Energy, Politics & Money - 02 September 2022
News curated from the ever evolving worlds of energy, geopolitics, and money just for you!
In this roundup, we restate the significant risk inherent in approving the US proposal to cap Russian oil prices as it will worsen the on-going disruption in the global energy markets.
Furthermore, we look at:
Why the petrochemical industry must prepare for a disruptive future
Why the macro-economic environment in China and developing world is worsening rapidly
Exciting news about electric powered steam cracking technology
The different strategies employed in the battery segment of the global economy
General Energy News
US CAP ON RUSSIAN OIL
Yesterday we declared the US’ plan to cap Russian oil prices on the international markets will backfire. The US’s stated objective is to increase crude oil supply while reducing Russian income. In practice, EPM notes that the move will reduce supply because Russia vowed it will end oil sales to countries who support the US proposal. The Group of Seven finance ministers will forward with the proposal today report Reuters and The Financial Times. In response, according to Reuters, Russia repeated its threats. EPM notes that so far, Russia acts on its energy-related threats.
SHELL LOOKING FOR A NEW CEO
Shell is looking for new chief executive to replace Ben van Beurden as he prepares to retire after almost a decade at the helm. According to The Financial Times contenders for the position are those that one would expect: Wael Sawan, leader of Shell’s integrated gas and renewables division, Huibert Vigeveno, head of Shell’s downstream business, Zoe Yujnovich, head of upstream, and Sinead Gorman, the company’s chief financial officer.
CRUDE OIL FUTURES – TO REMAIN STABLE
CNBC spoke to a number of crude oil traders on their expectation for the crude oil price. A majority expect the price to hold steady for the rest of the year, but decline marginally in 2023. A minority opinion sees crude moving higher before 2022 is through.
PETROCHEMICAL MARGIN – A DEPRESSED LONG-TERM OUTLOOK
As to petrochemicals, John Richardson of ICIS discusses depressed margins and notes that they are part of a typical downcycle that normally lasts a few years. This is followed by another fly-up in margins sometimes spectacularly. Richardson believes there is a great deal more is happening beyond the usual cycle of over-building followed by under-building. The end to China’s real estate boom will cause a structural change on the demand side, while its policy of delivering self-sufficiency has already structurally changed the supply side. On top of that, that the focus on sustainability is driving moves to more circular economy that includes recycling, biofuels and a carbon tax for conventional petrochemical operations.
Macro-Economics
CHINA – REAL ESTATE AND NON-PERFORMING LOANS
Nikkei Asia reports non-performing loans to the real estate sector are piling up at China's major listed banks, as they seek to reassure investors that any impact from deteriorating asset quality will be manageable. To us at EPM, this sounds an awful lot like the early days following the Lehman implosion. On the positive side, no doubt the Chinese government analysed the response to Global Financial Crisis of 2008 and will have a plan to avoid a similar fallout in response to the collapse of its real estate sector.
US DOLLAR - CONTINUES TO CLIMB
The dollar is approaching heights not seen since 1985, reports Nikkei Asia, as the Federal Reserve raises interest rates to combat historic inflation. We at EPM note that higher interest rates hold many countries hostage by forcing them to increase rates, otherwise they risk significant currency devaluation. EMP sees that as a problem because, while lower exchange rates are good for exports – they are, at the same time, equally bad for imports and tend to worsen existing current account deficits. An emerging economy with dollar-denominated debt will itself squeezed by higher debt-servicing costs. Nikkei Asia highlights the latter is a bigger problem now than it ever was before. Debt in emerging and developing countries equaled 207% of their gross domestic product in 2020, a dramatic increase from 56% in 1970 and 119% in 2010.
Energy Transition & Technology News
BIG NEWS - ELECTRIC STEAM CRACKING
In what is one of the most exciting pieces of Energy Transition technology news in a long time, BASF announced that in collaboration with SABIC and Linde, it will construct the world’s first demonstration plant for large-scale electrically heated steam cracker furnaces.
The demonstration plant will be fully integrated into one of the existing steam crackers at BASF’s Verbund site in Ludwigshafen, Germany. It will test two different heating concepts, processing around 4 tons of hydrocarbon per hour and consuming 6 megawatts of renewable energy. The start-up of the demonstration plant is targeted for 2023. The new technology has the potential to reduce CO2 emissions of one of the most energy-intensive production processes in the chemical industry by at least 90% compared to technologies commonly used today.
Climate Politics
INDONESIA – NEW ENERGY DEVELOPMENTS
In yesterday’s EPM daily roundup we argued the need for Indonesia to green its power supplies. The country wants to become a major player in the “new energy” industries, and it can because it has the mineral resources critical for these industries. But, the electricity it can offer to the players it wants to attract to the country has the highest carbon emissions intensity in the world due to Indonesia’s reliance on coal. Indonesia wants to attract notable firms, such as Elon Musk’s Tesla, and are under huge pressure not to do business with the country because of its dirty electricity supply. The IEA developed the same insight, reports Reuters, and is calling on Indonesia to enact major policy reforms to pave the way for renewable power and to reduce its reliance on coal. Whether Indonesia will head the call is fifty-fifty. The country’s political elite have substantial interests in coal mining and thus a personal incentive not to make any changes to legislation that makes development of Indonesia’s green energy potential impossible.
INDIA – EXPANSION INTO HYDROGEN
To meet climate targets, and to curb its dependence on – expensive – fossil fuel energy imports, India is planning a massive expansion of green hydrogen production, reports Bloomberg. New Delhi is aiming for an annual production capacity of 25 million tons by 2047. The potential to generate low-cost renewable energy in India has been a driving force behind the government’s green hydrogen ambitions, and it is considering offering production-linked incentives to make electrolyzers.
US – CLIMATE BILL AND RESHORING EV SUPPLY CHAINS
We have highlighted the fact that the US’s climate bill is incentivizing a reshoring of the electric vehicle supply chain, from minerals mining, to battery and electric vehicle manufacturing. Recent announcements by companies such as CATL, Honda and LG have shown the plan is working, but that does not please everybody. Bloomberg reports that South Korea views the new US rules that favor American-made electric vehicles and batteries as a “betrayal” and “an issue that threatens to complicate economic and security cooperation”.
The Electrification of Transport
LG AND HONDA – TO COOPERATE IN THE EV MARKET
Nikkei Asia analyses the strategy of LG Energy Solution, the battery arm of LG, in the global competition for the age of electrified transport. Rather than going it alone, LG Energy Solution has made a strategic decision to align with the automotive companies from whom battery demand will come. It struck a deal with Honda last week for a plant in the US, it is building three more plants in the US with GM, and joint ventures with Stellantis and Hyundai Motor are already underway. This strategy contrasts with China's CATL, the world's top onboard battery maker, which continues to build plants on its own.
TOYOTA – GOES IT ALONE IN THE EV MARKET
Toyota, meanwhile, has decided to go it alone, writes The Financial Times. The company will spend up to ¥730bn ($5.3bn) in the US and Japan to accelerate its production of batteries, believing this can provide a critical competitive advantage in the electric vehicle era. Toyota said it would begin battery production between 2024 and 2026.
The Global Energy Crisis
EUROPE – COSTS CONTINUE TO MOUNT
Reuters reports that the real economic impacts of the Global Energy Crisis are becoming painfully obvious in Europe. Close to 1 million tonnes of European primary aluminium capacity is now offline and more may follow as a notoriously power-hungry sector struggles to cope with soaring energy costs.
Javier Blas of Bloomberg calls for more support for smaller to medium size enterprise in Europe, that have also started to feel the pain of higher energy prices. Highlighting that much of the public debate on the subject is about household and large industry, this sector of the economy is facing with a choice between raising prices for customers to levels that will end sales; or shut down operations.
European Commission President Ursula von der Leyen will present firm options for the reform of the EU's electricity market design on September 14, writes S&P Global. Unless the options include a miracle solution that immediately increases energy supplies, we at EPM do not believe the plans will include a fundamental solution for Europe’s problems.
ESG
ESG FUNDS – DECLINING PERFORMANCE
Bloomberg reports on the declining fortunes of ESG funds. After two years in which more than $32 billion flowed into US exchange-traded funds with an ESG focus, investors have put only about $4.5 billion into such ETFs in 2022. It sees this as evidence the “ESG crown is slipping”: The investor base is highly concentrated, many funds cast too wide a net to appeal to single-issue investors, and several high-profile green washing scandals have tarred the industry’s virtuous image.