Energy, Politics & Money - 09 September 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
In this roundup, we take a close look at Europe’s plans to address its energy crisis. We said from the beginning, the real crisis is not in the availability of energy supply, but in the price at which this supply is available. However, we highlight that bringing this price down without increasing actual supply is essentially impossible – and attempts to go against this natural law of economics are likely to backfire severely.
Furthermore, we report on:
OPEC’s August production levels
The ECB’s surprise decision to increase rates
The “closing net” around China, as it’s regional neighbours unite
China’s continuing real estate problems
Japan’s efforts t make up for lost time in the electrification of transport
General Energy News
OPEC+ - August Production
OPEC+ crude production in August to its highest since April 2020's price war, according to S&P Global. OPEC's 13 members pumped 29.56 million b/d in August, up 480,000 b/d from July, the survey found. Russia and eight other non-OPEC allies fell by 220,000 b/d in the month, producing a collective 13.28 million b/d. In all, OPEC+ production totaled 42.84 million b/d, an increase of 260,000 b/d from July. Nevertheless, the 19 countries with quotas under the OPEC+ agreement (i.e. excluding exempt members Iran, Libya, and Venezuela) fell 3.61 million b/d short of their targets—the widest gap in the alliance's nearly five-year history.
Russian Oil and Europe
A Nikkei Asia analysis found that in the six months since Russia's invasion of Ukraine began, 175 transfers off the Greek coast involving tankers from Russia. There were only nine such transfers during the same period last year. 41 of the vessels that made ship-to-ship transfers of oil off the coast of Greece with tankers that left Russia later arrived at European ports.
UK Lifts Shale Drilling Ban
The UK, meanwhile, has decided to remove a ban on drilling for shale gas. Bloomberg writes new British Prime Minister Liz Truss said the objective it part of a broader effort to boost domestic energy supply – which sees not all that unreasonable considering Europe’s current energy crisis. Will this finally case the internationalization of shale technology that we had at EPM expected to take place?
Macro-Economics
The ECB Increases Interest Rates
To the surprise of some in the market, The Guardian writes the European Central Bank has raised interest rates across the eurozone by a record 0.75%, indicating that for now, the focus of the ECB remains on combating inflation, which has reached double figures in some of the currency bloc’s 19 member countries. Bloomberg reports Christine Lagarde hinted it could do the same again as part of “several” future moves.
China’s real estate problems
China’s real estate problems are far from over, and likely to worsen. The latest indicator is reported on by Nikkei Asia, Evergrande's Hong Kong headquarters has been seized by a lender after the struggling Chinese property developer defaulted on a loan and twice failed to sell the building.
Geopolitics
China’s Regional Neighbours Unite
All the most important players in Asia – India, Australia, Japan, South Korea – seem to be coming together to form a united front against China. Nikkei Asia writes Japan and India agreed to bolster bilateral cooperation on maritime security, including by expanding joint drills and setting up a high-level defense dialogue for this purpose. At EPM our perspective is that this is probably exactly as the US had hoped things would develop. China’s main weakness in international relations, in our view, is its lack of soft power. It can drive developments through money, and to growing extent by military force, but it is neither liked nor trusted nor seen as an “ideal model” by its neighbors in the region and around the world.
Energy Transition & Technology News
The Guardian reports on research by InfluenceMap, a climate finance think-tank, which found that the marketing campaigns by the world’s largest publicly traded oil and gas companies do not accurate reflect their investment decisions. According to the research, 60% of advertisements by BP, Chevron, ExxonMobil, Shell and TotalEnergies highlight at least one green claim, but the companies spend an average of just 12% of capex on low-carbon developments.
Climate Politics
In 2007, the U.S. Congress mandated the blending of biofuels such as corn-based ethanol into gasoline. One of the top goals: reducing greenhouse gas emissions. But today, the nation’s ethanol plants produce more than double the climate-damaging pollution, per gallon of fuel production capacity, than the nation’s oil refineries, according to a Reuters analysis of federal data. The average ethanol plant chuffed out 1,187 metric tons of carbon emissions per million gallons of fuel capacity in 2020, the latest year data is available. The average oil refinery, by contrast, produced 533 metric tons of carbon.
The Electrification of Transport
Japanese EV Efforts - Catching Up
Our view at EPM is that Japan placed a bad bet with its focus on hydrogen for transportation. This caused it to miss the boat in the area of transportation where the real action was, batteries, which has left Japanese automakers significantly behind competitors in the area where the real growth in demand will be over coming decades, battery electric vehicles. Nikkei Asia reports some Japanese companies are now trying to close the gap, and establish a competitive advantage, by prioritizing R&D in the field of solid state batteries. Nippon Steel Technology, a unit of Japan's top steelmaker, plans to launch by March 2023 a testing service at its Amagasaki development center near Osaka. Unusually for such a service, this will extend as far as building prototypes based on designs provided by battery makers. The Nippon Steel group is not the only Japanese company moving into this area. Oki Engineering, a unit of Oki Electric Industry, will begin offering reliability testing this month, checking for cracks and other problems that can hurt battery performance. It will start out with batteries for electronic devices and consider expanding to automotive batteries later. And just a few weeks ago Nikkei Asia reported Honda was making solid state batteries the focus of its push into battery electric transportation.
The Global Energy Crisis
The European Union is preparing emergency plans to suspend the markets for energy, by capping the price of natural gas and electricity. Reuters has an Explainer as to how it could possibly do this. Bloomberg has a similar analysis, looking at how electricity gets priced in Europe and how this can change.
Our view at EPM is that Europe is embarking on a very dangerous path with its intervention in the electricity market. It will not deal with the problem of too little supply fundamentally, but aims at patching the wounds the fundamental problem is causing. There are very intricate relationships within the European energy market, and between the energy market and the financial markets. Consequently, any kind of fiddling in the market rules is likely to have significant unforeseen consequences. Our network has raised a few (obvious) challenges to the idea of capping the price of renewable energy, as well as the idea of bailing out distressed players in the market, such as:
Once the guarantee of bail out is made, industry participants will adjust their behavior accordingly, and the bailout demand will become very, very large. Does the EU have the funds to finance this? (We early reported on Equinor’s assessment that $1.5 trillion will be needed to meet current margin calls, and a Baringa assessment reported on by The Financial Times agrees is over $1 trillion)
Is it wise to make such an open-ended commitment of “bailout”, considering what this will do to the financial situation of the EU nation states?
Electricity producers could have hedged their sales prices outward, meaning the bumper profits that result from renewable electricity being sold at prices set by electricity from gas turbine are actually not pocketed by the energy providers but by their counter-party, possibly from the financial sector. Who will the EU claw the “excess profit” from? How could the EU manage this effectively?
More broadly on the topic of hedging, this is a standard practice across the energy industry. Once the EU introduce price caps, some players on the financial markets will incur tremendous losses (while others will benefit in the form of tremendous profits), which could well create instability in the financial industry. How will the EU deal with this? (Energy Intelligence also covers this subject in a recent opinion piece.)
Could a price cap for electricity from renewable sources, but not for electricity from gas, be challenged in court? Would it hold up in court if the EU decides that electrons from renewable sources will have a lower price than the same electrons from coal or natural gas? How will the EU manage legal challenges from those with hedges that have been adversely affected by the sudden EU intervention in the market?
Does it make sense for Europe to “punish” renewable electricity providers for problems in the natural gas market?
Russia and Europe Energy Needs
Russian President Vladimir Putin threatened to halt all energy shipments to Europe, if Brussels goes ahead with a proposal to cap the price of Russian gas, writes Reuters. At present, the continental gas pipelines remain in operation, while the Nordstream pipelines are both shut down. This indicates Europe’s energy situation, disastrous as it already is, could still get worse before winter starts. Because so far, Russia has done all it threatened to do in response to sanctions.