Energy, Geopolitics & Money - 2023.12.18
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, under Climate Politics we take a closer look at the responses to the COP28 final agreement. In a nutshell, EPM’s analysis of the text of COP28 that we shared last week aligns with the sentiment it has caused among stakeholders of the oil and gas industry.
The industry itself is happy with the outcome, as the text does not establish any barriers for continued use of, and investment in, oil and gas.
Scientists, however, note that the pathway forward proposed by the text does not enable achievement of the “1.5 to 2 degrees” target of the Paris Climate Accord.
We at EPM say “Think of that target what you will”, but we do see that statement as factually correct.
It is why last week EPM highlighted the US’ refusal to agree on a phase out of subsidies for fossil fuels, as it indicates the big gap between the stated objective of the COP process and the solutions it is looking at to achieve this objective.
EPM would add the fact that the process itself requires consensus makes the best possible outcome a text such as COP28. That is information you should feed into our scenario planning process.
Obviously, this leaves climate activists very displeased, where EPM notes that nothing short of an immediate and complete end to the use of fossil fuels, irrespective the devastating consequences that would have, would please certain elements of that stakeholder group.
Furthermore, we look at:
The surprising increasing in US Shale production in 2023, which has added a volume of crude oil to the market similar to all of Venezuela’s current production
How commodities trader Vitol is transforming itself into one of the world’s largest retailers of transportation fuels
Why investors no longer believe interest rates will stay “higher for longer”
The clash between Biden and Putin on whether or not Russia has an intention to attack NATO countries; where EPM provides the historical background you need to assess whether Biden is most likely correct, or Putin
Thailand’s Landbridge project, its plan for a “new Panama canal” in Asia, which would provide an alternative to the Malacca Strait route for shipping
A new technology to extract uranium from the ocean, which EPM notes is of high strategic value as it has to potential to make any coastal country independent for uranium supply
The significant increase in EV inventories at US car dealers
The likely electrification of inland, and shorter distance seafaring water craft
The record-setting high temperatures across the Northern Hemisphere in October and November, which has left the world awash with natural gas, pushing down prices
The efforts by the world’s leading agricultural companies to switch to “greener” fertilisers in order to lower their carbon emissions
General Energy News
US Shale has hit production levels well ahead of expectation, writes Bloomberg. This time last year, US government forecasters predicted domestic production would average 12.5 million barrels a day during the current quarter. In recent days, that estimate was bumped to 13.3 million; the difference is equivalent to adding a new Venezuela to global supplies. Part of what makes the US crude surge surprising is that companies managed to increase production even as the number of drilling rigs at work fell roughly 20% this year. Producers are squeezing crude out of new wells more efficiently because of innovations in everything from electric-pump technology to new strategies for deploying workers while fracking wells to minimize downtime. EPM notes that this indicates not only higher production, but also at lower cost.
Vitol made purchases this year that mean it either owns or has a share of over 8,800 gas stations worldwide, writes Bloomberg. These acquisitions give it a portfolio to rival some oil majors and make the firm Africa’s No. 2 fuel retailer. In February, Vitol’s Vivo Energy agreed to buy a 74% stake in South Africa’s Engen, valuing the company at about $2 billion. In Turkey, Vitol’s Petrol Ofisi will operate over 2,700 fuel stations after agreeing to buy BP’s gas station network in the country as well as a stake in an oil terminal. That’s alongside around a 30% stake in Australia’s Viva Energy Group, which also operates a refinery in Geelong near Melbourne. Vitol also has stakes in Pakistan’s Hascol Petroleum and European refiner-retailer Varo Energy.
Macroeconomics
Investors are ditching the notion that interest rates will stay “higher for longer”, writes the Financial Times. It is happening because US the Federal Reserve gave its clearest indication yet that it would not raise borrowing costs again, and signaled that it expected three quarter-point cuts in 2024. And it has caused the benchmark 10-year US Treasury yield, seen as a proxy for borrowing costs around the world, to fall below 4 per cent for the first time since August.
Geopolitics
US president Biden is trying to get more military aid for Ukraine, arguing that a victory for Russia over Ukraine would leave Moscow in position to attack NATO allies and could draw US troops into a war, writes Reuters. Russian president Vladimir Putin dismissed this as complete nonsense, Reuters also writes. "It is complete nonsense - and I think President Biden understands that," Putin said, adding his opinion that Biden is trying to justify his "mistaken policy" on Russia. "Russia has no reason, no interest - no geopolitical interest, neither economic, political nor military - to fight with NATO countries," Putin said.
EPM recommends a review of Putin’s letter to president Biden and NATO from December 2021 to get a sense of what Russia is trying to achieve, and as such whether it really has an intention to attack NATO. As reported by The Guardian then, Russia demanded that the west provide Russia “legal guarantees” of its security. In practical terms, Russia was looking for a ban on Ukraine entering NATO and a limit to the deployment of troops and weapons to NATO’s eastern flank, in effect returning NATO forces to where they were stationed in 1997, before its eastward expansion. This letter and its demands makes very clear that Russia sees NATO as a threat to its security. The Russian war on Ukraine has proven that it is willing to go to war to prevent NATO forces establishing themselves close to its borders.
Beyond the current and immediate, Thailand seems intent to progress with its plan for a “new Panama canal” in Asia. In an opinion piece for Nikkei, prime minister of Thailand Srettha Thavisin explained the vision. The project will encompass the building of deep-sea ports at Ranong on Thailand's Andaman coast and at Chumphon on the Gulf of Thailand. Situated roughly 90 kilometers apart, the two ports will operate under a "one port, two sides" concept, supported by a freeway and dual-track railway lines to connect the ports with each other and with the country's national network. The plan also includes the installation of an oil and gas pipeline network. The estimated total cost amounts to 1 trillion baht ($28 billion). Plans call for the first phase of construction to begin in September 2025 and run through October 2030. Bloomberg adds that the so-called Landbridge project has been pitched to prospective investors from the US, China and the Middle East. Once completed, the project will help vessels avoid the Malacca Strait, cut travel time by an average of four days and lower shipping costs by 15%. EPM would expect significant interest in China for the project, as Thailand’s Landbridge would effectively provide an alternative to the Malacca Strait.
Energy Transition & Technology News
An article in TechXplore notes that according to estimates, 4.5 billion tons of uranium are floating around in our oceans as dissolved uranyl ions. This reserve is over 1,000 times more than what's on land. And, it reports on a new technology to extract this uranium from the ocean. This technology is essentially a flexible cloth woven from carbon fibers. It is coated with two specialized monomers that are polymerized. This cloth is then treated with hydroxylamine hydrochloride to add amidoxime groups to the polymers. The natural, porous structure of this specific cloth creates tiny pockets for the amidoxime to nestle in and easily trap the uranyl ions. In experiments, researchers placed the cloth as a cathode in seawater, added a graphite anode and ran a cyclic current between the electrodes, and thereby showed that bright yellow, uranium-based precipitates indeed accumulated on the cloth. It extracted 12.6 milligrams of uranium per gram of water over 24 days. The research is of high strategic value, EPM notes as it has to potential to make any coastal country independent for uranium supply.
The Biden administration will recognize a methodology for carbon emissions analysis favored by the ethanol industry for its tax credits for sustainable aviation fuel (SAF), Reuters writes, which calls it “a pivotal win for the politically powerful US corn lobby”. Ethanol groups had long lobbied the Biden administration, to recognize the GREET model for IRA credits, battling environmentalists who want standards that elevate feed stocks like used cooking oil and animal fat instead.
Climate Politics
The key players in the oil and gas industry are not concerned with the outcome of COP28, writes CNN. In a joint statement, the Organization of the Petroleum Exporting Countries (OPEC) and the Gas Exporting Countries Forum (GEPC) welcomed the “consensual and positive” outcome reached in Dubai but stressed that “continued investment in oil and natural gas is essential.”
Climate scientists aren’t happy with the language of the COP28 accord, writes The Guardian. The “failure” of COP28 to call for a phase-out of fossil fuels is “devastating” and “dangerous” given the urgent need for action to tackle the climate crisis, it says. It quotes David King, the chair of the Climate Crisis Advisory Group and a former UK chief scientific adviser, as saying, “The COP28text recognises there is a need for ‘deep, rapid and sustained reductions in greenhouse gas emissions’ to stay in line with 1.5C. But then it lists a whole bunch of efforts that don’t have a chance of achieving that.” That statement, in the view of EPM, is factually correct. Which is why last week we highlighted the US refusal to agree on a phase out of subsidies for fossil fuels, as it indicates the big gap between the stated objective of the COP process, and the solutions it is looking at to achieve this objective. We would add to that the fact that the process itself requires consensus makes the best possible outcome a text such as COP28. That is information you should feed into our scenario planning process.
Obviously, climate activists are not happy with this, again CNN writes. Here, EPM notes that nothing short of an immediate and complete end to the use of fossil fuels, irrespective the devastating consequences that would have, would please certain elements of that stakeholder group. But more importantly, we reiterate our view that the COP process itself, for the things it is looking at, the things it refuses to look at, and the way it is structured, makes it unsuitable for achievement of the goals of the climate activists. And that is our EPM factual assessment of the situation, not a moral judgement as to whether this is good or bad.
Away from the talk about the phrasing of the final agreement, investors seem to have loved COP28. It was by far the biggest in COP history, with some 70,000 attendees. A significant number of them were not negotiators, but business people, looking to make deals. Ray Dalio says “big change doesn't come from the heads of already over-burdened states pledging to do uneconomic deals”, but from “practical, entrepreneurial people working in an entrepreneurial way”.
The Electrification of Transport
Sales of electric vehicles hit record highs in the US this yea, but so has the amount of unsold inventory on dealer lots, writes Fast Company. Car dealers across the country say they had a 114-day supply of new EVs as of the end of November, compared to a 71-day supply of inventory for the auto industry overall. The amount of inventory varies by carmaker, though. The Ford F-150 Lightning has a 111-day supply, while Chevy Bolt EUV inventory sits at 59 days. EV models including the Nissan Leaf, Kia EV6, and the Mustang Mach-E had “higher-than-average” inventory. It should be noted, however, that the does not include inventory figures for Tesla, Rivian, or other automakers that sell directly to consumers, meaning dealers don’t hold their inventory.
Michael Barnard writing for Forbes says every watercraft operating on lakes, rivers and canals will be battery electric; will all port utility vehicles, including tugs, lighters and tenders; and all pleasure craft. Improvements in battery energy density are one of the reasons for his assertion. The current top-of-the line in battery technology can already power most inland watercrafts. Solid state battery and silicon battery technology, both of which are progressing are rapid pace, have the potential to increase battery energy density by multiples. This would make electrification a practical option for shorter distance seagoing watercraft as well – and cost effective as the alternative, hydrogen based solutions for decarbonized shipping are expected to be three times more expensive than the current fossil fuel based shipping.
The Global Energy Crisis
Record warmth leaves world with too much gas, writes John Kemp for Reuters. The northern hemisphere experienced its warmest October and November in records dating back to the 1880s. Northern hemisphere land temperatures were 2.61°C above the long-term seasonal average in October and 3.04°C above the seasonal average in November. This has pushed the gas market into a large surplus and triggered a slump in prices. Gas storage sites across Europe were still more than 95% full compared with a prior 10-year seasonal average of 83% at the end of November.
Other
The world’s leading food and drinks makers are rushing to reduce their carbon footprint by tackling one of the hidden culprits of emissions in their value chains, fertilisers, writes the Financial Times. Nitrogen-based fertiliser and farm manure make up 5 per cent of global greenhouse gas emissions, producing 2.6bn tonnes of CO₂ a year, more than global aviation and shipping combined. A sense of urgency is developing among companies in the food and drinks value chain, as from January 2024 companies incorporated in the EU will be obliged to report the carbon footprint of their entire supply chains, known as “scope 3” emissions. The US is working on similar disclosure rules.