Energy, Politics, & Money - 2023.08.08
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
Aramco’s planned investments, twice the size those of Shell
The strong decline in Chinese imports and exports, which in the EPM view indicates global economic weakness
The missed interest payments on two international bonds by Country Garden, China’s biggest private developer by sales
The view that the rhetoric of the Big Oil companies does not correctly reflect what they really believe regarding the Energy Transition
The growth strategy of China's Contemporary Amperex Technology (CATL), the world’s leading company when it comes to batteries
Why the first adopter of commercial hydrogen trains is switching tracks and eyeing an all-electric future instead
The “new OPEC” countries that produce the metals central to the energy transition
The efforts by government agencies and government-affiliated investment arms in the Middle East to eliminate the use of landfill, driving plastics circularity
General Energy News
The price differential between swaps for London’s Brent and Middle East’s Dubai crude has turned deeply negative, writes Bloomberg. It’s a dramatic shift from normal trading patterns as Brent generally trades at a premium to Dubai because of its lower sulfur content and lighter density. It was at a discount of $1.60 a barrel on Monday, compared with a more than $3 premium in January. The root cause are the production cuts by Saudi Arabia and Russia, which have tightened the medium-sour crude market, pushing up the price of the main medium-sour crude benchmark Dubai crude. At the same time, The Brent benchmark is now calculated by including US West Texas Intermediate crude, which has increased traded volumes.
Aramco expects to spend between $45bn and $55bn this year, which is double the capital expenditure planned by Europe’s biggest oil company Shell, writes the Financial Times. The investments will mean Aramco increases its maximum crude capacity to 13mn barrels of oil a day from 12mn b/d, and diversify its downstream activities abroad. Last month it completed the purchase of a 10 per cent stake in China’s Rongsheng Petrochemical Co Ltd for $3.4bn in a deal that will see Aramco supply 480,000 b/d of crude to China’s largest refining and chemicals complex. “China represents an important market for us, not in terms of only crude placements but also in terms of chemicals growth,” CEO Amin Nasser said. “There is a number of [petrochemicals] investments in China in the pipeline that we are currently evaluating and which we will announce in due course.”
Macroeconomics
China's exports fell 14.5% in July year-on-year, while imports contracted 12.4%, writes Reuters. As demand weakened at home and abroad, the Chinese economy grew at only sluggish pace. In the EPM view, this data indicates that economic weakness is not only to be found in China, it is global. We remain of the opinion, therefore, that a substantial economic downturn is coming to the developed world – no “soft landing”.
Meanwhile, Country Garden, China’s biggest private developer by sales, has missed interest payments on two international bonds, writes the Financial Times. The $500mn bonds, which are due in February 2026 and August 2030, and were already trading at distressed levels, fell to 13 and 11 cents on the dollar respectively on reports of $22.5mn in missed coupon payments. Country Garden, which had almost $200bn in liabilities as of the end of 2022, was one of a handful of private companies to survive a liquidity crunch that has ravaged the country’s real estate sector since the default of Evergrande almost two years ago. An official default would be a blow for an industry that typically drives more than a quarter of China’s total economic activity.
Geopolitics
An opinion piece in Nikkei Asia argues that the Biden the administration is having trouble formulating a consistent global security strategy. This, it says, is indicated by an examination of recent trips by several cabinet members, which it sees as communicating a “inconspicuous but substantial shift in its policy toward China”. America's top diplomat was compelled to go to Beijing and negotiate from a position of weakness due to the strategic circumstances that Washington faces, it says, because the lavish military aid that Washington has provided to Kyiv to sustain its fight against Russia has severely undermined US military preparedness. At EPM we disagree with this view, as we articulated yesterday in our review of the Jeddah Summit. We believe the US is very consciously moving its pieces on the geopolitical chessboard. In Ukraine, maintaining a hot war to exhaust Russia and Europe, and hopefully dragging in China such that its focus on Taiwan is interrupted. In Asia, building up a military alliance and arming this alliance, such that in case of a hot war with China, others can do the fighting under the leadership of the US. The attempts to get China to the table for discussions we believe is linked to this. It is a conscious move by the US to get China to move, but on the basis of a US framing of subjects, be that Ukraine or Climate Change.
Energy Transition & Technology News
Contrary to their rhetoric, the behavior of the Big Oil companies suggests that they believe a low-carbon transition will not occur, or they won’t be as profitable if it does, writes the New York Times. The fact that shareholders seem to prefer that oil profits be distributed as dividends rather than reinvested more in low-carbon energy solutions suggests they are also skeptical about the industry’s ability to be as profitable in clean energy. Their behavior suggests a preference for investing in other companies they believe have a competitive advantage in those technologies. The author, one of America’s leading thinkers when it comes to energy and the geopolitics of energy, Jason Bordoff, believes this view eventually cost Big Oil. He says, history suggests that climate action will proceed “gradually and then suddenly,” as a character in Ernest Hemingway’s “The Sun Also Rises” says of bankruptcy. That’s what happened in 1970 when chronic smog and polluted waters spurred one in 10 Americans to take to the streets on the first Earth Day and propelled the passage of America’s landmark environmental laws.
China's Contemporary Amperex Technology (CATL), the world's leading supplier of electric-vehicle batteries, is trying to head off three risks to its business by securing crucial minerals, seeking out more overseas buyers, and expanding beyond the auto industry, writes Nikkei Asia. The company is involved in roughly 20 projects worldwide for mining lithium, cobalt, nickel and more. In June, CATL said that it would provide a Thai company with battery assembly technology and production equipment. In Germany, CATL has begun production at a new factory whose clients are believed to include BMW. CATL said last August that it would build a factory in Hungary.
The first adopter of commercial hydrogen trains is switching tracks and eyeing an all-electric future instead, writes QZ. LVNG, a German state-owned railway company, has been devising ways to phase out diesel since 2012. In September 2018, it started running hydrogen fuel-cell trains–the Alstom Coradia iLint trains—on trial routes in the Lower Saxony region. The commercial rollout of these trains on a railway link, in August 2022, had already been derailed on several occasions. The trains required new hardware and software to be retrofitted for their routes, driver shortages left no spare time to educate them on running hydrogen trains, and there were troubles at the hydrogen refuelling station in winter. Now a year after the commercial launch, the Lower Saxony state ministry has abandoned ideas for future hydrogen trains, arguing that battery-electric models “are cheaper to operate.”
The Financial Times looks at the countries that produce the metals central to the energy transition. For cobalt, the DRC accounts for 70 per cent of global mining. In nickel, the top three producers – Indonesia, the Philippines and Russia – account for two-thirds of the market. For lithium, the top three producers – Australia, Chile and China – account for more than 90 per cent. Demand is only going to grow in coming years. Under current plans, none of these key commodities will have enough operating mines by 2030. When it comes to refining of the minerals, China leads the world.
Climate Politics
Government agencies and government-affiliated investment arms in the Middle East are spearheading efforts to eliminate the use of landfill, driving plastics circularity, writes S&P Global. Currently, only 5%-7% of plastics are recycled in the region, while the vast majority, about 90%, is sent to landfill, with the small remaining amount being exported. To put these figures into context, the European Union together with Norway, Switzerland and the UK recycled some 35% of post-consumer plastic waste in 2020 while another 42% went to energy recovery, and only 23% was landfilled. The two biggest economies in the Gulf Cooperation Council, Saudi Arabia and the UAE, have both set ambitious 2030 goals, with the Saudis aiming to divert all solid municipal waste from landfill and Dubai aiming at zero waste to landfill. But given the region's limited progress in the waste management and plastics recycling sectors to date, a rapid acceleration over the rest of this decade will be needed if targets are to be met, S&P concludes.