Why Kissinger Was Wrong To Tell Ukraine To Cede Territory

Politics, Geopolitics & Conflict

Henry Kissinger made headlines at Davos when he said what we suspected many of the more sinister actors were thinking for some time now: Ukraine should give part of its territory to Russia to end the war. It would be the most immediately easy thing to do. As Zelensky suggested upon hearing this, Kissinger should return to 1938-and stay there. Giving Russia a part of Ukraine (much like everyone did in 2014) would simply lead to another land grab in the near future. If the annexation of Crimea in 2014 wasn't a clear enough lesson… The West allowed it to happen, and thus Russia made its next move in the Donbas right afterward. That led to the current full-on invasion, which failed and has now been downgraded to the Donbas and a very large swathe of land connecting it to Crimea. Letting Putin have this Ukrainian territory would be a devastating strategy for Europe. Western nations carving up territory to appease one force or another has not worked so well in the past (the Middle East is one shining example).

Libya's current interim prime minister Dbeibah has declared that parliamentary elections will be held by the end of this year. No one is holding their breath after the parliamentary-backed prime minister Bashagha set up his government in the Oil Crescent and showed no signs of backing down from taking Tripoli and forcing Dbeibah to step down. No one is confident in Dbeibah's election proclamation, either, following a flurry of news and press releases warning him to step down by Thursday or face the consequences.

Hungarian Prime Minister Viktor Orban managed to get a constitutional amendment through parliament, allowing him to declare a state of emergency, citing energy and financial crises due to the war in Ukraine and Western sanctions. He also used the opportunity to decree a windfall tax on all big companies, including in the energy sector, to subsidize energy bills and modernize the Hungarian military, among other things.

As we noted last week, South Ossetia, the breakaway region of Georgia, unilaterally announced it would hold a referendum on becoming part of Russia. This announcement appeared to be met in Moscow with a bit of discomfort due to the ill-timing. This week, the Kremlin said it was not working on its end to organize such a referendum in South Ossetia. The Kremlin also questioned the legality of a referendum, saying that the working suggested the creation of a "third state".

In a clear provocation, Russian and Chinese warplanes neared Japanese airspace on May 24th while Biden, the Indian PM, and the Australian leader were visiting Tokyo. Two Chinese warplanes and two Russian warplanes flew over the Sea of Japan, prompting the Japanese to scramble their own jets. Beijing claimed the maneuver was part of its annual military cooperation plan with Russia, but the timing was lost on no one.

After declaring unilateral oil production from the Kurdistan Region of Iraq "unconstitutional" and making plans to take control of the oil, and Kurdish contracts with foreign companies operating on its territory, the Iraqi government in Baghdad is now demanding that oil and gas firms sign new contracts with Iraq's state-owned oil marketer, SOMO. Trouble is brewing beyond this, with the Kurdish authorities accused by Iran of entertaining Israeli and US spies, suggesting that Iraqi Hezbollah forces (Harakat Hezbollah Nujaba) would target US and Israeli "installations" in Kurdistan.

After months of rumors, the UK announced its 25% windfall tax on oil and gas companies. The windfall tax was not intended to be indefinite, and it comes with a clause designed to encourage short-term oil and gas investments. Companies such as BP, however, who had planned on sinking large sums of money into developments in the North Sea, have stated-contrary to a statement earlier in May-that they are reviewing their plans for the North Sea in the wake of the tax. The backlash to the measure has been swift among oil and gas companies and industry analysts, who argue that despite the incentives, a 25% tax on profits coming off years of hard times will effectively stifle future investments in the industry, further upsetting energy security for years to come.

Markets

Gasoline inventories continue to fall and are about 8% below five-year levels. Distillate fuel inventories are languishing 21% below five-year averages. Meanwhile, refineries are operating at 93.2% capacity-the highest in nearly two decades. SPR is now 96 million barrels from this time last year. Nevertheless, commercial crude stocks are still down 65 million barrels from that same time. On top of that, crude oil exports leaving the Port of Corpus Christi have increased 9% in the first four months of the year compared to the same period in 2020, with refined products exports increasing 17.8%.

In response to high gasoline prices, the White House is quietly making inquiries of the oil industry to see about restarting some of the refineries that have been shuttered in the last couple of years. Oil companies are being asked what led to the shutdowns and if they have plans to restart. Indications so far are that the White House has not made official requests of oil companies to restart refineries.

Kazakhstan's oil production from the giant Kashagan oilfield has been halved since the beginning of May, and production will stop completely beginning in June, due to maintenance. The field won't be back on track until August. However, for next year, Kazakhstan forecasts its overall oil output will rise to 90-93 million tonnes, up from just over 87 tonnes currently with new projects slated to come online-assuming no delays.

Deals, Mergers & Acquisitions

TotalEnergies has agreed to acquire 50% of the United States' fifth largest renewable energy player, Clearway Energy Group, marking the largest renewable energy acquisition in the United States. The deal, with Global Infrastructure Partners, will give Total a sizable position in the U.S. renewable energy market. Clearway boasts 7.7GW of wind and solar assets in operation, with 25GW of projects in the pipeline.

Equinor has shed four Russian joint venture stakes to Rosneft but has not been released from all future commitments. Equinor also signed an agreement to exit its Kharyaga PSA project. As part of giving up its stakes, Equinor is giving up 88 million boe of reserves and 21,600 boepd of output.

Shell is expected to receive approval for its North Sea Jackdaw gas field project within days. Shell is expected to start production in H2 2025, by which time Jackdaw should be supplying 6.5% of Britain's gas output. No significant objections to the project were raised during the public consultation period.

Saudi Aramco has approached Valvoline Inc to buy its global products unit-the segment that sells to commercial customers. Valvoline's global products division accounted for 59% of the company's sales last year. Valvoline is currently valued at around $5.4 billion. One item of particular note is that Valvoline is the world's top supplier of battery fluids to EV makers. The deal is in early stages.

Shell is looking to sell its stake in a major Russian LNG project, Sakhalin-2, to a consortium of Indian energy companies that includes ONGC Videsh. Shell announced earlier its desire to exit Russia completely, and has written off nearly $4 billion in Russian assets. Meanwhile, India has been looking for deals on Russian crude oil purchases as much of the rest of the world shuns in. India is looking to increase its gas consumption over the next few years.

Discovery & Development

Italian Eni and French TotalEnergies this week launched exploratory natural gas drilling offshore Cyprus, in Block 6. Block 6 lies outside Turkey's claimed exclusive economic zone in disputed waters, but it does come amid a NATO standoff with Turkey, a member of the military alliance. Turkey will likely attempt to seek concessions that could include Cyprus oil and gas, in return for its "yes" vote on NATO membership for Finland and Sweden.

Iran could renew its pipeline project that would carry gas to Oman. Iran's Oil Minister, Javad Owji, visited Oman where the project was discussed. The project had withered on the vine as the U.S. put pressure on Oman to find alternate suppliers. The original deal between Iran and Oman, signed in 2013, was for $60 billion over 25 years.

Chevron has sanctioned its Ballymore project in US Gulf of Mexico deepwater, in the Mississippi Canyon area expected to produce 75,000 bpd of crude, from 150 million barrels of potentially recoverable oil equivalent resources.

Regulatory Monitor

Commodities giant Glencore will pay up to $1.5 billion in penalties to settle corruption allegations with the United States, Britain and Brazil. Charges include bribery for lucrative oil contracts and market manipulation.