Energy, Geopolitics & Money - 2024.01.17
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we look at:
Gunvor’s crude oil price outlook for 2024, which is “stable in the current $70 - $80 range”
The view that a big upswing in LNG capacity is beginning, which if true would mean depressed prices over coming years
The likely appointment of Murray Auchincloss, BP’s acting chief executive, to permanent CEO succeeding Bernard Looney; which EPM believes indicates the company does not intend to follow the example of Shell and introduce major changes to its current strategy
Shell exit from the Niger delta, the major oil producing region it pioneered back in the 1930s
China’s economic growth in 2023, and what its population decline is likely to mean for its economic power
The current state of the US Federal Reserve’s fight against inflation
Why the US hydrogen industry is not yet moving forward, despite the promise of (massive) subsidies from the IRA
The state of the “CO2 Utilization” industry; where EPM explains why we believe it is unlikely the industry will ever have a meaningful impact on global carbon emissions
Tesla’s recent price cut in China, which bring EV – ICEV price parity in sight
Renewed investor pressure on Shell to improve its environmental targets
General Energy News
Global energy trader Gunvor sees oil prices holding at current levels in the $70-$80 a barrel range on the back of a "marginal oversupply" and with no expected serious damage to production resulting from land based attacks from Yemen in the Red Sea, Reuters quotes the company’s CEO Torbjorn Tornqvist as saying. Tornqvist said he sees new non-OPEC production outstripping demand growth this year while the re-routing of shipments creates more stocks in transit. He also noted that OPEC+ would need to stay disciplined for oil to remain in this band.
As to LNG, the next big upswing in capacity is beginning, writes the Financial Times. Supply has been tight for the past two years as a result of Russia’s invasion of Ukraine. To make up the shortfall, Europe has cut its gas consumption and hoovered up almost an extra 70bn cubic metres (bcm) of LNG originally destined for the Asian market. But the market is set to get more LNG than it bargained for, says FT. Projects capable of producing 140mn tonnes per annum (mtpa, equivalent to 200bcm) are set to come on stream between 2025 and 2027 – more than 30 per cent of the current market. So the long term price forecast on LNG will favour lowered prices.
BP is close to naming acting chief executive Murray Auchincloss as its permanent CEO to succeed Bernard Looney, writes Reuters. As CFO, Auchincloss played a key role in formulating changes to the BP’s strategy, including slowing down its retreat from oil and gas while reducing spending on renewables in an effort to improve returns. EPM believes this indicates that the company does not intend to follow the example of Shell and introduce major changes to its current strategy.
Shell’s exist from onshore operations in Nigeria marks the end of an era. Reuters writes the company pioneered Nigeria's oil and gas business beginning in the 1930s. It has now agreed to sell its Nigerian subsidiary to a consortium of five mostly local companies around $2.4 billion. Shell, however, will continue to remain active in Nigeria's more lucrative and less problematic offshore sector.
Macroeconomics
China's economy grew 5.2% year-on-year during the fourth quarter of 2023, up from 4.9% in the previous quarter, writes Nikkei. As a result, full year 2023 growth was also 5.2%, narrowly beating the governments 5% target.
More important, however, is the fact that in 2023 China population shrank for the second year in a row. Reuters writes the total number of people in China dropped by 2.08 million to 1.409 billion in 2023, well above the population decline of 850,000 in 2022. The birth rate in 2023 was 6.39 per 1,000 people, renewing a record low after 6.77 births per 1,000 people were recorded in 2022. EPM notes the demographic decline creates two major challenges for China’s economy. On the one hand, they are addressing the issue from the supply side, resulting from the shortage of workers, by the extensive deployment of robotics in all areas of the economy. On the other hand, the are addressing the issue on the demand side, the Chinese are trying to limit the reduction in aggregate demand as the population declines. Aging populations tend to consume less leads. China can only address by finding and creating additional foreign demand for the products it produces. This explains, for example, the focus of Chinese EV companies on penetrating and establishing a presence in western markets.
Paul Hodges of New Normal says this demographic trend is not China-unique, but will take place in all of the important developed economies.
He says “The ‘demographic dividend’ of constant growth and low inflation created by the BabyBoom generation has come to an end”, and that as a result, “business models have to change … from being supply-driven to become demand-led”.
Over in the US, a top Federal Reserve official has said the US central bank is within “striking distance” of returning inflation to its 2 per cent goal, but cautioned rate-setters would “ (we will) take our time” before cutting borrowing cuts from their current 23-year high, writes the Financial Times.
Christopher Waller, a governor on the Fed’s board, said “Based on economic activity and the cooling of the labour market, I am becoming more confident that we are within striking distance of achieving a sustainable level of 2 per cent PCE inflation,” .
Energy Transition & Technology News
According to S&P Global, the US hydrogen industry is not yet really moving forward, despite the promise of (massive) subsidies from the IRA. For months, the sector had been looking to the US Treasury Department for guidance on the type of projects eligible for the federal government's 45V hydrogen production tax credits, a $3 per kilogram incentive expected to make electrolytic hydrogen economic for the first time. In December 2023, the Biden administration released that guidance. According to developers, the proposal still leaves important questions unanswered such as whether certain hydrogen projects will be able to survive on the subsidy alone. The issue of greatest importance is the ambiguity as to whether green hydrogen producers must procure new clean electricity resources, a provision known as "additionality" or "incrementality," as opposed to using existing renewable and nuclear generation. The IRS has scheduled a public hearing on March 25 for stakeholders to comment on the proposal before the administration finalizes the rules.
Bloomberg looks at the state of the CO2 Utilization industry. Roughly 230 million tons of CO2 are utilized every year, it says. Roughly one-third of that is used in Enhance Oil Recovery (EOR), i.e. to coax more oil from the ground. This figure indicates most companies working on CO2-sequestering projects are still in their infancy. But, there is an opportunity for growth, as global venture capitalists in 2022 invested nearly $500 million into carbon utilization businesses. The examples Bloomberg provides are in concrete, perfume, fuels, chemicals and plastics. But, “It’s unlikely that we will ever be a cost parity,” one industry participant is quoted as saying. That is also the view of EPM. Our analysis concluded that in by far most cases the cost of CO2 Utilization is so much higher than conventional fossil based products, and sometimes even higher than conventional fossil based products if coupled with DAC, that we believe it is unlikely the industry will ever have a meaningful impact on global carbon emissions. We are not happy about the cold hard economics and find it unfortunate.
The Electrification of Transport
Last week, Tesla cut prices in China for its best-selling Model 3 sedan by 5.9%, lowering the starting price to 245,900 yuan ($34,300). Bloomberg notes that pushes the cost of a new vehicle below $35,000, for the first time. The falling cost of EVs is a boon for prospective buyers who want to get hold of an affordable ride. They’re a disaster, however, for financially-attuned fleet owners such as Hertz, who will see depreciation accelerate and the value of their assets decline. It is therefore one of the reasons why hertz decided to significantly reduce its fleet of Tesla’s – in addition to a higher-than-expected cost of maintenance. The main takeaway is, however, that EV – ICEV price parity now appears to be arriving. That’s great news for the electric car industry.
Other
Europe’s largest asset manager Amundi has been joined by 26 investors in demanding that Shell improve its environmental targets, writes the Financial Times. The resolution, coordinated by the activist group Follow This, called on Shell to align its “medium-term” greenhouse gas emissions target with the Paris agreement for limiting global warming. Global emissions must fall by almost half by 2030 for those targets to be met. Shell has claimed its targets are already Paris-aligned but the activist group wants the company to do better. This includes accounting for all the emissions of its products sold to its customers, known as scope 3. “We urge Shell to set a credible scope 3 absolute emissions target,” said Diandra Soobiah, head of responsible investment at UK pension fund Nest. Together the investors oversee more than €3.8tn and own about 5 per cent of Shell. They include UK pension fund London CIV, and international managers Rathbones, Candriam and Edmond de Rothschild, Swedish pension fund AP4 and Ethos Foundation, representing Swiss investors. Shell says the shareholder resolution was “unrealistic and simplistic” and “broadly unchanged” from the resolution filed by Follow This last year. The company aims to cut absolute emissions from its own operations — also known as scope 1 and scope 2 emissions — by 50 per cent by 2030. It has also committed to reduce the “net carbon intensity” of the products it sells by 20 per cent by 2030, but not their absolute emissions.