed energy
security concerns
The Ukraine invasion will also have implications for energy
transition, primarily in Europe, where a renewed focus on energy
security highlights the need to secure additional fossil fuel
supplies in short order. As indicated above, near-term measures
will likely include stepped up investment in LNG regasification as
well as investment to increase the production of biomethane and
renewable hydrogen and to front-load wind and solar. Beyond this,
there are indications that some countries are recognising that
nuclear will need to play a greater role.
In the United States, the administration is likely to double down
on efforts to accelerate the energy transition. While the drive to
supply additional gas to Europe may ease some near-term
restrictions, e.g., around new pipelines and even leasing, the
climate will remain the priority.
In the rest of the world, the elevation of security concerns will
prove positive for producing countries seeking to secure upstream
investment to counter energy poverty and may ease financing.
Overall, however, efforts to reduce hydrocarbon consumption,
combined with elevated prices and supply chain issues, will likely
curb the extent of demand growth, compounding transition
uncertainties in the longer term.
***
To read the report, Oil & Gas Risk Quarterly: Reverberations of the Ukraine Crisis - above-ground risk implications for the global upstream, sign up for complimentary access to the Upstream Oil & Gas Hub.
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.