Energy, Geo-politics & Money - 2023.11.23
An non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, there is much to look at:
Why Russia is unlikely to support a further cut in OPEC+ oil production
OPEC’s decision to delay its meeting to November 30, which did not support oil prices
Germany’s budget crisis
The agreement between Israel and Hamas about a truce and exchange of hostages; the heavy US involvement to get this point; and what EPM now believe is the most likely path forward
The opinion that BP should go down the path of Shell: appoint a new CEO to undo most of the energy transition work the company has done, and formulate a new strategy that is firmly oil and gas focused
Donald Trump’s plan to end the IRA and focus US energy policy back on crude oil and natural gas
Why the International Energy Agency believes oil and gas producers should be spending not less, but more on the energy transition
How battery technology improvements are causing developers to abandon scores for gas-fired power generation projects world-wide, as renewables plus storage is developing a cost-edge
The confirmation by the Canadian government that it too will provide (IRA like) tax credits for investment in CCS and other “green investments”
The launch of Singapore first battery powered cargo vessel, which is expected to reduce operational costs when compared to conventional vessels
China’s GAC plan to start producing solid state batteries, with an energy density of 400 watt-hours per kilogram, as of 2026
Why high natural gas inventories and mild weather so far leave Europe well prepared for winter; and why this will not address the issue of the continent having structurally higher energy cost than other parts of the world
General Energy News
As OPEC considers further supply cuts, Russia has little incentive for a radical change in its oil policy, as oil prices are higher than its forecasts, leaving its energy revenue strong and its budget deficit narrower than planned, Reuters writes. After a contraction in 2022, Russia's economy is forecast to grow by around 3% this year, faster than either the United States or the Euro zone.
OPEC+ has delayed a ministerial meeting expected to discuss oil output cuts to November 30 from November 26, writes Reuters, which says producers struggled to agree on production levels and hence possible reductions. The announcement caused quite a bit of stir in the market, with Brent at one time losing 5% from opening. Reuters also reports that three OPEC+ sources said it was all linked to African countries, which are smaller producers in the group, which somewhat eased investor concerns. Analysts said that Angola, Congo and Nigeria were seeking to raise their 2024 supply quotas above the provisional levels agreed at the OPEC+ June meeting. At closing, therefore, much of this was recovered and Brent futures were down $1.04, or 1.3%, at $80.92 a barrel, while WTI dipped 90 cents, or 1.2%, to $76.20,
Macroeconomics
Germany has entered an acute budget crisis, writes the Financial Times. When Germany enshrined a “debt brake” in its constitution in 2009, it was celebrated as a victory for fiscal rectitude and a definitive break with the profligacy of the past. Now, the country is in a financial crisis, brought on in no small part by its geopolitical stances, which has pushed up energy prices to the point that German heavy industry is now globally uncompetitive. In response the German government wants to provide subsidies to prevent an industrial implosion, but the debt ceiling makes that impossible – Germany’s constitutional court has ruled against the plan.
Geopolitics
Israel's government and Hamas on Wednesday agreed to a four-day pause in fighting to allow the release of 50 hostages held in Gaza in exchange for 150 Palestinians imprisoned in Israel, and the entry of humanitarian aid into the besieged enclave, writes Nikkei. The 50 women and children will be released over four days, during which there will be a pause in fighting. For every additional 10 hostages released by Hamas, the pause would be extended by another day. Implementing the deal must wait for 24 hours to give Israeli citizens the chance to ask the Supreme Court to block the release of Palestinian prisoners, Israeli reports said.
Israeli prime minister Netanyahu said the intervention of U.S. President Joe Biden had been critical to reach the agreement. Reuters provides more detail of how involved exactly the US has been. The secretive effort that led to the deal included tense personal diplomatic engagement by U.S. President Joe Biden, who held a number of urgent conversations with emir of Qatar and Israeli Prime Minister Benjamin Netanyahu. It also involved hours of painstaking negotiations including Secretary of State Antony Blinken, CIA Director Bill Burns, national security adviser Jake Sullivan and his deputy Jon Finer, and U.S. Middle East envoy Brett McGurk, among others.
As to what is likely to happen after the truce end, Israel's military operations against Hamas in the Gaza Strip will likely last for five months, the former head of the country's defense intelligence, retired Major General Amos Yadlin told Nikkei. But, EPM note, this is one view, and we believe there is no consensus inside Israel on how to move forward on the issue of Palestine. The position of Netanyahu and his rightwing government is clear, but there is also an element of Israel’s political elite that supports the US vision of a “2 state solution” to enable integration of Israel into the Middle East. As such, we believe the deciding factor will be not Israel, but the US. So far, the US has given a lot of leeway to the Netanyahu government to do as it wishes. We had not expected that, and many in the US foreign policy circles are upset with that. We don’t foresee a sudden, overnight change in US policy, because that rarely happens, and as such we fear that following the end of the truce, Israel will restart its bombardements of Gaza, moving further east and south into the territory. Meanwhile, during the truce we would not be surprised if we saw a further uptick in IDF operations on the West Bank.
EPM notes with interest that China has quite explicitly taken a stance in the Gaza War that is fundamentally opposite to the US stance. According to Nikkei, at a summit hosted by South African counterpart Cyril Ramaphosa, Xi said
It is necessary to ensure the safe and unimpeded passage of humanitarian assistance and stop the collective punishment against the people of Gaza through forced eviction, as well as turning off water, electricity and oil
Xi made these remarks at a BRICS summit via video link.
Energy Transition & Technology News
Javier Blas of Bloomberg is of the opinion BP should go down the path of Shell: appoint a new CEO to undo most of the energy transition work the company has done, and formulate a new strategy that is firmly oil and gas focused. The current strategy isn’t working, and investors don’t like it, he says. The only metric to decide investment should be the risk-adjusted return on capital employed, he says. The EPM view on the subject is, there should be balance. Balanced investing in the energy solutions of the future, because if you skip that now, you will find yourself “no longer relevant” 10 to 15 years from now. But balanced also in the sense that oil and natural will continue to dominate the world of energy for the next 15 to 20 years, and as such should remain a pillar in an energy company’s strategy.
Blas is correct that most investors seem to want oil and gas companies to focus solely on oil and gas – as evidenced by share performance. But they have a typically shorter-term perspective than an energy executive should have. Bridging the two requires storytelling. But we do believe that if Wall Street got their way, all oil and gas companies would focus on dividends and share buybacks to such an extent that they would die out along with demand for oil and gas.
Over in the US, advisors to Donald Trump say he is planning to gut US President Joe Biden’s landmark climate law, increase investment in fossil fuels and roll back regulations aimed at accelerating the transition to electric vehicles if he is elected next year, writes the Financial Times. “Some of the price tags involved with some of these credits seem to be wildly understated,” a senior Trump campaign official told the Financial Times. “We’d be looking to cut a lot of that spending.”
EPM considers this important information. It highlights, namely, that the energy transition and decarbonization of the global economy as currently envisioned is not a given. There are forces pushing against it. And the risk of the current global policy direction being adjusted carbon levels will go up, if and when the economy and/or the geopolitical environment worsen. As to our (completely irrelevant ;-) opinion about what policy should be, we would again highlight the importance of balance. Availability, affordability and sustainability are equally important, so that is what energy policy should revolve around. But balanced views are hard to find in politics in general, in US politics in particular…
Meanwhile, the International Energy Agency says oil and gas producers should be spending not less, but more on the energy transition. About half of their annual investment should go into clean energy projects by 2030, to be aligned with global climate goals, writes the Financial Times. Oil and gas producers account for just 1 per cent of global green energy investment and last year committed 2.5 per cent, or $20bn, of their capital to the sector, the IEA said. IEA head Fatih Birol said oil companies had been slow to invest in clean energy as they “don’t see they will make money” from it, but he argued fossil fuel returns were less stable and only slightly higher than clean energy. The IEA estimated the return on capital employed in the oil and gas industry was 6 per cent to 9 per cent between 2010 and 2022, compared with 6 per cent for clean energy projects. Birol added that companies needed to be “letting go of the illusion that implausibly large amounts of carbon capture are the solution”, with the IEA warning that current policies would require an “inconceivable” 32bn tonnes of carbon to be captured annually by 2050.
On the ground and away from policies and opinions, giant batteries that ensure stable power supply by offsetting intermittent renewable supplies are becoming cheap enough to make developers abandon scores of projects for gas-fired generation world-wide, writes Reuters. Some battery operators are already supplying back-up power to grids at a price competitive with gas power plants, it says. Reuters concludes the shift challenges assumptions about long-term gas demand and could mean natural gas has a smaller role in the energy transition than posited by the biggest.
Canada will provide tax credits for investment in CCS and other “green investments”, its government has confirmed according to Reuters. The objective is to help Canada compete with the United States, which is offering generous incentives through the Inflation Reduction Act introduced more than a year ago.
Singapore's first fully electric cargo vessel – an 18.5-meter harbor craft with swappable batteries that can carry cargo of up to 25 mt – was launched by consortium Goal Zero, writes S&P Global. The Hydromover generates zero emissions and is expected to reduce operational costs by up to 50% compared with conventional vessels due to "improved energy efficiency" and "lower maintenance costs". By using batteries that can be swapped out within minutes, the electric harbor craft can minimize operational downtime and improve productivity, and a smaller fleet can do the work of several conventional harbor craft.
The Electrification of Transport
Guangzhou Automobile Group Company (GAC) has announced plans to install self-developed all-solid-state batteries in vehicles by 2026, joining other carmakers in attempting to commercialize a technology that could revolutionize the electric vehicle industry, Nikkei writes. Solid-state batteries potentially offer a longer life span, increased range and faster charging times. GAC's version can have an energy density of up to 400 watt-hours per kilogram while meeting safety and reliability requirements under extreme conditions, the state-owned auto giant said. The lithium-ion batteries commonly found in EVs today have an energy density of 200 to 300 watt-hours per kilogram.
The Global Energy Crisis
Exceptionally mild weather across Northwest Europe during October and the first part of November has enabled Europe keep on increasing natural gas inventories, at a time when normally the seasonal drawdown starts, writes Reuters. For example, temperatures in Frankfurt, Germany, have been above the long-term seasonal average on 42 of 51 days so far since the start of October. Frankfurt is about 17% of the way through the normal heating season and so far heating demand has been almost 38% below average. It is still very early in the winter heating season, so there is still considerable uncertainty about how much gas the region will consume. But, Reuters says, as things now stand, even a very cold winter would leave inventories of 401 TWh (35% full) while a very mild winter could leave as much as 804 TWh (70%). The only problem that remains, therefore, is the price Europe is paying for gas. After it has switched Russian pipeline gas for LNG, that price is now structurally higher, affecting the disposable incomes of consumers and the competitiveness of energy intense industries.