Energy Politics & Money - 09 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
Note: input error caused yesterday’s newsletter to be published today.
In this roundup, we look at:
A review of how ExxonMobil has changed since the Engine No. 1 shareholder revolt
The clear signs the US banking crisis will begin to affect the real affect shortly, as lenders told the Fed they plan to tighten lending standards due to worries about loan losses and deposit flight
Bloomberg’s view that Europe is less likely to experience the kind of banking crisis that is underway in the US
Europe’s “sleepwalking” towards economic decoupling from China, something which it can not afford
Henry Kissinger’s expectation that with China involvement, the Ukraine War can be settled through peacetalks by the end of this year
Thermocatalytic methane decomposition, using iron ore as catalyst, in order to produce low cost hydrogen and graphite, without CO2 emissions
Disappointment in fusion technology, as the Lawrence Livermore National Laboratory that last year reported achieving the first fusion reaction that produced more energy than it took to create (regarding which we at EPM warned that its energy calculation ignored significant energy input streams to make the result look better than it really was) has been unable to replicate the result
Germany’s realization that it can only meet 30% of its own needs for green hydrogen, and will thus have to import the remaining 70%
The Church of England Pensions Board conclusion that engagement with Shell on climate change has failed, and consequently its call upon shareholders the support the Follow This demand that Shell adopts a Paris Climate Accord aligned decarbonization strategy
The demand by investors with $10 trillion of assets that the petrochemicals industry do much more in support of the transition to more sustainable business models
General Energy News
The Financial Times talks to the founder of Engine No. 1, to discuss how his revolt against ExxonMobil has changed the company. Conclusion: outsider appointments to senior roles have changed the company’s culture and put it on track to developing a strategy that is aligned with the changes underway in the world of energy. The IRA, meanwhile, has given these changed a push forward, as it makes the financial attractiveness of new energy areas such as CCS, hydrogen and biofuels so much greater.
Macroeconomics
The Federal Reserve has warned that the recent banking turmoil could fuel a broad credit crunch that risks slowing the US economy, writes the Financial Times. Lenders told the central bank they plan to tighten lending standards due to worries about loan losses and deposit flight.
The banking turmoil that has sunk four US regional lenders and threatens to claim more victims in California has so far mostly left Europe untouched, writes Bloomberg. Several key differences with the US banking sector also ought to give Europe a better chance of stability in the months ahead, it says. These include tighter regulation of smaller banks, fewer choices for customers about where to put spare cash, and slower deposit growth during the Covid pandemic, which means a smaller contraction after. The latter is the big difference between the US and Europe. Total US deposits jumped 36% from pre-Covid levels to a peak of more than $18 trillion last year. They have since shrunk 5%. In the euro zone, total deposits only grew by 24% from early 2020 to a peak of €14 trillion ($15.4 trillion) this year and have since declined only 2%.
Geopolitics
Europe is “sleepwalking” towards its own collapse, in the fog of the Ukraine War. It appears to be completely confused as to its own interests, and mesmerized by the mantra of “we must act morally” – which indeed is a great thing to do, except if that is what causes you to die. In this case, the death is economic. After cutting itself off from Russian energy, which as EPM has discussed extensively, is what underlies for example Germany’s energy cost problems that led to the proposal to indefinitely intervene in the energy market and subsidize energy cost until the end of times. Now, Nikkei Asia writes, Europe is considering sanctions on Chinese companies that are deemed to support Russia in Ukraine. Again, morally, that would be the right thing to. In reality, however, just adopting that proposal will not be looked upon nicely by China, and should be expected to lead to a Chinese response. In other words, it would be an important first step to decoupling Europe and China economically – something Europe can absolutely not afford in its present state, as it already significantly lags both China and the US in the technologies that are the foundations of future success. In other words, at EPM we believe the Europeans are making very bad policy choices, because we favor realism in international relations over morality. Critisize us for that, if you will, but here’s our counter: let’s see how many Europeans remain morality driven once they lose their jobs and general economic wellbeing because of it!
Fortunately for Europe, it might not come that far, as Henry Kissinger believes the Russia-Ukraine war is coming to a turning point and expects negotiations by the end of the year thanks to recent efforts made by China, writes Newsweek.
Now that China has entered the negotiation, it will come to a head, I think, by the end of the year. We will be talking about negotiating processes and even actual negotiations.
Energy Transition & Technology News
The Financial Times looks at a recent meeting in the US, spefcifically for investors looking to benefit from the IRA. It found that many states in the US are developing their own IRA programs to attract US-destined investment to them; that the US subsidiy offer is far more interesting than anything Europe has to offer; and that it is causing a scramble for workers with the skills to work in the new energy areas supported by the IRA.
An Australian company, Hazer, is experiencing a lot of interest in its technology to produce hydrogen and graphite from methane using thermocatalytic decomposition, writes the Australian Financial Review. Although the chemistry is not new, Hazer’s innovation is to use iron ore as the catalyst, cutting the cost and reducing the temperature required to generate the chemical reaction. The process can plug into existing LNG infrastructure, and can use methane from a range of sources, including from landfill or wastewater. Users also do not need to incorporate costly or unproven carbon capture and storage into their facilities because the carbon can be used to make graphite. A month ago the company launched a project in Japan with Chubu Electric and Chiyoda. Next, it will go to Europe, where it will partner with ENGIE from France.
The US government lab that made a long-awaited breakthrough in fusion energy late last year has run five similar experiments since then without being able to replicate the results, writes Bloomberg. The milestone came in December as the Lawrence Livermore National Laboratory near San Francisco reported achieving the first fusion reaction that produced more energy than it took to create — a threshold known as ignition. At EPM we warned at that time that the energy calculation ignored significant energy input streams (the energy feeding the laser), to make the result look better than it really was. Now, the lab says, it has run five similar experiments and ignition hasn’t been achieved again.
Climate Politics
Germany can only meet 30% of its own needs for green hydrogen, and will thus have to import the remaining 70%, German Economy Minister Robert Habeck said according to Reuters. At EPM we note that the energy transition is often touted as a pathway to reducing dependency on autocratic states. Apparently, if you are Germany, this is not really the case.
The Global Energy Crisis
Europe got lucky last winter, writes Javier Blas of Bloomberg. Thanks to mild temperatures, which significantly curbed consumption, and China’s zero-Covid policy, which let Europe import lots of liquefied natural gas that otherwise would have been unavailable, the continent’s gas storage bottomed out at 55% of capacity at the end of the heating season, well above the 10-year average of 33%. But, he says, ask any European industrialist, and they would tell you the crisis isn’t over for them. He also warns against complacency, as the lucky factors can easily switch in reverse this year – worse weather, and higher LNG demand from China in particular.
Other
Unlike the shareholder proxy group ISS, the Church of England Pensions Board will call upon shareholders the support the Follow This call to Shell, to make the company adopt a Paris Climate Accord aligned decarbonization strategy, it writes in the Telegraph. After years of “engagement” with Shell, to win it over to more climate supporting action, the Church has found that under new CEO Wael Sawan Shell is more likely to backtrack on past commitments, to enable it to do more of what is has traditionally done – pump oil, refine it and sell the result products. “This shift means Shell is moving away from being an actor seeking to positively shape the future in favour of the transition”, the Church says. It also believes this threatens Shell’s medium-term business outlook.
Paul Hodges of New Normal discusses the – what he believes are – disruptive changes facing the petrochemical industry. On the supply side, he says, electrification of transport will disrupt the refining industry, which in his view will have knock on effects for petrochemicals as a significant petchem feedstock – naphthas – will disappear with the closure of refineries. On the demand side, the sustainability trend is driving an increased focus on circular plastics, either recycled or bio-based, which is also disruptive for today’s petchem business model as this is all about virgin plastics. He notes that very recently, investors with $10 trillion of assets have put their weight behind a fundamental change in petchems, demanding a much more aggressive shift towards more sustainable business models. “Actions taken by companies to date have failed to have impact on the scale and at the rate required… signatories to the Global Commitment are not on track to meet their 2025 target that all packaging be reusable, recyclable and compostable. Efforts on reduction, implementing reuse and addressing toxicity remain very limited.” And they make 4 very specific demands for immediate change. They expect companies to:
“Support international efforts for an ambitious plastics treaty by joining the Business Coalition for a Plastics Treaty and advocate for legally binding measures designed to reduce production and consumption and boost reuse.
“Publicly support the ambition of the EU Packaging and Packaging Waste Regulation reform, to refrain from lobbying to reduce this ambition and to ensure that industry associations to which they are a member act in accordance with this position.
“Establish a clear plan of action to reduce material consumption in absolute terms, prioritising eliminating the need for single-use packaging altogether, including through upscaling reusable packaging systems, to be achieved by clearly defined timescales and subjected to external verification.
“Commit to identifying and eliminating the use of hazardous substances in products and packaging and to publicly report their progress in doing so.”
Bloomberg reports that in the US waters of the Gulf of Mexico alone, there are 14,000 unplugged, non-producing offshore and coastal wells. The estimates are that capping just those wells would cost more than $30 billion.