Energy, Politics, & Money - 2023.10.19
In this roundup, EPM takes a look at:
The US’s lifting of oil export sanctions on Venezuela; and why it will take time for this to have an impact on global supply / demand balance
The continued decline in new home prices in China
The 49.7 million miles of transmission lines the world has to add or replace by 2040, in order for countries to meet their climate goals and achieve energy security priorities
Geologic hydrogen, which, due to its low carbon intensity and potentially ample supply, could be the surprise that makes hydrogen a practically affordable decarbonization solution
Why Europe’s energy transition ambitions will take a hit if it continues its probing of subsidies paid by the Chinese state
The higher-than-expected drop in Tesla profitability, as Chinese competition forced the company to cut prices repeatedly during the third quarter; and why there is an overall slowdown in EV demand
China’s preparations to expand its national carbon market and prepare for the European Union’s carbon tax
How governments in Asia are progressing with efforts to establish carbon pricing
The bursting of the bubble that was “ESG investment”
General Energy News
The Biden administration officially eased sanctions on Venezuela's oil sector in response to a deal reached between the government and opposition parties for the 2024 election, writes Reuters. A new general license issued by the US Treasury Department authorizes OPEC member Venezuela, which had been under crushing sanctions since 2019, to produce and export oil to its chosen markets for the next six months without limitation. "This looks like a wide lifting of oil sanctions on Venezuela, which is surprising because the license is more expansive than expected," said Francisco Monaldi, a Latin American energy expert with Rice University's Baker Institute. But Reuters says it could take more than a year for some now-idled production and export operations to have an impact on world supplies again.
Venezuela has produced an average 780,000 barrels per day (bpd) of crude so far this year, above last year's 716,000 bpd of 2022 but still far below the official 2024 goal of 1.7 million bpd. The country averaged 2.4 million bpd before sanctions began in 2017. Only one drilling rig is active in the country, compared with more than 80 in 2014. Venezuela needs a long list of items to once again become a relevant oil exporter, including dozens of drilling rigs, billions of dollars in infrastructure replacements for refineries, flow stations and crude upgraders and a reliable power supply.
Bloomberg foresees a rapid 200,000 barrel per day increase in Venezuelan heavy oil production. However, it notes the likelihood of further increases beyond that is limited. The sanctions relief by the US is valid for just 6 months. That is too short of a window to attract major investments from international players. A more permanent agreement will have to be found for Venezuela to be able to return to prior levels of oil production and experts.
The developments in Venezuela are acting as a counter pressure to upward oil price pressures resulting from the Gaza War, writes Bloomberg. Brent for December settlement is now slightly below $91 a barrel, while WTI for November delivery is $87.56 a barrel.
Macroeconomics
China's new home prices fell for the third straight month in September, writes Reuters. New home prices fell 0.2% month-on-month. Slightly better than the 0.3% drop in August. Prices were down 0.1% from a year earlier, matching August's decline. China has quickened the pace of policy stimulus in recent weeks, by relaxing borrowing rules and lifting home-purchasing curbs in some cities, in attempts to boost battered buyer sentiment, which analysts say has started to show signs of stabilisation.
Energy Transition & Technology News
The world has to add or replace 49.7 million miles of transmission lines by 2040 in order for countries to meet their climate goals and to achieve energy security priorities, writes CNBC based on a new report published by the International Energy Agency. This scale up in the construction of transmission lines globe will require the annual investment of more than $600 billion per year by 2030, which is double what current global investment levels are in transmission lines. The IEA report notes that there are currently 1,500 gigawatts of renewable clean energy projects in “advanced stages of development”, and that are waiting to get connected to the electric grid around the world.
Geologic hydrogen is attracting a lot of attention, writes S&P Global. Its potential as a decarbonization fuel has spurred millions in investment and no fewer than 10 exploration companies are now looking at it. Despite having the tools, E&P companies in the past were not looking for hydrogen. But now it is clear that anybody that is doing any kind of drilling and is producing gas is looking for hydrogen. Estimates are that there may be enough recoverable natural hydrogen to supply more than 500 times the projection of global yearly demand in 2050. Geologic hydrogen has a carbon intensity of 0.37 kg CO2e per kilogram of hydrogen when including the embodied emissions of the well casing and hydrogen emissions. As a result, geologic hydrogen could theoretically fall under the 0.45 kg CO2e/kg per hydrogen threshold within the IRA 45V's lifecycle greenhouse gas emissions intensity and be eligible for the top tier of $3/kg tax credit of hydrogen produced. This makes it an attractive opportunity for exploration companies.
Climate Politics
Europe’s energy transition ambitions will take a hit if it continues its probing of subsidies paid by the Chinese state writes Bloomberg. Brussels announced an investigation into Chinese subsidies for electric vehicles in September, and this month mooted a further probe into wind-power equipment. Solar power, which escaped a contentious anti-dumping investigation a decade ago, could be next: Two German regions have pushed the EU to ban some Chinese panels as a slump in prices put pressure on the remnants of Europe’s photovoltaic manufacturing sector. At the center of Bloomberg’s argument lies Europe’s CBAM. Chinese companies will only prepare to play according o its rules if European regulators are seen as “fair”. If not, the Chinese might decide to let Europe be, which would cut Europe off from an important supplier of the materials and technologies its energy transition depends on.
The Electrification of Transport
Tesla reported worse-than-expected third-quarter results on Wednesday, with profit falling more than 40% after the US electric vehicle maker cut prices in several markets, including at home and in China, to try to boost demand, writes Nikkei. Tesla recorded net income of $1.9 billion, down 44%. Its operating margin dropped significantly to 7.6%, compared to 17.2% during the same period last year, due to a series of price cuts in China, the U.S., Japan and other markets.
Tesla on Wednesday also said it would be cautious about expanding electric vehicle production capacity, citing economic uncertainties which is leading to a slowdown in demand, writes Reuters. Tesla CEO Elon Musk said he was worried that higher borrowing costs would prevent potential customers from affording its vehicles despite substantial price cuts, and that he would wait for clarity on the economy before ramping up its planned factory in Mexico. Tesla’s announcement came on the heels of other OEMs announcing similar measures. GM has said it will delay production by a year of Chevrolet Silverado and GMC Sierra electric pickup trucks at a plant in Michigan, citing flattening demand for EVs. Ford said last week it would temporarily cut one of three shifts at the plant that builds its electric F-150 Lightning pickup truck. Amazon-backed Rivian, which makes electric pickup trucks and sport utility vehicles, also disappointed investors this month when it shied away from raising its full-year production forecast despite stronger-than-expected third-quarter numbers.
In this macroeconomic environment, expectations are for a wave of consolidation in China car market, that will leave only a handful of companies, writes the Financial Times. Hundreds of companies, that proliferated during an investment boom over the past decade, now face an uncertain future. Of these, approximately 50 are domestic EV brands that produce pure-electric cars and plug-in hybrids. But by 2030, it is expected there will be between 10 and 12 major Chinese automakers operating on a large scale.
Other
China’s environment ministry is asking large industrial polluters to tighten up their emissions reporting, as it adopts the procedures necessary to expand its national carbon market and prepare Chinese industry for the European Union’s carbon tax, writes Bloomberg. Factories releasing the equivalent of more than 26,000 tons of CO2 a year across seven key industries will need to verify their 2022 data by December, according to a document posted on the ministry’s website. The industries include aluminum, cement, steel, petrochemicals, chemicals, paper and aviation, all of which are slated to join China’s carbon market by 2030 and some as early as next year.
More broadly in Asia governments are progressing with efforts to establish carbon pricing, writes Bloomberg. “Asia is the fastest moving region in the world in terms of launching, planning and developing new systems,” said Stefano De Clara, head of secretariat at International Carbon Action Partnership. Asian carbon markets currently cover only 14% of the world’s emissions, while the region produces nearly half of the total. The picture is likely to be very different by 2030.
According to the annual ESG Attitudes Survey from the Association of Investment Companies, in 2021 almost two-thirds of respondents said they considered environmental, social and governance (ESG) factors when investing; in 2022 that number dropped to 60%; and this year it’s 53%, writes Bloomberg. ESG is not “post bubble” it says. Anyone in doubt need only look at the share price of Impax Asset Management Group Plc. It rose 33 times from late 2015 to late 2021 — and is down 70% since. Part of the reason is that in the current monetary environment, investors are more sharply focused on share prices performance. But another reason is the continuously changing defining of ESG, which leaves its impact on commerce effectively meaningless. For example, defense stocks used to be “Not OK”. But as soon as Russia invaded Ukraine, they became “ESG OKAY” with the reason being that national defense is also a social good.