Recent Russian escalations, including the annexation of Ukrainian territory and partial mobilization, and Ukrainian successes are driving an update of our conflict scenarios. The likelihood of further Russian escalation or some form of Ukrainian victory have risen. However, our base scenario remains continued fighting, before eventually settling into a frozen conflict. Regardless, the escalations and prolonged conflict are raising risks. The partial mobilization is unpopular, while the conflict and sanctions are weighing on Russia’s surprisingly resilient economy. Geopolitically, the moves are likely to reinforce Western sanctions resolve, while risks are spreading beyond Russia to its neighbors in Europe, Central Asia, and the Caucasus.

The UK is at a crossroads. Inflation is surging, while its energy sector is facing major challenges driven by war-linked record high energy prices. Political risks are rising as a new sovereign, King Charles III, and a new Prime Minister, Liz Truss, take the reins. Energy policy making is in flux as the UK boosts low carbon and fossil fuel investment, while pursuing policies like price caps and windfall taxes, which undercut these goals. Geopolitically, the UK is navigating its post-Brexit future, while managing risks from China and Russia. Nonetheless, it will remain one of the world’s least risky producers and a transition leader.

This Quarterly Risk Outlook examines the major investment, geopolitical and energy transition-related risks shaping the global oil and gas operating environment in Q3’22 and beyond. Iraq’s spiraling political crisis – including the growing likelihood of disruptions to oil and gas activities – and Kenya’s disputed elections are both highlighted as well as other key risk aboveground risk drivers. Iran nuclear talks and rising tensions in Asia are key geopolitical risk factors. Meanwhile, policy developments in the US, Brazil and Australia impact the outlook for energy transition risks and opportunities this quarter.

The Inflation Reduction Act will have a major, positive impact on the US investment climate. Critically, it will encourage greater spending on a host of low-carbon energy technologies, helping to drive a major reduction in emissions. While there are some fiscal terms shifts, it includes key victories for the oil and gas sector, including increased incentives for carbon capture and storage (CCS) and hydrogen as well as greater federal licensing certainty. The Act reinforces the US’s already favorable aboveground risk environment and advances US President Joe Biden’s green agenda, improving the US’s standing in both our Country Risk and Transition Risk Indexes.

Overall risks to Saudi Arabia’s operating environment are improving. Windfall oil revenues are providing a boon to the Saudi economy, and it continues to implement sweeping economic and social reforms, with the Vision 2030 initiative remaining at the center of its diversification plans. Geopolitical risks are declining as diplomatic efforts bear fruit and some of Riyadh’s cooler relationships improve, and a ceasefire with the Houthis in Yemen holds. Riyadh’s transition efforts are also taking greater shape, with significant additions to renewable capacity coming online between 2022-2024 and economic diversification efforts gathering steam.

Namibia is likely to see an E&P boom following major offshore finds by Shell and TotalEnergies. The country possesses a favorable investment regime, with attractive fiscal terms and relatively low aboveground risks. Yet, it faces several growing threats, such as rising voter dissatisfaction and government debt levels amid its long-running economic slump. It also faces risks from unstable trading partners and attempts to balance relations between China, the US and Europe. In Energy Intelligence’s Country Risk Index, Namibia is a relatively low risk country, scoring 4.1 out of 10, ranking 22nd out of 71 oil and gas jurisdictions worldwide.

Energy Intelligence’s latest Macroeconomic Outlook examines economic headwinds—such as inflation and recession fears—and their impact on the global recovery and aboveground risk. Europe’s energy crisis may trigger a recession, while US interest rate hikes threaten to exacerbate capital outflows and debt crises in emerging markets. In Asia, inflation is a key driver of South Asian political volatility, while concerns about China’s economy proliferate. In Latin America and sub-Saharan Africa, these developments are weighing on what was a strong recovery. For major producers, high oil prices are a boon, but many cannot fulfill their Opec-plus quotas, limiting upside.

Food and fuel inflation—exacerbated by the war in Ukraine—is dramatically increasing aboveground risk as public discontent grows. Economically weaker Mideast and Sub-Saharan African producers are particularly vulnerable given their reliance on imported food and fuel and weaker overall macroeconomic and fiscal outlook. Stronger, commodity exporting Asian and Latin American producers are also being impacted. For the energy sector, these dynamics are weighing on the aboveground risk in several ways, ranging from political upheaval and increased labor strife to fiscal and regulatory changes. These dynamics will likely get worse as the war drags on and global macroeconomic conditions deteriorate.

Gustavo Petro’s election as Colombia’s first left-wing president is raising aboveground risks and uncertainty for the oil sector. Elected on a platform to eradicate inequality and embrace the energy transition, Petro wants major reforms to the tax code and the agriculture, health, education and energy sectors. Facing a minority in Congress and strong judicial checks, compromise will likely prove necessary. Despite moderating his tone, Petro’s goal to raise taxes and wind down oil exploration threatens Colombia's supportive fiscal and regulatory environment. Proposed policy changes may also prompt further downgrades in Colombia’s Country Risk Index scores if his more radical proposals are enacted.

US relations with key Mideast players are evolving. Strained relations with Saudi Arabia and the UAE look set to improve. US President Joe Biden’s July Mideast trip, originally limited to Israel and the West Bank, will also visit Saudi Arabia, while a new US-UAE defense agreement is likely in the works. This shift is largely due to the likely failure of the JCPOA talks and the recent Opec-plus decision that speeds up quota tapering. As a result, much of Biden’s trip, as well as the “GCC+3” summit in Jeddah, will focus on regional security, especially Iran-backed missile and drone programs.