After the Russian Import Ban, Could Emerging Markets Help Meet the EU’s Oil Demand?

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  • The EU announced a ban on seaborne imports of Russian oil by the end of 2022.
  • Oil-exporting emerging markets could help meet this demand and gain new market share.
  • Financial and operational difficulties may restrict short-term production increases.
  • Despite oil demand, countries remain committed to the rollout of renewable energy.

Emerging markets are exploring opportunities to help meet the EU’s energy demand following the bloc’s announcement that it will ban seaborne imports of oil from Russia.

The move, announced on May 30 and set to be implemented by the end of the year, forms part of the sanctions crafted in response to Russia’s invasion of Ukraine in February.

Roughly 90% of the EU’s oil imports from Russia arrive on seaborne tankers, with the rest coming through the Druzhba pipeline. The exemption for pipeline imports allows Hungary – which receives 65% of its imports via the pipeline – and other landlocked European countries to maintain supply.

The decision is set to tighten the market for oil, which continues to be the largest source in the global energy mix. The International Energy Agency estimates that the ban will require the EU to find alternative supply for roughly 2.2m barrels per day (bpd) of crude oil and another 1.7m bpd of petroleum products.

Indeed, the EU ban sent oil prices to above $120 per barrel in the week after it was announced.

While members of the Organisation of the Petroleum Exporting Countries (OPEC) and other allied oil-producing nations, collectively known as OPEC+, responded to the EU’s announcement by agreeing to increase production by 648,000 bpd for July and August, this will not make up for the shortfall in supply.

Major OPEC producers Saudi Arabia, the UAE, Kuwait and Iraq have roughly 4m bpd of spare capacity that could be brought on-line quickly; however, the complex geopolitics and economics of the OPEC+ group has led many analysts to suggest that these countries may be hesitant to ramp up production significantly.

OPEC members provide options

Geopolitical considerations will shape how the EU meets its needs as the year progresses, but the broader dynamics present an opportunity for oil-exporting emerging markets – both OPEC and non-OPEC members – to increase production to meet demand.

In addition to bolstering the EU’s – and in turn, the world’s – energy security by providing supply, an increase in oil production and exports would provide an economic boon to certain emerging markets, many of which are still recovering from the economic effects of the Covid-19 pandemic.

One such country is OPEC member Libya. The country holds the largest oil reserves in Africa and is a short trip across the Mediterranean to ports in southern Europe, offering lower shipping costs than oil coming from the Americas or east of the Suez Canal. It is also exempt from OPEC+ production cuts.

Libya’s oil production reached 1.3m bpd in early 2022, although protests at production sites caused output to dip to 800,000 bpd in April. Returning to this year’s high would free up oil that could be exported to the EU.

Financing is another hurdle. Libya’s National Oil Corporation has ordered companies operating in the country to suspend maintenance and drilling because of a delay in the approval of the government budget.

Despite the challenges, any decision by the EU to increase oil imports from Libya could provide an incentive for private companies to invest in the country’s energy sector. In November last year the government began appealing to international oil firms and other multinational companies for investment in order to expand oil operations and resume upstream activity.

Another nation that stands to benefit is Nigeria. While OPEC increased Nigeria’s production quota from 1.74m bpd in April to 1.8m bpd in June, the country has struggled to reach these targets. It produced 1.42m bpd in May, and although this was the highest monthly figure for 2022 to date, the result was still below the 1.8m bpd seen in early 2020.

Declining levels of production have long been an issue for Nigeria, with output falling by 40% since 2012. In a report released in May, the World Bank cited a lack of maintenance and a deterioration in infrastructure efficiency as key factors behind the decline.

Nevertheless, Nigeria stands to benefit if it can increase output in line with its revised OPEC quota.

Latin America’s potential

Elsewhere, several non-OPEC emerging markets in Latin America are seen as possible sources of oil supply.

On June 6 international media reported that Italian energy company Eni and its Spanish counterpart Repsol could begin shipping Venezuelan oil to Europe as early as next month, with the US set to relax some sanctions on the South American country and allow the resumption of oil-for-debt swaps.

Meanwhile, Argentina’s oil production from shale fields reached decade-high levels in January, with analysts noting that further investment in infrastructure could help the country nearly double its overall production by 2026 and increase exports from current levels of less than 100,000 bpd to more than 500,000 bpd.

The Argentine government is working on a bill to ease capital controls on access to foreign currency that would incentivise energy companies to increase oil production for export.

Elsewhere on the continent, Colombia’s President Iván Duque said his country could produce additional oil to meet the EU’s needs, but stressed that it needed more foreign investment in exploration and production.

Colombian oil production averaged 740,000 bpd from January to November 2021, and the government announced a target to increase production in 2022 to 780,000-800,000 bpd.

Another potential supplier is Mexico. State-run oil company Pemex recorded $6.2bn in net profit in the first quarter of 2022, reversing a $2bn deficit in the same period of 2021, as production rose by 2.3% year-on-year (y-o-y).

The company has strong public backing and received $2.8bn in government support between January and March to help pay down its debt and finance the construction of the Olmeca refinery.

Notably, production from Mexican oilfields operated by private companies increased by 63% y-o-y in the first four months of 2022.

Impact on the energy transition

With oil demand rising, particularly in light of the supply shortages resulting from Russia’s invasion of Ukraine, the situation has prompted discussion about the implications this could have for the energy transition in oil-exporting emerging markets.

While some are likely to ramp up oil production in the short term to help meet global demand, many governments and energy companies remain committed to the long-term rollout of renewable energies.

For example, Saudi Arabia – the world’s largest oil exporter – aims to generate 50% of its electricity from clean sources by 2030, in part by rapidly expanding its total solar power capacity from the current level of 455 MW to 40 GW by 2025.

Key projects include a $5bn hydrogen plant in the NEOM smart city, as well as 400 MW in solar generation capacity and the world’s largest off-grid energy storage facility at the Red Sea residential and tourism mega-project.

The UAE is also pushing ahead with transition plans. Last month the government invited companies to bid for a 40% stake in a new 1.5-GW solar plant in Abu Dhabi.

Latin American countries have similarly ramped up renewable energy investment after a pandemic-induced slump in 2020.

International media reported that the continent added a record 17.5 GW of solar and wind capacity in 2021. Mexico, Argentina, Brazil and Chile all produce more than 10% of their domestic power from renewables, with $18bn recently invested in new projects across the region.

Author: Oxford Business Group

This article was first published by the Oxford Business Group and is republished with permission.


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