Emerging markets are exploring opportunities to help meet the EU’s energy demand following the bloc’s announcement to ban seaborne imports of oil from Russia. The move, announced in May 2022 and implemented at the end of the year, formed part of the sanctions crafted in response to Russia’s invasion of Ukraine in February 2022.

Previously, roughly 90% of the EU’s oil imports from Russia arrived on seaborne tankers, with the rest coming through the Druzhba pipeline. An exemption for pipeline imports allows Hungary – which receives 65% of its imports via the pipeline – and other landlocked European countries to maintain supply.

Global Market

The decision was expected to tighten the market for oil, which continues to be the largest source in the international energy mix. Indeed, the ban pushed oil prices to more than $120 per barrel in the week after it was announced. The International Energy Agency estimates that the EU will need to gain access to an alternative supply for roughly 2.2m barrels per day (bpd) of crude oil and another 1.7m bpd of petroleum products.

Members of the Organisation of the Petroleum Exporting Countries (OPEC) and other allied oil-producing nations, collectively known as OPEC+, responded to the EU’s announcement by agreeing to increase production by 648,000 bpd for July and August 2022. However, this will not make up for the shortfall in supply. Major OPEC producers Saudi Arabia, the UAE, Kuwait and Iraq have roughly 4m bpd of spare capacity that could be brought on-line quickly; however, the complexity of geopolitics and economics within the OPEC+ group has led many analysts to suggest that these countries may be hesitant to increase production significantly.

Russia has the world’s largest natural gas reserves and historically accounted for some 40% of imports in Europe. The ban therefore presents an opportunity for investment in countries that have the resources to fill the gap. African gas-producing countries such as Algeria, Egypt and Nigeria are in a position to benefit from increased gas exports to the EU.

Opec Options

Geopolitical considerations will continue to shape how the EU meets its needs, but the broader dynamics present an opportunity for oil-exporting emerging markets – both OPEC and non-OPEC members – to increase production to meet demand. An increase in oil production and exports would bolster the EU’s – and, in turn, the world’s – energy security by providing supply. It would also provide an economic boon to certain emerging markets, many of which are still recovering from the economic effects of the Covid-19 pandemic.

One such country is OPEC member Libya, which holds the largest oil reserves in Africa. The country’s location on the Mediterranean coast allows for easy access to ports across Southern Europe, thus offering lower shipping costs than oil coming from the Americas or east of the Suez Canal. Libya is also exempt from OPEC+ production cuts.

Libya’s oil production reached 1.3m bpd in early 2022. It fell to 800,000 bpd in April 2022 before recovering the following year, reaching 1.2m bpd in January 2023. This should help free up oil that could be exported to the EU. Financing is another hurdle. A delay in the approval of the government budget resulted in Libya’s National Oil Corporation in May 2022 to order companies in the country to suspend maintenance and drilling operations.

Despite these challenges, any arrangement by the EU to increase oil imports from Libya could provide an incentive for private investment in the country’s energy sector. In November 2021 the government began appealing to international oil firms and other multinational companies for investment to expand oil operations and resume upstream activity.

Another nation that stands to benefit is Nigeria. While OPEC increased Nigeria’s production quota from 1.7m bpd in April 2022 to 1.8m bpd in June of that year, the country has struggled to reach these targets. Total oil production –crude, blended condensates and unblended condensates – was over 1.5m bpd in February 2023, a figure that was still lower than the 1.8m bpd reported in early 2020.

Declining levels of production have long been an issue for Nigeria, with output falling by 40% between 2012 and 2021. In a report released in May 2022, the World Bank cited a lack of maintenance and a deterioration in infrastructure efficiency as factors behind the decline. Even so, Nigeria stands to benefit from an increased output in line with its revised OPEC quota.

Despite these challenges, efforts to reduce the EU’s reliance on Russian gas pose an opportunity for investment in Africa. Almost half of the countries on the continent have proven natural gas reserves, estimated at around 800trn cu feet. Nigeria has the largest proven reserves, which are equivalent to 206.5trn cu feet. Algeria has the second largest, with deposits of 159.1trn cu feet, which account for around 8% of natural gas exports to the EU. Egypt is another OPEC country with high natural gas reserves, with 77.2trn cu feet. Yet, it will be important to address logistical and infrastructure issues to further leverage the potential of Africa’s gas-producing countries.

Latin America’s Potential

Several non-OPEC emerging markets in Latin America are also being considered as potential sources of oil supply. In June 2022 international media reported that Italian energy company Eni and its Spanish counterpart Repsol could begin shipping Venezuelan oil to Europe as early as July 2022, with the US set to relax some sanctions on the South American country to allow for the resumption of oil-for-debt exchanges.

Meanwhile, Argentina’s oil production from shale fields reached decade-high levels in January 2022, with analysts commenting that further investment in infrastructure could help the country nearly double its overall production by 2026 and increase exports from current levels of less than 100,000 bpd to more than 500,000 bpd. The Argentine government is working on a bill to ease capital controls on access to foreign currency that would incentivise energy companies to increase oil production for export.

Elsewhere on the continent, in April 2022 Colombia’s then-President Iván Duque Márquez said his country could produce additional oil to meet the EU’s needs, but stressed that it needed more foreign investment in exploration and production. Colombia’s oil production averaged 740,000 bpd from January to November 2021, and the government reported aims to boost production in 2022 to 780,000-800,000 bpd.

Another potential supplier is Mexico. State-run oil company Pemex recorded $6.2bn in net profit in the first quarter of 2022, reversing a $2bn deficit recorded in the same period of 2021, as production increased by 2.3% year-on-year (y-o-y). The company has strong public backing and received $2.8bn in government support between January and March 2022 to help pay down its debt and finance the construction of the Olmeca refinery. Additionally, the Mexican private sector saw an expansion in production. Mexican oilfields operated by private companies witnessed growth of 63% y-o-y in the first four months of 2022.

Impact on the Transition

With oil demand rising, particularly in light of the supply shortages resulting from Russia’s invasion of Ukraine, the situation has prompted discussion about the implications this could have for the energy transition in oil-exporting emerging markets. While some are likely to ramp up oil production in the short term to help meet increasing global demand, many governments and energy companies remain committed to the longterm rollout of renewable energies.

For example, Saudi Arabia – the world’s largest oil exporter – aims to generate 50% of its electricity from clean sources by 2030, in part by rapidly expanding its total solar power capacity from the current level of 455 MW to 40 GW by 2025. Key projects include a $5bn hydrogen plant in the NEOM smart city, as well as 400 MW in solar generation capacity and the world’s largest off-grid energy storage facility at the 34,000-sq-km Red Sea residential and tourism mega-project. Additionally, other Gulf countries are pushing ahead with energy transition plans. As part of its aims to neutralise carbon emissions by 2050 and bolster its renewable energy capacity, in May 2022 the UAE government invited companies to bid for a share of up to 40% in a new 1.5-GW solar plant to be built in Ajban, Abu Dhabi.

Latin American countries have similarly ramped up renewable energy investment after a pandemic-induced downturn in 2020. International media reported that the continent increased its solar and wind capacity by a record of 17.5 GW in 2021. Significantly, Mexico, Argentina, Brazil and Chile all produce greater than 10% of their domestic power from renewable sources. Recently, the region has witnessed investment of $18bn in new projects.