Energy, Politics & Money - 13 June 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:
Shell’s going “back to the future”, as new CEO essentially brings back the company’s energy strategy from the period 2010 – 2015
China's lowering of short-term lending rates, in a bid to restore market confidence and prop up a stalling post-pandemic recovery
The worsening economic conditions in New Zealand and Australia
The growth in defaults in the $1.4tn US junk loan market
The significant decline in climate technology investment, resulting from deteriorating global macroeconomic conditions, in particular the monetary tightening policy of the world’s central banks
The growing interest in methanol as an alternative fuel for the shipping industry, where EPM provides its typical words of caution
Japan CCS plans until 2030
Toyota’s holistic plan to bring EVs to the next level by 2027 - 2028, covering solid-state batteries, rocket technology to reduce drag, “eAxles” and next generation semiconductors
The threat of a forced shutdown of industry that continues to hang over German as a result of its energy policies
General Energy News
U.S. oil output from top shale-producing regions is due to rise to the highest on record in July, to 9.38 million barrels per day (bpd), writes Reuters based on EIA data. Crude output in the Permian Basin in Texas and New Mexico, the biggest U.S. shale oil basin, is expected to rise by 1,000 bpd to a record-high 5.76 million bpd. That would be the smallest monthly increase for the region since February. In the Bakken region of North Dakota and Montana, output is due to rise 7,000 bpd to 1.21 million bpd, which would be the highest since November 2020. Crude oil production in the South Texas Eagle Ford region is due to fall by 5,000 bpd to 1.12 million bpd, the lowest level since April. Total natural gas output in the big shale basins will increase by about 0.1 billion cubic feet per day (bcfd) to 97.3 bcfd in July, topping an expected record high in June, the EIA projected.
It is becoming increasingly clear that under new CEO Wael Sawan, Shell is experiencing a case of “back to the future”. As in, it is tilting is strategy, again, this time away from energy transition, which has been its core focus since 2016 or so, towards what was its (fossil energy) strategy before that. Remember, in 2015 Shell bought British Gas to catch up with ExxonMobil in the LNG space. Now, Shell has returned to touting LNG as a business with a longer-term future that it wants to focus on, says Bloomberg. Liquefied natural gas is no longer a “transition fuel”, and Shell teams are being urged to do more business in China and India, with the company providing higher bonuses for deals struck in those and other target nations.
EPM’s view on the subject? The energy transition is real, not because of politics, but because of the development of technologies, principally solar, wind, batteries and electric drivetrains. These will, in our view, dramatically alter the global energy landscape, back up by government policies, not because of it. As such, in our view all energy companies should have a strategy that balances the current needs of the energy market with the likely future needs of the energy market. Therefore, we are not the greatest of supporters of a strategy that says “I will produce less fossil fuels by such-and-such date”, as Shell has done, which in our view is not business but virtue signaling. But we do believe that a balanced strategy covers the full range of energy solutions, conventional and new energies. Shell, in our view, seems to tilting from one exaggerated position back to another. It will not necessarily serve them bad in the short term, but medium to longer term they are likely to find themselves behind in the new energy space.
Macroeconomics
China's central bank lowered a short-term lending rate, for the first time in 10 months, in a bid to restore market confidence and prop up a stalling post-pandemic recovery, writes Reuters. The People's Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument. Commercial banks had already lowered last week, as EPM reported then, as a result of which this move was by-and-large expected. In our view you can look at this in two ways. The pessimistic view focuses on the fact that this move was necessary, i.e. it will be seen as an indication of the weakness of the Chinese economy, which really indicates that a global recession is underway (as per the EPM’s forecast following the start of the central bank rate hikes). The optimistic view focuses on the impact stimulus has, i.e. shorter-term gain (stimulus) at longer-term expense (inflated debt bubbles). The EPM view is balancing between these, i.e. Chinese growth will not hit targets, but there will not be an implosion of the Chinese economy either as the Chinese government is capable enough to prevent that from happening shorter-term. As such, we say the move should not build your confidence in the Chinese economy, but reduce any fears you might have.
Further in Asia, New Zealand is already in recession, writes Reuters based on a survey of economists. As a result of the aggressive rate hikes by the New Zealand central bank, gross domestic product is expected to be negative 0.1% in the March quarter, below the Reserve Bank of New Zealand's (RBNZ) forecast of positive 0.3%.
Next door to New Zealand, Australia is getting ready for a sharp slowdown in economic activity, again Reuters writes. Australian business and consumer surveys show that storm clouds were gathering for the economy, with a slowdown in business activity accelerating, and spending confidence staying near recession levels, amid warnings of more rate hikes to come, it says. Business confidence slid back to negative territory, and, worryingly, forward orders, a leading indicator of demand, contracted in May, highlighting the risks to growth in the months ahead. The year-ahead outlook for family finances and economic conditions dipped 2.1% and 0.1% respectively, while the measure of whether it was a good time to buy a major household item fell by 5.7% in June. Unemployment expectations rose sharply, with a sub-index surging 6.6%.
Over in the US, defaults in the $1.4tn US junk loan market have climbed sharply this year, as the Federal Reserve’s aggressive campaign of interest rate rises increases the pressure on risky companies with “floating” borrowing costs, writes the Financial Times. There were 18 debt defaults in the US loan market between January 1 and the end of May valued at $21bn — greater in number and total value than for the whole of 2021 and 2022 combined. Many “junk”-rated companies loaded up on leveraged loans — debt with floating borrowing costs that move with prevailing interest rates — when the Fed slashed rates close to zero at the peak of the Covid crisis. Issuance nearly doubled between 2019 and 2021 to $615bn. However, the Fed has lifted its “target range” for interest rates to 5 per cent to 5.25 per cent in just over 14 months. That has left borrowers facing much higher interest payments, just as slowing economic growth threatens to squeeze earnings.
Energy Transition & Technology News
There’s been a significant decline in climate technology investment resulting from deteriorating global macroeconomic conditions, writes Energy Intelligence. Climate technology investment fell by 56% in the first quarter of 2023. The number of funding rounds also fell from 384 to 132 in Europe in the same period last year. his decline is not unique to Europe; it is a global trend. The downturn in valuations and investment activity has caused investors to pull back, even from promising climate tech companies. Rounds are still getting done but require more time and effort to close, even for the most promising growth companies. The EPM perspective is that this is largely a result of monetary tightening by the world’s central banks. Money is now less available and more expensive, which has affected the venture capital world as we reported last week. This is what is really affecting the ability of startups to raise capital, less so the economic outlook.
Interest in methanol as an alternative fuel for bunkering has grown in the shipping industry, which seeks to achieve net-zero emissions by 2050, writes Reuters. Denmark's Maersk said on Monday it has secured fuel for the world's first container vessel able to run on carbon-neutral methanol for its inaugural journey. Reuters provides an overview of all the things happening in this space.
Maersk has ordered 19 methanol-enabled ships to work towards a goal of transporting 25% of its ocean cargo using green fuels by 2030. Also, a dozen methanol-fuelled 16,000-twenty-foot equivalent unit (TEU) vessels, to be built by Hyundai Heavy Industries, will be delivered to Maersk in 2024, and six 17,000-TEU ships are planned for 2025 delivery. CMA has ordered at least 18 methanol-fuelled vessels. COSCO Shipping ordered 12 methanol-powered 24,000-TEU ships last October, worth nearly $2.9 billion, that will be delivered between the third quarter of 2026 and the third quarter of 2028. At EPM we urge caution.
Firstly, methanol, just as any other fuel, will be as sustainable as its production methods. Similar to hydrogen, it can be produced from natural gas in gray and blue variants. Or from biogas, to make bio-methanol. Or from the combination of green hydrogen with capture carbon dioxide, for e-methanol.
Maersk’s first batch of sustainable methanol will be bio-methanol fuel produced from biogas captured from decomposing organic landfill waste. Question marks hover above blue methanol, just as they due over blue hydrogen, due to the fact CCUS remains largely unproven (or a failure where technically successful), while its carbon intensity will also be severely affected by the upstream natural gas production methodologies (flaring and venting practices). Big question marks also hover over the prospect of bio-methanol, due to the typical feedstock constraints that challenge any kind of bio-based solution for energy. As to e-methane there are no question marks, just thermos-dynamic facts: it will always be significantly more expensive than alternatives. EPM remains on the fence, therefore, regarding the actual decarbonization that will be achieved via methanol, and regarding the economic viability of methanol for shipping. Oh, and did we mention already that methanol is highly flammable…
Japan selected the country's first seven carbon capture and storage projects, to store 13 million mt/year of CO2 in Japan and abroad by 2030, writes S&P Global. The move comes as Japan sees CCS as among the essential means to proceed with the country's decarbonization strategy while ensuring a stable energy supply and using fossil fuels such as LNG. Japan designated five CCS projects in the country, spanning from Hokkaido in the north to Kyushu in the southwest, with two projects abroad in Malaysia and the Oceania.
The Electrification of Transport
Toyota Motor aims to release an electric vehicle powered by an all-solid-state battery as early as 2027, with the technology expected to more than double the car's range from a single charge, writes Nikkei Asia. Solid-state EV batteries can be charged in under 10 minutes and power a vehicle over a range of 1,200 kilometers -- 2.4 times that of conventional lithium-ion batteries. But electrodes for a solid-state battery have been known to expand and contract repeatedly in charging cycles. This causes electrodes to eventually detach from the solid-electrolyte material, compromising the battery. Existing solid-state batteries are capable of being recharged only hundreds of times at best -- far less than the thousands of charges required for a market-ready battery. Extending the life of solid-state batteries has been an issue keeping the technology from attaining commercial viability, but Toyota says that it has overcome that challenge. Clearing the next hurdle of developing mass-production capabilities holds the potential for redrawing the EV landscape. Chief Technology Officer Hiroki Nakajima said: "We found quality material. We'll keep up with the rest of the world and definitely put it to practical use."
Reuters has a more details on Toyota’s electrification plans. In addition to the solid-state battery, it says it will also be moving to Giga casting, a production process pioneered by Tesla. Giga presses reduce complex welded assemblies in car manufacturing with a single, massive aluminium die-casting machine to streamline production, to reduce the complexity and cost of manufacturing. Furthermore, Toyota is working with rocket designers at Mitsubishi Heavy Industries to improve the aerodynamics of EVs and to extend their range. Tesla's best-selling Model Y has a coefficient of drag of about 0.23. The Lucid Air has a market-leading coefficient of 0.197. Toyota said it could achieve a 0.1-level coefficient using Mitsubishi technology. And, Toyota says it will introduce smaller "eAxles" that combine electric motors and the components to propel an EV, from suppliers including Aisin and Denso, to add range to EVs and increase cargo space in the rear of the car, where the drive unit sits. Lastly, it is developing silicon carbide wafers for semiconductors that will be used in next-generation EV inverters, technology also being developed by Denso. Those chips promise to reduce power loss to the electric motor of an EV by up to 50%.
The Global Energy Crisis
Germany may be forced to wind down or even switch off industrial capacity if Ukraine’s gas transit agreement with Russia isn’t extended after it expires at the end of next year, according to Economy Minister Robert Habeck, writes Bloomberg. Despite the full-scale invasion of the country by Kremlin forces in February last year, Ukraine is still earning transit fees by allowing Russian gas to flow through its territory to countries like Austria, Slovakia, Italy, and Hungary. Even if some supply continues beyond 2024, it’s unlikely that the current transit agreement will be extended under similar conditions, given the lack of political support.