Saudi's eastward drift is Europe's next headache
Saudi Arabia is making clear that it will no longer dance to the West’s geopolitical tune.
US-Saudi relations in particular have turned sour in the Biden era - the President’s criticism of Crown Prince Mohammed bin Salman in 2020 was a bad omen and one compounded by the chaotic withdrawal from Afghanistan.
The US, though far from insulated from turmoil in global energy markets, may take some comfort in its own oil reserves and the green revolution promised by the Inflation Reduction Act.
Europe is far worse prepared for a Saudi drift out of the West’s orbit and into the growing axis of non-aligned states. Looking back to March of last year, energy producers like Norway and Qatar came to the continent’s rescue after a nervy delay following the short-circuiting of Russian hydrocarbons.
Norway is economically aligned with the EU and the bloc’s bilateral relations with Qatar are strong. This makes them suitable partners for energy-dependent European states. That said, readers will appreciate that the capacity of both nations is in no way comparable to that of Saudi Arabia which holds the world’s second-largest proven oil reserves and ranks fifth for natural gas.
A long-term attrition of supply from the Gulf, therefore, would be painful for the Western economy (as the Saudis well know). For context, in terms of gross reserves, global markets would need 53 Norways to make up for Saudi heft. This is not to say that Gulf oil will one day stop being pumped westwards – that’s in no one’s interest. More likely is that Europe will be squeezed as more of Saudi Arabia’s oil and gas is directed eastwards.
The continent needs to prepare for such an eventuality, even if it’s a gradual one, and bring new suppliers online sooner rather than later to keep energy prices in check.
In terms of potential options, Venezuela, Iraq, and Nigeria represent three of the top ten countries by proven oil reserves (they rank first, fifth and tenth respectively) from which Europe could realistically increase its long-term supply. Iraqi oil has long been touted as an unexploited resource, especially as the country returns to a degree of normality. French giant Total Energies announced investments in Iraq worth $27 billion USD in April of this year, adding to positive sentiment.
European observers, then, will have been disappointed to see the Iraqi oil ministry’s announcement last week that it will toe the Saudi line and plough ahead with a commitment to cut domestic production by 200,000 barrels per day (bpd) until the end of the year.
At least African producers Nigeria (the continent’s largest), Congo and Angola were spared this production cut. The Organisation of Petroleum Exporting Countries (OPEC+) ruled that all three will be allowed to maximise their quotas for 2023. Markets can therefore expect Nigerian output to reach 1.74 million barrels per day in that period with loyal European consumers like the Netherlands, France, and Spain all standing to benefit.
There is a catch, however. While more oil from Nigeria and others will come online in 2023, any downward pressure this will have on prices is being deliberately offset by OPEC+. Indeed, Saudi Arabia’s own voluntary cut of 1 million barrels per day far exceeds the gain in supply from OPEC+’s African members. In other words, the cartel has given with one hand and taken with the other.
In the search for a peer competitor to Saudi Arabia, only Venezuela measures up in terms of proven oil deposits. The South American state represents 24% of OPEC’s reserves compared to Saudi’s 21.5%.
International energy experts like Dr. Cyril Widdershoven have also marked out Venezuela as a potential LNG superpower. BP estimates that Venezuela's proven gas reserves are the seventh largest on earth, while an ongoing recertification study could take them up to third. However, there are a number of stumbling blocks that put the country’s hydrocarbon bounty out of Europe’s reach, at least for the moment.
While the US announced that oil major Chevron could resume production in Venezuela in November 2022, the country’s energy industry still labours under the weight of western sanctions. European producers like Eni and Respol are also unable to restart their in-country operations.
The initial optimism brought on by the Chevron deal has now faded, even though Maduro continues to engage with the Biden administration and its allies.
Venezuela’s ongoing isolation, however, increases the economic rationale for allying itself to non-aligned states like Russia, China, and Iran. If this happened, Venezuela’s mineral riches could fall out of Western hands for good, proving that from Caracas to Kurdistan there are no easy options for Europe’s policymakers.
Regardless, the continent’s current strategy of relying on a patchwork quilt of energy suppliers is surely outdated in the era of geopolitical realignment.
Indeed, as the Saudi-led Gulf drifts towards China, it will take a strong degree of realpolitik on the part of the West to reverse the resulting energy deficit. With Venezuela, for example, the EU will need to push hard in coordination with the Biden administration to sideline the American right which remains staunchly opposed to negotiations with the socialist Maduro.
This would allow both parties to begin to pick away at the sanctions that prevent European and American energy companies from getting Venezuelan oil and gas out of the ground. In sum, the clear (and increasingly rapid) drift of nations of huge strategic importance like Saudi Arabia away from the West should serve as evidence of the dangers of ideological policymaking.
That is not to say that such a clarion call will be heard anytime soon.
Gergana Urdarevska is the Founder and Director of Summit 11 which provides consultancy and business development services related to the energy sector, digitalisation and trade and investment.
