Energy, Geopolitics & Money - 2023.12.26
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we take a closer look at the War on Gaza, and the outlook for the conflict. As you know, the Israeli military response to the 7th of October has been more severe than EPM anticipated. We originally expected a limited military response, and a bigger diplomatic response, involving also regional stakeholders such as Saudi Arabia, in line with the United States vision for the Middle East, i.e. the Abraham Accords, based on its “Pivot to Asia” geostrategy.
It is by now very clear that Israel has not responded on this basis. This has caused behind the scenes tension between the United States and Israel. Israeli Prime <inister Netanyahu is under pressure from the US to define a “vision for the postwar period”, such that negotiations could be started, and after much hesitation he has now formulated such a view. Upon analysis, this view, Netanyahu’s “Three Prerequisites for Peace” are utterly unrealistic. Something EPM believes is clear to Netanyahu himself as well, for which reason we see it as a tactic to enable continuation of the current military operation in Gaza.
At the same time, Israel is risking horizontal escalation of the war, by assassinating an Iranian official in Syria. EPM does not believe, however, Iran will allow itself to be dragged into the war. As such, we expect the current War on Gaza to continue in its current form, for at least a number of weeks more.
Furthermore, we look at:
A significant setback for Russia’s Arctic LNG plans, as foreign partners have pulled out from the Arctic LNG 2 project due to sanctions
Resumption of normal traffic through the Red Sea, which in the EPM view indicates a behind-the-scenes diplomatic agreement with the Houthi’s (and Iran) has been achieved
The United States extension of its claim on the ocean floor by an area twice the size of California, in order to secure rights to potentially mineral resource-rich seabeds
The call by Brazil’s environment minister to cap oil exploration and production in her country, which conflicts with the objective of the country’s energy ministry which wants to turn the country into the fourth largest producer of fossil energy
The accusation by the secretary-general of United Nations Conference on Trade and Development that rich countries are using the green transition as an excuse to boost their own economies at the expense of developing ones
The crash in prices for carbon offsets on the world’s voluntary carbon markets
General Energy News
Foreign shareholders suspended participation in the Arctic LNG 2 project due to sanctions, renounced their responsibilities for financing and for off-take agreements for the new Russian liquefied natural gas (LNG) plant, writes Reuters. Apparently, China's state oil majors CNOOC and China National Petroleum Corporation (CNPC), which each have a 10% stake in the project controlled by Novatek from Russia as well as France's TotalEnergies and a consortium of Japan's Mitsui and JOGMEC, which also have a 10% stake each, have declared force majeure on participation in the project. This ends their financing support, as well as their off-take obligation. Novatek will now have to finance the project by itself and sell the seaborne gas on the spot market. Production from the first train is due to start in early 2024. The second train of the project is due to become operational next year, while the third is expected to start production in 2026. With three processing trains, Arctic LNG 2's capacity is meant to be 19.8 million metric tons per year and 1.6 million tons per year of stable gas condensate.
Macroeconomics
According to Bloomberg, just last week, global shipping company Maersk said it expected the chaos in the Red Sea to last for months. Now, Reuters writes, it has apparently changed its mind and is getting ready to resume operations in the Red Sea. Maersk said in a statement
As of Sunday 24 December 2023, we have received confirmation that the previously announced multi-national security initiative Operation Prosperity Guardian (OPG) has now been set up and deployed to allow maritime commerce to pass through the Red Sea / Gulf of Aden and once again return to using the Suez Canal as a gateway between Asia and Europe. With the OPG initiative in operation, we are preparing to allow for vessels to resume transit through the Red Sea both eastbound and westbound.
The speed of this change in mind, and it being inspired by recent announcement byOPG, without there yet being any evidence of its effectiveness, gives EPM the impression word of a behind-the-scenes diplomatic agreement with the Houthi’s, most likely involving the US and Iran, has been leaked to Maersk.
Geopolitics
As to Israel’s war on Gaza, in an OpEd for the Wall Street Journal, Israeli Prime Minister Netanyahu has laid out his “Three Prerequisites for Peace”: destroy Hamas, demilitarize Gaza, and de-radicalize the Palestinian society.
EPM’s analysis of the OpEd first places it into context. In our view, behind the scenes there is a disagreement between the United States and Israel on the subject of Gaza in particular, but Palestine more generally. While Israel focused on its military operations, the US called upon it to establish a “vision for the postwar period”. Effectively, this US call sets the stage for a ceasefire and negotiations, and as such clarifies the direction which the US would like to see the conflict more into. Netanyahu’s OpEd is the first time Israel has communicated such a vision – after almost 2 months of intense bombing of Gaza – which indicates Israel has resisted changing the focus to negotiations and instead has tried to maintain focus on the military operation.
As to the content of Netanyahu’s postwar vision, upon reflection it is clearly designed to prevent a switch to negotiations. While with the best of intent “destroy Hamas” might possibly be considered a realistic objective, it of course lacks the detail that makes it practical. When is Hamas considered destroyed? Already over 60% of Gaza is flattened and is that not enough? Does every member of Hamas need to be killed? Or also every supporter of Hamas’ ideals? How can it be verified such objectives are met?
As for “demilitarizing Gaza”, it is not a realistic objective as Gaza was never officially militarized to begin with – it has been occupied and controlled by Israel from 1967 until 2005 and under Israeli blockade since then.
“Deradicalization of Gaza” is an even more impractical and thereby unrealistic objective. Will every Gazan have to swear under oath that he or she loves Israel? Take a lie detector test? It is a ridiculous demand, especially after the death of over 20,000 Gazans, mostly civilians without connection to the Hamas organization. As such, Netanyahu’s OpEd does not provide the counter-position to the US vision for the postwar period that would enable the start of negotiations. It is a tactic to delay a ceasefire and negotiations in order to continue the war.
Meanwhile, an Israeli airstrike outside the Syrian capital Damascus on Monday killed a senior adviser in Iran's Revolutionary Guards, three security sources and Iranian state media said, according to Reuters. The adviser, known as Sayyed Razi Mousavi, was responsible for coordinating the military alliance between Syria and Iran. Iran's ambassador in Damascus Hossein Akbari told Iranian state TV that Mousavi was posted at the embassy as a diplomat and was killed by Israeli missiles after returning home from work.
EPM will not be drawn into a conversation on the morality of this. (Although, we note that international law is clear that one may not assassinate foreign officials, neither in your own country, their country, or in a third country). Since we focus on how events affect markets, we note that acts such as these increase the risk of horizontal escalation of the war in the region, dragging Iran into the conflict. In such a case, Israel would have to fight on three fronts simultaneously, namely in Gaza to its south, Lebanon to its north as Iran would undoubtedly instruct Hezbollah to engage, and also Syria to its west where Iran also has influence over Shi’ite militias.
As such, EPM view's Israel’s action with some surprise: does it perhaps want such a horizontal escalation, perhaps because it believes it is strong enough to win, or because it is confident the US military will come to its aid? Either way, it is clear to us such a larger conflict would be a disaster for the Middle East, as it would also thoroughly upset diplomatic relations.
That said, let us look at the likelihood of Iran allowing itself to be dragged into the conflict. This, we believe, is limited and based on the reason that Iran has fundamentally nothing substantial to gain from a war with Israel / the United States. Iran wants normalized relations, and, as EPM noted last week, that is why we believe it instructed the Houthi’s to create trouble in the Red Sea, to increase pressure on the US, such that Iran will have a little more leverage in diplomatic negotiations behind the scenes. An all-out war with Israel would end the possibility for normalization, however. As such, we believe the most likely Iranian response is the one they chose following the American assassination of general Qassem Soleimani in 2020 – a few harsh words, a token drone attack perhaps by the Houthi’s, and that will be it.
This was exactly Netanyahu’s message as he visited Gaza on Monday, where he met Israeli soldiers and pledged to push on with the war against Hamas, writes the Financial Times. “Whoever talks about stopping, there is no such thing,” Netanyahu told soldiers. “The war will continue until the end.”
The United States has extended its claim on the ocean floor by an area twice the size of California, in order to secure rights to potentially mineral resource-rich seabeds, writes Bloomberg. The so-called Extended Continental Shelf (ECS) covers about 1 million square kilometers (386,100 square miles), predominantly in the Arctic and Bering Sea, an area of increasing strategic importance where Canada and Russia also have claims. The US has also declared the shelf’s boundaries in the Atlantic, Pacific and Gulf of Mexico. The US, like all countries, has “an inherent interest in knowing, and declaring to others, the extent of its ECS and thus where it is entitled to exercise sovereign rights”, the US State Department said. The US continental shelf contains 50 hard minerals, including lithium and tellurium, and 16 rare earth elements. The extension highlights American strategic interests in securing these hard minerals on its seabed and subsoil, lying sometimes hundreds of miles offshore. The most recent assessment by the US Geological Survey, conducted in 2008, estimated that about 90 billion barrels of undiscovered oil and 1,670 trillion cubic feet of gas lie inside the Arctic Circle, along with critical metals needed for electrification.
Climate Politics
Marina Silva, Brazil’s Environment Minister, said it must consider capping oil production and exploration, in opposition to her government’s plans of turning the nation into one of the largest crude producers by 2029, writes the Financial Times:
One issue that will have to be faced is the issue of limits, a ceiling for oil exploration. It is a debate that is not easy but that oil-producing countries will have to face. We cannot give up on the energy transition. Energy security is necessary, but we also must think about transition. Both things must happen.
Rebeca Grynspan, Secretary-General of United Nations Conference on Trade and Development, is quoted by the Financial Times , as having said:
Rich countries are using the green transition as an excuse to boost their own economies at the expense of developing ones, exploiting outdated World Trade Organization rules. Many trade rules forbid policies that can be used by developing countries. And the developed countries have more fiscal space to subsidise in the areas that are good for ‘quote, unquote’, the environment.
Referring to the IRA over in the United States, she says that “developing countries (....) don’t have the fiscal space to go the path of subsidies, so they have to go the path of restrictions to trade or even duties or taxes”, which of course are banned by trade rules.
Other
As the effectiveness of carbon offset projects, such as forest conservation, are being called into question more and more, the demand for carbon offsets is plunging, writes Nikkei. As a result, carbon credit futures prices have fallen 90% from their peak. US research specialist Carbon Direct forecasts that issuances of private credits will fall 5% this year from a year earlier. As aviation and energy companies have begun to hold off on purchases, developers appear to be cutting back on credit issuance, or suspending projects. Interest in high-quality carbon credits backed by technologies such as DAC remains strong among potential buyers, however.