Energy, Politics & Money - 03 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, the big news is that OPEC+ will be discussing a 1 million barrel per day production cut during its next meeting, in order to support the crude oil price.
Furthermore, we look at:
China’s announcement of a 15 million tonnes additional export quota of refined fuels, which will not only support its domestic economy but also be of great support to Europe as it scrambles to find alternatives to Russian refined fuels.
Developments in the US shale patch (where we do forecast major increases in production that the world hopes for).
The interruption of Russian natural gas deliveries to Italy, and the political pressures building around TurkStream (which according to some should be given the same treatment by US president Biden as Nordstream -- whatever that may mean…)
The expected trajectory of Shell’s emissions
King Charles pulled out from COP27
General Energy News
Based on a suggestion by Russia, OPEC+ will consider an oil output cut of more than a million barrels per day (bpd) next week, OPEC sources said on Sunday to Reuters.
Bloomberg writes that amid a global energy crisis and upended trade flows as a result of Russia’s invasion of Ukraine, traders are playing a crucial role securing supplies in a world desperate for affordable fuel. Existential concerns over the future have been set aside for now. In their place were affirmations that fossil fuels are still very much a backbone of the modern economy even as the world slowly shifts toward carbon-free system. “Energy security is number one, price is number two, sustainability is number three,” said Russell Hardy, chief executive officer at Vitol Group, the world’s top oil trader by volume.
Luckily for the traders there will soon be more barrels to trade around, as China has set the size of its latest batch of oil products export quotas for 2022 at about 15 million tonnes, according to Reuters. Industry and government sources say the decision to raise refined fuel exports, a change in policy after steep curbs earlier in the year, was part of Beijing's effort to lift sagging merchandise exports. Sinopec and CNPC together accounted for over 80% of the new permits, with the rest shared by state-run firms such as Sinochem Group and China National Offshore Oil Company, as well as privately-controlled Zhejiang Petrochemical Corp. At EPM we note this move is likely to also be applauded over in Europe, as the Chinese exports could help the EU offset some of the Russian refined fuel barrels it wants to permanently ban over the winter period. We do wonder, therefore, whether the Chinese refiners will perhaps use Russian crude oil for these additional exports…
The Financial Times reports that just as the world is depending on the US to keep energy markets well supplied, America’s oil and gas drillers are growing increasingly uneasy surging costs and persistent shortages of equipment and workers, as well as a potential recession. These sentiments could be a signal of a coming slowdown in the US shale patch.
Now that the Nordstream pipelines will be out of order indefinitely, attention on the remaining pipelines carrying Russian natural gas to Europe increases. Among these remaining pipelines is TurkStream which carries Russian natural gas to southern Europe through the Black Sea and Turkey. Reuters reported late last week that the company operating TurkStream had its export license withdrawn by The Netherlands, where it is incorporated. South Stream Transport BV, a subsidiary of Gazprom, is the Dutch-based operator of the offshore portion of the pipeline, and it said the Netherlands withdrew the export license on September 18 amid wider sanctions from the European Union. But, the company also said, “The introduction of new sanctions does not restrict the continuation of gas transportation … (and) the gas supply of various industries and millions of households in Turkey and European countries will not be affected in the short and long term.” This is clearly something to keep an eye on, especially as the American Enterprise Institute is calling upon US president Biden to “give trans-Turkish energy corridors the same treatment he ultimately gave Nord Stream 2, and for the same reasons.”
Macro-Economics
Storm clouds are forming in the North American aluminum market as makers of everything from automobiles to beverage cans to kitchen appliances are holding off booking next year’s raw material orders, a clear signal the economy is slowing, writes Bloomberg.
In an interview with JOC on the global supply chain, Dan Yergin expresses a view on the medium- to longer term outlook for the global economy that is aligned with our EPM base-case scenario. As mentioned earlier, our base-case revolves around slowing population growth globally, and population decline in most major economies; structurally higher interest rates; and de-globalization, in part due to the US-China geopolitical conflict. Yergin in his interview discusses interest rates and geopolitical conflict. He also touches upon the global energy crisis (“Typically, Europe spends about $100 or $150 billion a year on wholesale electricity. Now it could be over a trillion dollars.”), the impact of Russian sanction on the oil price (“a lot of volatility”), and the energy transition (“All of this I think makes the energy transition more difficult. It makes it a bumpier road.”)
Geopolitics
Last week we discussed the renewed US effort to keep the Pacific within its orbit, for which it will be re-opening embassies in the region and increasing offers of financial aid. This seems to have worked, writes Nikkei Asia, as a total of 15 countries and regions signed the Declaration on US-Pacific Partnership on the final day of the first US-Pacific Island Country Summit in Washington. Among the signatories was Solomon Islands, which had been courted by China.
Energy Transition & Technology News
Energy Voice writes, Shell’s overall emissions are projected to drop this decade for the first time. By 2030, the oil and gas supermajor’s net emissions will be 5% lower than in 2019, according to a report by Global Climate Insights (GCI). Activist investor Follow This was not impressed, however. It said, firstly, the reduction is not in line with the Paris Climate Accord. And, second, that the reductions during the period will mainly be achieved through carbon offsets and divestments, rather than a “meaningful energy transition”.
A team of researchers at the University of Illinois Chicago believe they have found a process using electrolysis that can convert six tonnes of carbon dioxide from industrial emissions into one tonne of ethylene, writes The Financial Times. That ratio betters previous efforts. The process runs on electricity. If renewable energy is used the process is carbon negative. But, the process of turning carbon dioxide back into useful hydrocarbons requires vast amounts of energy. Cheap, clean energy therefore remains the key to decarbonising the dirtiest industries.
Climate Politics
Bloomberg writes King Charles will not attend next month's COP27 international climate change summit in Egypt despite his passionate commitment to environmental issues. It is rumored that Liz Truss had objected to him attending the gathering, as her new government is contemplating a scaling back of the UK’s climate commitment. This, Bloomberg writes separately, has been officially denied.
The Global Energy Crisis
Gazprom suspended supplies natural gas supplies to Italy, because the Austrian operator refused to confirm “transport nominations” after regulatory changes implemented in Austria in late September writes Bloomberg. Eni confirmed the cutoff and said it was reaching out to Gazprom. Austria’s government also said it was working on the matter at a technical level.
Forbes looks at the popular narrative circulating that Europe is facing an energy crisis because it moved to renewables too fast. At the Baker Institute’s Annual Energy Summit in Houston last week, a keynote speaker indeed made that point, but others in attendance argued reliance on Russian gas would have been reduced if Europe had transitioned to renewables faster. Our view at EPM is that the energy crisis in Europe is independent from the speed of energy transition. But, thinking on how to prevent a future energy crisis should include the energy transition - because it would include diversification of fossil fuel supply. Furthermore, consideration must be given to the military strength needed for Europe to independently secure its interests locally and regionally.