Energy, Geopolitics & Money - 2023.12.01
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
There is much to discuss in today’s roundup and we look at:
Saudi Arabia’s efforts to get OPEC+ agree to an additional 1 million barrels per day production cut, and what this would mean for the oil price; and why the finally agreed 900,000 barrels cut has not had the expected impact – yet
Occidental emergence as the lead contender to buy CrownRock, one of the most sought-after private oil producers in the US shale patch
How Huawei and accomplished development of the Kirin 9000S chip powering the Mate 60 Pro smartphone
The passing of Henry Kissinger
Saudi Arabia’s efforts to win over Iran and develop a common position regarding the war in Gaza
The hopes of fertilizer companies that their ammonia can become a low-carbon fuel
Dow’s decision to move ahead with constructing a $6.5 billion net-zero ethylene cracker and polyethylene complex in Canada
The start of COP28, where EPM discusses the view that the COP process is beyond its expiration date, that as a result it is not likely to achieve anything meaningful, and why sector-specific discussions between the most influential countries for each field would be a better approach going forward
India’s offer to host COP29, where EPM notes what this would mean for the global energy transition and decarbonization conversation
The unification of African nations at Cop28, behind the Nairobi Declaration
Tesla’s cybertruck is soon to be available but at $60,000, about 50% higher than indicated in 2019
How Germany’s constitutional budget crisis is worsening the country’s energy crisis
General Energy News
OPEC+ has agreed an additional 900,000 barrels per day production cut, writes Reuters. At the same time, Saudi Arabia and Russia promised to extend their voluntary cuts of 1 million and 300,000 barrels per day. This makes the total cut 2.2 million barrels per day. The UAE said it had agreed to cut output by 163,000 bpd while Iraq said it would cut an extra 220,000 bpd in the first quarter. The additional cut is close to what analysts expect crude oversupply to be in 2024. Nevertheless, oil prices declined following the news, indicating that traders do not believe OPEC+ members will actually life up to this promise.
The leader in OPEC+, Saudi Arabia, had been trying to get its partners to agree to an additional 1 million barrels per day production cut, writes the Wall Street Journal. Analysts expect a cut of 1 million would not be sufficient to drive crude oil to $90 a barrel again.
EPM believes that once the dust settles, the agreed cut, if actually delivered, should prevent Brent from falling further to below $80. The initial response from the market is the result of traders adjusting positions in response to the news, and some appear to have expected a bigger cut than 900,000.
As to the consolidation underway in the US shale patch, Occidental has emerged as the lead contender to buy CrownRock, one of the most sought-after private oil producers, in a deal valued at about $12.5bn, writes the Financial Times. Led by Tim Dunn, a prominent conservative donor, CrownRock is one of the leading private operators in the sprawling Permian Basin of Texas and New Mexico, America’s most prolific oilfield. Alongside rivals Endeavor Energy Resources and Mewbourne Oil, it has long been viewed as a prime target for bigger groups looking to scale up their operations in the oilfield. Like the others, CrownRock has significantly increased production since 2019. Occidental produced 968,000 barrels of oil equivalent a day in the Permian in August, leaving it second only to Pioneer. Absorbing CrownRock’s 226,000 boe/d would solidify its position as the number two player in the basin after Pioneer combines with Exxon.
Macroeconomics
Neither Huawei nor SMIC have given any hint as to how they accomplished the feat that is the Kirin 9000S chip powering the Mate 60 Pro smartphone. So the Financial Times interviewed dozens of industry insiders and experts, to develop the closest review yet of how the companies threw vast resources at the project, with the support of the Chinese state, to maintain market share — and have now opened the door to advances in cutting-edge AI chip production. While the likes of TSMC and Samsung use extreme ultraviolet (EUV) lithography equipment to build 7 nm chips, SMIC used the less efficient deep ultraviolet (DUV) machines for the Kirin 9000S. This comes at a cost. According to ASML, the Dutch lithography machine manufacturer, it takes 34 lithography steps to achieve 7 nm on DUV machinery, compared to just nine steps with EUV. The additional production steps result in higher production costs and lower yields. Assessments are that SMIC’s yield is in the order of 30%, whereas state-of-the-art production lines achieve 90%.
Industry experts believe Chinese state funding compensated for the excessive chip production costs. Huawei received Rmb6.55bn ($948mn) from the Chinese government in 2022, more than double the amount the previous year, according to the company’s annual report. SMIC has received Rmb6.88bn in state subsidies over the past three years. SMIC was also able to acquire the spare parts and technical services needed to keep its 7nm production facility operational. Industry insiders close to SMIC acknowledge it is possible some equipment was obtained in violation of export controls. SMIC has also reached out for assistance. Besides Huawei engineers, It also employed experts from Taiwan, Japan, South Korea and Germany in a bid to improve productivity. The overseas experts brought technical knowhow on advanced processes they gained from other foundries.
Geopolitics
Firstly, although it is of little relevance to current geopolitical developments, EPM notes the passing of Henry Kissinger. Rolling Stone writes, “Henry Kissinger, War Criminal Beloved by America’s Ruling Class, Finally Dies”. And it adds, “The infamy of Nixon's foreign-policy architect sits, eternally, beside that of history's worst mass murderers. A deeper shame attaches to the country that celebrates him”. As to why Rolling Stone reserved such a harsh judgement for Kissinger, it cites analysis by the Yale University historian Greg Grandin, author of the biography Kissinger’s Shadow. He estimates that Kissinger’s actions from 1969 through 1976, a period of eight brief years when Kissinger made Richard Nixon’s and then Gerald Ford’s foreign policy as national security adviser and secretary of state, meant the end of between three and four million people. That includes “crimes of commission,” he explained, as in Cambodia and Chile, and omission, like greenlighting Indonesia’s bloodshed in East Timor; Pakistan’s bloodshed in Bangladesh; and the inauguration of an American tradition of using and then abandoning the Kurds. Gradin’s personal response to the demise of Kissinger was as follows:
There is no doubt he’ll be hailed as a geopolitical grand strategist, even though he bungled most crises, leading to escalation. He’ll get credit for opening China, but that was De Gaulle’s original idea and initiative. He’ll be praised for detente, and that was a success, but he undermined his own legacy by aligning with the neocons. And of course, he’ll get off scot free from Watergate, even though his obsession with Daniel Ellsberg really drove the crime.
Then on the war in Gaza, Saudi Arabia has approached Iran with an offer to boost cooperation and invest in its sanctions-stricken economy, if the Islamic Republic stops its regional proxies from turning the Israel-Hamas war into a wider conflict, writes Bloomberg. The proposal has been delivered directly and through multiple means. US Assistant Secretary of State Barbara Leaf said Washington is working with Saudi Arabia on the subject.
Energy Transition & Technology News
Fertilizer companies are betting that their ammonia can become a low-carbon fuel, writes the Wall Street Journal. Proponents say ammonia is one of the easiest alternative fuels to ramp up, and that it could eventually help drive electric generators, power cargo ships or even prove useful in making jet fuel. On the flip side, as ammonia is made by producing hydrogen and then adding nitrogen, while it burns clean the way it is produced generates a lot of carbon emissions. The advantage of using ammonia over the hydrogen it is made from is that hydrogen is exceptionally difficult – and expensive – to transport and store but ammonia is not.
Dow will move ahead with constructing a $6.5 billion net-zero ethylene cracker and polyethylene complex at its Fort Saskatchewan, Alberta, site, writes S&P Global. Construction will begin in 2024, with the first phase expected to start in 2027, adding about 1.285 million mt/year of ethylene and PE capacity. The second phase will start in 2029, adding an additional 600,000 mt/year of capacity. The project also includes an additional $2 billion of investment from third parties for circular hydrogen, CO2 capture and other infrastructure assets. Linde will build a world-scale air separation and autothermal reformer complex at the site to convert cracker off-gas to hydrogen, which will be used as a clean fuel to supply the cracker furnaces. In addition, CO2 emissions will be captured and stored, reducing existing emissions by about 1 million tons per year of CO2 equivalent while abating all emissions from the addition of the site's new capacity. Dow will also retrofit the existing cracker at Fort Saskatchewan to net-zero Scope 1 and 2 emissions.
Climate Politics
COP28 starts today, and will last until December 12. Bloomberg is not optimistic and notes
We arguably know what’s going to happen. There’ll be a big fight over some words on fossil fuels, particularly over whether we ought to ‘phase out’ or ‘phase down’ their use. Plenty of concessions will be made at the behest of powerful polluters. And the culmination will be a series of political statements and perhaps an operational Loss and Damage Fund, but none of it will be enough to save the planet”
As in, set the globe on a course toward emissions reductions aligned with Paris. It argues even that the COPs are no longer useful.
It’s beyond time to ask whether COP works as it should. After all, we’ve had nearly three decades of summits, yet emissions continue to climb. There are clear problems: The voting structure means that all decisions must be made by consensus... That ensures that the lowest common denominator wins out. Much of the talk also focuses on long-term targets with broad scopes… We don’t need any more global goal-setting or discussions about process. Instead, we need implementation. We need to be talking about specific policies and practical cooperation.
A better format would be sector-specific discussions between the most influential countries for each field, it says. These deliberations need to focus on actions to take now in order to achieve rapid structural change in the global economy.
Looking ahead at the COP process nevertheless, Bloomberg writes that India has offered to host next year’s event. That could well be the death knell, EPM believes. Having a major oil and gas producer hasn’t helped the public image of the process. With India being one of the weakest “believers”, as evidenced by its “Net Zero by 2070 pledge”, we believe an Indian presidency for result in a focus on the complaints from the developing world regarding the current trajectory of the energy transition and decarbonization conversation – and that would hold back progress on the current trajectory. We don’t necessarily this is bad, but it would fundamentally change the outlook, in our view.
Meanwhile at the current COP, the Nairobi Declaration, adopted by the 54 nations of the African Union at the September summit, offers an opportunity to African nations to rally around a common position on the energy transition and decarbonization, writes the Financial Times. At its core is the concept of “common but differentiated responsibilities” to fight climate, which is a call for developed nations to cut carbon emissions more quickly. Also among its proposals is a tax on fossil fuel trade, maritime transport and aviation, as well as a global financial transaction tax, to provide “affordable and accessible finance for climate positive investments at scale” in the developing world.
The Electrification of Transport
Tesla's long-delayed Cybertruck will be priced starting at $60,990, over 50% more than what CEO Elon Musk had touted in 2019, Reuters writes. Its new body material and unconventional, futuristic styling has added complexity and costs to production. Analysts say the futuristic design threatens to alienate traditional pickup truck buyers who focus on utility.
The Global Energy Crisis
Energy industry representatives are warning that green investments in Germany could grind to a halt unless the country resolves its budget crisis quickly. “If we don’t have countermeasures now, we will experience a full stop,” Kerstin Andreae, the head of the energy group BDEW, said according to Bloomberg. Companies are increasingly worried that government support could be scaled back permanently after the country’s top court struck down €60 billion ($65 billion) of off-budget funding for climate action earlier this month. EPM notes that this explains how Germany’s constitutional budget crisis is worsening its energy crisis. The country shut down nuclear, and then cut off Russian gas, which has made an accelerated deployment of renewable energy critical not just for climate goals but for basic economics.