Energy Politics & Money - 01 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we look at:
JP Morgan’s bail out of First Republic Bank, with support of the FDIC; which is not the end of the issue but just an indication of the bigger issue facing the US banking sector
The strong decline in profitability in the chemicals industry, which has a long and accomplished history as an early indicator of global economic activity
The agreement under which American nuclear-armed submarines will visit South Korea, according to the US to protect the South against the North; but according to China, to escalate tensions in the region, order to justify a further American military presence close to its borders
Michael Liebrich’s view that instead of carbon capture and hydrogen, a thermodynamically and economically supported decarbonization policy would drive government support toward renewable energy capacity, storage solutions, upgrades of the electricity distribution network, and heat pump technology and adoption
Acceleration of US green hydrogen projects as a result of the IRA as well as the DAC
McKinsey’s analysis of the European gas situation post-Russian sanctions, which it says are still not sustainable
Germany’s plan to introduce a special industrial electricity tariff for industry, in order to boost the country’s competitiveness vis-à-vis the US and China
General Energy News
Oil continued to fall on Monday, as concern over the economic impact of the U.S. Federal Reserve potentially raising interest rates and weaker Chinese manufacturing data outweighed support from OPEC+ supply cuts taking effect this month. Brent crude fell $1.47, or 1.8%, to $78.86 a barrel by 1227 GMT, while U.S. West Texas Intermediate (WTI) crude slid $1.49, or 1.9%, to trade at $75.29.
Macroeconomics
JP Morgan will acquire First Republic Bank's assets, writes Reuters, after regulators seized the troubled lender at the weekend, marking the third failure of a major U.S. bank in two months. JPMorgan will pay $10.6 billion, and entered into a loss-share agreement with the U.S. Federal Deposit Insurance Corp (FDIC) on single family, residential and commercial loans it bought.
The fact that US banks have increased emergency borrowing from the Federal Reserve for the second week in a row is a sign that it is not only First Republic experiencing stress, writes Bloomberg. The implication is that bank lending is likely to contract over coming months, it says, which would have negative implications for economic growth. Coupled with a reduction in the money supply, it is leading to increased talk among company executives about debt defaults and how to prepare for them.
Nevertheless, The Fed is expected to boost the benchmark lending rate target by another quarter percentage point on Wednesday, writes Bloomberg, marking the 10th consecutive increase going back to March of last year.
Paul Hodges of New Normal says chemical industry results confirm a major recession is underway globally. The chemicals industry has a long and accomplished history as an early indicator of global economic activity, as it is at the start of so many value chains. Hodges notes that first quarter 2023 results for Dow, BASF, ExxonMobil, Sinopec and Covestro all show strong declines driven by demand factors, globally. This indicates all the world’s major economies are in a major downturn, he says, and he expect to see a second leg of the downturn will start as companies cut back spending and fire people. He also warns for tertiary impacts, as real estate markets will decline while the banking sector is already distressed due to interest rate increases.
Geopolitics
The U.S. will deploy nuclear-armed submarines to South Korea, to defend Seoul against rising nuclear threats from North Korea, U.S. officials said according to NBC News. The agreement comes as polls show that more South Koreans want a more independent military policy for the country, driven by questions over whether a Washington distracted by the growing clash with China would is indeed a reliable partner. The agreement is designed to prevent public opinion from pushing the South Korean government in this direction, and maintain the military collaboration agreements between South Korea and the US that have been in place since the Korean War.
China is not happy with the proposal, reports Dawn. It says the agreement provokes North Korea to escalate the conflict on the Korean Peninsula. Foreign ministry spokeswoman Mao Ning said, “What the US is doing … provokes confrontation between camps, undermines the nuclear non-proliferation regime and the strategic interests of other countries”. The latter point about “strategic interests of other countries” is what this is all really about, in the EPM view. China is not oblivious to the fact that the tension between North and South Korea, when it justifies closer military collaboration between South Korea and the US, places a(nother) US military presence close to its borders.
Energy Transition & Technology News
In 2022, investment in the clean energy transition broke through the $1 trillion mark for the first time, and now matches the total investment in fossil fuels, writes Michael Liebrich for BloombergNEF. Just under 90% of the funds went to just two sectors: renewable energy and electric vehicles, each attracting nearly half a trillion dollars. Looking ahead, he asks, what will be the next megatrend technology in decarbonization? Most predict it will be hydrogen, he notes.
Goldman Sachs is backing hydrogen: they have predicted that it will absorb investment of EUR 10 trillion ($11 trillion) by 2050, an average of $400 billion per year. McKinsey and Company, in a report produced for the Hydrogen Council agree. The Energy Transitions Commission is even more bullish, estimating investment of $15 trillion in hydrogen over the next 27 years, an average of $890 billion annually. But, based on his analysis of the he devastating economics of transporting hydrogen other than by pipeline, he says the foreseen switch to hydrogen this would be an uneconomic approach to decarbonization.
According to Liebrich, a much more effective and efficient approach would be to electrify heating. Via heat pumps for houses, but also for industry, he notes, as nearly half of industrial heat demand is at temperatures below 200 centigrade which is well within the range of what the current technology of heat pumps can provide. He mentions tons of companies that are working to make it all possible, as well as the latest-and-greatest in technology.
But, he also highlights the main drawback for adoption of this (logical) solution: government policy. For at present, fossil fuel based solutions are not being taxed in line with the cost of their externalities, while subsidies are being driven toward hydrogen and carbon capture, rather than electrification. A thermodynamically and economically supported decarbonization policy would instead drive support toward renewable energy capacity, storage solutions, upgrades of the electricity distribution network, and heat pump technology and adoption.
Despite Liebrich’s warning, North American clean hydrogen projects are booming, writes the Wall Street Journal. Planned hydrogen electrolyzer projects globally have jumped by 18% in the last six months, surpassing one terawatt of electricity capacity for the first time, with North America seeing the largest increase, it says based on analysis by Aurora Energy Research. Europe has long dominated the burgeoning hydrogen industry but its lead now appears to be slipping, particularly as a result of the U.S. IRA. The U.S. now offers straightforward, generous tax credits to clean hydrogen producers while the EU took many months to work out the details of its incentives which generally involve more red tape.
Also despite Liebrich’s warning, companies from banks and insurers to oil majors are placing bets on the development of a carbon capture industry and the resulting carbon removal credits used by buyers to compensate for their pollution that is expected to build into a lucrative market, writes the Financial Times. Nick Cooper, chief executive of carbon capture and storage developer Storegga, said the US taxpayer support had “a profound effect on the business environment. The CCS market has just taken off . . . This feels a bit like the US shale boom 15 years ago”.
The Global Energy Crisis
Europe is still likely to need an intensification of efforts to reduce gas demand, to balance the market and ensure security of supply while avoiding price spikes, says McKinsey. Europe has so far managed to avoid the sharp slowdown of economic activity that we at EPM warned for when the continent first announced its sanctions policy vis-à-vis Russia, and McKinsey says this is primarily due to it balancing its gas market through increased liquified natural gas (LNG) imports, reduced household demand, and industrial efficiencies and plant closures. After the invasion, Russian piped gas flow decreased by more than half from 140 billion cubic meters (bcm) in 2021 to 65 bcm in 2022. Liquified natural gas (LNG) was purchased as a substitute— increasing LNG imports to Europe by 64 bcm from 2021 levels. This shake in the European energy market caused energy prices to spike in 2022. As a result, Europe spent over €1 trillion more on oil, gas, and coal in 2022 than in 2021—more than doubling the share of GDP spent on energy. Looking ahead, McKinsey says Europe will need to reduce its gas consumption from 2022 levels by another 55 bcm, in 2023 to stabilize the market and prevent prices spikes. Because it faces an uptick in LNG demand from Asia, even lower pipeline gas volumes from Russia, and possibly a return to “normal” winter weather.
At the same time, Germany has realized its cost of energy will make its industry uncompetitive on a global level – something EPM has highlighted as a major issue resulting from Europe energy policy since the start of the Ukraine War. For this reason, Berlin plans to introduce a special industrial electricity tariff ranging between €0.05 and €0.09 per kilowatt-hour in order to boost the country’s competitiveness and push back against US and Chinese subsidies, writes Euractiv. Because there isn’t enough supply of low-cost renewable energy that would enable this, Germany is planning to introduce a cap electricity prices. Which, we at EPM note, is likely to disincentivize investment in low-cost renewable energy if not managed well…
Other
The chief executive of TotalEnergies has complained to investors that the French oil group’s valuation gap with its US-listed rivals is down to its listing in Europe, not its profitability, writes the Financial Times. Patrick Pouyanné argued in several investor meetings that while Total’s operations were as profitable as Chevron’s, the French company was trading at a discount only because one was listed in Europe and the other in the US. However the Frenchman made clear that moving the company’s primary listing to the US was not an option partly for political reasons. EPM is aware that Shell has similar complaints - and that it does not feel “politically obliged” to remain in the UK.