Energy, Geo-politics & Money - 2023.11.15
In this roundup, we look at:
Vitol’s outlook for the oil market
Aramco’s first production of tight gas
The view that an independent foreign policy by “third party nations” can help prevent hot war between the US and China
The German government’s decision to provide $8 billion in support to Siemens Energy
A new technology to produce heat from hydrogen, without combusting it
The challenges facing the maritime industry as it tries to decarbonize
The United States and China agreement to revive a bilateral working group on climate, and to work together on issues like methane, plastic pollution and energy transition
Why the UN believes developed countries should aim to hit net zero in 2040, and emerging economies as close as possible to 2050
Why Europeans and Americans want a solution to climate change, but only if they don’t have to pay for it, why this is likely to accelerate the adoption of Emission Trading Schemes, and, why that is likely to under perform versus the target of Net Zero
General Energy News
Yesterday EPM reported on the most recent IEA oil market outlook, which forecasts a return to a structurally long market as early as first quarter 2024. Today, according to Reuters, Vitol says it expects global oil markets to be fairly balanced in 2024, with a slight surplus towards the end of the year as demand and non-OPEC supply growth are exceeding expectations. The refining sector is "experiencing a potentially last growth spurt" and could go through a soft patch next year, but capacity could tighten again in 2028-2035 amid low investments, Vitol says. On refined fuels, Vitol says it is premature to say gasoline demand in China has peaked as sales of gasoline cars are still holding at steady levels. Demand for bunkering, or marine fuel, is flatlining because of improved efficiency for ships and the growing use of alternative fuels. Jet fuel demand is expected to return to pre-COVID 2019 levels next year and not likely to peak until after 2040 as the sector is too hard to decarbonise.
Saudi Aramco says it has produced the first tight gas at South Ghawar, writes Reuters. The efforts are part of the company’s strategy to boost gas production. Commissioned facilities at South Ghawar have a capacity to process 300 million standard cubic feet per day (scfd) of raw gas and 38,000 barrels per day (bpd) of condensate. Aramco aims to deliver 750 mmscfd of raw gas from South Ghawar in the near future.
Macroeconomics
China's economic recovery picked up slightly in October, writes Nikkei. Industrial production increased 4.6% in October from a year earlier, marginally more than the previous month's rise of 4.5%.
Geopolitics
An opinion piece in Bloomberg argues that in the midst of the simmering US – China conflict, which it too says is likely to continue and not be magically” resolved by the Biden – Xi meeting today, the best other countries can do is steer a middle ground and not pick sides too openly. It notes that many Southeast Asian countries rely on the US for their security while relying on China for their economic fortunes. These much smaller countries have retained their agency and forced the superpowers to the table to ensure they engage with each other, whether they want to or not. The alternative is a world where the US and China either jostle to gain allies into competing blocs, or neutralize them into zones of influence — both of which would make the possibility of conflict far higher, splintering the region even further. It is naïve to think that either Washington or Beijing will be satisfied with the status quo in terms of maintaining current levels of influence in Asean, it rightly says. But, it concludes, if Asia’s steers clear of both the Sinocentrism that the US fears, and the American containment that Beijing seeks to forestall, peace can be maintained.
Energy Transition & Technology News
EPM has over recent weeks been keeping a close eye on the troubles in the wind energy business. We have reported on the cost escalations experienced by the industry, due to the higher cost of money and supply chain disruptions; the resulting “zero bids” for UK offshore projects and the cancellations of US offshore projects; the resulting financial pain felt by the industry’s leading players; including Orsted and Siemens; but also the advances of China in wind turbine technology. All of this indicates the industry is in for a major disruption. It is too early to tell whether the pace of growth will be reset lower, or whether the cost issues are temporary, but to us at EPM it is clear the Chinese will cause severe pain for the current European leaders in the industry. So we see another front opening up in the US and European regulatory efforts to block Chinese companies from taking over what are considered important segments of the economy.
Further on the subject, Reuters writes the German government has agreed to “backstop” Siemens Energy with guarantees worth 7.5 billion euros ($8.1 billion), to keep the company afloat. You may recall we earlier reported on Siemens Energy needing financial support to be able to execute its order book, and that banks were unwilling to lend because of the company’s current financial difficulties. The German government has now stepped in to ensure Siemens Energy can remain in business – for now, we would add, as we seriously question how it could survive head-on competition with China once its companies start to go international. The economy ministry stated that the guarantees are part of a package totaling 15 billion euros agreed with private banks and other stakeholders and would also impose a pause on dividends and higher level bonuses at Siemens Energy.
A look at a new technology that produces heat from hydrogen without burning it in Forbes. An Australian company called Star Scientific made this discovery while studying nuclear fusion. They found a catalyst that encourages hydrogen gas to combine with oxygen gas to form water, and the reaction releases a large amount of heat. The process is called HERO which stands for Hydrogen Energy Release Optimiser. In a laboratory demonstration, with inflow pipes for hydrogen and oxygen, within just a few minutes the catalyst became hot and orange in color as its temperature shot up to 713 C degrees. Such a temperature will be sufficient to provide heat for many industrial processes. The company will start building a factory in Albuquerque, New Mexico in 2024. The investment is about $100 million, and the plant will eventually employ 200 employees to work at a 50-acre site
Of the 10 largest shipping companies by market capitalization globally, all have some form of net-zero target, writes S&P Global. The key challenge for the sector is that the ships deployed to international shipping are generally too large to be powered by batteries. Switching fuel to green methanol and ammonia is therefore the priority. "It's not hard from a technical perspective, but it is expensive because we need to build the production facilities," says Danish shipping conglomerate A.P. Møller - Mærsk A/S, which has estimated a $2 trillion investment would be needed in green fuels production facilities by 2050 to decarbonize the whole industry. Such fuels must make up 84% of the total bunker mix by 2050, but their share was 0.3% in 2022 and is expected to reach just 14% in 2050 without accelerated decarbonization efforts.
Climate Politics
The United States and China will revive a bilateral working group on climate and work together on issues like methane, plastic pollution and energy transition, they said in a joint statement, writes Reuters. The countries' top climate envoys, John Kerry and Xie Zhenhua, met in California last week to find common ground ahead of COP28 talks in Dubai. The two say they support a declaration by G20 leaders to triple global renewable energy capacity by 2030 and promised to work together to curb forest loss and plastic pollution.
Yesterday EPM reported on the talk in the EU on regulatory limits on methane releases during the production, transport and processing of fossil fuels. Bloomberg reports that the talks ended in a provisional political agreement to require energy companies to regularly check infrastructure like wells and pipelines for leaks of methane. The agreement implements rules on imports in three phases. The first will focus on data collection and the second and third phases will include monitoring and verification that will be applied by exporters to the EU that must include “maximum methane intensity values” by 2030.
Other
The Financial Times writes that according to the latest progress report by the UN IPCC, global greenhouse gas emissions are rising inexorably to put the world on course for a near 9 per cent rise by 2030 from 2010 levels. While the projected rise is slightly better than the 11 per cent in last year’s assessment, it remains vastly short of the 45 per cent cut needed to limit warming to 1.5C. To manage the situation, developed countries should aim to hit net zero in 2040, and emerging economies as close as possible to 2050.
Europeans and Americans seem to want a solution to climate change, but only if they don’t have to pay for it, says Forbes opinion piece. Indeed, IPSOS polling suggests that less than a third of EU citizens would pay more in income taxes to prevent climate change. For comparison, a University of Chicago poll finds that just 38% of Americans would be willing to pay a $1 monthly carbon fee to reduce emissions, down 14 percentage points from two years ago. The author’s conclusion is that political parties that wish to remain in power will have to back off decarbonization by decree. Instead, then, they will have to rely on market-based solutions like emissions trading systems (ETSs). But, ETSs will need several refinements to prevent industries from leaking into less regulated markets or getting subsidies for dirty products. There needs to be a global ETS scheme or a minimum global carbon tax to disincentivize leakage, it says. Also, ETSs should provide stronger incentives to reduce or prevent emissions instead of merely buying credits. And, governments need to stop subsidizing consumer carbon emissions and instead subsidize adoption of technologies like electric vehicles, geothermal heating and heat pumps that reduce dependence on fossil fuels.