Energy, Politics, & Money - 2023.08.28
In this roundup, we take a closer look at the continued growth in global coal based power capacity. EPM sees the world’s coal experience as relevant for forecasting the energy transition. Although renewables growth is significantly larger than coal’s, which means that as a share of energy coal has been in decline for a while already, in absolute terms coals use has been robust. We see a similar development when it comes to oil and natural gas. Under influence of a variety of new energy solutions, growth in demand for oil and natural gas is likely to come to an end, but we do not expect a significant decrease in demand at least until 2040. We therefore believe that the trend in the oil and gas industry will remain continued investment in fossil fuels, as a majority of overall investment; and we see clash coming between supporters of energy security on one hand, and energy transition on the other.
Furthermore, we look at:
Shell and TotalEnergies moving to Venus in Namibia, in a search for 3 billion barrels of oil
The likelihood of a further US Fed rate increase before the end of the year
The financial situation of China Evergrande Group, once China’s largest real estate developer, which continuous to be in deep distress; and how China could avoid “Japanification” of its economy
The invitation to Saudi Arabia, the United Arab Emirates, Iran, Ethiopia, Egypt and Argentina to join BRIS; why we believe that at least in the case of Saudi this is most likely a move coordinated with the US; and why we believe this does not make BRIS a more influential player on the global scene
The visit of US Commerce Secretary Gina Raimondo to China this week
The “forever war” brewing in Ukraine
The US Department of Energy’s plan to provide about $500 million in grants to help companies build carbon dioxide transportation infrastructure
China's BYD has joining the world's 10 biggest car companies by sales
The UN investigation of Saudi Aramco for human rights violations linked to climate change, which EPM believes could well be a harbinger of things to come for companies operating in oil and natural gas
General Energy News
The world continues to see a net increase in coal-powered generation as more capacity is added than retired every year, writes Nikkei Asia based on research by US group Global Energy Monitor. Many plants have sprouted in Asia, including Japan, while new facilities have opened in Poland and Turkey. China, which accounts for half of new plants, has slowed the pace of decommissioning existing units. The reason is coal’s relatively inexpensive nature, and its ability to provide stable, predictable supply. Both developed and emerging economies therefore rely on it in times of emergency, as shown by Europe during 2022. EPM sees the world’s coal experience as relevant for forecasting the energy transition. Although renewables growth is significantly larger than coal’s, which means that as a share of energy coal has been in decline for a while already, in absolute terms coals use has been robust. We see a similar development when it comes to oil and natural gas. Under influence of a variety of new energy solutions, growth in demand for oil and natural gas is likely to come to an end, but we do not expect a significant decrease in demand at least until 2040.
If you believe in the EPM outlook for oil and natural gas, then the recent comments by BP CEO Looney, that the world must invest in the production of oil and gas to avoid to sharp price spikes while accelerating the energy transition to combat greenhouse gas emissions. Reuters reports that Looney said, “We need to do both. We need to invest in today's energy system responsibly and, at the same time, we must invest in accelerating energy transition”. Looney said his company would invest 40% of its capital on energy transition projects by the middle of this decade and 50% by the end of the decade. EPM notes, however, that this is bad news for the ambition to limit clime change to 2 degrees. And, that BP is unlikely to meet is Net Zero pledge with this investment plan. But we do not expect BP to become the outlier, but rather the rule among traditional oil and gas companies. We also believe, therefore, that the energy transition debate will come to a head over coming years, as support for an energy security focus will grow globally, which will challenge the supporters of the energy transition agenda.
In line with BP’s sentiment, Shell and TotalEnergies are stepping up efforts to open a potentially giant oilfield off the coast of Namibia, writes the Financial Times. UK-based Shell, which has drilled four exploration wells in the Atlantic Ocean off Namibia’s southern coast since 2021, received approval in June to drill 10 more. This year France’s TotalEnergies will spend $300mn — half of its global exploration budget — in the country. Total and its partners — QatarEnergy, Impact Oil and Gas and Namibia’s state-owned oil company Namcor — first announced the discovery of “significant light oil and associated gas” at the Venus site in February 2022. This field has the most potential and is likely to hold more than 3bn barrels of oil, which would make it the eighth biggest oil discovery in the world since 2000 and the largest ever in sub-Saharan Africa
Macroeconomics
At the annual Jackson Hole Economic Policy Symposium, Federal Reserve Chair Jerome Powell said he may need to raise interest rates further to cool still-too-high inflation, writes Reuters. While not as hawkish a message as he delivered this time a year ago, Powell's remarks still delivered a punch, with investors now seeing one more rate hike by year-end more likely than not.
On the first trading day following a suspension of more than 17 months, China Evergrande Group shares opened 87% lower, writes Nikkei Asia. The company reported results for the first six months of the year over the weekend, a net loss of 33.01 billion yuan ($4.53 billion), better than the 66.35 billion yuan loss a year ago. The company said that its financial status is still precarious.
Masaaki Shirakawa, a distinguished guest professor at Aoyama Gakuin University in Tokyo and former governor of the Bank of Japan, has advice for China on how to deal with its real estate problems, in an opinion piece for Nikkei Asia. Outwardly, conditions in China resemble those of Japan in its post-bubble period, he says. Japan economic experience since the 1990s has two root causes. First, the bursting of Japan's asset bubble in the late 1980s, which hit its economy exceptionally hard. The decline in the combined value of Japanese property and stocks amounted to about 230% of the country's nominal gross domestic production. By comparison, the corresponding decline in the value of U.S. assets after the global financial crisis was 100% of nominal GDP. Second, demographic change has had a huge impact on Japan. The country's working-age population has fallen 15% since its peak in the mid-1990s. Fortunately for the global economy, in the 1990s Japan did not have to face a serious feedback loop with the global economy. China today, of course is very different. So, what should China learn from Japan? Most importantly, he says, China must contain the damage from the bursting of its real estate bubble and prevent it from causing a financial system collapses. Mild deflation is likely to result nevertheless, due to China’s demographic decline, but this should not be a cause of worry.
Geopolitics
Saudi Arabia, the United Arab Emirates, Iran, Ethiopia, Egypt and Argentina have been invited to join BRICS. According to the South China Morning Post, this means Saudi Arabia and the United Arab Emirates are taking a “step away” from the US, increasing their ability to maneuver independently in the geopolitical arena, in order to play a more global leadership role. As you may already know, we at EPM disagree with this view. Our observations have noted that the Saudi’s in particular operate in the geopolitical arena in close coordination with the US – their deal with Iran in China and the Jeddah Summit being two recent examples of this. As such, we also believe their ascension into BRICS is coordinated with the US.
Over at Project Syndicate, Jim O’Neill, the inventor of the BRICS acronym, sets out why he believes the enlargement of BRICS will not increase the actual clout of the group. The decision to invite this group of countries to join does not appear to have been decided on any clear objective, much less economic, criteria, he says. Which indicates the BRICS do not have a unifying “grand vision” as an alternative to the US “rules based international order”. As such, O’Neill says, it is only the BRICS’ symbolic power that will grow.
After US Secretary of State Antony Blinken, Treasury Secretary Janet Yellen and climate envoy John Kerry, this week US Commerce Secretary Gina Raimondo is visiting China. The South China Morning Post writes that a key concern for Beijing ahead of the meeting is whether the US government will make any policy changes and clarifications regarding its export controls and plans to restrict financing to Chinese companies covering semiconductors and microelectronics, quantum information technologies and certain artificial intelligence systems. This is exactly what EPM wrote following the Yellen visit, and we continue to stand behind that view, which is that China doesn’t mind the visits and is happy to go along, but will not do anything until the US takes a first step toward “détente”, by undoing some of its trade restrictions.
As to Ukraine, something EPM has not reported on for some time. Responsible Statecraft sees signs that a “forever war” seems to be brewing. It quotes the Financial Times as saying that “US officials are privately girding for what increasingly looks like a war of attrition that will last well into next year,” as well as the Wall Street Journal saying that “military strategists and policymakers across the West are already starting to think about next year’s spring offensive” and about “how to prepare for a protracted conflict.” It concludes from this that the United States and NATO are moving the goalposts (again) in a war that has already been characterized by steady mission creep. At least some of their Russian counterparts appear to feel the same, with former Russian President and Deputy Security Council Chairman Dmitry Medvedev recently saying that “should it take years or even decades, then so be it.” This is is exactly what at least some NATO officials had hoped for from the start, it says, in order to trap Russia in its own Afghanistan-like blunder, as reported by the New York Times reporting in March 2022 when it said that the US administration sought to “help Ukraine lock Russia in a quagmire.”
Energy Transition & Technology News
S&P Global writes that as part of the Biden administration's push to promote carbon capture technologies to reduce greenhouse gas emissions, the US Department of Energy plans to provide about $500 million in grants to help companies build carbon dioxide transportation infrastructure. The DOE said that the goal is to encourage developers to build CO2 transport capacity that may not initially be needed but that will become useful in the future, as new direct air capture projects and other CO2 storage facilities go into service.
The Electrification of Transport
China's BYD has joined the world's 10 biggest car companies by sales for the first time, surpassing Mercedes-Benz Group and BMW, writes Nikkei Asia, which describes this achievement as a sign of how electric vehicles are reshaping the auto industry. BYD's global new vehicle sales grew 96% on the year to 1.25 million autos in the first half of 2023, putting it in 10th place, behind Japan's Suzuki Motor. The Chinese automaker ranked 16th in sales last year and did not even make the top 20 in 2021. It quit making gasoline-powered cars in 2022.
Other
Saudi Aramco is being investigated by the United Nations for possible human rights violations tied to fossil-fuel induced climate change, writes Bloomberg. The company has been informed by the UN’s human rights and transnational corporation’s working group that it is looking into allegations that Aramco’s operations “appear to be contrary to the goals, obligations and commitments under the Paris Agreement on climate change,” and are “adversely impacting the promotion and protection of human rights in the context of climate change.” Similar letters to the one sent to Aramco were distributed to the company’s banks, and to the countries in which they operate, the UN said. The probe follows a 2021 request to the UN Special Procedures human rights system by the environmental advocacy group ClientEarth to investigate Aramco. The nonprofit is targeting the Saudi oil company because it’s the world’s biggest fossil-fuel producer and “the largest single corporate emitter of greenhouse gas leading to climate change.” A spokesperson for ClientEarth said, “We expect that the UN Special Procedures human rights system will be increasingly used to bring international legal attention to corporate responsibility for climate change and nature in the coming years”. This is something we at EPM fully agree with. Though the UN itself has no legal authority to force Aramco to change the way it conducts its business, a negative finding by the UN could lay the foundation for other parties to pursue litigation.