The European Union has never been shy about its climate ambitions. The Carbon Border Adjustment Mechanism (CBAM) is the jewel in the crown of this policy framework, designed to prevent “carbon leakage” by taxing dirty imports. It makes perfect sense for steel, cement, and aluminium. However, when you try to apply physical border logic to the fluid physics of electricity markets, the system begins to creak.
A highly influential new report from the Bruegel think tank has highlighted this precise issue, urging the EU to delay the application of CBAM to the power sector until at least 2028. For senior energy executives and strategists, this is not just a policy nuance. It is a warning flare about a potential disruption to security of supply and trading margins across the continent.
The “Electron Tracing” Trap
The core of the problem is technical but has massive financial implications. Unlike a coil of steel, you cannot stamp a certificate of origin on an electron. The current 2026 deadline assumes we can accurately tax electricity entering the EU from neighbours like the UK, Turkey, or the Western Balkans based on its carbon intensity.
Bruegel analysts point out a critical loophole known as “resource shuffling.” In this scenario, a non-EU neighbour with a mixed grid (renewables plus coal) could simply designate all its renewable generation for export to the EU to avoid the CBAM tax, while using its fossil fuel generation to power its own domestic market. The result? On paper, the EU imports “green” power. In reality, total emissions remain unchanged.
For the business development manager looking at cross-border Power Purchase Agreements (PPAs), this creates a massive headache. If the EU clamps down to prevent this shuffling, it introduces complex, heavy handed compliance burdens that could freeze trading liquidity.
The Security of Supply Risk
For the C-suite, the bigger concern is security. Europe is increasingly reliant on interconnectors. We trade power with the UK, Norway (part of the EEA, so different rules apply, but the principle stands for others), and the Balkans to balance our intermittent renewables.
If CBAM is implemented poorly or too early, it acts as a trade barrier. It adds a cost layer that could make imports unviable during tight market conditions. In a worst case scenario, non-EU generators might simply choose not to export to the single market rather than navigate a labyrinthine compliance regime.
We are already seeing friction in electricity trading post-Brexit. Adding a carbon tariff wall in 2026, without a fully harmonised system in place, risks exacerbating price spikes during winter months when the EU grid needs external support the most.
The Strategic Pivot: Wait for Market Coupling
The recommendation to delay is not about abandoning the goal. It is about waiting for the mechanism to catch up with the reality. The smart money suggests that the EU should wait until full “market coupling” is achieved with these neighbours, or until their domestic carbon pricing schemes are fully aligned with the EU ETS (Emissions Trading System).
For investment strategy, this potential delay offers a reprieve. It suggests that the current volatility in cross-border trading spreads might settle down if Brussels accepts the recommendation. It allows time for a more sophisticated, data driven approach to carbon accounting to be developed.
What Executives Should Watch
The immediate action for leadership teams is to monitor the European Commission’s response to this report. If they dig their heels in for 2026, expect a rush of complex compliance work and potential disruption in interconnector flows. If they accept the delay, it signals a pragmatic shift towards security of supply over rigid ideology.
Ultimately, electricity does not respect borders. Trying to tax it as if it stops at passport control is a high risk strategy. For the sake of grid stability and efficient markets, a pause on electricity CBAM is the only logical move.
The contrasting fortunes of two major deals—Saudi Aramco’s increased stake in MidOcean Energy and ADNOC’s withdrawal from the Santos acquisition—mark a definitive pivot in the region’s corporate strategy. We are moving from an era of unchecked asset accumulation to one of tactical, risk-adjusted partnerships.
The Santos Wall: Valuation Meets Regulation
The withdrawal of the $19 billion bid for Australia’s Santos Ltd by XRG (an ADNOC subsidiary) and its consortium partners is the most significant M&A correction of 2025. While officially attributed to “commercial disagreements” over valuation, the deal faced substantial headwinds that every BD leader in the region must recognize.
- Regulatory Friction: Acquiring a strategic national asset in a Tier-1 jurisdiction like Australia is becoming increasingly difficult for sovereign-backed entities. The scrutiny from foreign investment review boards is intensifying, adding a “political risk premium” to any full takeover bid.
- Operator Risk: Becoming the operator of record for assets like Santos’s Barossa or Gladstone LNG projects invites direct exposure to local environmental activism, labor disputes, and tax regime changes. For a Gulf NOC, this operational drag can outweigh the strategic value of the reserves.
The MidOcean Model: The Proxy Play
Contrast this with Saudi Aramco’s approach. By increasing its stake in MidOcean Energy to 49%, Aramco is essentially effectively “outsourcing” its M&A engine.
MidOcean, managed by institutional investor EIG, acts as a specialized vehicle. It acquires the assets (like interests in four Australian LNG projects and Peru LNG), manages the regulatory approvals, and handles the operational partnerships. Aramco, as the major shareholder:
- Secures the Offtake: Gaining access to the LNG volumes for its growing trading desk.
- Limits Exposure: Avoiding the direct “sovereign buyer” label that complicates deals in Western markets.
- Deploys Capital Efficiently: Gaining exposure to multiple geographies (Latin America and Asia-Pacific) for a fraction of the cost of a single corporate takeover.
Strategic Drivers: Volume Over Vanity
This shift is driven by a fundamental realization: You don’t need to own the well to trade the gas.
For MENA executives, this signals a change in the flow of outbound capital. The “Checkbook Diplomacy” of buying entire companies is fading. It is being replaced by sophisticated joint ventures, equity-light offtake agreements, and investments in agile midstream vehicles.
Key Takeaways for Business Development:
- Target the Vehicle, Not the Asset: If you are selling into this market, structure your deals as partnerships or minority equity opportunities rather than full divestments.
- The Trading Desk is King: The ultimate goal for both ADNOC and Aramco is to feed their trading arms. Any deal that brings flexible LNG volumes (destination-free cargoes) will be prioritized over fixed-asset acquisitions.
- Jurisdiction Matters: Expect capital to flow away from “difficult” regulatory environments (like Australian M&A) toward more transactional markets or US Gulf Coast brownfield expansions where offtake financing is king.
The failure of the Santos deal is not a retreat; it is a refinement. The Gulf’s capital is still looking for a home in the global gas market, but the terms of engagement have strictly changed.
For energy executives operating in the region, this standoff is not merely a diplomatic row; it is a material disruption to the supply/demand balance of North Africa and a signal that geopolitical risk is re-pricing regional infrastructure assets.
Context: The Interdependency Trap
The deal in question was designed to solve two problems simultaneously. Israel has a gas surplus and limited export routes (no LNG facilities of its own). Egypt has a gas deficit, soaring domestic electricity demand, and idle LNG export capacity at Idku and Damietta.
- The Plan: Chevron and its partners committed to investing heavily to expand Leviathan’s production and build a new offshore pipeline (Nitzana route) to bypass existing infrastructure bottlenecks.
- The Reality: Israeli Prime Minister Netanyahu paused the approval process in late 2025, linking the gas deal to broader security negotiations regarding the Gaza border and Sinai.
This politicization of the molecule flow breaks the “commercial shield” that has largely protected the Israel-Egypt gas trade from political volatility over the last five years.
Risks: Capex, Counterparties, and Credibility
The immediate casualty of this pause is investor confidence.
- Stranded Capex Potential:
The expansion of Leviathan Phase 1B and Phase 2 requires Final Investment Decisions (FIDs) worth billions. These FIDs are predicated on firm offtake agreements. If the Egyptian offtake is uncertain, the partners (Chevron, NewMed, Ratio) cannot greenlight the upstream capex. The “November 30” deadline was a critical gate for these decisions; passing it without resolution puts the entire project timeline in jeopardy.
- Egypt’s Energy Fragility:
Egypt is already grappling with power shortages. The government had factored these incremental Israeli volumes into its 2026-2030 power generation strategy. If this gas does not arrive, Egypt faces two expensive choices:
- Increase reliance on fuel oil for power generation (higher emissions, higher cost).
- Import more LNG from the global spot market, draining foreign currency reserves.
- The LNG Re-Export Model:
Egypt’s strategy to earn hard currency by re-exporting Israeli gas as LNG to Europe is effectively paused. This denies Cairo a critical revenue stream needed to service its sovereign debt and stabilize its currency.
Upside Scenarios and Strategic Pivots
Is the deal dead? Likely not. The economic logic remains overwhelming for both sides.
- The “Grand Bargain” Scenario: History suggests that energy often becomes the sweetener in larger diplomatic deals. A resolution to the security disputes could see the gas deal approved as part of a broader normalization package. If unlocked, the project could move fast, with the partners likely prioritizing the new pipeline to recover lost time.
- Alternative Routes: This friction may accelerate Israel’s exploration of alternative export routes, such as the long-discussed pipeline to Turkey or a Floating LNG (FLNG) facility. For BD executives, this opens new potential engagement channels: if the Egypt route is deemed too politically risky, technology providers for FLNG could see renewed interest from Israeli operators.
Executive Takeaway
The paralysis of the Leviathan expansion serves as a case study in political risk management. For companies investing in MENA cross-border infrastructure, the lesson is clear: Commercial viability is necessary, but insufficient. Contracts must include robust buffers for political force majeure, and supply portfolios must be diversified. Until the valve is politically reopened, the Eastern Mediterranean remains a high-beta energy market.
