Energy Geopolitics Transformed

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Global energy geopolitics were transformed in 2022 by Russia’s invasion of Ukraine, which will continue to cause major reverberations this year. In Ukraine itself, an extended conflict looks most likely, but escalation is always looming within the country and beyond. More broadly, the crisis has forced a geopolitical inflection point that has heightened concerns around Taiwan, raised the potential for escalation in the Mideast Gulf and accelerated global realignments. Oil and gas will remain deeply politicized, too, as energy and security dynamics in European, Asia-Pacific, Mideast and Asian theaters are reshaped.

As the energy industry navigates a complex and tumultuous environment in 2023, it will have to keep its eye on multiple geopolitical arenas that will shape both hard realities such as oil and gas trade flows, and the broader context in which it must operate. First and foremost will be the course of the war in Ukraine. But the impact of that conflict has extended far beyond its borders, influencing developments in Europe, China, Taiwan, Venezuela and more. Other conflict areas now look more intractable — not least Iran, given its military aid for Russia’s war in Ukraine — or unpredictable, with Russia’s grip in the Caucasus weakening.

More broadly, the Ukraine war has forced a geopolitical inflection point. The conflict has seen the West find new depths of unity and resolve, but also exposed the limits of its reach as an increasingly multipolar world pushes back. India has made clear that buying discounted Russian crude — that is, sourcing affordable energy — is in its national interest, and that this will remain the case, no matter what Europe or the US thinks.

Saudi Arabia, similarly, has made clear that it views its Opec-plus partnership with Russia as critical to market management — and therefore to its national interest. This has thrown up new pressures in producer-consumer relations, especially as Western sanctions and controls on Russia’s oil trade expand. The Mideast Gulf’s longer-term shift in focus from West to East has also accelerated, as evidenced in the very different atmospheres around visits to Saudi Arabia by the Chinese and US leaders last year.

Frozen Conflict

Ukraine’s outlook will depend partly on the military course, partly on the sustainability of international support. During a Washington trip last month by Ukrainian President Volodymyr Zelenskiy, President Joe Biden said the US “will stay with you as long as it takes.” But this support is not open-ended. When asked about the US’ refusal to send advanced weaponry like long-range missiles, Biden stressed that Nato allies are “not looking to go to war with Russia.” A Republican-controlled House of Representatives raises the prospect of a lessening commitment. As the war drags on, frustration with the economic fallout could also mount in Europe.

But even if the US or Europe pushed for negotiations, it’s hard to see either Russia or Ukraine making serious compromises. Clear military limits challenge the idea of either a Ukrainian or Russian triumph on the battlefield. Improved Russian defenses, supported by conscription, could make any further Ukrainian inroads harder and more costly. That leaves an extended or frozen conflict as the most likely trajectory for the year ahead.

Escalation, however, is still possible. Signs that Russia is leaning harder on Belarus to support its war efforts in Ukraine cannot be ignored. Some reports also suggest that Moscow may be planning a fresh offensive in Eastern Ukraine or beyond early this year. Any escalation has clear potential to spread beyond Ukraine. Unclaimed attacks on critical infrastructure in Europe could increase, with cyberattacks a known strategy for Moscow. More energy supply disruptions could also figure — with remaining Russian piped gas the more likely target, making it even more difficult for Europe to replenish gas stocks for winter 2023-24. Some oil market response by Moscow should also be on the radar.

China on Edge

Beyond Europe, the Ukraine crisis has pushed Russia and China closer together, while shifting geopolitical dynamics over a key Asian flash point, Taiwan. Whatever Beijing’s discomfort with Moscow’s invasion, it will see a loss for Russia in Ukraine as a win for the US, its biggest geopolitical rival. That makes any break in China-Russia ties in the year ahead hard to envisage.

Regionally, Russia’s invasion of Ukraine has been a wake-up call: A warning that an attempt by China to annex Taiwan by force, and a US-Chinese conflict in the Asia-Pacific theater, should be treated as real possibilities. Japan, for one, last month tore up its postwar security stance, announcing major new military spending plans in what Prime Minister Fumio Kishida called a historic “turning point.”

In the year ahead, many Chinese experts believe Beijing may opt for relative caution and steady pressure on Taiwan, drawing lessons from Russia’s difficulties in Ukraine and the wide-ranging sanctions against it, and focusing instead on the economy and Covid-19. But tighter ties between Taiwan and its allies — viewed by Beijing as provocative — could yet spark tensions, and accidental conflict amid a ramp-up of Chinese incursions in Taiwan’s air defense zone can’t be ruled out.

Mideast Escalation?

In the Mideast Gulf, the Ukraine war served to inflame producer-consumer tensions — with the US in October accusing Opec-plus of aligning with Russia, while Gulf producers viewed Western sanctions and strategic stock releases as challenging their market management.

The war has also shifted the dynamic on nuclear negotiations with Iran. Tehran’s crackdown on protesters and supply of drones and other arms to Russia have put nuclear talks into a deep freeze, but continued advances in Iran’s nuclear program will still be seen as a threat. While Washington won’t want to trigger a major conflict in the Mideast, Israel, under a new right-wing government led by Benjamin Netanyahu, could take covert action against Iran’s nuclear program. This risks putting the region on a fresh escalatory path, with Iran potentially retaliating by targeting tankers and energy infrastructure in the Mideast Gulf, including via proxies in Yemen, as seen in 2019.

Meanwhile, the longer Russia’s war in Ukraine drags on, the less influence Moscow may wield in its near abroad. That could see border skirmishes spill over into bigger conflicts, particularly between Armenia and Azerbaijan. Kazakhstan and Azerbaijan are angling for closer ties to Europe, including on energy trade. But none will want to antagonize Moscow, given reliance on Russia as a transit route for their oil and gas and other goods. In 2022, Kazakh exports were repeatedly disrupted as Russia halted operations at its CPC terminal — a scenario that could replay in 2023.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Jill Junnola is the editor of Energy Compass and David Pike is Energy Intelligence's editor-in-chief. A version of this article originally ran in Energy Compass.

Military Conflict, Security Risk , Sanctions, Opec/Opec-Plus, Ukraine Crisis
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