Energy, Politics & Money - 15 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed of Monday 15 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we examine:
Saudia Aramco’s record quarterly profit and its re-investment plans
Potential troubles in the petrochemical sector and the impact of high prices for fertilizers
The move to economic de-globalization and regionalization (or friend-shoring)
Increased interest in hydrogen and the impact of the US green energy bill on carbon credit pricing
ESG reporting is up for greater scrutiny from pension funds and the industry’s new leaders
Developments in Europe’s energy crisis
And much more….
General Energy News
The second quarter was an excellent quarter for the International Oil Companies, but equally for the National Oil Companies. Saudi Aramco posted $48.4 billion in quarterly profit, highest profits of any listed company ever, Bloomberg reports. Unlike the IOCs, however, Aramco announced it plans to invest a significant part of the money in an expansion of its production capacity, betting that demand for its oil and chemicals will remain high even as the world looks to transition away from fossil fuels. S&P Global reports the company intends to raise its sustainable production capacity to 12.3 million b/d by 2025.
A while back, we reported on news that Russia was in serious price competition with the Middle Eastern countries for deliveries to the main demand centres in Asia, China and India. Bloomberg reports the US has now joined the competition. Apparently, South Korean and Indian oil refiners have in August so far purchased around 16-to-18 million barrels of US crude, that will be mostly delivered during November – double the amount for all of July. Traders are saying offers for West Texas Intermediate Midland, a key US export grade to Asia, are $8 less than a barrel premium to the Dubai benchmark for barrels scheduled to arrive in November. That’s cheaper than comparable Murban crude, the flagship grade of the United Arab Emirates, when taking into account freight and logistics, they added.
Chemicals analyst John Richardson of ICIS calls the current crisis facing the chemicals industry “deeper and more complex than anything we have faced before” and it all has to do with the availability of natural gas over the winter period. BASF, for example, has said it will have to shut down if gas supply collapses by more than half for a sustained period. The company uses about 60% of the natural gas it purchases to generate energy and about 40% as a raw material to produce important basic chemicals. Once down, a complex petrochemicals site can take two to three months to restart. Since petrochemical sites are at the root of modern industry, and if they are forced to close, this will affect availability of raw materials down the important value chains and impact areas such as automotives, construction and electronics. Disruption to industrial production will dampen economic activity, putting downward pressure on GDP growth.
The Macro Environment (economics & geopolitics)
As to economic environment at macro level, The Conversation has a piece on the history of economic relations between the US and China. Its main conclusion is that today, the two countries are drifting apart, which, it poses, will eventually result in the creation of two segregated economic blocs. This, of course, is also our view, and we refer to it as the “deglobalization” or “regionalization” trend. As an example of this trend, the article points to a recent speech by US treasury secretary Janet Yellen, who in April of this year called for “friend-shoring”, which effectively divides countries into friends or foes.
Over recent weeks we have explained that our fundamental view regarding the macro-economic environment over the short- to medium-term. We argue that it is based on three macro-trends, which in addition to the above mentioned deglobalization includes monetary tightening and demographics (with the prior following a period of unequalled monetary loosening and the latter being characterized by an aging and shrinking population in the mature markets and continued explosive growth in the developing markets).
Writing for Project Syndicate, Nouriel Roubini explains what these trends are likely to mean for the world economy. During the post-Cold War era of hyper-globalization, he says, China, Russia, and other emerging-market economies became more integrated in the world economy, supplying it with low-cost goods, services, energy, and commodities. Large-scale migration from the Global South to the North kept a lid on wages in advanced economies, technological innovations reduced the costs of producing many goods and services, and relative geopolitical stability allowed for an efficient allocation of production to the least-costly locations without worries about investment security. This started to crack during the 2008 global financial crisis and then during the 2020 COVID-19 recession.
According to Roubini, there is now a growing backlash against hyper-globalization, evidenced by renewed protectionism that restrict trade and the movement of capital. There are also geopolitical tensions, which are driving a process of reshoring of the supply chains (“friend-shoring” in the language of Yellen, mentioned above) and are restricting flows of technology, data, and information. This balkanization of the global economy is deeply stagflationary, and it is coinciding with demographic aging, another trend we too are following, not just in developed countries, but also in large emerging economies such as China. Because young people tend to produce and save, whereas older people spend down their savings, this trend also is stagflationary.
China’s economic performance has been weak this year, primarily due to its policy of Zero Covid. Nikkei Asia reports that in order to stimulate the economy, the country on Monday unexpectedly cut key interest rates for the second time this year. Last month, China posted its weakest quarterly growth in two years, with the economy expanding just 0.4% from the same three months a year ago, as virus lockdowns in major cities, including the financial capital of Shanghai, took a toll. Unemployment among 16- to 24-year-olds hit a record 19.9% in July, according to data from the National Bureau of Statistics.
The issue of food price inflation is brought back to attention by Politico, which highlights that officials at the United Nations are stepping up warnings about the mounting crisis for fertilizers, as vulnerable countries in areas such as Africa continue to grapple with prices that have soared by 300 percent since Russia's war in Ukraine began. These high prices of fertilizers, it says, will mean less food at a time when people need it most.
As to geopolitics, a five-member delegation of American lawmakers is visiting Taiwan just 12 days after a visit by US House Speaker Nancy Pelosi that angered China, Nikkei Asia reports. Led by Democratic Senator Ed Markey of Massachusetts, the delegation will meet senior Taiwanese leaders to discuss regional security, trade, investment and other issues, based on information released by the American Institute in Taiwan. The institute represents the US government, which does not have official ties with Taiwan. The other members of the delegation are Republican Representative Aumua Amata Coleman Radewagen, a delegate from American Samoa, and Democratic House members John Garamendi and Alan Lowenthal from California and Don Beyer from Virginia.
Also under geopolitics we report the news that Saudi Arabia’s Kingdom Holding, mostly owned by Saudi Prince Alwaleed Bin Talal but with a 16.87% stake for Saudi Arabia's sovereign wealth fund the Public Investment Fund (PIF), invested in Russian energy groups Gazprom, Rosneft and Lukoil between February 22 and March 22. While many Western nations imposed sanctions on Russian energy firms and their executives, effectively forcing their energy companies to break ties with Russian counterparts, Kingdom Holding invested 1.37 billion riyals (US 376 million) in Gazprom, 196 million riyals (US 54 million) in Rosneft, and 410 million riyals (US 113 million) in Lukoil, Reuters reports (US 1.00 = KSA Rial 3.64).
Energy Transition & Technology News
DOW will install a small modular nuclear reactor (SMR) at one of its Gulf Coast sites to decarbonize power and process heat for its chemicals production. The Chemical Engineer reports Dow signed a letter of intent with reactor developer X-energy, and plans to deploy X-energy’s Xe-100 high-temperature gas-cooled reactor technology, with operations expected to begin by 2030.
Climate Politics
America’s climate bill includes significant support for hydrogen, some $5.3 billion over 10 years to be exact. This analysis by The Financial Times explains how this element of the overall bill, which according to FT “has been touted as a potentially revolutionary alternative to fossil fuels, with the promise to power dirty heavy industry, replace car and jet fuel, and act as a store of energy” for decades already, came about. According to the FT, it is the result of the US fossil fuel industry wanting to get in on the hydrogen act.
So far, the US has been struggling to upgrade its power network, CNBC reports. Blackouts are growing more frequent, with the average American experiencing just over eight hours of power outages in 2020, primarily due to “extreme weather” events. The necessary upgrades to the system, to make it more resilient and create room for further penetration of renewables, is being held back by the fact that the electricity system is an area of shared federal and state jurisdictions.
Over at Energy Intelligence an opinion piece discussing carbon pricing, introducing a scenario where carbon pricing becomes essentially irrelevant, as market forces propel renewables and electric vehicles (EVs) forward even in the absence of a cost for carbon emissions.
The Electrification of Transport
As more and more companies adopt net-zero targets, pushed on by ESG conscious investors, they are pushing their supply chain to do similarly. This is supporting the electrification of transport, as highlighted in this Reuters report. The firms that lease and manage car fleets are now being pushed to convert to electric vehicles faster than they themselves had ever thought possible.
Bloomberg reports that Chinese battery manufacturer CATL said Mercedes will join it in building a battery factory in Hungary, for a total investment of euros 7.3 billion, $7.6 billion. The plant will have capacity of 100 gigawatt hours, enough to power more than 1 million cars, and will run on renewable energy. It is planned to be built in Debrecen, in close proximity to customers BMW, Stellantis and Volkswagen, CATL also said.
Last week we reported on the challenges US automakers foresaw for their models to meet the requirements for the tax incentives included in the US’s climate bill. This week, Nikkei Asia reports that Toyota and the other Japanese carmakers also don’t have their supply chain set up in a way that will enable their EVs to qualify. In other words, the climate bill will drive significant changes to the carmakers’ EV supply chain, “reshoring” important elements – which is exactly the intent of the bill, we believe.
ESG
The New York State Common Retirement Fund, which has US$272 billion in assets, has announced it will be evaluating 28 publicly-traded integrated oil and gas companies to determine if they are prepared for the transition to a low-carbon economy. The targeted companies – including ExxonMobil, Chevron and Shell – will be asked to provide information demonstrating their readiness for the transition to net zero. This is part of the fund’s Climate Action Plan and commitment to transitioning the portfolio to net zero by 2040. For more on the announcement, see here (via ESG Investor).
The private-equity industry is about to undergo an epochal shift, as the founders of many leading firms retire and a younger generation with a different view of capitalism takes over, writes Project Syndicate. This, it says, can play the key role in taking ESG mainstream, because this new generation, now in their thirties and forties, is well aware of the failures of Gordon Gekko-inspired, baby-boomer investors and of the limitations of Milton Friedman’s view that business leaders’ only social responsibility is to maximize shareholder value, and thinks that generating good financial returns requires recognizing that sustainability, the environment, and the dignity of workers are core to building enduring enterprises.
The Global Energy Crisis
A few weeks ago, Hungary dispatched a delegation to Russia, requesting additional gas. That, and the country’s opposition to the European sanctions on Russia, seems to have worked. Reuters reports that, Gazprom started ramping up gas flows to Hungary on Friday. It will add 2.6 million cubic metres of additional gas per day to previously-agreed deliveries via Turkstream through August, with the amount of September deliveries being negotiated. This highlights, again, that Europe’s energy crisis is self-inflicted, i.e. it is first and foremost sanctions related. It is argued there is a strong moral case for the sanctions. We wonder how long this moral case will hold up in the worst-case scenario, in which energy becomes rationed at prices that are unaffordable to large segments of society, households and industry.
Before the weekend there was the relatively good news for Europe that its gas inventories are now above 70% -- although the way it got there should be reason for concern, as it is the result of paying record prices, switching from gas to coal, and lowering demand. Nevertheless, Germany remains under severe pressure, as indicated by a report in The Financial Times. It says that according Germany’s top network regulator, the country must cut its gas use by a fifth to avoid a crippling gas shortage this winter. The regulator also warned that the longer-term cost of ending Germany’s dependence on Russia would be a very high gas price, that could have big consequences for business as some sectors of the economy would move away from Germany because gas would be too expensive.
Interestingly, in the midst of this crisis, there continues to be uncertainty as to whether Germany will be extending the lifetime of three nuclear plants -- Isar 2, Emsland and Neckarwestheim – which are scheduled to be shut down permanently by the end of this year. One with think that extending their lifetime, to not add additional energy pressure on the country, would be a “no brainer”. But The Financial Times reports that the operators of the plants, E.ON, RWE and EnBW, have not yet procured the additional fuel needed for the lifetime extension. “Based on the existing legal situation, we assume that our nuclear power plant will still have to be shut down at the end of this year,” EnBW’s finance chief Thomas Kusterer said. “We are preparing for this accordingly.” Even we at EPM cannot make sense of this one…
The situation is similarly negative for diesel. The product, along with other distillate fuels such as heating oil and gasoil, is the lifeblood of industry with uses ranging from transportation, to powering factories and heating homes. According to Reuters, Europe is heading into winter with seasonally low levels of diesel in storage tanks. In this situation, the European Union plans to stop buying all seaborne Russian crude oil from early December, and to ban all Russian refined products two months later.