Energy, Politics & Money - 11 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
The impact of Saudi Arabia’s production cut extension, which has not increased the oil price but has succeeded in stabilizing speculator sentiment
The milestone achieved by TotalEnergies regarding its $27 billion investment in Iraq
The view of the Economist’s Intelligence Unit that the current policy environment and government actions are insufficient for a rapid decline of fossil-fuel consumption
A contrarian view which argues that China’s economic recovery is on track; which is challenged by the fact that China is on the brink of deflation
The bad and worsening outlook for the German economy
Turkey’s support for Sweden's entry into the North Atlantic Treaty Organization (NATO)
Early bets, supported by the IRA, on blue ammonia production
The UN efforts to regulate deep sea mining, to enable the practice by addressing some of the concerns of environmentalists
The rise of local car manufacturers in China, which now have a larger share of the market than their western counterparts, due to their excellence in electric vehicles, and what this means for the future of the automobile industry
The new sector of the energy industry developing in the US: capping abandoned wells, to sells the resulting “avoided methane leaks” as offset credits
General Energy News
The extension of Saudi Arabia’s production cut has stabilized the oil market, writes John Kemp for Reuters. It has offset some of the extreme pessimism gripping the financial market at the end of June, he writes, which is evidenced by the fact that hedge funds and other money managers purchased the equivalent of 47 million barrels in the six major petroleum futures and options contracts over the week ending on July 3-4.
A few years in the making, but Iraq and TotalEnergies on Monday finally signed the $27 billion energy deal that aims to increase oil production and boost the country's capacity to produce energy with four oil, gas and renewables projects, writes Reuters. Initially signed in 2021, the deal has faced delays amid disputes between Iraqi politicians over the terms, but was finally closed in April when Iraq agreed to take a smaller than initially demanded stake in the project of 30%. TotalEnergies took a 45% stake and QatarEnergy holds the remaining 25%. The Gas Growth Integrated Project (GGIP) aims to improve the country's electricity supply, including by recovering flared gas at three oilfields and using the gas to supply power plants, helping to reduce Iraq's import bill. TotalEnergies said it would also develop a 1 GW solar power plant to supply electricity to the Basra regional grid, inviting Saudi company ACWA Power to join the project. The GGIP includes a treatment plant that will enable drought-stricken Iraq to use seawater in the water-intensive oil production process instead of limited freshwater from rivers and marshes.
Looking further out, the Economist’s Intelligence Unit (EIU) has developed an outlook for oil, gas and coal consumption in the decade to 2030 with that of other energy forecasters, including the Organisation of Petroleum Exporting Countries (OPEC), the International Energy Agency (IEA), and BP. All analysed forecasters expect that by 2030 global oil and gas demand will be higher than in 2021. However, EIU also expects that coal demand will increase up to 2030, while BP and the IEA see coal demand falling during that period. In summary, EIU believes that the current policy environment and government actions are insufficient for a rapid decline of fossil-fuel consumption.
Macroeconomics
A contrarian view in Nikkei Asia writes that China’s economic recovery is on track. The recent data from China's real estate and export sectors have not lived up to expectations, but, it says, the bigger picture is that Beijing's economic revival strategy encompasses more than these traditional pillars of the economy. Domestic tourism was the first to rebound post COVID, and total retail sales for the first five months of the year grew 9.3% from a year earlier, and more recently have been expanding at a double-digit rate. Food and beverage sales were up 22.6% through May. Total car sales rose 8.9% in the first five months, and China said in June that it would extend tax breaks for electric vehicles and other green cars until the end of 2027. At the same time, investment in new infrastructure, including 5G base stations and data centers, is also gathering pace. The author concludes that it would be shortsighted to gauge China’s economic recovery this year solely based on the performance of its real estate and export sectors. China's determination to leverage a diverse range of sectors for its economic recovery demonstrates that there is more to its economic prowess than meets the eye. The EPM perspective is this contrarian view is well reasoned. However, from an energy and commodities perspective, the bright spots in the economy do not offset the impact of weakness in the real estate and export sectors of the economy.
More on China’s economy, regulators there have extended some policies of a rescue package, introduced in November to shore up liquidity in the embattled real estate sector, writes Reuters. While the extended policy could ease the short-term financial pressure on property developers and ensure their home project completions, analysts’ believe new measures would be needed to tackle the cash crunch in the sector.
The Financial Times writes that China is on the brink of consumer deflation, a sign of weakness in demand. The consumer price index was flat year on year and declined 0.2 per cent compared with the previous month, while factory gate prices fell at the fastest pace since 2016 as demand for consumer and manufactured products softened.
Over in Europe, Germany is already in a technical recession. But, economists predict that GDP growth is set to stagnate for the rest of the year, writes CNBC, while they paint a gloomy picture for the period beyond. Germany’s inflation rate is expected to hit 6.4% for June, which is an increase from the 6.1% recorded for May and well above the country’s 2% target. In addition, the energy crisis is continuing to impact some of Germany’s biggest industries. The Endowed Chair of Monetary Economics at Goethe University in Frankfurt, Volker Wieland, told CNBC:
Energy intensive industrial production is reduced substantially. The automobile sector [has also been] having difficulties for some time and substantial restructuring is still ahead.
Utilities costs are still expected to increase in 2023. Electricity bills are expected to increase by around 35% this year, while industrial power prices are set to rise by around 75%. German exports also unexpectedly nudged lower in May. Lastly, the demographic outlook is bad. The number of people at retirement age (67 years or older) will rise by roughly 4 million by the middle of the 2030s, bringing the total number of retirees to at least 20 million. The growing elderly population has exacerbated concerns about the country’s pension system, which is “on the verge of collapse” according to Rainer Dulger, president of the Confederation of German Employers’ Association.
Taiwan's Foxconn has withdrawn from a $19.5 billion semiconductor joint venture with Indian metals-to-oil conglomerate Vedanta, writes Reuters. The company said it had worked with Vedanta for more than a year to bring "a great semiconductor idea to reality", but they had mutually decided to end the joint venture and it will remove its name from an entity that is now fully owned by Vedanta. A source familiar with the matter said concerns about incentive approval delays by India's government had contributed to Foxconn's decision to pull out of the venture. EPM reports this under macroeconomics, as it relates to our investment thesis that India will underperform versus expectations due to the weakness of its institutions, i.e. the ability of the country to “just get things done”.
Geopolitics
Hours before NATO leaders were to meet in Vilnius for the alliance's annual summit, Turkey has agreed to support Sweden's ascension to the North Atlantic Treaty Organization, writes Nikkei Asia. In return, Sweden has stepped up its efforts to crack down on groups that Ankara regards as terrorist organizations. NATO said in a statement:
Sweden has amended its constitution, changed its laws [and] significantly expanded its counter-terrorism cooperation (against the Kurdistan Workers Party (PKK))
Energy Transition & Technology News
Dutch fertilizer company OCI is building a $1 billion plant in Texas to produce blue ammonia, writes Reuters. OCI's plant would be the world's first new commercial facility to capture and sequester 95% of the emissions produced from making ammonia. The hydrogen and nitrogen compound is mostly used as fertilizer. OCI's Texas plant, to start production in 2025, will produce 1.1 million metric tons annually. Producing blue ammonia costs up to $119 per metric ton more than the conventional method, but U.S. Inflation Reduction Act (IRA) subsidies worth roughly $145 per ton cover the difference. But even with U.S. support, blue ammonia economics hinge on further government incentives. This time the incentives are expected from Japan and South Korea for utilities to produce electricity with less emissions, using coal and 20% ammonia. That is the percentage utilities consider technologically feasible for now without causing emissions of another pollutant, nitrous oxide (NO2), to increase. If utility premiums don't emerge, OCI plans to use its Texas blue ammonia to make fertilizer in The Netherlands, where the company has under-utilized its plants due to high natural gas prices. It can also sell it to industrial buyers looking to decarbonize.
A United Nations body, the International Seabed Authority, launched a series of meetings on Monday to discuss setting guidelines for deep sea mining, writes Nikkei Asia. Deep-sea mining projects to extract cobalt, copper, nickel, manganese and other key inputs for electric vehicle batteries are expected to play a critical role in meeting growing demand from the auto industry. While China, South Korea, Russia, Norway and others are eager to forge ahead with deep-sea mining, France and Germany are spearheading calls for a pause, a moratorium or a ban on such operations. They are joined by Palau, Fiji, New Zealand, Panama, Samoa, Costa Rica, Chile, Spain and many others. Opponents say mining could harm ocean ecosystems, causing the loss of coral reefs and depleting populations of fish and marine mammals. They urge more scientific research before deep-sea mining operations get the green light, and push back against the argument that it is essential.
The Electrification of Transport
In China, the era of western carmakers is over, writes the Wall Street Journal. Sales of homegrown passenger-car brands in China are now consistently eclipsing those of their Western rivals. Local brands captured 54% of China’s wholesale car market in the first six months of 2023, from 48% a year earlier. China’s auto revolution is being driven by its commanding lead in battery powered and plug-in hybrid cars—the only types of vehicle for which demand has been consistently growing. Led by BYD, nine local manufacturers were among China’s 10 bestselling electric-vehicle makers in June. Tesla was the only foreign carmaker on the list. EPM sees this as an important indicator of where the future of the car industry is heading. Firstly, it remains on path to electrification, something which as you know we have believed since longer. Second, it remains on path to becoming the preferred type of vehicle around 2025, as the Chinese continue to push down the cost of EVs, in no small part through optimizing battery technology. Third, and this is the one we didn’t saw coming until more recently, it will be the Chinese carmakers – together with Tesla - that will dominate globally in the electrified future of the automobile. For too long the legacy companies such as VW and Toyota fought the development, which has left them significantly behind. Now they try to catch up, but the leaders are not sitting still either. As a result, the outlook for western car brands in the developed markets does not look good, in our EPM view.
Other
The US has some 3.7 million derelict oil and gas wells, the Environmental Protection Agency estimates, located anywhere from tony Los Angeles suburbs to Pennsylvania trailer parks, and more are left behind every day. Many leak huge volumes of methane, which has a far greater planet-warming impact than carbon dioxide, equivalent by some estimates to the emissions from more than 1.8 million cars. Companies have now popped up aiming to locate abandoned wells, calculate how much they’re leaking, and then cap them to keep the gases deep underground. They then sell their work as so-called carbon credits to buyers seeking to voluntarily offset their own emissions, writes Bloomberg. EPM just wants to highlight that the reason this can become a profitable business, is regulatory failure. Wells are most productive and profitable in their early years, then as output starts to decline they’re usually sold and resold to smaller and smaller companies. Once they’re abandoned, they’re often owned by tiny outfits that don’t have the means to plug them or no longer exist—and there’s little enforcement of the rules anyway. Fewer than half of all disused wells in the US have been properly sealed, the EPA estimates.