Energy, (Geo)Politics & Money - 2024.02.19
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources.
Welcome to EPM, where we take our daily look at the interconnected worlds of Energy, (Geo)Politics and Money. Curated from the world’s leading sources of information, we provide you both the information and the objective, neutral commentary that you need to make sense of it all – and beat the market.
In this roundup, we take a closer look at the implications of a second Donald Trump presidency for energy policy in the US. According to Republican policy advisors, he is likely to drive an expansion of oil, gas and coal development; end Biden’s pause on new LNG export permits; scrap electric vehicle mandates; withdraw, once again, the United States from a United Nations pact to fight global warming; and unwind key elements of Biden's signature climate law, the Inflation Reduction Act.
EPM notes that in a second term, Trump is likely to have a similar transformational impact on geopolitics. In the past, US policies in the key areas of energy and geopolitics were developed on bipartisan basis, which left them by-and-large unaffected by the outcomes of elections. This time, we at EPM believe, things are likely to be different. For this reason EPM will start to follow the US election campaign more closely from now on.
Furthermore, we look at:
Why M&A activity in the US Downstream is close to zero, although in US Upstream already over $20 billion in deals has been signed over recent months; where EPM provides its view as to why this apparent contradiction exists
The crash in US natural gas prices, due to extraordinarily warm weather on the continent
The view that India’s recent growth performance – the country was the fastest growing major economy in 2022 and 2023 and is forecast to be so once again in 2024 – will continue into the foreseeable future
Foreign direct investment in China drop to the lowest level in 30 years
The potential of “gold hydrogen”, that is naturally produced hydrogen, which is estimated to be in massive supply underground, and likely to be produceable at significantly lower cost than blue or green hydrogen
The electrification of heavy industry, where we set out what technological solutions the different heavy industries are looking at, as well as the most important companies leading in these technologies
Why California’s is planning to achieve 60 GW of renewable power by 2035, and why the part of the plan that aims to achieve 4.5 GW of offshore wind capacity by then is unlikely to be met
General Energy News
US Downstream - Lower Activity and Consolidation:
Reuters looks at the question why, while the US Upstream sector is over active with M&A activity, there is nowhere near the same level of activity in the US Downstream sector. A fair question in the EPM view. After, every barrel that comes out of the ground needs to be refined. Hence, if you believe the outlook for Upstream is good, should you not also believe the outlook for Downstream is good? The issue is not on the sell side. A growing number of operators is looking to sell assets in the hope that the post-pandemic surge in margins - which for some products nearly quadrupled in 2022 - might have opened up a rare window to exit assets profitably. The issue is on the buy side, Reuters notes. There are many willing sellers (Phillips66, CITGO, LyondellBasell, Shell, Delta Airlines) but no buyers. The primary cause of the current situation is the outlook for gasoline demand, which according to most forecasters (EPM included) is set to enter a strong decline over the coming decade due to the electrification of transport. The rising cost of maintenance and workloads to keep aging plants online have also deterred potential refinery buyers. EPM’s view is that the US Downstream refining industry is also under going consolidation. No one is interested in acquiring smaller, older plants. But ExxonMobil and Chevron are investing in their existing refineries to maintain capacity so they can continue processing these barrels.
US Shale Consolidation - Favourable Again?:
The consolidation in US Shale is being enabled by a Wall Street that has warmed up to the sector again, writes Bloomberg. Bigger-is-better is the new mantra, as investors see opportunities to drive efficiencies in operations and capital expenditure in consolidated companies, and more ability to sustain payouts to investors through oil price shocks.
US Natural Gas Prices Plummet:
Meanwhile, US natural gas prices have plunged to a near-three-decade low as what is set to be the country’s warmest winter on record slashes demand, writes the Financial Times. Winter months, when heating demand is highest, are on track this year to be the mildest since reliable records began in 1950, leaving gas usage much lower than expected. Coupled with surging US gas production — which hit a record 105bn cubic feet a day in December — that has sent prices into freefall, plummeting by more than 50 per cent since mid-January. On Friday, benchmark Henry Hub contracts for March settled at $1.61 per million British thermal units, up marginally from $1.58/mnBtu on Thursday.
Macroeconomics
India - Substantial Economic Growth:
India was the fastest growing major economy in 2022 and 2023 and is forecast to be so once again in 2024, an opinion piece over at Nikkei Asia notes, and it provides three reasons as to why it believes this growth performance will last for much longer. Among the reasons of the recent success is reforms, it says, such as introduction of a national goods and services tax in 2017 which simplified a complex web of central and state taxes and helped to streamline the movement of goods across India's 36 states and territories. Another is investment in infrastructure. The rate of highway construction has tripled since 2015. Capital expenditure on railways, as a share of GDP, has more than doubled over the last decade. But another important reason why current growth levels are likely to be maintained is China. Foreign direct investment is rushing into India as companies around the world are looking to diversify (or friend shore) supply chains. Expats and international expertise typically follow foreign direct investment. India's most pressing macroeconomic policy challenge is to ensure that the near-20% rate of growth in credit is reduced to a more sustainable level, and to maintain the movement towards reform of the economy – cut red tape and reduce trade hindrances.
China - Lower FDI Slowing Economic Growth:
Foreign direct investment in China has sunk to the lowest level in 30 years, writes Nikkei Asia. A clear sign that the global economy is breaking apart, in accordance with EPM’s “regionalization of the economy” thesis. FDI declined for the second straight year and is now less than 10% of the peak of $344 billion marked in 2021. This is the lowest point since around the time Deng Xiaoping pushed for accelerating his "reform and opening up" policy during a tour of southern China in 1992. The geopolitical tensions between China and the West make it harder for potential investors in China to do the types of market research they are accustomed to, Nikkei Asia says, as China has stepped up its efforts to prevent spying in the country. Additionally, western semiconductor companies are existing due to the US sanctions policy, while car manufacturers are scaling back operation due to the strong competition from local brands.
Energy Transition & Technology News
Unlimited Hydrogen?:
EPM notes with interest a new and as of yet unpublished study by the US Geological Survey says as much as 5 trillion tonnes of hydrogen exists in underground reservoirs worldwide, writes the Financial Times. While it says most of this “gold” hydrogen is likely inaccessible, a few per cent recovery would still supply all projected demand — 500mn tonnes a year — for hundreds of years. This gold hydrogen is likely to be significantly cheaper to produce than blue or green hydrogen. As such, many expect a significant increase in the exploration and production of gold hydrogen. US company Natural Hydrogen Energy has already drilled an exploratory well in Nebraska. US start-up Koloma raised $91mn last year from funds including Bill Gates’s Breakthrough Energy Ventures.
Electrification of Heavy Industry:
The Economist has looked into the electrification of heavy industry. It mentions the consortium consisting of BASF, SABIC and Linde, that is looking into development of electric furnaces capable of generating the heat required for complex petrochemical processes. In a separate initiatives, Rio Tinto and BHP announced a joint effort to build Australia’s first electric smelter for iron ore; Fortescue is introducing all-electric excavators and mining lorries; and Spain’s Roca Group recently unveiled the first electric industrial tunnel kiln for ceramic production. Among the reasons electrification is now attracting interest is the fact that renewable electricity has become more readily available and much more affordable. But the biggest reason is innovation. For temperatures up to 200°C, the technology attracting most attention is the industrial heat pump. As this technology is improving, sales are increasing and prices are falling. The Economist mentions companies such as AtmosZero, Kobe Steal and Heaten as leaders in this area. Storage of generated heat is provided by solutions such as those of Rondo Heat, whose system heats up bricks to temperatures over 1,000°C and enables a controlled release of this heat at variable doses and temperatures. Others in this area are Antora and Fourth Power. In petrochemicals, where the need is for temperatures well above 200°C players are looking at the “roto-dynamic reactor” developed by Coolbrook, while Dow is investing in small modular reactors made by X-energy.
Climate Politics
California Dreaming - Wind Power:
California must add nearly 60 GW of new renewable energy and energy storage resources by 2035 to slash power sector greenhouse gas emissions as per its targets, writes S&P Global. But, California’s plan to bring offshore wind farms to its coastline by 2035 as part of the state’s push to get more energy from renewable sources is unlikely to be realized, writes Bloomberg. Forecasts predict that the state will have just 1.1 gigawatts of offshore wind by that time, versus a target of 4.5 gigawatts. Regulatory uncertainty, waters over a kilometer deep, high costs and the lack of a local supply chain will make it difficult for California to meet its installation goals.
Trump’s Return and Transformation of the Energy Agenda:
A return of Donald Trump to the White House would results in a transformed US energy agenda, writes Reuters. Republican policy advisers say they would drive an expansion of oil, gas and coal development; end Biden’s pause on new LNG export permits; scrap electric vehicle mandates; once again withdrawing the United States from a United Nations pact to fight global warming; and unwind key elements of Biden's signature climate law, the Inflation Reduction Act.