Energy sector outcomes are imminent - will geopolitical disputes reshape their discourse?
In the wake of recent geopolitical conflicts, oil and gas companies have been forced to adapt their strategies, with significant implications for their future investment priorities.
Shell and TotalEnergies have significantly expanded their Qatar LNG partnerships, signing multi-decade supply contracts, citing energy security and the potential for greater profits as motivations. However, these short-term responses to geopolitical shocks often become long-term commitments, making a change of course harder.
The Russia-Ukraine war, for instance, led to a sharp pivot in Russia’s fossil fuel exports from Europe to Asian countries such as China, India, and Turkey. This shift required logistical changes, creating new trading partnerships and payment mechanisms to circumvent Western sanctions.
Ongoing military actions have also targeted oil infrastructure, such as Ukrainian attacks on Russian refineries and storage facilities, which introduce supply uncertainties and encourage oil and gas companies to seek more resilient and diversified operations.
The 12-day war pushed the oil price from $60 to over $70 due to fears that the Strait of Hormuz could be blocked. This crisis was seen by TotalEnergies as renewed confidence in its fossil-heavy strategy and reinforcing the view that we must "invest in two energy systems". Shell described the crisis as proof of the need for a "balanced transition" that keeps gas flowing and infrastructure expanding.
Decisions made under the influence of conflict and instability can shape portfolios for decades. For example, in the UK, regulators greenlit Shell’s Jackdaw gasfield, with approval coming "at a time when UK energy security is critically required".
However, these geopolitical tensions also contribute to a complex environment for renewable energy investments. On the one hand, disruptions in fossil fuel supply and price volatility underline the economic and security advantages of diversifying energy portfolios toward renewables. This could accelerate investments as companies and governments seek energy independence and resilience.
On the other hand, short-term strategic adaptations to keep existing oil and gas assets profitable may delay or complicate the transition if companies prioritize safeguarding current fossil fuel revenues over clean energy development.
Investors have an opportunity to push companies to respond differently to geopolitical shocks, focusing on disclosure of capital allocation, separating temporary responses from long-term strategy, and treating net zero as the only long-term route to sustainable energy security.
One example of this shift towards renewables is Eni's fast-tracking of LNG development in Congo, reviving the long-stranded Marine XII gas with the acquisition of Tango FLNG. However, the pace and scale of such transitions vary based on regional policies and company strategies.
Renewables decentralize energy systems, making them less exposed to spot markets or embargoes and reducing exposure to geopolitical leverage. Therefore, while oil and gas companies continue to adapt their strategies amid geopolitical conflicts, they also face increasing pressure to invest in renewable energy for energy security and sustainability.
References: [1] "Russia's oil exports to Europe plunge as new pipeline to Turkey starts up." Reuters, 2022. [2] "Russian oil exports to India surge as EU sanctions bite." Al Jazeera, 2022. [3] "Ukraine attacks Russian oil storage facilities in occupied territories." Reuters, 2022. [4] "Russian oil refineries under threat as Ukraine attacks strategic infrastructure." The Guardian, 2022.
The recent geopolitical conflicts have prompted oil and gas companies to reconsider their investment priorities, as evidenced by Shell and TotalEnergies' expansion in Qatar LNG partnerships, a move motivated by energy security and profitability. However, these short-term responses, such as those to the Russia-Ukraine war and ensuing sanctions, may lead to long-term commitments that make it difficult for companies to pivot towards renewable energy, a sector with significant potential for energy security and sustainability. Finance and investment decisions in the oil-and-gas industry, influenced by these geopolitical tensions, can shape portfolios for decades, underscoring the need for careful consideration and forward-thinking strategies.
