Energy, Politics & Money - 18 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, EPM takes a closer look at Europe’s gas situation. Gas inventories are at a record high following an extended period of exceptionally mild temperatures since the middle of December. The EPM view is that this does not warrant complacency, but nevertheless is likely to. The immediate pressure on governments to intervene and manage the situation has now gone allowing governments to turn their attention elsewhere. This creates a massive risk for Europe because if, indeed, China were to recover economically the demand for LNG will increase significantly in 2023. The consequence for Europe in 2023 is that the EU will find itself competing with Chinese buyers for LNG cargoes thereby pushing prices up. And remember in 2022 Europe had to manage a cutoff from Russian pipeline gas for the last 6 months of the year. In 2023, that is likely to be for a full 12 months!
Furthermore, we look at:
OPEC’s and the IEA’s optimism regarding Chinese and consequently global crude oil demand growth in 2023 which offer support to crude oil prices
Russia’s concerns about the EU’s refined products embargo which comes into force on February 5 – where we share our EPM view on how this is likely to play out
China’s record solar capacity addition in 2022, which is set to be beaten again in 2023
ADNOC’s plan to launch a pilot project to transform CO2 into rock
The energy transition strategy of LG Chem
The global growth strategy of EV maker BYD, and why it has not yet entered the booming US market
That Germany will be able to avoid a recession this year by successfully managing all headwinds: monetary tightening, a substantially higher energy bill, a cutoff from close to 50% of its natural gas supply, the IRA subsidies pulling away German companies, US pressure on Germany to reduce business dealings with China; at EPM we admire Scholz’s confidence (but question his realism…)
Danone’s struggles to appease stakeholders on the ESG front – first accused of doing too much, it now finds itself in court accused of doing too little…
General Energy News
OPEC is optimistic about global growth in 2023, writes Reuters. In particular it expects Chinese oil demand to rebound this year following the relaxation of the country’s COVID-19 curbs. It expects global oil demand to grow 2.22 million barrels per day (bpd), or 2.2%, with China growing 510,000 million barrels per day.
The IEA largely agrees with OPEC, writes the Financial Times. Demand for crude oil could rise 1.9 million barrels a day to reach a record 101.7 million barrels per day, it says, while also noting the evolving impact of western sanctions on Russia could threaten to constrain supply.
Bloomberg reports the release of the OPEC outlook supported the crude oil price. Brent for March settlement advanced 0.9% to $86.66 a barrel. WTI for February delivery rose 0.9% to $80.92 a barrel.
Russia expect EU’s oil product embargo – which comes into force on February 5 – to have a bigger impact than the crude oil embargo writes Reuters. The reason for this is that Russia lacks storage capacity for its products. The country therefore plans to process less crude oil domestically and instead export more crude for processing elsewhere. At EPM we can see China as a natural destination as it has spare refining capacity (and a willingness to import Russian crude while exporting refined products). This would leave the supply – demand balance largely undisturbed at a macro level though it will change global trade flows. If, however, China caves in to US pressure to limit Russian imports of crude oil possibly by limiting export quotas for refined products, the global supply – demand balance for refined products could quickly be disturbed, leading to what could be witnessed in the LNG market in 2022.
Energy Transition & Technology News
China set another record for solar power capacity last year, writes Bloomberg. The country installed 87.4 gigawatts of solar last year, easily beating 2021’s record of 54.9 gigawatts. The addition fell short of earlier industry forecasts of as much as 100 gigawatts due to supply chain disruptions increasing prices and slowing installations. Which, in the EPM view, tells you everything you need to know about 2023, that is most likely to be another record setting year for China!
ADNOC has struck a deal with 44.01 to bring technology to the Emirates that transforms CO2 into rock, writes Energy Voice. A pilot project will be launched to capture CO2, dissolving it in seawater, and then inject it into peridotite formations where it is expected to mineralize thus incapable of returning into the atmosphere.
Nikkei Asia nicely summarizes LG Chem’s new strategy which will see the company focus on three product lines: battery materials, sustainability, and new drug development. As to battery materials it is building new plants in the US (to leverage the IRA subsidies) where it will supply battery plants operated by LG Energy Solution, South Korea and Hungary. As to sustainability – which focuses on environmentally sound materials – LG Chem aims to tap into demand for recycled plastic through its own, in-house, plastic waste collection and recycling process – which is very much in line with the EPM view that for success in recycled plastics, petro-chemical players must move up the value chain into waste collection and management, to secure the necessary feedstock. It will also be moving into bioplastics.
The Electrification of Transport
Reuters says Chinese electric vehicle (EV) giant BYD is embarking on a rapid global expansion to challenge Tesla. Its competitive strength is well established in its home market, and over 2022 it launched a foray into a number of European markets (Bloomberg reports BYD will start selling in the UK this quarter), while studying how to set up a US distribution network for its latest electric models. Among the reasons BYD has – so far – not practically moved in the US, is the US – China geostrategic conflict, and the IRA. The prior creates uncertainty. The latter provides a $7,500 discount for EVs manufactured inside the US, something BYD has no intention of doing, which will leave it at a significant cost disadvantage.
The Global Energy Crisis
The weather has saved Europe, writes Reuters. Northwest Europe is now half-way through the winter heating season and gas inventories are at a record high following an extended period of exceptionally mild temperatures since the middle of December. The EPM view is that this does not warrant complacency, but nevertheless European policy makers are likely to become very much so. The immediate pressure on European governments to intervene and manage the situation has now gone, which allows for governments to quickly turn attention elsewhere. This creates a massive risk for Europe, because if, indeed, China were to recover economically national demand for LNG will increase significantly in 2023. The consequence for Europe is that it will find itself competing with Chinese buyers for LNG cargoes and push prices up. And remember, in 2022 Europe managed a cutoff from Russian pipeline gas 6 months of the year. In 2023, that is likely to be for a full 12 months!
For those searching for the kind of overconfidence that might lead to complacency, look to Germany. In an interview with Bloomberg Chancellor Olaf Scholz said he’s sure that despite monetary tightening and a substantially higher energy bill, Germany will avoid a recession this year; that despite a cutoff from close to 50% of its natural gas supply, Germany will avoid having to manage shortages of supply in 2023; Germany will be able to work things out with the US over its IRA subsidies (which are designed to incentivize business to leave Europe (among other places) and relocate to the US); and, that Germany will be able to manage the impact of the US – China geopolitical conflict on its ability to export to China. At EPM we admire Scholz’s confidence, but question his realism…
ESG
Danone just can’t seem to do right for doing wrong, writes the Financial Times. Two years ago, activist investors helped to oust the Chief Executive of the bottled water and dairy company claiming he put too much emphasis on the pursuit of environmental and social sustainability goals compared with financial performance. Now, three environmental groups are suing the producer of Evian water and Activia yoghurt for allegedly failing to do enough to help cut rising plastic pollution. The law firm Baker McKenzie expects a “steep increase” in plastics-related lawsuits against companies such as this one, and “may even reach the proportions of asbestos, tobacco, or opioid litigation”.