Emerging Markets explore opportunities to help meet EU energy demand after the announcement by the European Union of its intention to ban maritime imports of oil from Russia.
This measure, announced on May 30 and to be implemented by the end of the year, is one of the sanctions crafted in response to Russia’s invasion of Ukraine in February.
About 90% of EU oil imports from Russia arrive in tankers transported by sea, with the rest flowing through the Druzhba pipeline. The exemption for imports by pipeline allows Hungary, which receives 65% of its imports by pipeline, and other landlocked European countries to maintain their supplies.
This decision aims to tighten the oil market, which remains the most important source in the global energy mix. The International Energy Agency estimates that the EU will have to find other sources of supply for around 2.2 million barrels per day (bpd) of crude oil and 1.7 million bpd of petroleum products.
Indeed, the EU ban pushed oil prices to over $120 a barrel in the week after it was announced.
Although members of the Organization of the Petroleum Exporting Countries (OPEC) and other allied oil producing countries, collectively known as OPEC+, reacted to the EU announcement by accepting increase production by 648,000 bpd for July and Augustit will not make up for the lack of supply.
Major OPEC producers Saudi Arabia, United Arab Emirates, Kuwait and Iraq have extra capacity of approximately 4 million barrels per day which could be put into service quickly.
OPEC members offer options
Geopolitical considerations will determine how the EU meets its needs over the course of the year, but the broader dynamics present an opportunity for emerging market oil exporters, members or not of OPEC, to increase their production to meet the demand.
In addition to strengthening the energy security of the EU and, in turn, of the world by ensuring the supply, an increase in oil production and exports would provide an economic boost to certain emerging markets, many of which are still recovering from the economic effects of the COVID-19 pandemic.
One of these countries is Libya, a member of OPEC. The country has the largest oil reserves in Africa and is only a short distance from southern European ports across the Mediterranean, offering lower transportation costs than oil from the Americas or east of the Suez Canal. It is also exempt from OPEC+ production cuts.
Libya’s oil production reached 1.3 million bpd in early 2022, although protests at production sites caused output to drop to 800,000 bpd in April. A return to this year’s peak would free up oil that could be exported to the EU.
Funding is another obstacle. The Libyan National Petroleum Company has ordered companies operating in the country to suspend their maintenance and drilling activities due to the delay in approving the government budget.
Despite difficulties, any EU decision to increase Libya’s oil imports could encourage private companies to invest in the country’s energy sector. In November last year, the government began soliciting investment from international oil companies and other multinational companies to expand oil operations and resume upstream activities.
Another nation that will benefit is Nigeria. Although OPEC increased Nigeria’s production quota from 1.74 million bpd in April to 1.8 million bpd in June, the country has struggled to meet those targets. It produced 1.42 million bpd in May and, although this is the highest monthly figure for 2022 so far, the result is still lower than the 1.8 million bpd seen at the start of 2020.
Falling production levels have long been a problem for Nigeria, with a 40% drop since 2012. In a May report, the World Bank cited lack of maintenance and deterioration of infrastructure efficiency as key factors of this decline.
However, Nigeria could benefit if he manages to increase his production in accordance to its revised OPEC quota.
The potential of Latin America
Otherwise, several non-OPEC emerging markets in Latin America are seen as potential sources of oil supply.
On June 6, international media reported that Italian energy company Eni and its Spanish counterpart Repsol could start shipping Venezuelan oil to Europe as early as next monththe United States having eased certain sanctions against the South American country and authorized the resumption of oil-for-debt exchanges.
Meanwhile, Argentina’s oil production from shale deposits hit decade-high levels in January, and analysts said further infrastructure investment could help the country almost double its total production by 2026 and to 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 currencieswhich would encourage companies in the energy sector to increase oil production for export.
Elsewhere on the continent, Colombian President Ivan Duque said his country could produce additional oil to meet EU needs, but stressed it needed more foreign investment in exploration and production .
Colombia’s oil production averaged 740,000 bpd from January to November 2021, and the government has announced a target to increase production in 2022 to reach 780,000-800,000 bpd.
Mexico is another potential supplier. State-owned oil company Pemex posted a net profit of $6.2 billion in the first quarter of 2022compared to a deficit of $2 billion in the same period in 2021, while production increased by 2.3% year-on-year.
The company enjoys strong public support and received $2.8 billion in public aid between January and March to help it repay its debt and finance the construction of the Olmeca refinery.
In particular, production from Mexico’s private oil fields grew 63% year-over-year in the first four months of 2022.
Impact on energy transition
With oil demand on the rise, especially in light of supply shortages resulting from the Russian invasion of Ukraine, the situation has sparked a debate on the implications this could have for the energy transition in emerging oil-exporting markets.
While some are likely to increase oil production in the short term to help meet global demand, many governments and energy companies remain engaged in the long-term deployment of renewable energies.
For example, Saudi Arabia, the world’s largest oil exporter, aims to produce 50% of its electricity from clean sources by 2030including rapidly increasing its total solar power capacity from 455 MW currently to 40 GW by 2025.
Major projects include a $5 billion hydrogen plant in the NEOM smart city, as well as 400 MW of solar generating capacity and the world’s largest off-grid energy storage facility in the Red Sea residential and tourism megaproject.
The United Arab Emirates is also continuing with its transition plans. Last month, the government invited companies to bid for a 40% stake in a new 1.5 GW solar power plant in Abu Dhabi.
Latin American countries have also increased their investments in renewable energy after a pandemic collapse in 2020.
International media reported that the continent added record solar and wind capacity of 17.5 GW in 2021. Mexico, Argentina, Brazil and Chile produce more than 10% of their household energy from renewables. $18 billion has recently been invested in new projects in the region.