Energy, Geopolitics & Money - 2024.01.18
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we look at:
BP’s final decision to named interim boss Murray Auchincloss permanent CEO and stick with its energy transition strategy
How will the newly minted CEO of BP address the key challenge – it’s low valuation on the stock exchange – and how he might go about it
Why OPEC believes oil demand growth will be robust through to 2025
When central banks around the world are likely to start lowering rates, which is probably going to be later than financial investors originally hoped
Tensions in the South China Sea de-escalate after top officials from China and the Philippines meet
Why bankers and investment managers use global summits such as the WEF in Davos to argue investment in the energy transition is a low return business
Tesla’s decision to significantly cut prices in Europe, a week after it did so in China
General Energy News
Following EPM’s speculation yesterday, BP indeed named interim boss Murray Auchincloss the permanent CEO, writes Reuters. And, as EPM expected, because of his role in drafting and implementing BP’s current energy transition strategy, its not surprisingly that he pledged to stick with it:
Our strategy – from international oil company to integrated energy company, or IOC to IEC – does not change. I'm convinced about the significant value we can create.
A Reuters opinion piece examines the main challenges facing BP. Most importantly, the group trades at 3 times the next 12 months’ cash flow, whereas Shell trades 4 times and Exxon Mobil and Chevron around 7 times. This makes BP an ideal acquisition target. A radical solution might be to seek a defensive merger with the likes of $92 billion Equinor. Another could be to split the conventional, fossil-fuels based business and the energy transition focused businesses. The latter could be valued at around 7 times EBITDA, suggests ENI’s recent sale of a similar bundle of transition assets. The prior would, separately, appeal more to the fossil energy focused investors that have liked ExxonMobil and Chevron.
Predictably, Javier Blas of Bloomberg believes the appointment is a mistake, but that’s primarily because Blas does not believe in the company’s energy transition strategy, BP should just focus on the highest return energy projects – which historically are fossil based.
The Financial Times is of the view, however, that continuity is in BP’s best interest. What the company should do, it says, is focus on delivering the 15% returns it promised for its new energy businesses, and then uses these returns for additional share buybacks (to protect itself from an unwanted acquisition).
In its first look at 2025, OPEC expects robust oil demand growth, writes Reuters. OPEC said world oil demand will rise by 1.85 million barrels per day in 2025 to 106.21 million bpd. For 2024, OPEC sees demand growth of 2.25 million bpd, unchanged from previous analyses. China, the Middle East and India will drive the increase in oil consumption, OPEC said.
Macroeconomics
Global stocks and bond markets retreated on Wednesday as investors scaled back expectations of swift interest rate cuts in the Eurozone, the UK and the US, writes the Financial Times. The worldwide sell-off came after European Central Bank president Christine Lagarde signaled that borrowing costs would come down in the summer rather than spring. “Short of another major shock we have reached a peak” in interest rates, she said. “But we have to stay restrictive for as long as necessary” to ensure inflation keeps falling. “The risk would be we go too fast [on rate cuts] and have to come back and do more [rate increases].” US Fed board member Christopher Waller on Tuesday warned the US central bank should also not rush to cut rates, saying policymakers should “take our time to make sure we do this right”.
Geopolitics
China and the Philippines have found a way to de-escalate their disagreements over the South China Sea. The two countries have had numerous confrontations recently in certain disputed waters in the South China Sea, with both trading accusations of provoking conflict in the economically strategic waterway. Nong Rong, Chinese Assistant Foreign Minister, and Theresa Lazaro, Philippine Foreign Undersecretary, met in Shanghai, as part of the eighth meeting of the China-Philippines Bilateral Consultation Mechanism, and formally agreed to improve maritime communication to properly manage conflicts and differences through friendly talks in regard to issues around the South China Sea, writes Nikkei.
Energy Transition & Technology News
Bankers and asset managers are using the World Economic Forum in Davos to tell governments they’ll only back the green transition if there’s a profit to be made, writes Bloomberg. There’s plenty of money to be made by investing in the green energy transition, and financial professionals who say otherwise aren’t paying attention to the facts, according to Brookfield Asset Management Chair Mark Carney, who’s a former governor of the Bank of England. Carney said that tracking green investment flows shows there’s enough motivation among the holders of capital to back the transition. In 2023, investors plowed 1.8 times as much into clean energy as they did into fossil fuels, according to the International Energy Agency. “That 1.8 trillion is going to make a very good returns,” Carney said. “Not every single investment, but the whole thing will make a very good investment elevator pitch.” In EPM’s view, this is business at play. If investors can make government officials believe investing in the energy transition is hard, unprofitable, and/or risky, they can have a dialogue over government support… (for more subsidies, tax breaks, less stringent regulations, and the like)
The Electrification of Transport
Tesla reduced prices of its Model Y cars across Europe including in Germany, coming a week after the company cut prices in China, writes Reuters. Tesla reduced prices in Germany for its Model Y Long Range and Model Y Performance by 5,000 euros to 49,990 euros ($54,340) and 55,990 euros respectively, representing a discount of 9% and 8.1% compared to their previous prices. It also cut the price of Model Y rear-wheel drive models by 4.2%. In France, the company reduced its Model Y prices by as much as 6.7%. Prices were cut by up to 10.8% in Denmark. In the Netherlands, prices for the Model Y were cut by up to 7.7% and, Tesla cut prices by between 5.6% and 7.1% in Norway. While no reason was given for the move, EV demand has generally been slowing as a reduction in state subsidies and high borrowing costs prompt buyers to rethink big purchases. EPM notes that as we discussed yesterday, these competition induced price cuts, while not ideal from Tesla’s perspective, are good news for the consumer as they bring EV – ICEV purchase price parity closer.