Energy Politics & Money - 11 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we look at:
China’s purchases of Russian energy and metals, which are being settled in yuan these days
The view that one of the reasons why the European IOCs attract lower multiples is that they keep a large part of their profitability – trading – out of investor sight
The ECB pessimism over inflation, and over-optimism regarding the impact its rate hikes (and EU energy policy) will be having on the European economy
The Chinese perspective on a potential attempt to unify with Taiwan forcibly, which it fears will open up four fronts simultaneously, causing a war it can not possibly win
Occidental Petroleum’s decision to not spend the “windfall profits” from 2022 on investment DAC (for which it is looking for external funding), rather on additional share repurchases
Next-generation geothermal technologies
The outlook for organic fertizers in India
The bi-partisan consensus building in the US on permitting reform, for both renewables- and fossil-based projects
The pessimism among many chemical companies regarding Europe, as they take a long-hard look at their asset base and wondering if the continent is still worth the hassle
General Energy News
China Exports to Russia
Reuters has an interesting Factbox on China's oil and commodities imports from Russia. Chinese imports of major commodities from its northern neighbor totaled $88.3 billion in 2022, up 52% from 2021 as refiners, utilities and smelters snapped up discounted Russian resources after western buyers shunned the trade shortly after Moscow's invasion of Ukraine. Interestingly, and sensibly EPM would add, nearly all of these purchases are now settled in the Chinese currency instead of dollars. As to crude oil, over half of China's crude oil imports from Russia last year at 1.73 million barrels per day (bpd) were seaborne shipments. They include ESPO blend loaded from Russia's Far East ports, a favourite grade for independent Chinese refiners, and Urals loaded from Russia's European ports. Separately, Chinese state oil major CNPC buys around 800,000 bpd of ESPO blend from Rosneft via the East Siberia-Pacific Ocean pipelines under government-to-government deals.
Reasons for low multiples for European IOCs
An opinion piece in the Financial Times argues that one of the reasons why the European IOCs attract lower multiples is that they keep a large part of their profitability – trading – out of investor sight.
Macroeconomics
Euro zone interest rate increases
In an interview with Nikkei Asia, European Central Bank (ECB) President Christine Lagarde expressed concern over rising prices in the eurozone and strongly hinted at further increases to interest rates. Consumer price inflation is running at an annual rate of 7% in the 20-member eurozone, compared with 5% in the U.S. and 3% in Japan. Prices are rising at a particularly fast clip in Central and Eastern Europe, with inflation exceeding 10% in the Baltic countries. Regarding concerns about the European economy, Lagarde is very confident, arguing that the worst is over already
We do not have a recession in our baseline projection for 2023, and we are in a better position than what we feared six months ago.
Geopolitics
China faces a “Four Front” war over Taiwan
A ban on an all-sides debate over China unifying Taiwan by force appears to have been lifted, writes Nikkei Asia. Even a contrarian and previously taboo view has been allowed to flourish – that attempting to forcibly unify Taiwan is unrealistic and even dangerous for China. Anonymously written articles that thoroughly reject China's hawkish "wolf-warrior diplomacy" are being reposted on different portals, with their content slightly changed and the tone of their headlines becoming increasingly strong. They all emphasize the likelihood of China being plunged into a "four-front operation," suggesting the country would be surrounded by enemies on four sides. On the first of the four fronts, the Chinese military would face American, Japanese and Taiwanese forces in the Taiwan Strait and surrounding areas. On the second front, Chinese forces would face off against American and South Korean troops on the Korean Peninsula. On the third, China would square off against American and Australian forces in the South China Sea and South Pacific. Finally, Chinese forces would face off against Indian troops on the country's southwestern border. According to Nikkei Asia, this indicates that the upper echelons of Chinese leadership intend for this contrarian view to spread.
Chinese and US Defense Ministers unlikely to meet
At the same time, China has told the US there is little chance of a meeting between the countries’ defense ministers at a security forum in Singapore due to a dispute over sanctions, writes the Financial Times. US defense secretary Lloyd Austin wants to meet Li Shangfu, China’s new defense minister, at the Shangri-La Dialogue security forum in Singapore in June. However, arranging such a meeting is fraught with difficulty because Li was placed under sanctions by the US in 2018. The US has told China that the sanctions do not prevent Austin from meeting Li in a third country. But several people said it would be almost impossible for China to agree to a meeting while they remain in place.
Energy Transition & Technology News
Occidental goes for share buy backs over low carbon emission spending
Occidental Petroleum has a plan to build to 100 direct air capture (DAC) plants, to leverage the generous incentives from the IRA. So far, it has lacked external funding for this plan. The “windfall profits” from 2022 could offset this shortfall, but the company has decided not to use these for investment. Rather, they are to go to investors in the form of share repurchases, writes Reuters. Occidental will limit capital spending in low carbon initiatives this year to $600 million.
Geothermal investment activity
Geothermal power is a firm, abundant energy source that has struggled for decades to break out of its niche status. It has recently regained interest globally, thanks to the advancement of next-generation geothermal technologies, writes BloombergNEF. Next-generation geothermal technology has considerable advantages over other renewables. First, it offers significant resource potential with minimal land use requirements. Second, it can provide dispatchable, flexible electricity which is not dependent on the weather.
India’s ambitious plans to switch to organic fertilizers
S&P Global looks at India’s ambition to switch from conventional – natural gas based – fertilizers to organic fertilizers. The country’s cow dung manure or “farmyard manure” could satisfy over 20%-25% of India's plant nutrient requirements. Other organic fertilizer sources such as rural compost, organic manure, city compost, vermicompost, among others, account for 4.25 million mt and could hardly fulfill 0.5% of India's total nutrient requirements. Another challenge is that in part due to government subsidies, chemical fertilizers are significantly cheaper than their organic alternatives.
Climate Politics
Post IRA - Permitting reform is coming
At EPM, we have already discussed the next big piece of legislation coming in the US on the back of the IRA – permitting reform. There appears to be bi-partisan consensus this is what is required next, in order to develop the industries upon which a new era of American economic leadership can be built. Reuters writes, the White House has called on Congress to pass permitting legislation to speed up clean energy and fossil fuel projects.
The Global Energy Crisis
European chemical companies ponder staying in Europe
Many chemical companies are taking a long-hard look at their asset base and wondering if Europe is still worth the hassle, writes Chemical ESG. Energy costs, the 14,000-page Green Deal document, new regulations, a loss of talent overseas, taxes…it’s all a bit too much or too quick for many. Energy costs have come down but volatility remains a risk as imported LNG and the current pace of wind-farm construction can’t compensate for the loss of Russian gas supplies, according to CEOs. It’s not an easy problem to overcome, when the cost of LNG into Europe is currently in the $14-17 per mmbtu range, compared to $2-3 in the US.