Energy, Money, & Politics - 2023.08.24
Providing independent, objective, & neutral analysis of global developments curated from sources covering global developments in energy, geopolitics, & investment.
In this roundup, we take a closer look at BlackRock’s decision to further reduce support for shareholder resolutions on environmental and social matters. EPM sees this as a business-minded backlash against the ESG wave, that BlackRock itself helped cause, rather than a political positioning. It makes business sense to focus on improving the E and S performance of a company. But obviously not in a way that hurts the core business of that company. This is what more and more resolutions have been calling for, however, hence BlackRock’s response to these resolutions. With that said, EPM continues to be of the view that many business leaders underestimate the value that sustainability can bring to their businesses, primarily as it requires them to consider strategic directions that are at odds with what they are used to – but that is a conversation for another day.
Related, we also provide analysis and commentary on the US position on the new Loss and Damage fund that is one of the proposals up for discussion at the coming COP28 meeting.
Together, these two pieces of EPM commentary set out our fundamental recommendation to governments and companies when it comes to things like sustainability, ESG, climate change, decarbonization and energy transition. Take these subjects very, very seriously, as they will be key to competitive advantage in the future. But, be very, very wary of what the professional advisors suggest you do, as most of this is self-serving advice. Instead, plot your own course, considering your own circumstances. The tell your own story in exactly this manner.
Furthermore, we look at:
The higher than expected draw in US crude oil inventories, and the outlook for the Saudi voluntary production cut of 1 million barrels
Shell’s plan to sell its refining and petrochemical assets in Singapore, and what this communicates regarding the company’s strategy
A comparison of the risks facing Chinese and US banks
The US decision to allow South Korean and Taiwanese chipmakers to continue bringing advanced semiconductor technology and related equipment into China, which hinders U.S. efforts to curb China's ambitions in the tech sector but prevents widespread disruption in the global semiconductor supply chain
BRICS enlargement, which in very contrarian manner, EPM believes will be the death-stab for the group
The appointment of Slovak commissioner Maroš Šefčovič as vice-president of the European commission responsible for the EU’s Green Deal, replacing Frans Timmermans, and what this likely means for the EU direction on the Climate Change front
Continued growth in CO2 emissions globally, and the unintended consequences of environmental measures in the maritime industry
The plans of Ford, Toyota and Stellantis (Jeep, Chrysler) maintain a side focus on hybrid vehicles
The further decline in BlackRock’s support for shareholder resolutions on environmental and social themes
General Energy News
US crude inventories fell by 6.1 million barrels in the week to August 18, to 433.5 million barrels, compared with analysts' expectations for a 2.8 million-barrel drop, writes Reuters. "Ongoing strength in refining activity and crude exports have encouraged a solid draw to oil inventories, while peak summer refinery runs have resulted in builds for both gasoline and distillates," said analyst firm Kpler in response to the data. Gasoline stocks rose by 1.5 million barrels, while distillate stockpiles, which include diesel and heating oil, rose by 900,000 barrels.
Despite this, Saudi Arabia is expected to roll over a voluntary oil cut of 1 million barrels per day for a third consecutive month into October, writes Reuters. "The kingdom is adopting a cautious approach after the weakness in oil markets over the first half of the year and will want to see global inventories significantly decline before starting to unwind the additional voluntary cuts," one analyst is quoted as saying.
Shell is looking to further reduce its global refining presence, through a sale of its Singapore refining and petrochemical plants, writes Reuters. The Bukom refinery, Shell's only wholly owned refining and petrochemicals centre in Asia, can process 237,000 barrels per day (bpd) of crude. Built in 1961, it was Singapore's first refinery. The complex also houses a 1 million metric tons per year (tpy) ethylene cracker and a 155,000 tpy butadiene extraction unit. These are integrated with a monoethylene glycol (MEG) plant at Shell’s petrochemicals site on Jurong Island. Companies that are reviewing Shell's Singapore assets for a potential purchase include Asia's largest refiner, China's Sinopec, as well as global trading companies Vitol and Trafigura. EPM notes that this provides further indication as to where Shell is strategically heading. Upstream focus, oil and gas, supported by trading and marketing, but very little processing in between – and even less new energy.
Macroeconomics
Bloomberg puts China’s debt problem into a global context, by comparing Chinese banks with their US counterparts. Chinese lenders’ exposure to local government debt and the real estate sector account for close to 40% of their total assets. The real estate close to collapse, and the People’s Bank of China cutting interest rates to stimulate the economy and make consumers’ monthly mortgage payments more palatable, there are significant risks to their profitability and even solvency. In the US, banks are dealing with rising interest rates, which has lowered the value of US Treasury bills, causing solvency issues. The Bloomberg assessment is that in terms of credit risk, US banks are by far healthier, thanks in no small part to the collapse of Lehman which cleansed excessive financial engineering on Wall Street. But China’s political system does allow its banks to play the prisoner’s dilemma game a bit better. In recent months, big US banks have been rushing to reduce their commercial real estate exposure, selling office building loans at a discount even though most of these are still performing. This puts regional banks, which have sizeable exposure, at a huge disadvantage. They might have to mark-to-market their holdings.
Geopolitics
The U.S. has decided to extend its one-year exemption allowing South Korean and Taiwanese chipmakers to continue bringing advanced semiconductor technology and related equipment into China, writes Nikkei Asia. The move is seen as potentially undermining U.S. efforts to curb China's ambitions in the tech sector. But it is also expected to prevent widespread disruption in the global semiconductor supply chain. It would permit South Korean and Taiwanese companies such as Samsung Electronics, SK Hynix and Taiwan Semiconductor Manufacturing Co. to bring American chipmaking equipment and other key supplies to their facilities in China, allowing production to continue uninterrupted.
President Xi Jinping called on the BRICS bloc of emerging markets to fasttrack a plan to expand its members at a summit in South Africa, writes Bloomberg. In China’s view, this would give the group more clout on the world stage. Some 20 nations have formally applied to join the grouping — these are reported to include Saudi Arabia, Indonesia and Egypt. As we at EPM mentioned earlier, we believe the negative consequence of enlargement will be more impactful. This is that the enlargement will just add more diverging views, which will make BRICS as a group less effective. Despite our EPM advice, BRICS leaders are edging closer to adding new members to their club, for the first time since 2010, after agreeing terms for an enlargement, writes Bloomberg. “We have a document, which we have adopted, that sets out guidelines and principles, processes for considering countries that wish to become members of BRICS,” South African Minister of International Relations and Cooperation Naledi Pandor told reporters.
Energy Transition & Technology News
An opinion piece at Forbes argues that headlines and stories which suggest that investment in renewables, renewable capacity, and electric vehicle sales are booming and the transition is advancing rapidly, run contrary to reality. In the real world, namely, global CO2 emissions growth is slowing, slightly. But even with the pandemic, it has continued to rise.
S&P Global has looked at two environmental measures introduced in the maritime industry, and their practical impact. As to the IMO’s regulation to lower sulfur emissions, the impact has been an increase in global temperatures, it writes. Apparently, SO2 emissions, while causing acid rain, lead to sulfate aerosols in the atmosphere which block incoming solar radiation. That means that, while their reduction improves air quality, it also leads to more global warming. The switch to LNG for lowering GHG emissions similarly is likely to have worsened overall global warming, due to the methane releases associated with LNG production.
Siemens Energy shocked markets in late June when it announced several problems at Siemens Gamesa, one of the world's biggest wind turbine makers, just weeks after it fully acquired the business it had only partly owned. Reuters writes that earlier this month, the company announced 2.2 billion euros in charges, including 1.6 billion euros to fix the onshore wind problems. According to a recent report, however, a special committee made up of CEO Christian Bruch and members of the board had conducted simulations showing the cost of the onshore problems could be almost three times as high as the amount set aside – up to 4.5 billion euros ($4.9 billion).
Climate Politics
COP28 will feature discussions on establishment of a fund to help countries manage climate change related natural disasters. During these discussions, the U.S. will be arguing to efficiently limit its use, writes Reuters. The new Loss and Damage fund should target the most vulnerable countries and focus on areas not already covered by development banks or emergency relief funds, two U.S. State Department officials told Reuters. The U.S. is part of a 24-country committee deciding how the fund will work before the COP28 climate summit in Dubai can officially adopt it this year. The committee will meet again next week in the Dominican Republic. The US “violently opposes” arguments by some countries and environmental groups that developed countries have a legal obligation to pay into the fund. Instead, both Washington and Brussels say the fund should be filled from myriad sources including industry taxes, philanthropic donations or other schemes.
Other negotiators and officials have proposed ideas including creating new revenue streams through taxing environmental pollution, such as methane emissions or shipping pollution and windfall profits from oil and gas – but this is something we at EPM believe the US will never, ever support. Because we are well aware of the behind-the-scenes diplomacy around COP meetings, going back decades, at EPM we are cynical regarding all these proposals. The promise to establish a $100 billion fund to finance the developing world’s energy transition was made in order to get the developing world behind the climate change agenda, which it hesitated to do because climate change is not a problem the developing world caused. This promised has not been delivered upon, as you well know, because that was never the intention. And what is presented as attempts to “now finally deliver” is in reality more akin neo-colonialism, creating new markets in the developing world for private, developed capital, primarily by letting institutions such as the World Bank reduce the risk for this private capital. With all this in mind, we do not expect to see a sincere effort by the developed countries that are responsible for the great majority of historic emissions, to help the developing world deal with the consequences. If anything, we expect to see a fund designed in such a way that, again, creates more room for private capital to invest in a risk-managed manner in the developing world. Things like private real estate investment, following a devastating flood.
Meanwhile, in Europe Slovak commissioner Maroš Šefčovič replaced Frans Timmermans as vice-president of the commission, after the Dutch politician quit to run as a candidate in national elections. The Financial Times writes that Sevcovic promises “intensive” talks with industry and voters about the bloc’s measures to fight climate change. In recent months, Brussels’ efforts to push climate laws have been resisted by rightwing politicians, farmers, some consumers and industrial sectors who fear that the cost of complying will be too much amid high inflation and staffing pressures, FT notes. Sevcovic is generally considered to be closer to industry, it also says.
The Electrification of Transport
Ford, Toyota and Stellantis (Jeep, Chrysler) are planning to build and sell hundreds of thousands of hybrid vehicles in the U.S. over the next five years, writes Reuters. The companies are pitching hybrids as an alternative for retail and commercial customers who are seeking more sustainable transportation, but may not be ready to make the leap to a full electric vehicle.
Other
BlackRock reported a further decline in its support for shareholder resolutions on environmental and social themes, writes Reuters. In an annual stewardship report being released with the end of the 12-month corporate annual meeting cycle on June 30, New York-based BlackRock said it supported 7% of 399 shareholder proposals on environmental and social issues. According to prior reports that was down from 22% of 321 of such measures in the previous cycle and 47% of 172 of them the year before. "Because so many proposals were over-reaching, lacking economic merit, or simply redundant, they were unlikely to help promote long-term shareholder value and received less support from shareholders, including BlackRock, than in years past," the report said.
EPM sees this as a business-minded backlash against the ESG wave, that BlackRock itself helped cause, rather than a political positioning. It makes business sense to focus on improving the E and S performance of a company. But obviously not in a way that hurts the business of that company. This is what more and more resolutions have been calling for, however, hence BlackRock’s response to these resolutions. With that said, EPM continues to be of the view that many business leaders underestimate the value that sustainability can bring to their businesses, primarily as it requires them to consider strategic directions that are at odds with what they are used to – but that is a conversation for another day.