Energy Politics & Money - 15 May 2023
In this roundup, we take a closer look at the global image of plastics, which is now the world’s most vilified material, despite the fact that many alternative solutions have a worse lifecycle GHG impact. We use this news report to reiterate our EPM view that the plastics industry has made a mess of things. It has not taken control of the narrative, allowing factually incorrect stories to become dominant in the minds of people. As we see it, based on facts, plastic is not the enemy. But uncontrolled plastic waste is the enemy. The plastics industry was happy to let this be someone else’s problem – despite our advice to the contrary – and this has come back to haunt them. The right thing to do now is for the plastics industry to organize, in partnership with governments and waste management companies, to ensure that plastic waste become properly managed in those key markets where today it often is not. Once this is achieved, which it can be fairly quickly and cheaply, then the industry should highlight the fact that plastics have a lower lifecycle GHG profile than alternatives – and how this profile will be brought down further through decarbonization of industrial operations.
Furthermore, we look at:
- How, according to the IEA, the oil and gas industry can reduce GHG emissions by 60% between now and 2030, at a cost of “just” $600 billion
- The US sovereign debt stand-off, how it could impact the global economy, and what we at EPM think is the most likely outcome of the negations between the Democrats and Republicans currently underway – a deal including a pathway forward for permit reforms
- Chinese monetary policy, which is expected to move into “loosing” as the economic recovery post-Covid is behind hopes and eexpectations
- The G7 and EU plan to permanently ban Russian gas imports on routes where Moscow has cut supplies, which would make it practically impossible for any EU country to change its energy policy, irrespective of how the circumstances might change
- Noted China and Asian foreign policy expert Kishore Mahbubani criticism of Europe’s position re Taiwan, which he believes is based on ignorance
- The agreement between the US and Papua New Guinea, which will allow American troops access to the island nation's ports and airports – which EPM sees as another step forward in the US’s plan for military encirclement of China
- China’s latest push for peace talks to settle the Ukraine War
- China’s world-leading achievements in nuclear fusion, through its Experimental Advanced Superconducting Tokamak (EAST) project
- Aramco’s challenges in funding customers for its planned blue hydrogen production, which is making the consider exporting LNG instead
- Growing pushback in Europe against the continent’s “green” policies
- The Institutional Shareholder Services (ISS) decision to support the shareholder resolution, submitted by Dutch shareholder activist Follow This, at TotalEnergies – although it recommended to vote against a similar resolution at Shell!
General Energy News
Both the Brent and WTI crude oil benchmarks settled about 1.5% lower last week, writes Reuters. Brent ended the week at $74.17 per barrel while WTI ended the week at $70.04. The referenced article has a great summary of the main news items that drove the market last week, such as the outlook for the US economy considering the sovereign debt talks underway, the China growth outlook, and the oil demand outlook from OPEC.
Due the recent winter having higher than typical temperatures, European gas stocks are close to full, which is pushing down natural gas prices, writes Reuters. Storage sites were 55.7% full at the end of the winter season on March 31, a record for the time of year, and that had already risen to 62.7% by May 9, still the second-highest on record.
The oil and gas industry can reduce GHG emissions by 60% between now and 2030, says Fatih Birol of the IEA in a Linkedin post. This would require upfront spending of around $600 billion – much less than the trillions of dollars the industry accrued last year off the back of record high energy prices. The first required action is to tackle methane emissions and put an end to all non-emergency flaring. Producers should also electrify their upstream operations, instead of relying on high-polluting diesel or natural gas generators to power facilities. Another key area for action is in scaling up low-emissions hydrogen use in operations, and carbon capture, utilisation and storage.
Macroeconomics
Lots of media talk about how a US sovereign debt crisis could affect the global economy. Reuters says that a US default would be strongly negative for US economic growth, which in turn would be very negative for the global economy. The EPM perspective is that the assessment of what a US default would mean for the global economy is probably not exaggerated. Which is why at this moment we believe a deal will be struck in the US to avoid that, for it is difficult for us to imagine that the Democrats or the Republicans consider a deep economic crisis and further weakening of the US global standing a price worth paying to get something they want.
Unsurprisingly to us, therefore, the Financial Times writes that the shape of a possible US debt ceiling agreement between the White House and Republicans in Congress is emerging. At the heart of any deal would be a pact to limit domestic spending. Republicans are demanding deep cuts to many government programmes over 10 years, while the White House wants to see more modest curbs over two years. Another element of a possible deal is legislation to speed up the permit process for big investment projects. That legislation has been championed by West Virginia senator Joe Manchin, a centrist Democrat, and is backed by the White House and supported in different forms by Republicans.
Meanwhile, China's central bank kept interest rates unchanged, writes Reuters, which notes that but markets expect monetary easing may be inevitable in the coming months to support the economic recovery. he government lifted stringent pandemic measures in December that have started to rekindle credit demand in the world's second-largest economy, but there are growing concerns that momentum is slowing after the initial bounce. With evidence of subdued domestic demand and weak investor sentiment, Beijing will likely have to ramp up its easing efforts to ensure the economic recovery stays on track.
Geopolitics
The G7 and EU will ban Russian gas imports on routes where Moscow has cut supplies, writes the Financial Times. One of the officials, all of whom spoke on condition of anonymity, said the move was “to make sure that partners don’t change their mind in a hypothetical future”. Oil pipelines where Russia has cut supplies, including the northern leg of the Druzhba line that supplies refineries in Germany and Poland, could also be blocked under EU measures to prevent a resumption in flows. The EPM perspective o this is that it makes sense if you are a nation that is determined to weaken Russia and to break the economic relationship between Russia and Europe. However, if you are a European nation, we don’t understand how you could support a law that will make it practically impossible for you to change your energy policy, irrespective of how the circumstances might change. Europe cornered itself when it established an energy dependency on Russia, but it is now making the same mistake by enshrining in law a disconnect from Russia!
The Europeans would be wise to read this brilliant piece on (geo)strategy by Hal Brands in Bloomberg. He says: “There’s no substitute for strategy. Strategy is what allows nations to act with purpose in a chaotic world; it is vital to out-thinking and out-playing their foes. Without strategy, action is random and devoid of direction; power and advantage are squandered rather than deployed to good effect. The greatest empires may survive for a while if they lack good strategy, but none can thrive for long without it.”
In a Nikkei Asia opinion piece, the noted China and Asian foreign policy expert Kishore Mahbubani expresses his annoyance with the narrative about Taiwan coming out of Europe. Asian leaders have generally had little to say about Taiwan, notwithstanding some recent statements made jointly with their U.S. counterparts. European leaders have been much more outspoken about the island, he notes. Underlying the difference he says is ignorance. Asians understand that Taiwan is a dangerous and complex issue. They are also aware that the status quo has kept the peace for the decades since then-U.S. National Security adviser Henry Kissinger's pathbreaking visit to Beijing in 1971. Asians know that it is not wise to rock the status quo. So who is trying to change the status quo, he asks? European politicians suggest that China is trying to do so, but they are being intellectually dishonest. They lack the courage to say openly that it is reckless American politicians like former House Speaker Nancy Pelosi and Mike Pompeo who are trying to do so. What everyone needs to understand, he says, is that Taiwan remains the last living symbol of China's "century of humiliation" between 1842 and 1949. Therefore, no leader in Beijing can allow the independence of Taiwan or they would be crucified by the Chinese people. As such, any seasoned observer of the Taiwan issue knows that if the island declares independence, China will declare war. Surprisingly, Mahbubani believes the US under president Biden is trying to steer clear of the prospect of war, downplaying the Taiwan independence issue and unequivocally supporting the “One China” policy. This is where Mahbubani lost us at EPM. His analysis of the sensitivity of Taiwan for the Chinese is excellent and insightful. His criticism of the Europeans is justified – they seem to be completely lost in geopolitics, unaware and ignorant. But then to say the US is at least acting wisely. Who does Mahbubani think is incentivizing Europe to take up an ignorant hardline on Taiwan and China? It seems to us at EPM that while Mahbubani is very learned about Asian geopolitics, he is not as informed regarding North Atlantic politics.
Further in Asia, the US is progressing with its military encirclement of China. It is close to agreeing with Papua New Guinea a defense cooperation agreement, which would allow American troops access to the island nation's ports and airports, writes Nikkei Asia. Papua New Guinea is located at the southern tip of the so-called second island chain, which includes Japan's Ogasawara Islands and the U.S. territory of Guam. Facilities there could be used to launch support and military operations in a crisis in the Taiwan Strait or the South China Sea.
As to the Ukraine War, China will send a special envoy to Ukraine, Russia and other countries to discuss a “political settlement to the Ukraine crisis”, the Chinese foreign ministry said on Friday, according to the Financial Times. Li Hui, a former Chinese ambassador to Moscow, will visit Ukraine, Poland, France, Germany and Russia from Monday. At EPM we note that China is not involving the US – although it seems obvious to us that the US is the most influential power in Kiev. This is probably a conscious Chinese decision, but the reality is that peace will only result if the US tells Kiev that it wants Ukraine to settle for peace
Energy Transition & Technology News
In a three-part series, Asia Times looks at the advancements China is making in nuclear fusion technology. In the first part, the basics. Among the many different approaches to fusion power, one can usefully distinguish between systems that operate in a pulsed mode such as laser fusion and those in which the fusion reactions are maintained continuously. For the latter approach, among the main challenges is that the hot fusion plasma must be maintained in a stable dynamic state and prevented from coming into contact with the walls of the reactor vessel, as such contact could instantly vaporize wall materials and quench the fusion reactions. High-temperature plasmas are capable of quasi-stable “modes”, in which the patterns of fields and particle motions remain relatively constant, but they are also capable of wild, violent behavior which can cause serious damage to any device. The currently best practical solution to confining a plasma on a sustained basis is to suspend it inside a vacuum chamber using powerful magnetic fields, a process known as magnetic confinement. The leading design for achieving sustained magnetic confinement of a plasma is the tokamak, invented in 1950 by Soviet physicists Andrei Sakharov and Igor Tamm. Despite an initial euphoria, maintaining a hot plasma for a significant amount of time in a steady, stable state using a tokamak proved to be far more difficult than expected. Here is where China comes in, with its Experimental Advanced Superconducting Tokamak (EAST) project, located at the Institute of Plasma Physics in Hefei, the capital of Anhui province. Until relatively recently, individual experiments with tokamaks have typically lasted only a fraction of a second, or at most a few seconds. Fusion scientists refer to them as “shots.” On December 30, 2021, however, EAST broke all previous records by maintaining a plasma for over 17 minutes at a temperature of around 100 million C°. Then on April 12, 2023, EAST succeeded for the first time in maintaining a 100 million C° plasma for over six minutes in the dynamic state known as the “H-mode”, where “H” stands for “high confinement.”
As to hydrogen, Saudi Aramco is weighing exports of liquefied natural gas instead of blue hydrogen, as talks with potential buyers of the latter fuel prove tough, writes Bloomberg. “It is very difficult to identify any off-take agreement in Europe” for blue hydrogen, Amin Nasser said on a call with analysts on Tuesday. “Even the customers in Japan and Korea are waiting for government incentives. Until they get these incentives, it’ll be costly for them to pursue that blue hydrogen.”
Climate Politics
The European Union wants both more green rules and economic growth, but a growing chorus of voices says it can’t have both, writes Politico. The energy emergency, the increasing view of China as a competitive threat to the EU, and the U.S. subsidy-heavy Inflation Reduction Act are prompting calls for a rethink, it says. “We have already passed lots of environmental regulations at the European level, more than our neighbors. In regulatory terms we are ahead of the Americans, the Chinese or any other power in the world,” French President Emmanuel Macron said last week. “Now we should be implementing them, not making new changes in the rules or we are going to lose all our players." This sentiment is leading to pushback against EU policy proposals, such as the Sustainable Use of Pesticides Regulation to slash chemical pesticides use, and the Nature Restoration Regulation to restore the bloc’s degraded lands and waters, and the Net-Zero Industry Act, a bid to boost the bloc's manufacturing capacity of clean energy technologies.
The Electrification of Transport
The Global Energy Crisis
Other
Plastic has become the world’s most vilified material, especially for single-use packaging, writes Bloomberg. It’s not only environmentally damaging; it’s become socially unacceptable. Polling consistently finds that consumers want to see plastic replaced. Consumer product companies, hoping to shield their brands from the fury, are seeking sustainable solutions. Paper has become a favored alternative. Consumers see it as more “natural." But, Bloomberg says, it’s not always the green choice that advocates seek — or claim. In some cases it can be worse than plastic. A recent study of milk containers in the US found that paper cartons (which must be lined with plastic) generate 20% more greenhouse emissions over their lifecycles, from production to disposal, than plastic jugs. Other plastic packaging, from meat packages to shopping bags, showed similar to greater climate advantages over paper. At EPM we should reiterate our view that the plastics industry has made a mess of things. It has not taken control of the narrative, allowing factually incorrect stories to become dominant in the minds of people. As we see it, based on facts, plastic is not the enemy. But uncontrolled plastic waste is the enemy. The plastics industry was happy to let this be someone else’s problem – despite our advice to the contrary – and this has come back to haunt them. The right thing to do now is for the plastics industry to organize, in partnership with governments and waste management companies, to ensure that plastic waste become properly managed in those key markets where today it often is not. Once this is achieved, which it can be fairly quickly and cheaply, then the industry should highlight the fact that plastics have a lower lifecycle GHG profile than alternatives – and how this profile will be brought down further through decarbonization of industrial operations.
Interestingly, proxy adviser Institutional Shareholder Services (ISS) has recommended that investors in TotalEnergies back a shareholder resolution, submitted by Dutch shareholder activist Follow This, urging the group to do more to cut its emissions, writes the Financial Times. EPM says this is interesting because ISS, just weeks ago, recommended that investors not support a similar resolution by Follow This when it regarded Shell – and anyone who knows Follow This, knows that the content of these two resolutions will be very similar!