Energy, Politics, & Money - 2023.09.27
In this roundup, we look at:
What does ‘peak oil’ mean for China?
Why even $100 oil is unlikely to dent demand from Asia in the shorter term
How the GCC’s expansion of refining capacity is set to further limit the supply of its crude oil to refiners around the world
Why Taiwan would like to see both AUKU.S. and NATO challenge China and come to its support
The indefinite extension by the U.S. of a waiver granted to South Korean chipmakers to bring chip equipment into China, which we at EPM see as an indication of the U.S. dependency on China for its supply chain
Why Chinese companies operating in the battery space are flocking to Morocco
Bio-naphtha
Why the boss of Nissan believes the world “needs to move on” from the internal combustion engine
The increase in China’s quotum for rare earths production, in support of the country’s developing EV industry
Why France is set to become a testing ground of public support for climate change related policies
Why Europe is approaching winter in a much better energy state than last year, regarding which EPM notes that it paid a tremendous economic price for this “achievement” and the continent continues to walk a tightrope
General Energy News
The Financial Times has looked at the question, what will ‘peak oil’ mean for China? The importance of this question is reflected in the comment by an IEA analyst, who says “China’s market is a microcosm of the world. What’s going on there reflects how the world oil market is changing”. At the heart of China’s waning thirst for oil is the country’s rapid take-up of electric vehicles, with the country’s own carmakers at the fore. EVs made up 37 per cent of all new car sales in China last month. As a result, China’s energy mix will shift to electricity, which in turn means a shift towards renewables and coal. This has geopolitical implications, EPM notes, as in these specific areas China is self-sufficient, unlike in oil. Refiners in China will not all shut down overnight. Instead of producing gasoline, however, they will switch to petrochemicals. In that area too, therefore, China will become less dependent on imports, and is likely to become an important exporter to the world.
Asia's appetite for oil is unlikely to falter even if benchmark prices hit $100 per barrel, writes Nikkei Asia. The most important reason is that China and India are not really paying benchmark prices yet. They regularly buy from countries under Western sanctions. One-third of India's crude imports come from Russia. China gets some of the best deals on crude oil globally. Buyers in the country take almost all of Iran's crude exports, 1.2 to 1.4 million barrels per day in recent months, mostly sold at a discount of $10 per barrel compared to Brent. China also buys an equivalent amount of Russian seaborne crude, as well as all of Venezuela's oil exports. In short, things are not as bad as they seem, when it comes to Asia. Refinery margins are also still high in Asia, indicating continued strong demand. The bigger concern is the impact increasing oil prices have on inflation. Nikkei quotes an analyst as saying: "If inflationary expectation gets out of control and triggers resumption of monetary tightening, there could be more worrisome spillover effects"
Oil supplies from the Arabian Gulf are set to tighten further, writes Bloomberg, as Kuwait, Oman, and Bahrain expand refining capacity and will thereby consume more regional crude to produce fuels for export like diesel. Earlier this year Kuwait brought its newest refinery online, a 615,000 barrel-a-day facility at Al Zour on the Persian Gulf. Oman’s new Duqm refinery has begun exporting the first cargoes of refined products. Traders expect the 230,000 barrel-a-day facility to be running at full capacity by the start of next year. Bahrain is expanding its Sitra refinery, boosting the 87-year-old crude processing plant’s capacity to about 400,000 barrels a day from 267,000 a day now. The expansion is set to be complete by the end of 2024
Geopolitics
Nikkei Asia writes that Taiwan would like to see both AUKUS and NATO come to its aid in case of Chinese aggression. National Security Council Secretary-General Wellington Koo Li-hsiung said they are “important power(s) for respond(ing) to China's expansionism and military buildup”. He added, “Beijing (is) the provocateur who started the arms race." Koo also warned of aggressive Chinese military expansion overseas and identified areas of increased Chinese activity such as the Chinese naval port in East Africa's Djibouti, the Ream naval base in Cambodia, Gwadar Port in Pakistan, the Hambantota port in Sri Lanka, as well as a secretive security agreement inked by Beijing and the Solomon Islands. Koo said:
China’s naval power expansion is certainly worrying for countries across this region. If Beijing didn't have an ambition to take over neighboring territories, it would not have been as serious a problem. The U.S. Navy has a presence across the world but doesn't seek to acquire territories of other nations.
Meanwhile, more evidence the U.S. blockade of China when it comes to semiconductors is not going as planned. After the Chinese announcement of domestically produced, state of the art, 7-nanometer chips last week, Reuters reports that the U.S. is expected to indefinitely extend a waiver granted to South Korean chipmakers Samsung Electronics and SK Hynix to bring chip equipment into China. Samsung Electronics has NAND flash memory production in Xian, China whereas SK Hynix has DRAM chip production in Wuxi and NAND Flash production in Dalian, in which both companies invested billions of dollars. Together, the companies control nearly 70% of global DRAM and 50% of NAND flash markets. The Department of Commerce had been in discussions with Samsung and SK Hynix to designate equipment that can be brought into their Chinese production lines taking into consideration the companies' future plans, as equipment upgrades are also needed to enable business in the next few years. EPM suspects the U.S.’ decision is to ensure that its own supply chain does not become affected by its own sanctions, i.e. it highlights the dependency of the U.S. on China.
Energy Transition & Technology News
Chinese companies in the battery space are avoiding or delaying direct investments in the U.S. and Europe because of geopolitics and lengthy waits for permits writes the Financial Times. Instead, they are going to third countries. For example, China’s CNGR Advanced Material has decided to build a $2 bn cathode materials plant in Morocco, to supply the U.S. and European battery markets. Morocco in particular is starting to benefit, as a bridge between Chinese companies and western markets. South Korea’s LG Chem and China’s Huayou Cobalt said they would build a lithium refinery and cathode materials plant in the country, because Morocco is a free trade partner of the U.S. Consequently, its raw materials count towards sourcing targets required for electric vehicles sold in America to receive subsidies of up to $7,500 under President Joe Biden’s Inflation Reduction Act (IRA).
Similar to biofuels, bionaphtha is derived from bio-based feedstock instead of crude oil. Usually a co-product in biodiesel or sustainable aviation fuel production, it is set to see a growing market in Europe and Asia, spurred by bioplastic demand and fuel blending mandates writes S&P Global. Global biorefinery capacity has been expanding in recent years and is estimated to grow from 19 million mt/year as of 2023 to upward of about 50 million mt/year by 2030 in output including renewable diesel, jet fuels, bionaphtha and bioLPG, based on the delivery of committed projects. The general expectation is that bioplastics will drive demand for it. Bionaphtha could be used as a drop-in feedstock in naphtha crackers, producing olefins and aromatics for bioplastics production.
Climate Politics
Earlier this week, France announced a more ambitious decarbonization plan, which we covered here on EPM. Next, the country is set to test public support for this policy, writes Bloomberg, as paying for it requires the government to delay previously promised tax cuts and withdraw measures that have shielded households from soaring energy prices.
The Electrification of Transport
The boss of Nissan, Makoto Uchida, has warned that the world “needs to move on” from the internal combustion engine, writes the Financial Times. The company said on Monday that it would not launch another engine-based model in Europe, where governments are also looking to shift the auto industry towards EVs. Uchida said Nissan’s line-up of models would be restricted to EVs by the end of the decade, a tightening of the company’s previous targets. Nissan plans to have 19 EVs on sale by the end of the decade and will sell its hybrid models in countries that “do not have the sufficient infrastructure” for charging electric-only vehicles. In China, the company was preparing for a “huge price war” on electric vehicles, while Uchida also warned that new Chinese brands with export plans for Europe had developed much faster than expected. “None of us expected that speed,” he said. In the EPM view, Uchida appears totally in tune with what is happening in the world. He is not denying reality, as some of his colleagues do, nor trying to halt inevitable developments, as some of his other colleagues do.
China has raised its rare-earth metal production quota for 2023 by 14% over last year to 240,000 tonnes, as the country moves to support its booming electric vehicle (EV) industry, writes Nikkei Asia. China produced 7 million new energy vehicles in 2022, the most in the world. It aims to further increase domestic sales and exports, heightening the need for a stable supply of rare earths. The quota for medium and heavy rare earths, considered essential for high-tech products and weapons, was kept unchanged at just under 20,000 tonnes. China accounts for most of the commercial production of these elements; countries like the U.S. and Japan are heavily dependent on its supply.
The Global Energy Crisis
Europe is heading into a second winter with scarce Russian gas in a more comfortable position than a year ago, writes Reuters. Before its invasion of Ukraine, Russia sent around 155 billion cubic metres (bcm) of gas to Europe each year mostly via pipelines. In 2022, piped gas imports to the EU dropped to 60 bcm. This year, the EU expects them to fall to 20 bcm. Coping with the shortfall has required tackling supply and demand. On the supply side, Norway has replaced Russia as the EU's biggest pipeline gas supplier and liquefied natural gas (LNG) imports have surged, led by supplies from the United States. Across the EU, gas storage caverns are now 95% full, enough to cover about one third of the EU's winter gas demand. EPM, however, notes two things: this achievement has come at a very high cost and, that while Europe is more comfortable with the situation it is not comfortable with the situation.
In regard to increasing its strategic gas supplies, Reuters quotes an analyst as saying. “Europe has managed to swap out the [Russian] volumes. But in reality, this has only been possible at the expense of wider economic activity,” Estimates are that 8% of the 2017-21 average industrial gas demand in Belgium, Britain, France, Germany, Italy, Portugal, the Netherlands and Spain is gone for good. A “pyrrhic victory” if ever there was one. In regard to to comments from EU officials over recent weeks indicate that Europe might be more comfortable, but that it remains far from comfortable, the continent continues to walk a tightrope when it comes to natural gas. Everything has to go right to avoid price spikes and supply disruptions – no unusual cold weather and no unexpected supply disruptions.