Energy, Politics & Money - 15 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 take a closer look at Shell’s new strategy, a return to the pre-energy transition days of “fossil fuel production focus”; and which was announced officially on the same day that the IEA reiterated its warning oil peak demand will happen before 2030, primarily due the electrification of transport. At EPM we agree with the IEA’s peak demand view.
As such, we believe investors with a longer-term focus should demand an energy transition strategy from the energy companies they invest in – and thus punish Shell not only for flip-flopping on strategy, but also for adopting a strategy that is about shorter-term profit maximization at the expense of preparations for longevity assurance.
We understand, however, that most investors do not have a longer-term focus, and if they do, they tend to prefer investing in dedicated new energy companies that do not have a fossil fuels legacy. This, we believe, explains why Shell did what it did despite the IEA warning.
Furthermore, we look at:
India’s growth in energy demand, which will shortly see the country driving global oil demand
The Feds decision to interest rates unchanged for now
China’s overwhelming lead in conventional renewables such as solar and also in electric vehicles (EVs), and why the IRA will not dramatically alter this situation
Germany’s change in course when it comes to GHG emissions management, which is a necessary response to its energy policy decision which cut it off from Russian pipeline supplies
General Energy News
Yesterday EPM discussed the Citigroup oil outlook, which is less worried about future supply shortages, and thereby more aligned with the EPM view, than the bullish Goldman Sachs outlook. Today, Reuters reports the prompt month's premium to prices six months out has sharply shrunk in the last week, which is a sign investors are becoming less fearful that demand will indeed outstrip supply later this year.
During Shell’s investor conference yesterday, in the EPM view the company’s new CEO Wael Sawan made perfectly clear, in all but words, that the energy transition strategies of Ben van Beurden (there were a few…) have been thrown out of the door. Reuters reports that the focus until 2030 is on ramping up dividend and share buybacks while keeping oil output steady, which means the company has relegated anything energy transition related to 3rd or lower-level priorities. Shell will increase its overall shareholder distribution to 30% to 40% of cash flow from operations, from 20% to 30% previously. Shell scrapped its previous target to cut oil output by 20% by 2030 after largely reaching the goal. It produced around 1.5 million barrels per day of oil in the first quarter of 2023. It said it will now keep its oil production steady to 2030 and will grow its natural gas business to defend its position as the world's biggest liquefied natural gas (LNG) player. Capital spending will be in a range of $22 billion to $25 billion per year for 2024 and 2025, after a planned $23 billion to $27 billion range for 2023. Shell plans to spend around $40 billion on oil and gas production and trading between 2023-2025, compared with $35 billion on its downstream, renewables and low-energy solutions businesses.
EPM earlier called this “back to the future” for Shell. Javier Blas of Bloomberg words the same sentiment by saying “green is out, black is back”. In the European oil industry, green is out of fashion and black is making a comeback. Gone are the days when Shell aimed to reduce its oil production every year, and lavishly invest in loss-making electricity businesses. Now, Wael Sawan, the company’s new-ish chief executive officer, has promised that it “will invest in the models that work – those with the highest returns that play to our strengths.” It’s translation, according to Blas: more spending on fossil fuels, less solar and wind.
Global oil demand growth will taper off over the next few years as high prices and Russia’s invasion of Ukraine speed up the transition away from fossil fuels, the International Energy Agency said, according to Bloomberg. Consumption in 2024 will grow at half the rate seen in the prior two years, and an ultimate limit for demand will arrive this decade as electric vehicles send the use of gasoline by cars into decline. With production capacity still growing, markets will remain “adequately supplied” through to 2028, it says.
The EPM take away from the Shell and IEA news is as follows. It is also our view that the electrification of transport will make oil demand peak somewhere this decade. As such, we believe investors with a longer-term focus should demand an energy transition strategy from the energy companies they invest in. The Shell flip-flop on strategy, and BP’s to a lesser extent earlier, to us indicates that most investors do not have a longer-term focus, however. The IOCs are under investor pressure on what will maximize returns in the short term, meaning pump as much oil and gas as possible, and leave the energy transition work to other companies.
India will soon overtake China as the largest driver of global oil demand, International Energy Agency (IEA) chief Fatih Birol said according to Reuters. "One of the reasons why we say this is that electrification of cars and buses in China is growing rapidly"
Macroeconomics
The Federal Reserve has decided to leave interest rates unchanged for now, in reaction to a stronger-than-expected economy and a slower decline in inflation, writes Reuters. But, it signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year. The pause is out of caution, to allow the Fed to gather more information before determining if rates do need to rise again, Chairman Powell said.
Energy Transition & Technology News
Although an objective of the Inflation reduction Act (IRA) is to "renew American economic leadership", Energy Intelligence writes it is unlikely to achieve this -- China’s lead in conventional renewables such as solar and also in electric vehicles (EVs) is overwhelming, it says. Despite attracting sizeable investment (plans) so far, it all pales in comparison with what China is planning to invest in just solar. China accounted for 91% of some $78.7 billion in global investment in clean-energy manufacturing capacity in 2022. Chinese modules last year were “up to 57% cheaper than US and EU produced modules,” and its solar companies were highly profitable. The best the US can hope for with the IRA is domestic independence, it says, not global leadership – that will be China.
The evidences that the IRA is at least supporting domestic US growth in new energies is abundant, however. For example, the US solar industry’s growth trajectory is incredibly strong, writes Forbes. Within just a few short years, the industry will be regularly installing 40-50 gigawatts (GW) of capacity according to our latest outlooks. This is quite the feat when you consider the most the industry has installed to date was 25 GW in 2021. Over the next decade, annual average growth will be 11%. And the installed base of projects will multiply nearly five times – from 150 GW installed today to nearly 700 GW installed by 2033.
Climate Politics
Germany is set to water down emissions goals for the most polluting industries, writes Bloomberg. Starting next year, the country’s coalition government wants to track progress on emissions by focusing on economy-wide figures instead of the current sector-by-sector goals. The new approach will allow less-polluting industries to compensate for dirtier ones. Germany’s climate efforts have been set back by Russia’s invasion of Ukraine — and the loss of Russian gas — which forced the country to turn to coal instead. Germany is currently far behind where it needs to be if it wants to meet its 2030 climate goals, having only cut carbon emissions by 1.9% last year. The transport sector is the biggest laggard, with emissions increasing in 2022 for a second consecutive year.
Switzerland is about to perform an interesting experiment when it comes to climate policy. It will allow citizens to vote on whether to adopt a net zero target for 2050 or not, writes Bloomberg.