The Top 3 Risks

For Energy Markets

This Winter

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 The Top 3 Risks For Energy Markets This Winter
World War III: Blurring the Line Between Proxy
War and Direct Conflict
For consumers of mass media and social media, it is in-
deed becoming increasingly difficult to wade through the
propaganda on both sides of the Atlantic. It would be best
for oil and gas industry investors to ignore far-right pan-
ic-mongering suggesting that we are already in the middle
of World War III, or that it is the inevitable outcome for the
near future. We are not, and it is not. If we were fighting
WWIII, there would be no debating it.
That does not, however, make the proxy war that we are
fighting a low-level geopolitical risk, especially for the oil and
gas industry. While the line between a proxy war and a di-
rect war has not been crossed, there will be continued toxic
banter from Moscow to DC about where, exactly, that line is
and how its nature is defined. That is the entire game here,
and WWIII would end the game in no one’s favor because
it would mean a nuclear option. As it always has been, the
nuclear option is primarily about leverage and fear.
The geopolitical risk is of a prolonged proxy war. In part,
what will determine what happens next is Ukraine’s own
strategy. There will be an extremely delicate balance be-
Top 3 Risks For Energy Markets This Winter
tween pushing Russia back and regaining recently occu-
pied territory on one hand, and attempting to retake the
Crimea on the other hand. While Western nations will cheer
Kyiv on in its successful attempts to retake areas of the Don-
bas that Russia occupied this year (with the aid of Western
weaponry), there will be no cheering if Ukraine oversteps
and attempts to retake the Crimea, which Russia annexed
in 2014. That will be a line for which there is no blur, and it
will result in an immediate escalation that the West will wish
to avoid.
Things have changed considerably since early September
when Ukraine managed to push Russia out of territories it
had occupied in February.
Putin’s military commanders, including the man pegged as
his successor, Defense Minister Sergei Shoigu, are being
sidelined. What has ensued is no less than a power battle to
be the next Shoigu, which ultimately means being the next
Putin. Everything now is about this power battle, and the
Ukraine battlefield must be viewed from this perspective.
Kamikaze drone strikes on Kyiv are meant to be a brutal
show to distract from losses elsewhere, as disinformation
stokes fears of a ground invasion of the Ukrainian capital,
despite the fact that ground troops were unable to hold
onto Kharkiv.
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There is no clear path to negotiating a resolution to this ter-
ritorial dispute. Ukraine has dug in and is not willing to back
down now. The dilemma for Moscow is that it absolutely
has to hold on to territory it occupied or the entire “special
military operation” will be viewed as a complete failure at
home. Yet, new military advances are backfiring, and the
highly controversial partial mobilization of troops has not
been enough, and untrained troops thrown into this conflict
are coming home in body bags. The nuclear option, then,
is really intended as a threat to get the West to step in and
force Ukraine to back down on its increasingly intensifying
counteroffensive.
The geopolitical risk here is one that will keep the oil and
gas industry in a state of extreme uncertainty and volatility
for some time to come. This could last for decades. This
Top 3 Risks For Energy Markets This Winter
Source: Institute for the Study of War
is not a battle that will play out quickly, nor is the war in
Ukraine going to end with any clear-cut victory or anytime
soon. Because this is not a “world war”, there will not be a
decisive winner and it will change the oil and gas industry
for the long term.
Iraq: The Biggest Potential Threat to Oil Supply
What worries us now is the fact that it was too easy for
Iraq to elect a new president on October 13th and the im-
mediately nominate a PM-designate who is a rival of the
Sadrists. Many seem to be hailing this development as a
major positive turning point for Iraq. Analysts appear to as-
sume that influential cleric Moqtada al-Sadr has now sud-
denly been sidelined and is simply waiting for the new prime
minister, Al-Sudani, to purge parliament of his allies. All neat
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and clean and non-violent. Perhaps it’s plausible. After all,
al-Sadr had already vowed—amid violent clashes—to re-
move his parliamentarians earlier.
Al-Sadr did, in fact, lose this round of the game. He had at-
tempted to completely paralyze parliament, but failed. Yet,
he still has the ability to summon tens of thousands of sup-
porters in an instant, and right now, he will be biding his time.
If there is an attempt made to exclude al-Sadr from the gov-
ernment—and funding—it will not go down without a fight.
Now that nearly a week has gone by without any bloodshed
or mass protests by the Sadrists in the aftermath of the pres-
idential elections and nomination of a new prime minister, it is
safer to assume that Sadr is waiting to see what al-Sudan’s
first move will be, with only 30 days to form a government.
What happened in Basra in early October indicates a huge
potential threat for the oil industry.
There are some 17 militias under the umbrella of the PMF
(Popular Mobilization Forces) operating in Basra—Iraq’s
oil-rich province in the south that is largely responsible for
the country’s status as OPEC’s second-largest producer.
These militia factions all get money from the provincial bud-
get as well as from oil and gas revenues. They also get to
control the ports and are involved in smuggling. It’s gov-
ernment-sanctioned organized crime. The Sadrists-aligned
militia in this area is the Saraya al-Salam, recently renamed
as the “Peace Brigades”. They have three brigades in the
area, but are not directly involved in provincial security.
While the militias themselves are generally not a part of the
political machine, they are used toward eventual political
ends, and the key to power here is revenue—or cutting off
another militia’s revenue. That’s what happened in Basra
in early October when the presidential palace—where mi-
litias are headquartered--was attacked. This was al-Sadr
attempting to stir things up in Basra. He wants to control
Top 3 Risks For Energy Markets This Winter
Basra (he’s failed in this move before) because controlling
Basra is the gateway to power in Baghdad.
Washington finds itself in a very difficult place here. Former
PM Nouri Al-Maliki, a pro-Iranian force, is largely credited
with having fomented the ISIS insurgency that was even-
tually shut down. But that also opened the door for Iran to
play a much wider role and for pro-Iranian militias to assert
a significant amount of control. While the new PM-desig-
nate, al-Sudani, is pretending he’s an independent figure
these days, he is still al-Maliki’s front man, it appears. While
Washington might be praising the electoral progress made
in Iraq, in back corridors they will be very nervous about
al-Sudani and what this means for Iranian influence in Iraq.
Al-Sadr, a die-hard opportunist, has been the only buffer
countering pro-Iranian forces, even if his maneuverings
have caused severe instability in Iraq for some time. Sup-
porting al-Sadr now, as a buffer against pro-Iranian forces,
some of whom are launching attacks on U.S. positions in
Syria (from Iraq), would mean a civil war—Shi’ite vs Shi’ite,
struggling for control of a vastly oil-rich country.
Shadow War in the North Sea
North Sea oil and gas installations have long (and surpris-
ingly) been declared among the most secure in the world.
We find this to be a shockingly naïve declaration that should
come with a significant caveat: As long as Europe is not in
the middle of an energy war with Russia, or as long as Eu-
rope does not attempt to rid itself of dependence on Rus-
sian energy products.
The war has, in fact, already been launched. It started with
sightings of unidentifiable drones surveilling oil installations.
Then it escalated to two underwater explosions that caused
leaks in two trunks of the Nord Stream pipeline that were
miles apart from each other—yet detonated simultaneously.
The North Sea is one of Europe’s most important weapons
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in this energy war. Some 3 million barrels per day of oil are
produced in the North Sea. The UK, Norway and Denmark.
On the sidelines of Russia’s war on Ukraine, which is inevi-
tably an energy war, the North Sea is emerging as a shadow
venue for a parallel war that will is (and will continue to be)
played out unofficially. By that we mean that it will be a Rus-
sian war launched without any declaration, to avoid esca-
lation, and without the means to conclusively place blame
without crossing another red line.
NATO is now holding nuclear deterrence exercises in West-
ern Europe through October 30 th, and that will include drills
in the North Sea. These exercises were already on the
books before Russia’s invasion of Ukraine; however, now
they take on more meaning. Germany, France and the UK
have all pledged to assist Norway as it steps up its security
presence in the North Sea.
But while separate investigations into the Nord Stream
leaks by Sweden and Denmark pointed to clear sabotage in
terms of the underwater explosions that caused the leaks,
Sweden has refused a joint investigation, citing security
concerns. The problem here is that a joint investigation with
definitive findings showing that Russia was behind the at-
tack raises the stakes. The North Sea countries prefer to
pretend this is not a shadow war. If it declares Russia defin-
itively proven to be behind the attacks, then this will require
a response that would lead to escalation. That is exactly
what Putin has gambled on. The Nord Stream explosions,
as such, have gradually disappeared from media attention,
but the threat remains.
This is Putin’s favored weapon: The war that isn’t a war. The
war that everyone is afraid to declare. And all the better if
you blow up your own pipelines in European waters. It also
gives Russia a justification for doing more surveillance: The
pipelines are Russian-owned, and the territorial waters are
both Swedish and Danish EEZs (at the points of explosion),
but not officially Swedish and Danish territorial water. Ter-
Top 3 Risks For Energy Markets This Winter
ritorial waters give you full sovereignty, but EEZs just give
you rights over what’s below the surface. Above the surface
remains international waters. In other words, they cannot
stop the Russians from showing up and either doing more
damage or removing evidence.
It’s drone warfare, and its modern twist is extremely dan-
gerous.
Drone warfare is arguably more dangerous to oil and gas
than missile attacks, and in this Russia will take a page from
Iran’s playbook in attacks on Gulf oil installations. While
missile defense systems (American, notably) have managed
to intercept missiles aimed at Saudi oil installations and fired
by Iran-backed Houthis in Yemen, drones have eluded inter-
ception in an extreme threat to oil.
Even non-weaponized drones could wreak havoc with oil
and gas installations if they were to make contact with plat-
forms. Weaponized drones, of course, cause severe dam-
age. Oil could be taken off-line in both cases for varying
periods. Again, such attacks would not be intended to start
WWIII but to convince the West to convince Ukraine to ac-
cept a compromise over occupied territory.
If there is to be a winter “war”—in hybrid form--this is the
venue, particularly as the EU edges closer to implementing
its ban on Russia seaborne crude on December 5th. The
North Sea is a key element of this plan’s efficacy.
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