Energy, Geopolitics & Money - 2023.12.07
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we take a closer look at the view that the world’s major oil and gas producers should not lead in the energy transition. The traditional view says that, fundamentally, incumbents are bad at innovating. And additionally, the potential for years – if not decades – of healthy oil demand means that there’s little incentive for Big Oil to go head-to-head against any green disruptor. The Best for Big Oil is to retrench to its core expertise, this view therefore holds, which it is said Exxon, Chevron and, to some extent, Shell are doing now.
EPM respectfully disagrees with this view. We believe the IOCs have developed unique capabilities in their organizations. Their ability to manage large, highly complex, and technologically advanced projects in inhospitable terrains is the best evidence.
In our view, it would be a waste, therefore, if these companies employ strategies that by design set them up for a slow death, along with the decline in oil demand. We believe successful organizations such as the IOCs should have a longer-term perspective and manage longevity --- along the lines of what Arie de Geus of Shell recommended through his classic Harvard Business Review article “The Living Company”.
Now, EPM’s view does not mean the IOCs should abandon oil and gas in a rush. But it also does not mean they ignore the changes that are taking place in society and in technology. We see ExxonMobil’s attention to lithium mining from brine as an excellent example of longevity thinking. And so was Dong’s (now Orsted) thinking about renewables. If anything, we would say the IOCs need more of that, not less.
Furthermore, we look at:
The development of the crude oil price, which remains at 6-month lows; while Persian Gulf producers are experiencing significant competition from relatively lower priced alternative crude grades
China’s success in switching its exports from basic manufacturing goods, to high technology goods in the green sectors of the economy
The increasing tensions between Venezuela and Guyana over the Essequibo area, part of the latter’s territory and home to its prolific oilfield
The efforts in Asia to enable transport of carbon between countries, such that countries such as Singapore, Japan, South Korea and China can dispose of captured CO2 in countries such as Indonesia, Malaysia, Australia, Thailand and East Timor
Canada’s announcement that it will launch a carbon emissions cap and trade system starting in 2026
The progress by Chinese EV manufacturers towards their goal of domestic semiconductor supply chains
General Energy News
Oil prices continue to hover near the lowest since June 2023, primarily on signs that global supplies are eclipsing demand despite, plans by OPEC+ to rein in its production into 2024, writes Bloomberg. Global benchmark Brent for February settlement is slightly below $75 a barrel while WTI for January settlement is now below $70.
The Financial Times has looked at a key number driving investor sentiment: The US accounts for 80 per cent of the expansion in global oil supply this year. Its production is set to grow by 850,000 b/d, the US Energy Information Administration estimates, well below the pace reached earlier in the shale revolution but much faster than analysts had anticipated.
Another worry for OPEC’s main producers should be that at low benchmark oil prices, their crudes are seen as relatively expensive. Bloomberg writes that Asian crude buyers are likely to turn more to the spot market for cargoes, after Saudi Arabia reduced pricing of its key grade by only half the amount expected. At least two customers receiving the kingdom’s contractual supply said they’re considering reducing their intake for January loading. More refiners are likely to snap up physical cargoes from the Persian Gulf spot market where prices have fallen sharply this week. Saudi and other OPEC+ producers also facie steeper competition from producers in the US and elsewhere that have an increased amount of crude to export.
Russian president Vladimir Putin visited the UAE and Saudi Arabia yesterday. Putin met Sheikh Mohammed Bin Zayed Al Nahyan in UAE, and Crown Prince Mohammed bin Salman in Saudi Arabia. According to Reuters, after the meetings, Kremlin spokesperson Dmitry Peskov said:
The parties agree that our countries bear a great responsibility for interaction in order to maintain the international energy market at the proper level, in a stable, predictable state.
Putin's delegation included top oil, economy, foreign affairs, space, nuclear energy officials and business leaders.
Lastly, the world’s major oil and gas producers should not be expected to lead in the energy transition, says Javier Blas of Bloomberg. Fundamentally because incumbents are bad at innovating, he says. Additionally, the potential for years – if not decades – of healthy oil demand means that there’s little incentive for Big Oil to go head-to-head against any green disruptor. Rather than fight green energy head-on, Blas believes the best strategy for Big Oil is to retrench to its core expertise. That’s the approach of Exxon, Chevron and, to some extent, Shell are taking now.
EPM respectfully disagrees.
We believe the IOCs have develop unique capabilities in their organizations. Their ability to manage large, highly complex, and technologically advanced projects in inhospitable terrains is the best evidence. In our view, it would be a waste, therefore, if these companies employ strategies that by design set them up for a slow death, along with the decline in oil demand. We believe successful organizations such as the IOCs should have a longer-term perspective and manage longevity --- along the lines of what Arie de Geus of Shell recommended through his classic Harvard Business Review article “The Living Company”.
To be clear, EPM’s view does not mean the IOCs should abandon oil and gas in a rush. But it also does not mean they ignore the changes that are taking place in society and in technology. We see ExxonMobil’s attention to lithium mining from brine as an excellent example of longevity thinking. And so was Dong’s (now Orsted) thinking about renewables. If anything, we would say we need more of that, not less.
Macroeconomics
There is growing sentiment that China's status as the world's dominant exporter is diminishing as importing countries look to diversify their sourcing, Nikkei says. But the reality is more nuanced, it highlights. As manufacturing of certain goods is shifted to other locations to reduce costs or to mitigate supply chain risks, indigenous Chinese supply chains focused on green technology products are thriving. Exports of these goods are booming, even as overall overseas shipments are falling. The result is a significant rebalancing of China's exports. Between January 2019 and June 2023, China's global share, in value terms, of lithium-ion battery exports grew from 48% to 61%. Its share of solar panel exports rose from 44% to 62% and its share of electric vehicles -- the standout example of an indigenous Chinese product -- soared from 1% to 24%.
Geopolitics
Venezuela’s President Nicolás Maduro has dramatically raised the stakes in his country’s border dispute with Guyana, ordering state companies to exploit contested oil and mineral deposits and redrawing official maps, writes the Financial Times. Maduro’s speeches have alarmed Guyana and sparked fears that Venezuela might use force to seize the remote Essequibo area, which accounts for two-thirds of its neighbour’s territory, as well as a big offshore oilfield operated by US oil major ExxonMobil. Most experts believe military conflict is unlikely in the near term. They say the revolutionary socialist Maduro’s main motive for running a patriotic referendum campaign was to take voters’ minds off his own unpopularity.
Energy Transition & Technology News
Indonesia, Malaysia, Australia, Thailand and East Timor are eager to develop hubs for the crucial decarbonization technology by tapping their reservoirs -- mostly in the form of depleted oil and gas fields and saline aquifers, writes Nikkei. Singapore and Japan, meanwhile, are keen to take advantage of the potential Carbon Capture Storage and Usage (CCSU) services offered by those countries to achieve their net-zero carbon goals. South Korea and China are also seen as potential carbon exporters as they look to offset some of their carbon-intensive industrial activities. A regional grouping of major energy companies is now calling for a cross-border regulatory framework to enable transport of carbon between countries. EPM notes that in addition to the significant regulatory, there are also of course significant technological and economic hurdles. In our view, CCSU technology will remain “unproven” (a controversial statement, we know!) until someone can point us to a project where things have worked (out) as planned. Additionally, transporting CO2 over long distances is very expensive and hazardous if the pipeline leaks, and EPM doubts it will be a cost-effective decarbonization technology in the longer run – other decarbonization solutions such as electrification we believe are likely to become techno-economically superior.
Climate Politics
Canada says it plans to unveil a cap and trade system for carbon emissions starting in 2026, as part of its plan for limiting emissions from the oil and gas sector, writes Reuters. Federal Natural Resources Minister Jonathan Wilkinson said the cap would start in 2026 to give oil and gas companies time to adjust and acquire the technology needed for decarbonizing the operations. A government source said, "The (emissions) cap is going to be set at what is known to be technically achievable without impacting production". Any oil and gas producers that exceed the cap will have the option, up to a certain point, of buying carbon credits to offset their emissions or paying into a decarbonization fund, the source added.
The Electrification of Transport
As part of China’s efforts in the electrification of transport, its car companies are developing domestic semiconductor supply chains, writes Nikkei. While one gasoline-powered vehicle uses less than 500 semiconductors, an EV requires around 1,300. An advanced Level 4 autonomous vehicle would even need more than 3,000 semiconductors. Building a semiconductor supply chain spanning development to mass production requires years of investment and coordination. But, Nikkei says, China's auto industry has made a breakthrough in chips for data processing. Volvo Cars parent Zhejiang Geely Holding Group released the 08 SUV in September under its Lynk & Co. brand. The vehicle contains Longying One, a chip made with 7-nanometer technology that processes images for driver assistance. Shanghai-based EV startup Nio has recently started to mass-produce chips used to control lidar -- light detection and ranging -- sensors that assist automatic brake systems.