Energy, Geopolitics & Money - 2023.12.12
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 deadlock at COP28 in the talks over the future of fossil fuels. We suspect you will already have heard that Saudi Arabia is leading OPEC nations with the aim of preventing anything in the COP final text hinting at a phasing out of oil and natural gas.
What EPM finds at least as interesting, however, is that the US is leading resistance against a call from The Netherlands to phase out subsidies for oil and natural gas. It is clear to us which of the two options – a text with the words “phase out” or an end to subsidies – will have the bigger decarbonization impact.
Furthermore, we look at:
The talks between Australia’s largest oil and gas companies Woodside Energy and Santos about a potential merger
Occidental’s $12 billion acquisition of Crown Rock, the privately held Permian operator
The view of the petrochemicals industry, in the form of SABIC, on the outlook for the global economy
Why central banks need to start lowering interest rates again soon, as the amount of maturing US corporate debt is set to double in the next two years, to about $1 trillion in 2025, and triple in the euro zone, to the equivalent of more than $400 billion
The indications Israel is considering opening a second front, this one to the north of the country, in Lebanon
The world’s first fourth-generation reactor, China’s Shidaowan nuclear power plant, which has begun commercial operations; where EPM also looks at the fourth-generation nuclear technologies more broadly
France’s decision to base EV subsidies on the “carbon intensity” of the vehicle, which offers a significant advantage to French manufacturers while hurting most Asian producers; where EPM notes how carbon intensity is a useful tool in economics, geopolitics, and climate, and as such is likely to become more popular globally
Why South Korean makers of automotive batteries are under pressure from customers to develop lithium iron phosphate (LFP) batteries, and why this is a major challenge for them
Wall Street’s and the City of London’s preparations for capturing a good chunk of the decarbonization money that COP28 is putting on the table
General Energy News
Oil has finally steadied, after almost seven weeks of decline, writes Bloomberg. A stronger-than-expected US jobs report and plans to refill the Strategic Petroleum Reserve helped crude to snap its losing streak on Friday. Brent for February settlement was $76.22 a barrel during early morning Monday trading in Singapore. WTI for January delivery was $71.54 a barrel.
Australia’s largest oil and gas companies, Woodside Energy and Santos, say they have opened talks over a potential merger, writes the Financial Times. If completed, it would consolidate nearly all of Australia’s LNG sector into a single entity. The discussions are triggered by the need for both companies to increase their size, as the market looks to consolidate, analysts say. The combined entity will still pale in size compared with major global LNG players. Woodside sold about 11.2mn tonnes of the super-chilled fuel in 2022 and Santos 5.8mn tonnes. By contrast, Shell and Total Energies, the two largest private LNG suppliers, sold 66mn tonnes and 48.1mn tonnes, respectively. A combined entity would be comparable to BP, which sold 19mn tonnes last year.
Occidental has agreed to buy US shale oil producer CrownRock in a cash-and-stock deal valued at $12 billion including debt, writes Reuters. The deal expands Oxy’s presence in the largest US shale oilfield, the Permian. The deal is expected to close in the first quarter of 2024 and will boost Occidental's Permian production by 170,000 barrels of oil and gas per day, to 750,000 BOED.
Macroeconomics
The head of Saudi Arabia’s largest chemicals producer, SABIC, has warned of another difficult year for the industry in 2024, as the outlook for the global economy remains weak, writes Bloomberg. Demand for chemicals — used to make plastics that go into anything from cars to mobile phones — has been hit by sluggish growth amid a slower-than-expected rebound from the Covid-19 pandemic. Margins in the sector have also been squeezed by inflation and higher energy costs. 2023 “was a bad year for the chemical industry,” the CEO said last week in an interview on the sidelines of a conference in Doha. “I’m not sure whether 2024 is going to have any pickup. It does not seem to be.”
Bloomberg says interest rate cuts are urgently needed. So far, the impact of the aggressive rate hikes has been limited. But as the world heads into 2024, it says, more and more companies and households are faced with re-financing at substantially higher rates than before. The amount of maturing US corporate debt is set to double in the next two years, to about $1 trillion in 2025, and triple in the euro zone, to the equivalent of more than $400 billion. If the Fed begins cutting rates by June, that should help limit hard-landing risks, says Morgan Stanley.
Geopolitics
Israel’s national security adviser has warned that Israel “can no longer accept” the presence of Hezbollah forces on its northern border, writes the Financial Times. “We can no longer accept the Radwan force sitting on the border . . . The Israeli public . . . understand that the situation in the north needs to change. And it will change,” Tzachi Hanegbi said in an interview with Israeli broadcaster Channel 12 news. Hanegbi said that Israel did not want to fight Hezbollah at the same time as Hamas. He added that it was “making clear to the Americans that we are not interested in war” in the north, but that Israel would have “no alternative but to impose a new reality” if Hezbollah’s forces continued to pose a threat.
In EPM’s view, this is one to watch closely, as it gives the impression Israel is willing to move beyond cross-border shelling into Southern Lebanon (which recently killed a Reuters journalist), effectively opening up a second front to regionally expand its current war on the Palestinian territories.
China's President Xi Jinping starts a two-day visit to Vietnam today, to upgrade ties between the Communist countries, writes Reuters. The visit comes three months after US President Joe Biden travelled to Hanoi, which indicates how the major powers vie for influence in the Southeast Asian nation. Despite ties that have been very close on the economic front, the neighbours have been at odds over boundaries in the South China Sea and have a millennia-long history of conflict. "Asia's future is in the hands of no one but Asians," Xi said in an opinion piece published in the newspaper of the Vietnamese Communist party ahead of his visit. A "community with a shared future" between the two countries would have strategic significance, he added, while warning against rising "hegemonism" in the world, an apparent reference to the United States, though he did not name it.
Energy Transition & Technology News
China’s Shidaowan nuclear power plant, the world’s first fourth-generation reactor, has begun commercial operations, writes the South China Morning Post. The high temperature gas-cooled reactor (HTGR) went online following a week-long (168 hours) continuous operation test. Instead of using water to cool the system, the high-temperature reactor will be cooled using helium gas, offering a promising way to develop more inland nuclear plants, as they will not need to be located next to a water source. The facility, which began construction in 2012, features two 250 megawatt thermal reactors and a steam generator with an installed capacity of 200 megawatts. Six types of nuclear technology represent the fourth-generation category. Apart from gas reactors like the Shidaowan HTGR which use helium to cool, there are also lead, molten-salt or sodium-cooled fast reactors, capable of turning nuclear waste into fuel, and supercritical water-cooled reactors, which directly use water to drive a turbine instead of steam for electricity generation. Fourth-generation nuclear reactor projects are undergoing research and design in the United States, Japan, and Canada, but have yet to begin construction.
Climate Politics
The subject “future of oil and gas” has dominated the COP talks in the United Arab Emirates, after countries failed to reach an agreement at last year’s COP27 talks in Egypt. And, things are looking like they might be going in the same direction this year. Sultan Al Jaber, president of the United Nations-backed COP28 summit, held a special meeting of ministers from nearly 200 countries, in a bid to break the deadlock, writes Bloomberg. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said this week that the kingdom won’t agree to a text that calls for the phase down of fossil fuels. Meanwhile OPEC’s top official urged member countries in a letter to reject any agreements that target fossil fuels.
This explains why, according to Nikkei, a draft text released by COP28 on Monday did not include a "phaseout" of fossil fuels. The draft text outlining the state of play in negotiations called for "reducing both consumption and production of fossil fuels ... so as to achieve net zero by, before, or around 2050 in keeping with the science."
Meanwhile, the Netherlands pushed for establishment of a global coalition of nations to phase out subsidies for fossil fuels, which the US refused to join, writes Bloomberg. The Netherlands has been at the forefront of combating fossil fuel subsidies after it tallied its own and found they totaled around €40 billion. Now the country wants the European Union to undertake the same assessment as a first step to phasing out support for dirty fuels. Other countries who signed up for the coalition include France, Canada, Spain and Austria. The group wants to involve international organizations like the International Monetary Fund and the World Trade Organization, as well as create a common methodology to measure support for fossil fuels. The IMF estimates that global fossil fuels subsidies will rise to $1.3 trillion this year.
The Electrification of Transport
France is set to adopt rules that may exclude some Asian-made electric vehicles from subsidies while Italy considers similar steps, adding to signs of European protectionism around EVs, writes Nikkei. Changes to France's "green bonus" subsidy, which provides 5,000 euros ($5,400) to 7,000 euros at purchase, will assign vehicles a score based on carbon emissions. Emissions during auto parts production, assembly and transport of the finished vehicles will be considered in the score. Cars that fall short of the minimum score will not qualify for the subsidy. French-made vehicles are expected to have an advantage under the new scoring system. Local automakers will benefit from shorter delivery distances and the availability of zero-emission nuclear and renewable energy for their factories. Most Asian-made EVs, on the other hand, are expected to fall short. EPM believes this is an important development. It highlights how “carbon intensity” can be used to promote local manufacturing over imports. It supports economic, geopolitical and climate objectives, and as such, it would make sense to us if more countries start to use the concept, more broadly even, over years to come.
South Korean makers of automotive batteries are under pressure from customers eager to diversify away from China, to develop lithium iron phosphate (LFP) batteries, the more affordable type of battery chemistry favoured by their Chinese rivals, writes Reuters. This is a challenge for companies such as LG Energy Solutions, SK and Samsung, as they cannot compete with China in the LFP area. One of the reasons for this is that South Korean battery makers have focused on nickel-based batteries, arguing these are better due to greater energy density that provides longer driving ranges as well as being smaller and lighter. "Our automotive customers have told us: 'We would like to buy batteries from your firm - LFP batteries for our smaller cars and nickel batteries for our more premium cars'," said an executive at a major Korean battery maker. In the EPM view, this further highlight, firstly, that a decoupling from China is truly underway in the automotive sector. And secondly, that this will negatively affect the electrification of transport in the western markets.
Other
As the carbon offset market gets a new lease on life from the COP28 climate summit in Dubai, bankers from Wall Street and the City of London are positioning themselves to get a chunk of the dealmaking they say is coming, writes Bloomberg. Banks that have been building up carbon trading and finance desks include Goldman Sachs, Citigroup, JPMorgan Chase and Barclays. They’re looking to finance the development of carbon sequestration projects, to trade credits and to advise corporate clients buying offsets. They’re also keen to support local projects in emerging markets that currently lack the financial clout to scale up their work.