Energy, Politics, & Money - 2023.08.23
Providing independent, objective, & neutral analysis of global developments curated from sources covering global developments in energy, geopolitics, & investment.
In this roundup, we look at:
The shareholder payouts by US energy firms, which were higher than investments in the business for the first time in history
What China’s current economic challenges could mean for oil demand
The default in China’s Trust sector that serves as a key lender to property developers and local government funding vehicles
The US’ decision to leverage China’s economic weakness for geopolitical objectives
Why China risks losing friends and making enemies in Asia
Germany’s decarbonization trajectory, which is significantly behind its goals of minus 65% by 2030 and net zero by 2045
Bloomberg’s (surprising) response to call to boycott the UAE’s COP28
The impact electrified transport will have on the “gas station” business
The view that LNG operator strikes in Australia are unlikely to affect global LNG prices further
The view that fears for a de-industrialization of Europe are overblown
General Energy News
Top US energy companies last year paid out more of their earnings to shareholders than they invested in new oil and gas fields for the first time, writes Reuters. Spending on dividends and share buybacks by the top 50 US independent oil and gas producers hit $58.8 billion last year, topping the $55.1 billion allocated to exploration and development. In the EPM view, this is not a sign of industry belief in a long term future.
Reuters looks at what China’s current economic challenges could mean for commodities demand. The country as exceed to be responsible for 40% of global crude oil demand growth in 2023, so that’s what is at stake as far as oil prices are concerned. For now, Chinese demand has been supported by larger-than-usual export licenses for refined products. Without it, the effect of weak economic activity would show, via diesel demand and petrochemicals. China’s petrochemicals sector also saw a rare decline in sales and profits in the first half and remains heavily dependent on the health of the property market.
Macroeconomics
One of China's largest trust companies, Zhongrong International Trust, a unit controlled by Zhongzhi Group, has failed to pay interest on its investment products, writes Nikkei Asia, adding to worries about the health of the country’s financial system. Zhongrong International had assets under management of 785.7 billion yuan ($109.1 billion) at the end of last year, including 629.3 billion yuan in trust products. Although Zhongrong's total assets represent roughly 3.7% of the industry's total, the market is questioning whether other trust companies will follow suit. The trust sector serves as a key lender to property developers and local government funding vehicles.
Geopolitics
The US has clearly decided to leverage China’s economic weakness for geopolitical objectives. The Financial Times writes that Jake Sullivan, the US national security adviser, has called on China to be more transparent about the state of its economy. China’s government last week halted publication of data on its soaring youth unemployment amid concerns that it would reveal new weakness in the recovery of the world’s second-biggest economy, and has cracked down on corporate due diligence reporting in the country. Sullivan told reporters in Washington on Tuesday:
These are not in our view responsible steps. For global confidence, predictability and the capacity of the rest of the world to make sound economic decisions, it’s important for China to maintain a level of transparency in the publication of its data.
An opinion piece on geopolitics in Asia with some valuable insights in Bloomberg. The historic relations between China and the other Asian country run long and deep, it notes, which is something that works to China’s advantage. Especially if the “historic partner” China can today offer money, through trade and investment. In this regard, China’s current economic weakness could have geopolitical implications as well, if it results in Beijing reducing the amount of money available to its Belt and Road initiative. Another risk, from the Chinese perspective, is its tendency to react with a clear display of anger to US diplomatic maneuvering in Asia. This actually creates more hostility than friends for China, EPM notes. A “maintain the moral highground” approach would much better serve China’s interests, we believe.
Climate Politics
German goals to cut greenhouse emissions by 65% by 2030 are likely to be missed, meaning a longer-term net zero by a 2045 target is also in doubt, reports by government climate advisers and the Federal Environment Agency (UBA) show, writes Reuters. Last year its CO2 levels were already 40% below the 1990 level, but the new reports said that was not enough. "The expected overall reduction is probably overestimated," said Hans-Martin Henning, the chairman of a council of climate experts that advises the government. The German government has ordered 130 measures in various sectors. The buildings and transport sectors in particular are failing to implement them. The buildings sector is expected to be 35 million tonnes of CO2 short of target by 2030, while the transport sector is expected to have excess emissions of between 117 million and 191 million tonnes compared with the government target.
Meanwhile, calls to boycott COP28 are reaching a crescendo, writes Bloomberg. Although no government is yet formally boycotting the summit, leading climate campaigners and environmental groups are urging more action. Belgium’s environment minister, Zuhal Demir, has declared she will skip the summit — others may well follow. But, Bloomberg says, a boycott would not be in the interest of global efforts against climate change. And would not serve the interests of the Global South, as it says, COP28 “is the first where structural bureaucracies preventing progress on climate finance are being tackled”.
We at EPM are left wondering if this article, full of praise for the UAE’s COP, is a result of the massive PR contract that the country awarded a while ago for managing (elite) public opinion (something EPM reported on earlier)? EPM could respond to the “boycott COP” call, but that would require us to delve into the geopolitics behind the process. Just let us know if that is something you would be interested in reading.
The Electrification of Transport
CNBC writes on a report investigation the future of gas stations in the electric era. As electric vehicles proliferate, some gas stations are making expensive overhauls to add EV charging stations, it says. In most cases, they aren’t scrapping traditional liquid fuel pumps, it notes. They are investing in Level 3 chargers, which are more powerful and generally charge a car in 20 to 30 minutes. In the EPM perspective, the electrification of transport reduces the need for gas stations, as most EV will charge overnight at home. Hence, the objective of an “EV retail strategy” should be to offer a “value added” service. The “on the road” charging solutions that will be sought after are the fast charging type for those few days a year when a car is driven more than 200 miles, in strategic locations along highways.
The Global Energy Crisis
The Woodside Energy and Chevron LNG operations in Australia that are at the heart if the strike action by workers supply about 10% of global LNG output, writes Reuters. As such, analysts say the strike would need to last more than a month to significantly affect global supplies and push up prices. The risk of shorter term production stoppages have already been mostly priced in, they say.
The sharp rise in European natural gas prices caused by concerns over potential strikes in Australia is “irrational” and a “clear sign of the fragility of the market”, according to the chief executive of Woodside Energy, writes the Financial Times. Talks that have been ongoing since the start of the year remained “constructive”, she says, despite the increasingly bitter rhetoric.
Meanwhile, BASF’s signing of the longer tern LNG supply deal with US LNG producer Cheniere signals that fears for a de-industrialization of Europe are overblown, says the Financial Times. BASF will purchase an annual 800,000 tonnes of LNG from Cheniere Energy, the US’s biggest producer of the super-chilled fuel, from mid-2026 to 2043. The number of corporations signing up to long-term LNG contracts “tells you that Germany is going to continue using gas and there is demand” for the fuel, it quotes Henning Gloystein of Eurasia Group as saying.