Energy, Politics & Money - 16 September 2022
Independent analysis of global developments in energy, geopolitics, and money curated just for you!
In this roundup, we look extensively at geopolitical developments on Russia’s borders. Not only the Ukrainian offensive, but also an escalation of tensions on the borders of Azerbaijan and Armenia, and Kyrgyzstan and Tajikistan are creating a significant headache for Moscow, raising questions as to how the situation is likely to develop.
Furthermore, we look at:
The IEA’s following of OPEC with regard to the oil demand outlook for 2022 and 2023
The likely course taken by new Shell CEO Wael Sawan
The potential of electric flight and ammonia in the Energy TransitioN
Samsung’s new Net Zero announcement
Indonesia’s struggles to reduce the usage of coal in its power system, and the Biden administration’s efforts to drive decarbonization in heavy industry
A wave of nationalizations in Germany’s energy system to avoid a collapse that would be devastating for the economy
General Energy News
OIL DEMAND HIGHER IN 2023
The IEA agrees with OPEC that oil demand is likely to increase sharply next year, reports Reuters. The outlook of an increase of an increase in demand of 2.1 million bpd over 2023 is built on the expectation that China will get back to work while growth in air travel will boost jet fuel demand. For this year, the IEA forecasts demand growth of 2 million barrels per day (bpd). This will in part be due to a switch from gas to oil for power generation, which is expected to provide a 700,000 bpd boost to demand during in the last quarter of this year.
SHELL’S NEW CEO
Shell announced its CEO Ben van Beurden will step down at the end of this year and be replaced by Canadian Wael Sawan, writes The Financial Times. The Guardian looked at what could be expected from the new CEO. Environmental campaigners might hope for a transformation of the company similar to that of BP following appointment of Bernard Looney to the position of CEO, but it is likely to be more continuation than revolution under the helm of the new Shell CEO.
Macro-Economics
CHINA’S CONTINUED ECONOMIC CHALLENGES
China’s local government financing vehicles are rushing to buy vast quantities of land with borrowed funds, bailing out cities and provinces struggling for cash after an exodus of debt-stricken private sector developers, writes The Financial Times. This is as we forecasted, here at EPM. The Chinese government will inflate the real estate bubble rather than allowing it to burst at this moment.
GLOOMY FUTURE FOR STOCKS
Ray Dalio has come out with a gloomy prediction for stocks and the economy after a hotter-than-expected inflation print rattled financial markets around the globe this week, reports Bloomberg. He expects interest rates in the US to rise to the higher end of the 4.5% to 6% range, which will, he says, bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it. A mere increase in rates to about 4.5% would lead to a plunge of around 20% in equity prices, Dalio expects.
Geopolitics
Developments in the Ukraine conflict have been extensively reported on. Ukraine’s offensive in the northeast has the Russians on the run, while Ukrainian pressure in the southeast remains.
What we at EPM want to highlight is that this is not Russia’s only concern at present. Russia leads the Collective Security Treaty Organization (CSTO), which is Central Asia’s answer to NATO. It provides Russia with influence in Central Asia in a way that is similar to the way NATO provides the US with influence in Europe. Earlier this year it was under the umbrella of the CSTO that Russia intervened in Kazakhstan to protect the political and economic establishment there, upon which it has significant influence and from which it can draw support.
With all this in mind, we highlight that as The Wall Street Journal reports, the recent escalation in the conflict between Azerbaijan and Armenia creates an additional headache for Russia. Russia stationed troops on the border between the two countries in 2020, as part of the ceasefire deal that halted an earlier round of fighting between them. Armenia is also a historical ally of Russia, and has called upon the CSTO to provide additional (Russian) support.
Effectively, therefore, the escalation in the conflict between Azerbaijan and Armenia creates a “second front” for the Russian army, something it can clearly do without in the current circumstances. The Russian dilemma is now that using precious resources to intervene in Armenia will weaken its position in Ukraine, while not intervening in Armenia will seriously damage the status of the CSTO and thus undermine Russian influence across Central Asia. According to Deutsche Welle, Azerbaijan recognized this, and this is one of the reasons why it, with support from Turkey, has chosen to escalate its conflict with Armenia, as it assumes Russia will prioritize Ukraine.
As if things were not bad enough already, two further Russian allies in Central Asia, Kyrgyzstan and Tajikistan, started infighting yesterday, reports Reuters, adding pressure and worries on Russia.
Our assessment is that all the above place Russia in a situation that is beyond what it can manage. The meeting between Putin and Xi in Uzbekistan yesterday on the sidelines of the Shanghai Cooperation Organization (SCO) summit, reported on by Axios, is therefore something to watch closely. Undoubtedly, Russia will be looking for Chinese support. A Chinese intervention in Central Asia, such that Russia can focus on Ukraine, is a likely request. Military support from China for Russia, below the radar-screen but otherwise akin to how the US is supporting Ukraine, will equally be on the table. We rule out a direct Chinese intervention on the side of Russia in Ukraine, as this is likely to have severe political repercussions for China globally, and would expose the country to additional western sanctions.
Energy Transition & Technology News
CANADA BUYS SWEDISH HYBRID AIRCRAFT
Air Canada on Thursday said it will purchase 30 electric-hybrid aircraft from Sweden-based Heart Aerospace AB, reports Bloomberg. The lithium-ion battery-powered aircraft is expected to enter service in 2028. It will be able to carry 30 passengers for 200 kilometers (124 miles) in all-electric mode. Two turbo fuel generators could extend that range to 400 kilometers and charging time for the planes will be 30 to 50 minutes. The planes are to be used for short haul traffic.
AMMONIA’S FUTURE EXAMINED
S&P Global has a detailed look at ammonia, which is expected to play an important role in the energy transition, as many expect it to be one of the fuels of the future.
Climate Politics
SAMSUNG – NET-ZERO BY 2050
Samsung Electronics on Thursday announced it will target achieving net-zero emissions across all operations by 2050, writes Nikkei Asia. It said it will do so among other ways by meeting its power needs with renewable sources by 2050. A major step for one of the world's largest corporate consumers of electricity. It used 25.8 terawatt-hours in 2021, 1.8 times what all of Seoul's 9.5 million residents did at home, and outpacing the 18.2 TWh of Google parent Alphabet, the 18.1 TWh of Taiwan Semiconductor Manufacturing Co., and the 2.9 TWh of Apple.
INDONESIA: CLEANER ENERGY PLANS
Indonesia’s plan to retire its coal-fired power plants over the next three decades and replace them with cleaner energy isn’t drawing support from potential investors, writes Bloomberg. The plan needs $600 billion, to phase-out 15 gigawatts of coal generation and add a similar amount of renewable capacity over the period. The government has done investor roadshows in Saudi Arabia, the United Arab Emirates and some European nations to promote its energy-transition plans, the government said, “but no one responded to our offer”.
US – CONSTRUCTION MATERIAL TO FROM LOW EMISSION MANUFACTURING
The Biden administration announced new actions to prioritize the purchase of low-carbon-emissions construction materials, including steel, concrete, asphalt and flat glass, for use in federally funded projects, writes S&P Global.
The Global Energy Crisis
GERMANY TAKES CONTROL OF ROSNEFT GERMANY
Germany will be taking control of Russian oil major Rosneft’s German unit, including stakes in three oil refineries, according to Bloomberg. The move is meant to secure operations of the Schwedt refinery near the Polish border, which supplies the bulk of the jet fuel for the German capital’s airport and gasoline for the region’s vehicles. The facility has traditionally relied on the Druzhba pipeline from Russia for crude supply.
GERMANY WORKING TO AVOID ECONOMIC COLLAPSE
According to another Bloomberg report, it is also in advanced discussions with gas companies Uniper, VNG and SEFE for a takeover. Here the objective is to avoid a collapse in the gas market, as the companies are threatening to collapse under the pressures from the gas crisis in Europe.
ECONOMIC IMPACT OF GERMAN GAS RATIONING
The Guardian explains how gas rationing could have significant second- and third-order consequences for the Germany economy. Using BASF’s Ludwigshaven complex, which operates on the basis of the “verbund” or connected principle, it explains that if BASF would be forced to shut down, a whole range of downstream industries would be forced to shut down as well. In short, as COVID also highlighted, there are bottlenecks in the supply chain, that should be recognized when you do scenario planning. In the current situation, an XXX% reduction in gas supplies could have a far greater impact on the overall economy.
ITALY - CALLS FOR ENERGY BILL STRIKE
An Italian consumer group has called for an energy bills strike, offering legal support to people unable or unwilling to pay skyrocketing gas and electricity prices amid the soaring cost of living, reports Reuters. The initiative echoes a similar campaign in Britain where the 'Don't Pay' group is demanding a cut in bills to what it calls an affordable level.