The Nord Stream 2 gas pipeline has been a subject of heated debates all along the construction cycle. The pros and cons are abundantly exposed in the public domain and have been at the centre of technical and political discussions for several years. The project comes amid a wide range of comments and statements on the high political level, involving leaders of Germany, Russia, the United States and the European Union. The polemic around the Nord Stream 2 takes place in a particular context marked by the growing tensions between Russia and the West and recurrent security incidents in the East of Ukraine and the Crimea area. Those factors add further to a tendency to overemphasize political and security dimensions of the Nord Stream 2. Consequently, the project has been associated with far-reaching strategic implications. Referring to the opinions expressed by politicians and experts on both sides of the Atlantic, Western media have represented the pipeline construction as infringing on the NATO interests in the region and frustrating the unity of the European nations. The pipeline has also been presented as laying the ground for Russian military offensive into its European neighbourhood. This has created quite an exceptional environment for a project which was designed merely as an extension of the already existing pipeline route (Nord Stream 1). Indeed, the project could hardly be viewed in ‘normal circumstances’ as a very new element in, or a substantial change, to the European energy and security landscape.
Making an extra argument in favour or against the project will not be the objective of this article. What it will, however, try to explore is to what extent the contention around the Nord Stream 2 may interfere with existing security balances in Europe and how far it can impact strategic security relations in a triangle formed by Russia, the EU and the USA.
On the one hand, the developments around the Nord Stream 2 are quite similar to those which accompanied earlier projects of hydrocarbon transit from Russia to Europe, starting from the Nord Stream 1 and back to the Cold War times. This can be noticed by looking at the international reaction to the project. Indeed, many arguments currently advanced against the Nord Stream 2 have already emerged at the order of the day on several occasions. The narrative is commonly constructed along the lines of Europe’s energy vulnerability and its dependence on external energy supplies, from the Cold War era “red oil” threat to later Soviet and now Russian gas dependency. Ten years ago, the opponents of the first Nord Stream pipeline put on the table almost the same points of criticism. They considered the project as an attempt to bypass traditional transit countries, exert political and military influence on them, gain strategic dominance over Europe.
The diplomatic and political manoeuvres around the Nord Stream 2 are also not entirely new. Back in 1962 (a time when oil and not gas was the main product in energy trade relations between the USSR and Europe) NATO countries introduced a US-proposed embargo on oil pipes and connected technology for the Soviet Union. This strategy was enacted as an attempt to delay the construction of the pipeline named Druzhba (the Russian for ʻfriendshipʼ) intended to bring the country’s oil to Europe. Further embargo on pipeline technologies was implemented in the early 1980s by Ronald Reaganʼs government. The measure was supposed to prevent the construction of the Soviet export gas pipeline Urengoy-Pomary-Uzhhorod, in which several European companies and banks had a stake. For these past events, various features of the European and transatlantic policy were quite similar to the present times. The division of Europe into supporters and detractors of the pipelines from Russia, US and NATO attempts to block Russian energy deals with the European companies, and the national governments’ subjection in international affairs to the energy majors’ strategies, do not sound like anything new. Thus the actual contention over the Nord Stream 2 is inscribed into the longer-term turbulent history of the Russian hydrocarbon transit projects in Europe.
On the other hand, today’s context is different, and there are mainly two new elements which account for the change. First is that the world has entered a new historical period, security-wise far less structured, predictable and manageable than the Cold War times and even the post-Cold War era. Dramatically reduced level of trust between the USA and Russia, coupled with the harsh rhetoric of their leaders and continuous mutual accusations raise the conflictual potential in the bilateral relations. US-China competition over trade and economic leadership adds to further international complexity. The growing number of actual and potential military conflicts, including hybrid ones, brings about a higher risk of escalation with unpredictable consequences. Serious concerns hover over disarmament and non-proliferation regime, with its significant components fallen apart or remaining in limbo. While the demise of the time-proved mechanisms aimed at conflict prevention may be traced back to 2002, when Washington’s withdrew from the Anti-Ballistic Missile treaty (ABN Treaty), the recent developments, mainly the US decision to pull out from the 1987 Intermediate-Range Nuclear Forces (INF) Treaty and Russia’s suspension shortly after of its own compliance with the pact, have put the finishing touch to the arms control and disarmament agenda of the whole post-Cold War era.
In such a context, armed conflicts are likely to break out or grow in intensity along one of many existing fault lines. The cross-border energy projects also turn into dividing factors within the current confrontational conjuncture. Consequently, North Stream 2 has got the potential to impact the European geopolitical scene profoundly.
The second new element pertains to the US domestic hydrocarbons production and the way it strains the competition for the European gas market sharply. Only about a decade ago, the United States was supposed to become the largest importer of liquefied gas. However, the shale revolution brought about a sharp increase in domestic gas production. Paradoxically, the infrastructure previously designed to import LNG to the USA was used later on to export gas. That contributed to a significant reduction in the cost of American LNG projects compared to similar endeavours in other countries (Qatar, Australia and Russia). By 2020, the production capacity of the six existing US LNG plants reached about 78 million tons, and the United States is now quite able to outrun Qatar in production volumes (this is apart from being currently the world’s leading exporter of refined oil products).
Meanwhile, domestic gas production in the European countries accounts today for less than 50 per cent of domestic consumption. The demand for imported gas is growing. Over the past six years, gas supplies from external sources have increased by an average of almost 4 per cent annually. In 2018, European countries imported 326 Bcm of gas, 4.8 per cent more than in 2017. In the first half of 2019, the total net gas imports in the EU amounted to 210 Bcm, which was 19 per cent more than in the first half of 2018, amid increasing consumption (+4.5 per cent) and decreasing domestic production (-7.6 per cent), pointing to further increase of gas import dependency in the EU. Russia remained the top pipeline gas supplier of the EU, covering the major part (almost 45 per cent) of total extra-EU gas imports.
The approximate market share volume in Europe for the US gas producers may potentially elevate up to 60 – 80 billion cubic meters, but only if supplies from Russia are effectively restricted. Because of the hurdles which the US LNG may face on the European market due to the growing competition with the cheaper pipeline gas from Russia, its export may find itself limited only to the markets of the Asia-Pacific Region and Latin America with only a marginal proportion going to Europe. That explains the rationale behind some non-market restrictive measures, or sanctions, which serve as an instrument to sideline the competitor and politically facilitate American LNG flows toward Europe. President Trump and high officials of his administration expressed on various occasions their opinions on the North Stream 2 project, which oscillated from lukewarm to overtly adverse. The US ambassadors in Berlin and the Hague overtly pressured local governments and private companies to reconsider their support for or involvement with the pipeline. In June 2019, the US House of Representatives’ Foreign Affairs Committee approved the Protecting European Energy Security Act, a bill which would impose sanctions on anyone who sells, leases, or provides pipe-laying vessels used in the construction of a Russian-origin energy pipeline that makes landfall in Germany or Turkey. A month later, the US Senate Foreign Relations Committee advanced the bill that would impose sanctions on the Nord Stream 2 as an effort to “protect European energy security and Ukraine’s stability”.
Finally, on December 20, 2019, the US President signed a sanctions package on the Nord Stream 2 and another offshore pipeline designed by Moscow, Turkish Stream (also called TurkStream). As an immediate effect, the Swiss-Dutch company AllSeas in charge of laying the pipes in both projects announced its withdrawal from the Nord Stream 2, causing presumably a one-year delay to its completion.
The surplus shale oil and gas production in the US has impacted the governmental approach toward diplomacy. Ever since the 1970s, Washington had criticized the use of energy as a political instrument; however, once the self-sufficiency was achieved, energy sanctions have become the tool of choice for American foreign policy. This new role of the US — that of the ‘energy hegemon’ — will likely have several effects on the transatlantic relations and international security.
First of all, overusing sanctions in the energy domain would affect the supply security of the EU countries and necessitate some innovative safeguards against further deterioration. A situation when almost all non-US sponsored energy supply projects in Europe may face fierce American opposition on political grounds is constraining for actual and potential investors into hydrocarbon transit business. As long as the US economic interests find their way in Europe under the guise of political considerations, the stakes of the European companies involved in the Nord Stream 2 (or other energy projects with Russia or Iran) will remain at risk. That kind of setting may result in a broader awareness within the EU about the diverging political priorities of Washington. It is also possible to expect the elaboration of some specific measures aiming to mitigate the effects of the US sanctions on what Europeans see as their legitimate business and security interests. It should be noted, that the big question is whether the EU will have enough of united political will and capacity to take a course of action that goes against the attitude of its central political and commercial partner, the US. However, the ongoing discussions in Europe about the de-dollarisation of the energy products trading, as well as some attempts made by France, Germany and the United Kingdom to set up a special purpose financial vehicle (INSTEX) to facilitate trade with Iran, are some early examples of a search for greater autonomy.
Secondly, fierce US lobbying against the Nord Stream 2 stokes tension to an already complex and sometimes explosive European security landscape. The US and some Eastern European countries used to strengthen the arguments against the project by stressing its linkage with the ongoing conflict in Ukraine. It purportedly followed therefrom that the raison d’être of the North Stream 2 was to slowly strangle Russian neighbour’s economic and political capabilities, particularly by causing Ukraine to lose around 2 billion euro annually in gas transit fees when the new pipeline becomes operational.
However, by the end of 2019 Moscow and Kyiv reached a new five-year agreement on Russian gas transit through Ukrainian territory. Ukraine got the supply volumes it wanted: 65 billion cubic meters in the first year, and 40 billion the next year. In the absence of the Nord Stream 2, delayed by the US sanctions, Gazprom might have to supply some 75 Bcm through Ukraine in 2020.
Nevertheless, the critics of the project are already extending the strategic implications of the pipeline to the Baltic area. The standard argument here is that the pipe would give Russians a pretext to patrol the entire Baltic sea, as well as provide infrastructure for information transmission and for tracking the movement of naval vessels. From that reasoning follows that adequate countermeasures need to be designed and implemented by NATO in order to prevent a “blow” against security in Eastern Europe. As a consequence, the whole area is getting locked in a highly conflictual conjuncture aggravated by already existing regional security challenges, such as the demise of the Intermediate-Range Nuclear Forces Treaty and the ongoing military buildup on the NATO’s Eastern flank.
Thirdly, the recurrent difficulties in involving Europeans into sustainable and smooth economic partnership in the gas sector, as well as the American sanctions which could eventually apply to any additional lines to the Russia-sponsored pipelines in Europe, incentivize Russia to reconsider the geometry of its energy export routes. The deliveries of Siberian gas to China in the amount exceeding 1 trillion cubic meters in 30 years began via a new trunkline — ‘the Power of Siberia’, with the annual capacity of 38 Bcm . The reorientation of substantial gas volumes toward the East is a sign that the former Cold War allies seem to be on the way of upgrading their relationships while trying to fend off escalating pressure from the West. Washington clearly designates Russia and China as US strategic rivals, and this precipitates both countries to cooperate on a broader range of issues, like energy and related infrastructure, international security and domestic governance. With all the limitations which an alliance between Moscow and Beijing may face, this it is likely to become a consequential factor of the strategic landscape in Eurasia and beyond.
Fourthly, the growing US pressure both on Russia and on Europe to stanch the Nord Stream 2 construction causes discords within the EU and is likely to rebound badly for the European political unity already put to the test by many economic and security issues. The controversial reputation of Donald Trump’s international policymaking could pose a problem to those EU member states that follow American president in warning against the project. On the contrary, those who support the Nord Stream 2 or stay neutrally favourable toward it, are likely to be in a more advantageous position by representing their attitude as resistance to external pressure and uncompromising defence of national and European interests. The German’s pattern of political conduct fits well into this framework. Berlin supports the pipeline construction (regarded primarily as a business project) and defends it as a contribution to national economic development and secure energy supply for Europe. In a way, Germany has revealed the limits of pressure that President Trump is prone to exercise on the US allies and adversaries alike. What is happening proves that applying coercion, or just evoking it publicly, can bring about the opposite effect. That holds true for the Nord Stream 2 which has got broad public support within German society, and is now championed both by major ruling political parties in the current CDU/SPD coalition as well as three parties of the opposition: the far right AfD, the liberal FDP, and the extreme left, die Linke. The same holds in other cases as well. For instance, another President Trump’s favourite subject of anger concerning Germany is its defence spending. However, pushing Berlin into increasing it up to 2 per cent of its GDP makes it extremely difficult to do so. On the one hand, existing polling data proves that Germans oppose defence spending above the 1.5 per cent of GDP, already promised by Angela Merkel by 2024. On the other hand, hardly any politician in Germany wants to be seen succumbing to Trump’s overt forcing. Although there is no direct link between the German involvement with the Nord Stream 2 construction and its vision of the defense spending obligations, the underlying factor on both accounts is compelling American demand for clear-cut solutions to the issues, which turn out to be much more nuanced from the German standpoint.
The overemphasized political and military dimensions of the Nord Stream 2 increase pressure on the strategic relationship between Russia and the West. The anti-Russian rhetoric fans the continuous contention around the project in the American and European mass media. The moment when it happens is all the more inopportune, taking into account the deteriorated security environment in Europe which moves closer to the untrammeled arms race with the demise of the INF Treaty and the uncertainty about the future of the New START — one of the last pillars of the arms control regime. International energy supply projects have become — nolens volens — closely intertwined with political and security developments, be it escalation between the US and Iran at the Strait of Hormuz — a vital shipping route linking Middle East oil producers to global markets — or the simmering conflict in the East of Ukraine, in the vicinity of a transit corridor for Russian gas exported to Europe. Being a constant element of the strategic picture, energy is more and more regarded as a dividing factor which serves the interests of one party to the detriment of the other. The application of this conflictual paradigm to the Nord Stream 2 gives rise to yet another fault line amidst already strained European political and security environment.
Paradoxically, with the Nord Stream 2 contention, the very concept of energy resources supply and sharing acquires a confrontational connotation in Europe. Whereas, the same idea was underlying regional integration back in the mid-20th century. The European Coal and Steel Community (ECSC) established by the Paris agreement in 1951 was intended to neutralize competition between European nations over natural resources and prevent further war with Germany. The visionary idea behind the transnational community implied that amidst dramatic lack of trust toward a particular country the best way to avoid conflict and to restore confidence was to involve the distrusted state into a large-scale energy project. Unfortunately, subsequent historical developments on the European continent resulted in a situation where the idea of promoting extended energy partnership as a pledge of lasting peace seems no longer attractive. The Nord Stream 2 case demonstrates quite clearly the lack of collective will on behalf of the European Union to engage on a long-term basis with its Eastern neighbour in the gas sector. Keeping in mind the limitations of any historical analogies, back than the ECSC represented a political option in dealing with a nation which was suspected of seeking regional domination. In the modern days, rather than making out of the Nord Stream 2 another squandered opportunity for building a more sustainable relationship with Russia, the West, and primarily the EU as a close neighbour, could have looked at the pipeline beyond its primary function of one-way gas supply. The connecting gas artery might also serve to send something back from Europe toward Russia, albeit in a virtual sense, like a better understanding of European priorities and concerns, trust, and a vision of a shared future. The project could have also been viewed as a safeguard against presupposed Russian military invasion into the countries of the EU Eastern periphery. The possible damage to the pipeline which would provide significant and much-needed export revenues for the national economy is a convincing disincentive for Moscow to mount some dubious warfare operation in its neighbourhood. However, this perspective was not able to make its way through alarmist rhetoric which depicted the Nord Stream 2 as a part of Russia’s sinister designs. The same reasoning certainly reinforces the aggressive image of Russia and gives additional sense to NATO’s raison d’être. At the same time, it leaves Moscow disenchanted with the European partners, locks the country out in a reactive posture and makes look for strategic alliances elsewhere.
Finally, the US-Russia contention over the Nord Stream 2 is likely to take a toll on the transatlantic solidarity. The trends going in that direction are gaining strength driven by the specifics of the current American foreign policy. It would be premature to argue that the European elites are ready to break ranks with Washington. However, on several issues, such as the nuclear deal with Iran (JCPOA), Middle East policy, the role of NATO or relations with China they show increased independence and greater consideration of their national interests. The way things will develop for the Nord Stream 2 will be partly determined by the unfoldment of the debates over the greater European strategic autonomy from the US. However, even if the outcome of these debates tilts the balance in favour of the Nord Stream 2, it is difficult to predict for how long that could last. The European position regarding the project has indeed proved to be a complicated, precarious symbiosis between internal strategic concerns, imposed security frameworks and economic motivations.
From our partner RIAC
 As Roberto Cantoni notes, those were not the only USA-proposed blockades aimed at hindering Soviet industrial projects: “…In 1946, a penicillin plant program launched by the United Nations Relief and Rehabilitation Administration to build up the capacity of the pharmaceutical industry in Eastern and Southern Europe was significantly delayed by an American embargo on extractor technologies. The State Department refused to grant export licenses for the necessary equipment to pass the Iron Curtain. Other products including radioisotopes and computer equipment were also embargoed to stifle Soviet technological progress”.
 Among the primary factors driving gas demand growth in Europe are the decline in domestic production, reduction in nuclear generation, and the decreased role of coal in the energy sector. Within the EU, the gradual capping on the extraction from the major Dutch Groningen gas field resulted in the production downturn of a magnitude similar to the increase of Russian gas imports (both roughly 40 Bcm).
Role of Renewable Energy in Mitigating Climate Change as part of Saudi Vision 2030
Growing up in Saudi Arabia between the first and third decade of the 21st century, I, like most others, was aware of the slow yet noticeable changes in the Saudi climate over the years. The curse of climate change became apparent, with rain getting intense and flash floods ravaging coastal cities frequently. I was in Jeddah during the 2009 flash floods and witnessed firsthand the horrors the locals went through, with 122 dead and more than 350 never to be found again. Such a harrowing change in climate in a short span is concerning for the public as well as the policymakers who have begun to look for solutions, particularly in renewable energy.
The kingdom is part of some of the countries that are most vulnerable to climate change. Saudi Arabia has an acute water shortage issue that poses a threat to its people and the environment. Besides water scarcity, the kingdom is also a potential victim of rising sea levels (a 3mm increase per year), with about 210,000 people at risk of flooding by 2050. Temperature rises are also a concern for the Saudis, studies predict an increase between 3 to 4.2 degrees Celsius of daily surface mean temperature in the long run. According to The Climate and Atmosphere Research Center, about 600 million people in the Middle East and North Africa are at risk of heat exhaustion and heart attacks due to heat waves by the start of the next century. Extreme rainfall is also a potentially lethal impact of climate change on Saudi Arabia, as evident by the 2009 and 2018 flash floods. Precipitation in the kingdom is anticipated to increase by around 23%-41% in the long run due to climate change, which only aggravates existing issues.
Since Saudi Arabia depends on oil for its income, any factors affecting it will affect the economy and the people. Due to changes in trends, oil demand is constantly decreasing due to the increased popularity of green energy, causing oil prices to fluctuate since 2014. Studies show that the kingdom must keep about 68% of its oil reserves and 85% of its fossil fuels untouched to keep warming below 1.5 – 2 degrees Celsius. Moreover, the Middle East must abandon 40% of its oil and 60% of its natural gas reserves. Since the kingdom relies on oil for most of its income, such measures will prove detrimental to its economy and ultimately its people.
Therefore, in 2016, the kingdom announced plans for Vision 2030, which aimed to curtail many of the issues surrounding climate change using renewable energies. For this purpose, the Saudi Green Initiative was launched in 2016 and aimed to eliminate emissions by 2060. The kingdom plans to invest more than $100 billion into the project to achieve its objectives. However, there is reasonable doubt about these goals, which may sound overly ambitious. As the country continues to receive criticism from the Climate Change Performance Index which gives it an average ranking of 62nd. Therefore, there is considerable risk involved as the country is currently not on track with the Paris Agreement’s 1.5-degree Celsius limit.
During the past seven years, Saudi Arabia has invested approximately $400 billion into renewable energy, with plans to invest an additional $30 billion in the next two years. As part of Vision 2030, the government plans to achieve renewable and sustainable energy projects for 9.5 GW of RnSE (Renewable and Sustainable Energy). However, energy demand is projected to rise to 120 GW by 2032, which is much more than what is currently being worked on. The government plans to invest in solar, wind, and hydropower energy to achieve its energy demands and mitigate climate change.
Saudi Arabia has immense potential for solar power, after the government’s testing through 46 weather stations across the country. It has a large surface area and lies in the Global Sunbelt. Through solar power, the kingdom plans to generate 42.7 GW of energy. In 2019, the kingdom connected the 300 MW Sakaka power plant, 10 MW Layla al-Aflaj power plant, and 50 MW Waad al-Shamal power plant to the rest of the country. Furthermore, the Saudis have shown interest in seven additional plants in Madinah, Rafha, al-Qurayyat, al-Faisaliah, Rabigh, Jeddah, and Mahd al-Dahab with a combined capacity of 1.52 GW. In 2020, further progress was made by embarking on four more plants with a total capacity of 1,200 MW. The Saudis have made promising progress in solar energy, as evidenced by the kingdom becoming the 6th largest in solar energy generation, with plans to generate a third of their energy from solar power. However, there are large sums of costs associated with solar panels, along with dealing with external factors such as high temperatures, dust, and humidity that reduce efficiency. It can also backfire and damage the environment by causing soil erosion. On the other hand, it has been argued that the benefits outweigh the drawbacks as it is renewable and produces zero air and water pollution, which is why the Saudi government should continue to explore this option with the same momentum they currently maintain as it provides the opportunity to explore other economic policies such as carbon taxes.
The kingdom has also invested in wind energy to generate 16 GW of energy. A $500 million wind project in Daumat al-Jandal was funded by the government in 2017. ARAMCO also installed two 2.75 MW plants in Turaif and Huraymila in 2017 and 2019. Aiming to exploit its wind potential, the kingdom intends to become one the largest wind energy markets in the next half of the century. However, it requires a constant volume of wind, which is projected to decrease in the kingdom. It can damage the environment by harming the land and killing birds. However, this drawback has been explored by researchers and newer models of wind turbines are more efficient at maximizing productivity and minimizing drawbacks. Moreover, the wind farms often add to the scenic beauty which can come in handy for the kingdom that is seeking to make tourism 65% of its GDP by 2030.
The kingdom currently relies on desalination plants to curb its water shortage, producing around 4 MCM per day. It seeks to increase the number to 8.5 MCM per day by 2025 with its 28 distillation plants to achieve climate objectives. The desalination plants can also be used to produce hydropower, particularly the Ras al Khair plant, as well as others such as the ones in Jubail, Khobar, al-Khafji, Jeddah, al-Shuaibah, Yanbu, and al-Shuqaiq. However, the kingdom faces drawbacks in maximizing hydropower production due to its unfriendly landscape for dams and the lack of water bodies. Moreover, the kingdom is a tribal society at heart in its vast deserts which retains the propensity of social conflicts between the government and the locals, as had happened in the Tabuk region between the state and Huwait tribe due to the construction of NEOM and The Line. Therefore, hydropower may not be a viable option for Saudi Arabia, but it is still a viable substitute.
Renewable energy will provide unsurmountable benefits to Saudi Arabia. Studies show that the GCC region can rid itself of almost one gigaton of carbon emissions and save around $87 billion in reserves. Renewable and sustainable energy will also create many jobs for Saudis, estimated to be 80,000 by 2030. It will also preserve the rapidly depleting oil reserves of the country and reduce carbon emissions by almost 3kgs for every m3 of produced water.
There are certain challenges and risks that the Saudis currently face. There is a lack of coordination between different institutions of the state to execute policies and collect data. This causes a gap in accessible knowledge and data, clouding analysis and making it difficult to measure progress. Professionals and academics must be aware of the intensity of climate change and that is not possible without concrete data produced by trustworthy sources such as government institutions. This could also result in the misallocation of funds and resources which hinder further progress as policymakers would have a low-resolution picture of the cost of operations. Therefore, organizations like King Abdulaziz City for Science and Technology (KACST), King Abdullah University of Science and Technology (KAUST), King Abdullah Petroleum Studies and Research Center (KAPSARC), King Abdullah City for Atomic and Renewable Energy (KACARE), and others, must increase collaboration, coordination, and integration to make data more readily available both to the government and the public. Moreover, it is not possible to counter climate change solely through national programs, neighboring countries in the Middle East also need to cooperate with the Saudis to collectively deal with the issue, however, that is not always possible due to domestic issues such as civil wars, terrorism, natural disasters, and so on. These issues will jeopardize any efforts toward a sustainable future and further worsen the impact of climate change in the Middle East.
Italian Eni: Energy Transition and Economic Development as Fundamental Pillars of Approach in Africa
Eni, an Italian multinational energy giant headquartered in Rome, in its latest 2022 report has outlined the main outcomes and objectives in the energy transition pathways for a number of African countries. It described Eni’s contribution to a just transition that ensures access to efficient and sustainable energy, sharing the social and economic benefits of the path towards net zero emissions by 2050 with employees, suppliers, communities, and customers with an inclusive and transparent approach.
“In addressing the challenges in the energy sector that Eni faces, we keep our priorities firmly on track with an ongoing commitment to promote energy access, local development, and environmental protection,” said Claudio Descalzi, Eni’s Chief Executive Officer.
She explained that the success of Eni’s strategy could not be achieved without collaboration with key stakeholders, from private individuals to the public sector, international organizations, civil society associations, and research institutes. “Today, more than ever, it is necessary to pool resources and human capital, through a broad vision that allows us to align our common goals, to reduce geographical gaps and promote global human progress,” said Claudio Descalzi.
With regards to the carbon neutrality strategy, Eni remained firm in its commitments towards net zero emissions by 2050 and confirmed all its decarbonization targets, which are anchored on sound investments.
The company achieved a 17% reduction in Scope 1, 2 and 3 emissions, compared to 2018 levels, and continued implementing the necessary measures to achieve Scope 1 and 2 net zero emissions in the Upstream by 2030, by investing in emission-reduction technologies and developing low-carbon projects. In this context, in 2023, Eni launched the FPSO that will be used for production from the Baleine field in Côte d’Ivoire, the most important discovery ever made in the country and the first net zero development for Scope 1 and 2 emissions in Africa.
In Eni’s strategy, the United Nations Sustainable Development Goals are a fundamental reference for conducting activities in the countries of operations. Agri-business projects, for example, embodies the fundamental pillars of Eni approach for the just transition, an energy transition with a strong innovative component combined with a concrete focus on the social dimension.
In this context, Eni is committed to ensure that the decarbonization process offers opportunities to convert existing activities and develop new production chains with significant perspectives in the countries where it operates.
In 2022, the first cargo of vegetable oil produced in Kenya not competing with the food production chain, from waste and raw materials produced on degraded land, was delivered to Eni’s biorefining plant in Gela, with substantial positive impacts on employment and local development. The model will be replicated in other countries.
To achieve a just transition, particular attention was paid to initiatives to promote access to energy and education in the countries of operation. These include the projects in Côte d’Ivoire, Mozambique, and Ghana to facilitate access to clean cooking.
In Côte d’Ivoire, more than 20,000 cooking stoves were distributed in just six months, reaching more than 100,000 beneficiaries. Eni has promoted the right to education in Congo, Ghana, Iraq, Mexico, Mozambique, and Egypt, where it opened the Zohr Applied Technology School to significantly increase the number of youths with upgraded technical and professional skills in the energy and technology fields.
With revenues of around €92.2 billion, Eni ranked 111th on both the Fortune Global 500 and the Forbes Global 2000 in 2022, making it the third-largest Italian company on the Fortune list (after Assicurazioni Generali and Enel) and second largest on the Forbes list (after Enel). Per the Fortune Global 500, Eni is the largest petroleum company in Italy, the second largest based in the European Union (after TotalEnergies), and the 13th largest in the world.
OPEC+ Cuts Production
On April 3, 2023, OPEC published a press release saying that a number of countries, both members of this cartel and those participating in the extended OPEC+ format, decided to cut oil production. This was unexpected for the market as OPEC+ managed to keep things in secret until the official publication. Previously, media usually did receive some information about the forthcoming decisions. Alternatively, numerous officials would openly state that the possibility of altering the crude production volumes was under consideration. Moreover, public statements intended OPEC+ willingness to influence the market by changing the quotas have traditionally been an independent instrument of manipulating the oil market. Such moves are known as “verbal intervention.” Yet, OPEC+ has scrapped the trick this time, realizing that its effect is too short-lived, whereas the goal of oil-exporting nations is wielding at least mid-term influence on the market.
The volumes to be reduced, as announced by the OPEC+ member states, were also quite unexpected. On April 3, they declared their intention to cut production by 1.16 million bpd starting in May 2023, but if we take into account Russia’s announced cut by 500 thousand bpd from March 2023, the total reduction of global supply will be close to 1.66 million bpd. These are significant volumes on a global scale. At present, the market is close to equilibrium in terms of demand and supply, so the 1.66 mln cut in crude oil production may tip the scale towards the deficit, which will affect the prices.
Early in April, it was also announced by the countries willing to comply with the OPEC+ quotas that they would make extra cuts voluntarily, which might unbalance the market even further. The fact of the matter is that many parties to the agreement, for their own internal reasons, cannot produce as much oil as they are permitted as per OPEC+ quotas. By the way, since 2021, Russia has been one of those producers. Yet, it was the states actually fulfilling the quotas that announced the reduction in April 2023.
|Country||Production Cuts, thousand bpd|
One important pattern is worthy of note. Previously, OPEC+ generally cut production quotas proportionally for all parties to the agreement. This meant that the actual supply reduction was less than the declared curtailment of quotas as some countries do not produce as much as they are allowed under quotas. For such countries, quota cuts simply result in narrowing the gap between their actual production and the allowed “cap.” In the April decision, the OPEC+ countries formally proceed from the quotas—however,since they mostly reached the cap in their production, the gap between the declared and the real reduction will be tiny.
Russia, for its part, declared a reduction starting in March 2023 without reference to the existing quotas but to the average level of production in February. This means that Russia intends to cut real production by 500 thousand barrels rather than virtual quotas. Another factor that made the decision of the oil-producing countries even more significant was the long-term nature of the measures taken. The OPEC+ member states declared that the cut would last till the end of 2023. Russia immediately followed suit by declaring that it would also prolong its voluntary cut of production till the year’s end in an bid to strengthen the effect on the market (earlier, the end date for the voluntary cut had not been determined), on the one hand, and to get in sync with its OPEC+ partners acting as a “united front”, on the other hand. The latter factor is important for Russia in terms of OPEC+ political posturing.
The development amps up the announced decision to cut production volumes. Immediately after the OPEC+ participants announced production adjustments, the commodity exchange saw a surge of oil prices. But this was a psychological response of the market, as other countries plan to start the actual reduction in May.
Russia benefits greatly from the decision of OPEC+ to cut production. Back in February 2023, Deputy Prime Minister Alexander Novak, who is in charge of the energy sector, announced the decision of the national leadership to voluntarily reduce production by 500 thousand bpd. That is, Russia would have cut oil production anyway. But the fact that OPEC+ partners are now joining this thrust means that concerted action will have a much greater impact on the market, keeping oil prices at a high level. Russia has its own reasons for the decision to cut production. The country’s leadership is trying to demonstrate to the main buyers of Russian oil—primarily India, China and Turkey—that maintaining pre-sanction oil exports is not an end in itself. It is important for Russia to monetize our hydrocarbons profitably, which is why Russia is trying to reduce the discount on its oil. Moscow shows that, to achieve this goal, it is ready to reduce production and export volumes. This is a clear signal to the buyers of Russian crude: let’s negotiate a reduction of the discount—otherwise, with a decrease in production, a deficit will emerge, and all the crude will become more expensive globally. Other OPEC+ countries simply want to balance the oil market in order to keep prices high.
General benefits also exist. Under a joint cut in production, the demand for tankers will diminish, and hence the cost of transportation. The point is that the global oil market had become inefficient by early 2023, as all exporters were affected by an increase in their transportation leg. Russia now has to redirect its crude to Asian markets, while producers from the Middle East had to replace Russia and redirect their crude to Europe. It turns out that more tankers are needed to transport the same amount of crude. As a result, the cost of oil tanker freight has markedly increased. Lower export volumes as a result of the OPEC+ decision will alleviate this problem, leaving oil companies, including Russian, with more money from the sale of hydrocarbons. Russia’s budget will also benefit from higher oil prices. Even with the discount accounted for, Russian oil prices may rise, which will generate more revenue from the export duty and MET.
From political perspectives, the OPEC+ decision to cut production is also beneficial. After the February statement of Mr. Novak regarding Russia’s intention to cut oil production, many critics interpreted it as a forced measure. They say the sanctions are doing their job, and Russia can no longer produce enough oil without Western technologies, trying to disguise the actual drop in production as a planned voluntary reduction. Following this logic, other producers also face problems, which is, surely, not true. Furthermore, Russia can present the OPEC+ decision in the information space as a proof that the country is not in isolation, as the Collective West struggles to prove. We cooperate and implement joint programs with many states, OPEC+ members being just one example.
Western media and decision-makers criticized the decision of the OPEC+ countries to reduce oil production volumes. This is a real economic risk for them, since both the U.S. and the EU are net importers of oil. The share of the oil cost in a liter of fuel is very high in the West, so a rise in oil prices quickly leads to an increase in prices on the fuel market for the end consumer. This generates discontent among citizens, as they take more and more money out of their pockets when they fuel their cars. Consequently, support for incumbent politicians is waning. For the U.S., this is extremely relevant in connection with the actual beginning of the presidential campaign. On the other hand, the rising cost of fuel spins up inflation, as the cost of delivery is built into the cost of goods. Western media also accuse the Arab nations of helping the Russian economy by these cuts in production.
Such accusations expose the real problem. Western nations do not want to listen to explanations of OPEC+ member states as to why they decided to reduce oil production. Such a conflict of interests makes itself felt on a regular basis. A telling incident occurred on October 5, 2022, at an OPEC+ press conference after the decision to cut production quotas by 2 million bpd was announced. At the time, Saudi Energy Minister Abdulaziz bin Salman refused to talk to a Reuters reporter. It turned out that the minister had previously given a 30-minute interview for Reuters explaining the reasons for the OPEC+ decision. The editors, however, did not publish the text of the conversation, having replaced it with an article saying that Saudi Arabia and Russia are allegedly colluding as they seek to push oil prices above USD 100 per barrel.
This shows that Western political circles and the media believe that OPEC+ decisions are directed against them, denying OPEC+ members the right to pursue their own legitimate economic interests and instigating a conflict instead, especially between the U.S. and Arab oil-producing countries—above all, Saudi Arabia. Indeed, the decision by a number of OPEC+ states is negative for the U.S. economy, but their motivation has nothing to do with a desire to hurt Western nations as they just want to retain their own revenues. The decision was made in response to the U.S. and the EU policies, whereby the Fed and the ECB, respectively, keep raising the interest rates. This leads to a slowdown in their economies, which means a lower demand for oil. In addition, when the U.S. Fed raises interest rates, money supply shrinks so that less money enters the stock market. That means traders close fewer deals, not buying oil futures, among other things. When demand falls, so does the price of oil futures. Both the U.S. and the European Union never look back on the interests of the oil producing nations as they push down oil prices using monetary instruments. The latest increase of the FRS rate took place on March 23, 2023, that is, a week and a half before the OPEC+ decision to cut the production of crude. So, the oil producers immediately reacted to the U.S. policies. They are eager to keep oil prices from falling rather than hiking them above USD 100 per barrel. Apparently, unless the OPEC+ states decided to cut production, oil prices, given the pressure of monetary factors (rising rates of the Fed and the ECB), could have dropped to USD 60-70 per barrel.
No doubt, there is a certain political implication of the decision made by some OPEC+ countries to cut oil production. It lies in the fact that relations between the U.S. and Arab oil-exporting countries have been cooling of late. The point is that, thanks to the “shale revolution in the U.S.,” oil production has significantly increased since 2010. Even though the U.S. remains a net importer of oil, it cut purchases from other countries. Statistics show that the U.S. prefer to give up on oil from the Middle East, while supplies from Mexico remain stable since 2016 and supplies from Canada are on the rise for several decades in a row.
Source: Energy Information Administration
Such dynamics can be perceived by the Arab countries as a formal U.S. strategy aimed at reducing the dependence on Middle East markets, in order to have a free hand in their Middle East policies. In response, Saudi Arabia will cross over to alternative centers of power, China and Russia. Especially since it is China that has become the largest buyer of Saudi oil.
As for the future, we can foresee a spiral of tensions between the U.S. and OPEC+ states. After all, rising oil prices will continue to whip up inflation. To fight inflation, the U.S. and the EU are raising the key interest rate, putting pressure on oil prices. In response, producers may cut production still further in an attempt to support prices, forming a sort of a vicious circle. To put pressure on Saudi Arabia and other producers, the U.S. could pass the NOPEC (No Oil Producing and Exporting Cartels Act), which would allow the U.S. to impose sanctions on OPEC+ nations under the pretext of antitrust violations. This will cause a backlash down to the imposition of an embargo and a repeat of the 1973 energy crisis. For now, such a scenario is unlikely to happen, though recent developments suggest that no scenario can be totally ruled out.
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