As an extension of my earlier piece on Divergent and Convergent Scenarios For Global Commodities During the Russia-Ukraine Conflict, this article delves into the significant changes in energy markets this year, marked by market volatility and geopolitical shifts.

The focus here is on how sanctions targeting Russia are elevating global commodities within the geopolitical arena, prompting a reevaluation of industrial policies in key regions and among major producers. For additional insights on nations impacted by the ongoing Russia-Ukraine conflict, refer to my prior work published in Areas & Producers.

Politically, Russia aims to reshape its industrial strategies to align with its anti-Western stance, while raw materials are primarily sourced from regions where sanctions are disrupting supply chains. This underscores Russia's necessity to assert greater "sovereignty" over global commodities.

This geopolitical ambition is closely tied to the China-Russia alliance, as both nations share similar goals regarding global commodities, potentially leading them to dominate raw materials in the world's most vulnerable regions.

Despite the negative perceptions surrounding certain commodities as instruments of power for rival governments, the global demand remains strong, raising critical questions regarding foreign policy: Which commodities are in focus? Who are the targets?

In this uncertain global climate, the escalating demand for raw materials, commodities, and energy is significantly influencing foreign policy in both developing and developed nations. I have previously explored how countries and corporations are developing industrial policies centered around oil and gas while preparing for the impending Energy Transition.

These strategies unfold against a backdrop of volatile global markets and diverging geopolitical trends, placing global commodities at the center of geopolitical discourse. For instance, the future of industrial production hinges on future-facing commodities, necessitating that industrial policies conform to Environmental, Social, and Governance (ESG) frameworks concerning global commodities.

Let me illustrate this further. The G-7 imposed a price cap on Russian oil, effective December 5. Shortly after, OPEC+ announced a reduction in oil production by 2 million barrels per day in October. This development followed President Biden's visit to Saudi Arabia aimed at reconciling differences between the US and Saudi Arabia.

Another contentious issue is the shale oil production in the US. According to Hess CEO John Hess, “OPEC is back in the driver’s seat.” He made this observation against the backdrop of declining shale oil production, which had previously transformed oil availability and pricing from 2009-2019. In 2022, US shale oil production was expected to increase marginally by 0.7 million barrels per day.

Energy experts concur that OPEC has regained significant influence over global oil supplies and market prices, tied to its production capabilities.

While several companies aim to capitalize on the G7's oil price cap on Russian maritime oil exports and the European Union's embargo on Russian crude, firms like ExxonMobil are now wary of the risks tied to Europe’s reliance on Russian natural gas imports.

Notably, in the third quarter of 2022 alone, ExxonMobil's earnings soared to $18.7 billion, indicating they have substantial capital to invest in natural gas production.

Natural gas output is closely linked to advancements in Liquefied Natural Gas (LNG) infrastructure and technologies. For instance, on April 11, 2022, TotalEnergies entered into a "heads of agreement" with Sempra Infrastructure, Mitsui & Co. Ltd, and Japan LNG Investment. This agreement, with Sempra holding 50.2% ownership, aims to boost LNG production capacity to over 6.75 million tonnes annually by adding a fourth train to the facility.

TotalEnergies’ Chairman and CEO Patrick Pouyanné stated, “The expansion of Cameron LNG will contribute to our LNG growth strategy by investing in low-cost, long-term competitive LNG projects with lower GHG emissions.” This reflects the company’s commitment to enhancing LNG exports in light of Russia's actions impacting European energy supplies.

While Equinor of Norway has stepped up to assist with Europe’s energy crisis, TotalEnergies appears poised to lead the charge in facilitating Europe’s energy transition, evidenced by this HOA.

As the largest exporter of US LNG and the second-largest LNG trader globally, TotalEnergies is well-positioned to enhance its export capabilities. The final investment decision regarding the Cameron LNG project is anticipated in 2023, further underlining the importance of US LNG for the European Union’s energy strategy.

TotalEnergies has been involved with US LNG since September 2016, when it acquired a majority stake in Barnett Shale assets. However, production is expected to taper off by 2028. The production capability at Barnett will enable TotalEnergies to regasify natural gas into LNG for export to Europe, Asia, and Africa.

Additionally, TotalEnergies is launching North America's first Carbon Capture & Storage (CCS) project at the Hackberry Carbon Sequestration (HCS) project. Senior vice president of LNG, Thomas Maurisse, emphasized the importance of reducing CO2 emissions at the Cameron LNG terminal, enabling the supply of low-carbon LNG, a vital element for energy transition.

It’s crucial to note that while major corporations are striving to implement Energy Transition initiatives globally, commitments to natural gas production and LNG exports are expected to rise. TotalEnergies has indicated in its 2021 Energy Outlook that natural gas and renewable energy will play complementary roles in the journey toward achieving Net Zero.

Despite US and EU sanctions aimed at reducing Russia's crude oil revenue through the G-7 price cap, Russian LNG exports to European countries are actually increasing, as indicated by S&P Global Platts.

At the same time, US crude oil production and exports are on the rise, reaching record levels according to the Energy Information Administration.

US crude oil exports have surged due to strong demand from Asia, with China, India, and South Korea emerging as the largest importers. This increase in inventory comes ahead of the December 5 deadline for the oil price cap against Russia.

In a surprising turn, the US government announced on November 28, 2022, the lifting of sanctions on Venezuela’s oil extraction operations, benefiting companies like Chevron. Ongoing discussions in Mexico City focus on creating a humanitarian spending plan with the Venezuelan government.

French President Emmanuel Macron visited President Joe Biden at the White House on November 30 and December 1, 2022, where discussions included the ongoing conflict in Ukraine and the Biden Administration's Inflation Reduction Act (IRA). Biden highlighted Macron’s friendship as a reason for this state visit.

This meeting bears significance for global commodities as Macron had recently hosted Venezuelan officials prior to the lifting of US sanctions at the Paris Peace Forum on November 11, 2022. The US and France share mutual interests in safeguarding investments related to global oil supplies, as numerous agreements have been made between American and French producers for oil exploration and production (E&P), particularly in Algeria and across the Middle East and North Africa (MENA).

On November 21, 2022, Saipem, an Italian oil and gas company, announced its increased involvement in offshore and onshore projects at the ADIPEC conference in Abu Dhabi, UAE. The CEO indicated that Saipem is actively pursuing tenders and bids, including a $4.5 billion deal with Qatargas for offshore gas compression complexes in Qatar and several contracts in Angola.

Saipem's CEO Alessandro Puliti, appointed in late 2022, is steering the company towards renewables and oil and gas contracts.

The developments at the producer level align with recent offshore oil and gas discoveries in Africa, particularly in Nigeria, Angola, and Mozambique.

Both Nigeria and Angola stand as major oil and gas producers on the continent. A significant offshore oil discovery near Luanda on November 8, 2022, was hailed by Greece's Prime Minister as a solution for both national and European energy security.

This discovery represents the largest fossil fuel find in Africa since the natural gas discovery in Mozambique’s Rovuma basin in 2010, positioning Mozambique as a key LNG player.

Thus, Nigeria’s inaugural floating liquefied natural gas (FLNG) facility is pivotal for addressing energy supply challenges in Africa and Europe. Its geographical advantages will enable it to export LNG to both regional and European markets.

According to Reuters, the North American energy sector anticipates increased investment in 2023, driven by larger budgets from leading oil and gas firms like ExxonMobil, Chevron, and Canadian Natural Resources Ltd. A Coal Production Update from October 2022 indicated a rise in coal production across North America and globally.

In a bold move, the European Union proposed a Market Correction Mechanism on November 22, 2022. The contentious initiative to implement a price cap on natural gas prices via the Title Transfer Facility (TTF) has been a hot topic within the EU. The Agency for the Cooperation of Energy Regulators (ACER) will oversee this price correction mechanism and implement safeguards against price volatility.

The natural gas price cap is scheduled to take effect in February 2023, aiming to limit prices to no more than €180 per megawatt-hour over three consecutive trading days.

After finalizing the legislation, Czech Industry and Trade Minister Jozef Sikela expressed satisfaction with the agreement, noting it would protect citizens from soaring energy prices and ensure market stability. The agreement received support under the EU's "qualified majority" rule, with 55% voting in favor.

Opposition has emerged not only from EU countries like Hungary but also from the American trading platform Intercontinental Exchange (ICE), which argues that the mere existence of a cap increases the likelihood of it being enacted.

Safeguards are in place, allowing the European Commission to suspend the price cap mechanism in times of significant market volatility.

Proponents of ICE’s stance may overlook developments beyond Europe. The Black Sea has become a focal point in the Russia-Ukraine conflict, with disruptions to oil supplies from the Caspian Pipeline Consortium affecting Kazakhstan's oil revenues, while the Nord Stream 2 pipeline exemplifies the new era of adversarial geopolitics.

In these contexts, sanctions on Russia have resulted in both divergent and convergent scenarios for global commodities during the ongoing conflict.

Despite these geopolitical dynamics, the EU continues to collaborate with countries on pipeline infrastructure and renewable energy initiatives. A memorandum of understanding (MOU) was signed between Hungary, Romania, Azerbaijan, and Georgia, aimed at developing a new energy source for the EU, facilitating natural gas transport from Azerbaijan to Romania through an undersea electricity connector in the Black Sea.

EU President von der Leyen underscored this project’s importance in reducing dependency on Russian fossil fuels.

“Since the onset of Russia’s war, we have chosen to distance ourselves from Russian fossil fuels and diversify our energy partnerships, and it is yielding results. The European Union has managed to compensate for the reductions in Russian pipeline gas,” she stated.

These assertions support my previous arguments regarding the Nord Stream 2 pipeline. In response to Michael Gorecki’s commentary in Transatlantic Perspectives, I maintain that abandoning the pipeline entirely is unwarranted, as politicizing it may reduce it to a symbol of the Russia-Ukraine conflict for years to come.

Energy pipelines serve as a conduit for EU collaboration with other nations while ensuring energy resources for European markets. This illustrates how sanctions on Russia intersect with industrial strategies and energy collaboration.

I will be publishing The Weekend Brief (TWB) regularly, exploring facets of global markets (including stock markets) at the intersection of technology, industrials, and global commodities. Follow the publication Areas & Producers for more insights into the future of critical producers and core areas of the global economy.

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