Energy, Geopolitics & Money - 2024.02.13
Non-partisan, objective & neutral analysis of intersecting global developments in energy, business & geopolitics curated from leading global sources & resources.
In this roundup, we review:
We take a closer look at TotalEnergy’s energy transition strategy (see immediately after).
The first indications that the fears for Middle East escalation are starting to subside among oil traders, in line with EPM’s forecast for the short term
The explanation by Saudi Arabia’s energy minister of the Kingdom’s decision not to raise its Maximum Sustainable Capacity (MSC) by 1 million barrels per day to 12 million barrel per day, which is linked to the energy transition he says
The next round of consolidation in the Permian, with Diamondback Energy buying privately held Endeavor Energy Partners in a $26 billion cash-and-stock deal
The fears about commercial real estate, and the potentiality of it causing a global real estate crash
The view that China is not addressing the structural issues in its economy, just as Japan in the 1990s, and therefore runs the risk of the same economic outcomes as Japan has experienced since then
The pressures building on Israel to accept the US vision regarding the forward trajectory of its War on Gaza
Energy Transition
We take a closer look at TotalEnergy’s energy transition strategy.
It is built on the view that the energy transition is fundamentally inflationary, something that EPM agrees with. If alternative energies were really capable of replacing fossil-based energy in an economic manner, we would not be seeing any government policies to drive the energy transition. Market dynamics would have driven it. The current reality is, however, that policy support such as the IRA in the US is needed.
Given this reality, fossil-based energy will continue to make up the dominant share of energy for the foreseeable future. Alternative energies will scale up, but complimentary to the existing fossil-based energy system.
Therefore, the wise, longevity focused energy transition strategy couples continued investment in oil and gas with increased investment in (the right) alternative energies. It does not ignore alternative energies (Chevron, ExxonMobil pre Engine No. 1, Shell under Sawan), nor move into alternative energies at the expense of oil and gas (BP, Shell under Van Beurden).
TotalEnergies is one of the energy companies that, in the EPM view, has gotten this correct from the very beginning of the energy transition debate.
General Energy News
Oil prices were little changed on Tuesday for a second straight day, writes Reuters, which in the EPM view is the first indication that the fears for Middle East escalation are starting to subside. After gaining 6% last week, as a result of the US military response to the attack on its base in Jordan, Brent futures edged 1 cent lower to $81.99 a barrel on Tuesday morning, while WTI crude rose 1 cent to $76.93 a barrel.
Saudi Arabia's U-turn on its oil capacity expansion plans was because of the energy transition, its energy minister said on Monday according to Reuters. "I think we postponed this investment simply because ... we're transitioning," Prince Abdulaziz bin Salman said at the IPTC petroleum technology conference in Dharan, adding that Aramco has other investments to make in areas including oil, gas, petrochemicals and renewables.
U.S. oil producer Diamondback Energy will buy privately held rival Endeavor Energy Partners in $26 billion cash-and-stock deal, writes Reuters. This continues a rapid consolidation in the Permian, the top U.S. shale oilfield. The combined company will be the third-largest oil and gas producer in the Permian Basin of West Texas and New Mexico, behind ExxonMobil and Chevron. The combined company would pump 816,000 barrels of oil and gas per day (boepd), behind the Exxon-Pioneer combination of about 1.3 million boepd and Chevron's 867,000 boepd in the basin.
Macroeconomics
The New York Community Bancorp recently flashed a fresh warning sign for investors globally, as the commercial real estate investors cut its dividend and set aside more money than expected for losses on bad real estate loans, writes Bloomberg. The reason is that more than $1 trillion in commercial mortgages will come due in the next two years. Analysts are concerned about what could happen to other banks that have lent money for commercial buildings, many of which have tumbled in value as borrowing costs climbed.
China, the world's second-largest economy is poised to enter its own "lost decade", 30 years after Japan, writes Nikkei Asia. Its stock market has lost trillions over the past two years (reported on previously by EPM), in response to which the government has resorted to increasing stock purchases by state-affiliated funds, cracking down on short-selling, and replacing the head of the China Securities Regulatory Commission. None of this addresses the structural economic problems, and as such runs parallel to Japan's price-keeping operations of the 1990s. Three decades ago, investors shifted their sights away from Japan and to the explosion of the internet in the U.S., economic integration in Europe, and growth in emerging economies. China now faces a similar situation. Japan's recent stock rally owes in part to investors seeking to rebalance their holdings in Asia, disillusioned by state-backed interventions in China.
Geopolitics
Pressure continues to build on Israel to accept the US vision regarding the forward trajectory of its War on Gaza. First, a Dutch court has ordered the government to block all exports of F-35 fighter jet parts to Israel over concerns they were being used to violate international law, writes Reuters. "It is undeniable that there is a clear risk the exported F-35 parts are used in serious violations of international humanitarian law," the court said, ruling in favour of a lawsuit against the Dutch state over the exports brought by rights groups including the Dutch arm of Oxfam. An earlier judgement by a lower court had taken the opposite position and allowed continued exports. Second, according to Reuters the European Union foreign policy chief Josep Borrell has made a thinly veiled call on the U.S. to cut arms supplies to Israel. Third, the chief prosecutor of the International Criminal Court has warned Israel, saying that his office is investigating its War on Gaza “as a matter of the utmost urgency”, writes Bloomberg. "Well, if you believe that too many people are being killed, maybe you should provide less arms in order to prevent so many people being killed," Borrell told reporters after a meeting of EU development aid ministers in Brussels. EPM notes all this comes after US president last week called out the Israel military operations, saying they were “over the top”, while Egypt threatened to pull out of its peace treaty with Israel. As such, we believe this news supports the thesis we shared yesterday, which was that last week’s events indicate a fundamental turn in the conflict, with the US now taking a tougher position in order to force Israeli to comply with the US plans.
Energy Transition & Technology News
Patrick Pouyanné, chief executive of France’s TotalEnergies, has warned that governments are mis-selling the energy transition if they fail to acknowledge the shift to a less-polluting system will lead to higher energy costs, writes the Financial Times. “We think that fundamentally this energy transition will mean a higher price of energy”, he said. Policymakers and campaigners were naive, he argued, to think it would be possible to shrink oil and gas production before sufficient renewable energy is available to take its place, given continued growth in global energy demand. In the EPM view, Pouyanné is spot on. If alternative energies were really capable of replacing fossil-based energy in an economic manner, we would not be seeing any government policies to drive the energy transition. Market dynamics would have driven it. The current reality is, however, that policy support such as the IRA in the US is needed, which clearly indicates that the energy transition is fundamentally inflationary. This view underlies TotalEnergies energy transition strategy, under which the company invests in renewable power while still pursuing new oil and gas projects. The company plans to increase oil and gas output by a combined 2 to 3 per cent a year until 2030. This investment in traditional fossil fuel business will be vital to funding the growth of its electricity assets, and maintaining returns in the meantime. Out of $16.8bn in capital spending in 2023, approximately two-thirds were spent on oil and gas and one-third on the group’s “low-carbon” integrated power business.