Energy, Politics & Money - 14 September 2022
Independent analysis of global developments in energy, geopolitics, and money curated just for you!
In this roundup, we discuss growing relations between Russia and China – ever-closer – resulting from Western sanctions because of the war in Ukraine. The closer relationship is showing itself in increased commodity trading, settlement of trades in local currencies (rather than USD), increased lending to Russian companies from China, and shared perspectives on the geostrategic causes for the Ukraine conflict.
Furthermore, we cover:
Trouble continues to brew in the crude oil market
The second front opening for Russia’s army in Armenia
US – Taiwan efforts to grow global support for more sanctions against China
The US push into biotechnology – the “next big thing”
Europe moves forward with a windfall tax, but not a price cap on (Russian) gas
And much more.
General Energy News
OIL DEMAND AND PRICING
OPEC on Tuesday stuck to its forecasts for robust global oil demand growth in 2022 and 2023, citing signs that major economies were faring better than expected despite headwinds such as surging inflation. OPEC says oil demand will increase by 3.1 million barrels per day (bpd) in 2022 and by 2.7 million bpd in 2023, unchanged from last month, reports Reuters.
US PRODUCTION TO DISAPPOINT
According to Javier Blas at Bloomberg, at the same time US oil output growth is going to disappoint, both this year and into 2023. He bases his assessment on the fact that the number of rigs drilling horizontal oil wells in the Permian has hit a four-month low of 316.
OIL MARKETS TO TIGHTEN
Obviously, these two reports combined spell trouble for the global economy: a further tightening of oil markets means higher prices, maintaining inflationary pressures and sovereign debt worries.
GROWING CLOSER – CHINA AND RUSSIA
Reuters has a report that looks at how much closer China and Russia have grown this year in the area of energy trade. It says China imported 17% more Russian crude between April and July from the same period a year ago. It also bought over 50% more LNG and 6% more coal from Russia during the same period while electricity imports from Russia, mainly via a cross-broader transmission line connecting northeast China and Russia's Far East, soared by 39%. Most of this comes at discounted prices, which has enabled China to keep inflation low, and provided Chinese manufacturers a competitive advantage in the global marketplace.
We believe this growing closeness between China and Russia could also be one of the contributing factors behind China’s decline in oil demand. Using official statistics, the International Energy Agency says will decline by 420,000 barrels a day, or 2.7%, in 2022, Bloomberg reports. The explanation provided is that this is linked to COVID lockdowns and the slowdown in real estate. We believe at least part of it might also be due to Russian crude imports which have been kept below to radar so as not to upset anyone in North America or Europe…
GLOBAL EXPLORATION TO COOL
Global oil and gas exploration will cool further this year as the number of licensed blocks and total acreage fall to “near all-time lows” according to findings by Rystad Energy, reported on by Energy Voice. Just 21 leasing rounds were completed worldwide as of the end of August 2022, half the 42 rounds held in the first eight months of 2021, which already wasn’t a good year. The acreage awarded has also shrunk, with a 20-year low of 320,000 square kilometres having been offered. All told, the group expects a total of 44 lease rounds to be held by the end of the year, 14 less than in 2021 and the lowest level since 2000.
Geopolitics
RUSSIAS 2ND FRONT?
Already faced with a counter-offensive in Ukraine, the Russian military is now also facing a “second front”, as war has again erupted between Azerbaijan and Armenia, an area where Russian peacekeepers are stationed. Reuters reports Putin has, understandably considering the situation in Ukraine, called for an end to fighting there.
CHINA’S PERSPECTIVE ON US POLICY AIMS
The Chinese perspective on the war in Ukraine is that the US aims to use it to drive a wedge between Russia and China, writes Nikkei Asia. Considering Zbigniew Brzezinski “The Grand Chessboard” from 1997, which argues that to maintain global dominance the US needs to prevent any country from dominating the “Eurasian continent”, this is not as farfetched an idea as it might sound. And whether or not there is an “American hand” at play here, the reality is that Ukraine and Taiwan are driving a big wedge between Europe on the one hand, and Russia and China on the other; while the Ukraine conflict in particular is making it more difficult for Russia and China to collaborate, as it could trigger US and Europe sanctions against China.
US SANCTIONS FOR CHINA?
Reuters writes the United States is considering options for a sanctions package against China to deter it from invading Taiwan, with the European Union coming under diplomatic pressure from Taipei to do the same, according to sources familiar with the discussions. Taiwan's de facto ambassador in Washington, Hsiao Bi-khim, on Tuesday hosted dozens of international lawmakers, about 60 parliamentarians from Europe, Asia and Africa, all members of the Inter-Parliamentary Alliance on China (IPAC) gathering in Washington this week, to discuss the subject. Reuters says the guests hailed from the UK, Australia, Canada, India, Japan, Lithuania, Ukraine, New Zealand and the Netherlands, among others.
Nikkei Asia reports more Russian companies are issuing bonds in the Chinese currency. This is a natural outcome of the Western sanctions imposed on Moscow for its invasion of Ukraine, and we at EPM see this as supporting the trend towards regionalization of the global economy which we’ve previously discussed.
Energy Transition & Technology News
GAME CHANGING US BIOTECH INITIATIVE
US president Biden will shortly sign an executive order to launch a biotechnology and biomanufacturing initiative, according to a White House press release. In our view at EPM, biotechnology is one of the emerging fields of science from where the “next big thing” – at the level of the steam engine, the internal combustion engine and the internet – could emerge. The US administration clearly sees things in a similar manner, hence the executive order to drive federal investment in the area: “we know that the global industry is on the cusp of a revolution powered by biotechnology. Analyses and facts suggest that before the end of the decade, engineering biology holds the potential to be used in manufacturing industries that account for more than one third of global output. That’s equivalent to almost $30 trillion in terms of value. Living factories — cells — and biomass can be used to make almost anything that we use in our day-to-day lives, from medicines to fuels to plastics. And this allows the U.S. to leverage innovation — this innovation — to strengthen our economy and society.”
GREEN HYDROGEN IN AFRICA
French independent power producer HDF Energy expects its green hydrogen power plant in Namibia, Africa's first, to start producing electricity by 2024, reports Reuters.
Climate Politics
INVESTOR PRESSURE ON CLIMATE GOALS
The Investor Agenda, a group of investors managing $39 trillion, has called on governments to raise their climate ambition, including setting plans to phase out fossil fuel use and forcing companies to set out science-based transition plans, Reuters reports. The move by some – but not all – top fund firms comes ahead of the next round of global climate talks in Egypt in November. In all, 532 investors signed the letter, including UBS, Amundi and Federated Hermes. However, none of the top three US index fund managers BlackRock, Vanguard and State Street signed onto this letter.
PRIVATE EQUITY – BIG INVESTMENTS IN HYDROCARBONS
The investments of Private Equity into fossil fuels are also coming into the spotlight. Bloomberg reports on the Private Equity Stakeholder Project, which is calling upon PE firms to open up about their investments and the associated emissions. Since 2010, Carlyle Group, Warburg Pincus and all of the other private-equity firms have collectively invested more than $1 trillion in energy companies, with the lion’s share going to oil, gas and coal, as well as “dirty assets” publicly traded companies have offloaded, according to PESP’s estimates.
The Electrification of Transport
CHINESE EV COMPANIES TARGET JAPAN
Chinese automobile giant BYD is jumping into the space left behind by Japan’s carmakers. Nikkei Asia reports it is preparing a line up of electric models for the Japanese car market. Our expectation at EPM is that Japanese consumers will be as enthusiastic about electrified transport as any, once they are presented with real options. This is what BYD is betting on as well. Electric vehicles accounted for only about 1% of new vehicle sales last year in Japan. BYD Japan President Liu Xueliang recently told Nikkei Asia that “the small lineup and variety of EVs may perhaps be the reason for the low percentage”.
TWO WHEELED EVS – THE FUTURE?
As far as Asia is concerned, the electrification of transport will probably affect 2-wheeler transport first. In this area, Honda, which dominates the global motorcycle business, announced it plans to launch more than 10 electric motorcycle models globally in the next three years, according to Reuters, part of the Japanese manufacturer's aim to achieve carbon neutrality for motorcycles by the 2040s. Interestingly, Honda said it is targeting annual sales of 1 million electric motorcycles within the next five years, and 3.5 million electric motorcycles annually by 2030. It will equip its electric motorcycles with all-solid-state batteries, which are currently under development.
The Global Energy Crisis
GERMAN CONSUMERS HIT HARD
As an indication of the extent of the crisis, calculations by the German Savings Bank show that 60% of German households now use their entire monthly income on rent, food, electricity and heating. The bank warns this will have dramatic consequences for the German economy, as this means people will be unable to spend anything on leisure, travel, entertainment, et cetera. For many small- and medium-size enterprises, already stretched to the limit by higher electricity and heating bills, this could be the final blow that knocks them out permanently.
EURO ZONE GOVERNMENTS PROP UP ENERGY MARKETS
Another Reuters report sets out how much support European governments have by now pledged to players in the European energy markets. Utilities often sell power in advance but must maintain a “minimum margin” deposit in case of default before supplying the power. This deposit has raced higher with surging power prices, leaving companies struggling to find cash, given many firms face limits on the extent extra costs can be passed to clients. The support pledged runs in the tens of billions already, mid-September. Our view at EPM is that this is only the beginning, and we wonder therefore whether European governments (a) have any idea as to how much support they should be preparing for coming months, (b) if they are truly prepared to provide such amounts of support, and (c) from where they will be getting the necessary funds…
FAULT LINES EMERGE OVER ENERGY POLICY
According to Reuters, clear fault-lines are appearing in Europe over energy policy. The MidCat pipeline, which is supposed to connect France to the LNG terminals on the Iberian Peninsula, is a case in point. Germany, Spain and Portugal support the building of the pipeline, arguing it would support energy security for the continent. France, apparently, is against it, arguing it is too expensive and would go against its green energy ambitions and plans. Underlying the difference of opinion, however, are competing interests. For France’s nuclear industry, the gas connections are a threat to business. This highlights that, as we argued many times before here at EPM, the kind of collaboration Europe needs to become energy independent, is unlikely to materialize. Individual country interests are too different and no political force or body exists that can elevate decision-making above the short-term and limited by national interests currently dominating European political discourse and action across the continent.
EUROPE’S ENERGY WINDFALL TAX
Meanwhile, the EU is moving forward with its proposed windfall tax on oil, gas, coal and refining companies, based on “taxable surplus profits” made in the 2022 fiscal year, writes Reuters. According to The Financial Times, the tax is to bring in around euro 140 billion.
The plan is to cap the price at which non-gas fueled generators can sell their power at 180 euros per megawatt hour, says Reuters. A cap on Russian gap could not be agreed on, reports The Guardian.
POLAND FREEZE ENERGY PRICES
Poland has joined the list of countries that will freeze energy prices for households, reports Reuters. But with an innovative twist. The offer is for households that use max 200 kWh, and they are offered a further discount if they are able to reduce consumption by 10%.
Other
Hydrocarbon Processing as a nice piece on history covers the role of industry pioneers from the 19th and 20th centuries.