Energy, Politics & Money - 03 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed of Wednesday 3 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we review:
BP’s quarterly results and a 10% increase to its dividend
India is making overseas investments to increase oil supply
Pelosi’s visit to Taiwan signals a new phase in Chinese - US relations that has started the process of re-polarizing the world
Nissan will allow their EVs to be rented while Russia and New Zealand are most popular destinations for used EVs from Japan.
General Energy News
BP was the last of the majors to announce second quarter earnings yesterday. According to Reuters it made $8.45 billion, its highest in 14 years. Interestingly, unlike its competitors BP chose to not only use the additional profits for an increase in share buybacks, but also for an increase in dividend, of 10% -- which indicates BP believes a least some of its additional profits are structural.
The Financial Times reports the company most associated with US Shale, Chesapeake Energy, plans to exit oil altogether and return to its roots as a natural gas producer.
According to S&P Global, India is looking to invest more funds in overseas oil projects through its state-run refiners, in order to achieve greater control and security over its crude oil imports. A recent announcement by India to invest $1.6 billion in a project in Brazil for equity oil highlights the strategic interest of New Delhi to look for pockets of opportunities overseas, with analysts saying New Delhi is keen to explore such opportunities in other Latin American countries as well.
The Macro Environment (economics & geopolitics)
You will by now certainly have heard about US House speaker Nancy Pelosi’s visit to Taiwan. Nikkei Asia covered her landing. China was and is visibly upset by the visit. It announced military drills in the seas and airspace around the island within the hour of Pelosi’s plane landing which include long-range, live-fire drills in the Taiwan Strait. Bloomberg reports the drills won’t start until noon on August 4, after Pelosi’s scheduled departure. But, they do mark an unprecedented escalation of China’s military tactics in the Taiwan Strait, as the areas designated as off-limits during the drills reveal that they simulate a naval and areal blockade of Taiwan.
More importantly, China’s Foreign Ministry said the visit was a serious violation of the “One China” principle, and that it will have “a severe impact on the political foundation of China-U.S. relations”.
Aligned with our view, an Nikkei Asia op-ed argues Pelosi’s visit was not thought through enough. “Her visit, against the advice of the military, may have brought forward the risk of a U.S.-China crisis when preparations in Taiwan and Japan are not yet adequate. In terms of what it aims to accomplish within the broader context of U.S.-China relations, Pelosi's visit is lacking in any apparent strategic component. From the American perspective, Pelosi's move could be explained as having some strategic value for preempting any Chinese attempts to unify Taiwan by force. From Beijing's perspective, however, Washington appears to be gradually neglecting the ‘One China’ policy that is the foundation of the U.S.-China relationship. Both sides are talking past each other with an eye to public opinion. The risk is that a vicious cycle is about to break out in which hard-line discourse will lead to hard-line action. All this is a reminder that the issue of Taiwan's status is a powder keg in Asia whose fuse can be lit by the slightest misstep.”
From German newspaper der Spiegel comes a report that in response to the Pelosi visit, the German foreign minister Baerbock had pledged Germany’s support for Taiwan. This is remarkable considering Germany’s economic dependency on China (which is its main export market). In other words, within a matter of months, Germany has alienated the country it depends on for energy (Russia) and the country it depends on for exports (China). The impact this will have on the German economy in the short- to medium-term is significant.
As mentioned above, increasing US and China tensions will translate into additional pressure on companies to pick sides, i.e. either operate in the China market or operate in the US / western markets. The Financial Times highlights the problems this created for global companies, using chipmaker TMSC as an example. TSMC operates facilities in China, and is being courted by the US to open facilities in the US. The Lex coverage rightly concludes, “TSMC is feeling the strain as a linchpin between Chinese and US economies intent on pulling apart. Its shares have fallen more than a quarter from their January peak and trade at 13 times forward earnings, a discount of a fifth to US peer Intel, which has only low-tech assembly and testing facilities in China. Pressure for TSMC to pick a side is relatively subtle. The Taiwanese chip group may find workarounds. But, demand for advanced chips is rising alongside global tensions. Sooner or later, China and America will present chip multinationals with the same choice more starkly. ‘Both of the above’ will not then be a feasible response.”
Further on the subject of microprocessors in the context of US – China relations, the Nikkei Asia posted an interesting opinion piece drawing parallels between the start of WWII in Asia and today’s situation. Japan invaded Southeast Asia in response to the US sanctions against Japan and for banning crude oil sales. By occupying Southeast Asia, in particular (at the time) the Dutch East Indies, Japan attempted to secure crude oil supplies to feed its economy. Today, the US is spearheading efforts to ban sales of advanced microprocessor technology to China. The US has pressured ASML not to sell its equipment to Chinese companies, Taiwanese and South Korean chip manufacturers to build chip manufacturing facilities in the US, and has offered financial support to US chip manufacturers to end operations in China.
In similarities to pre-WWII Japan, cutting China’s access to semiconductors could have devastating effects on its ability to function as a modern economy. Consequently, the incentive to start a war to avoid a further and deeper decline in China's geo-strategic position is increased by US policy. It is noted that Pelosi’s visit appears t to communicate the US no longer acknowledges China’s “One China” principle and increases the risk of military action.
The Electrification of Transport
According to the Financial Times, Nissan plans to let Japanese drivers rent its electric vehicles for several years instead of buying them. By retaining ownership of more of the vehicles, Nissan is betting that it can limit the flow of electric vehicles and batteries to abroad, as second-hand models. Russia and New Zealand are the two most popular destinations for used EVs from Japan. The step is therefore aimed at keeping more of the precious metals that make up the batteries within the country and company.
The Global Energy Crisis
CNBC report an Covestro - a German chemicals company - who yesterday warned that Germany’s supply chains are collapsing as a result of the current natural gas supply problem. They predict that “If gas supplies are rationed in the further course of the year, this could result in partial load operation or a complete shutdown of individual Covestro production facilities, depending (of course) on the level of the cutback” and cautioned that “Due to the close links between the chemical industry and downstream sectors, a further deterioration of the situation is likely to result in the collapse of entire supply and production chains”.
A Nikkei Asia report confirmed our prediction that as Europe tries to offset lower Russian gas supplies by buying additional LNG imports, prices for LNG on the Asian spot market surged nearly 10 times from average summer rates and resulting in crippling shortages in emerging nations strapped for foreign currency.