Energy, Politics, & Money - 2023.10.24
In this roundup, we take a closer look at the IEA’s most recent World Energy Outlook, which in its Stated Policies Scenario forecasts a peak in the demand for oil, coal and gas this decennium. According to the IEA, this forecast is a warning against continued investment in fossil energy – demand for the products might simply not be there 2030 onwards.
EPM notes that the Stated Policies Scenario assumes governments follow through on pledges to clean up energy supply – which, in our view, is exactly where the question mark is. We have seen the UK and Germany backtrack already on important elements of their decarbonization pledges, while the complaints in the developing world against the way the western developed countries are steering the decarbonization debate is growing under the leadership of India and China. This could become a broader trend in both the developed and developing world, in our view, and result in a wider scaling back of ambitions. The greater the disruptions to the current status quo, the greater the likelihood of this alternative possible outcome materializing, in our view – another example of the inter-connectedness of geopolitics, macroeconomics and energy.
Furthermore, we look at:
Chevron’s acquisition of Hess, where EPM looks at what it does to the Chevron overall Upstream portfolio, the value of the deal, and general investor response
The likelihood of China experiencing a “Lehmann Moment”, as the US did in 2008; and the challenges faced by the US real estate sector, which in the view of Bloomberg should limit how fast the economy can grow but not trigger a recession over the next couple of quarters
The announced collaboration between the US, EU and Japan to set shared standards for their own subsidies for sectors of the economy deemed critical for national security, which in the EPM view is further evidence the global economy is experiencing a trend towards “regionalization”
More evidence the biofuel push will eventually impact the food chain
The words of praise for China’s EV startups by the head of design at Porsche and Volkswagen
General Energy News
Chevron will buy Hess in a $53 billion all-stock deal, writes Reuters. The transaction is generally well received by the investment community, it says. It addresses some concerns with Chevron's portfolio, namely over-concentration in the Permian and lack of depth in growth elsewhere. Hess has minimal presence in the Permian basin yet is one of the leading producers in the Bakken basin in North Dakota. The deal makes Chevron the second-largest shale producer in the United States. Additionally, of course, Hess is one of the main players in the “miracle” that is offshore Guyana.
Over at Bloomberg Javier Blas looks at the financial side of the Chevron – Hess deal. It is another “all shares” deal, he notes, which is also the basis of last week’s ExxonMobil – Pioneer deal. Also similar is the fact that the premium paid by the acquirer is limited: just 9% in the case of Pioneer and 10% in the case of Hess. In both cases the sellers position the deal less as a sale, and more as a joining with a bigger partner. This, in the EPM view, indicate the dominant opinion in the shale patch today, which is that consolidation is required to survive – economies of scale and integration into downstream operation.
According to the IEA’s so-called the Stated Policies Scenario, laid out in its annual World Energy Outlook, global demand for oil will reach its peak this decade, as will coal and natural gas, writes Bloomberg. That doesn’t mean a rapid plunge in fossil fuel consumption is imminent, the IEA says. It will probably be followed by “an undulating plateau lasting for many years”. Oil demand in the petrochemicals, aviation and shipping industries will continue to increase to 2050 but it won’t be enough to offset lower demand from road transport amid “astounding rise in electric vehicle sales,” the IEA says. EPM notes that the Stated Policies Scenario assumes governments follow through on pledges to clean up energy supply – which is exactly where the question mark is, in our view. We have seen the UK and Germany backtrack already on important elements of their decarbonization pledges, while the complaints in the developing world against the way the western developed countries are steering the decarbonization debate is growing under the leadership of India and China. This could become a broader trend in both the developed and developing world, in our view, and result in a wider scaling back of ambitions.
S&P Global writes that the IEA central scenario lowered both the agency’s 2030 and 2050 oil demand forecast. 2030 is now 92.5 million b/d, 0.5 million b/d lower than in last year’s forecast, and 2050 2.4 million b/d lower, to 54.8 million b/d, due to faster adoption of electric vehicles.
For a fourth straight year, the IEA lowered its projections for gas consumption, Bloomberg writes. Europe accounts for about 75% of the agency’s downward revision in gas demand. The European Union’s push for renewables — together with gas savings by industries and households — contributed to the region’s record reduction last year, when its consumption fell by 55 billion cubic meters. It’s set to reduce gas demand by another 50 billion by 2030, the IEA says.
Because of this Stated Policy Scenario, the IEA is warning energy companies against “betting the house” on current levels of demand for fossil energy continuing into the future, writes the Financial Times. “Looking at the world today or tomorrow, no one can convince me that oil and gas represent safe or secure energy choices for countries and consumers worldwide,” IEA head Fatih Birol told the FT. “Larger-scale fossil fuel investments” not only posed a “risk for our climate but also have some business risks as the world may not need an increase of oil production”.
Macroeconomics
An opinion piece in Nikkei looks at whether China will experience a “Lehman Moment”, as the US did in 2008. As with the US in 2008, China is suffering from a property market bubble fueled by excess debt. Beijing's decision to let large property developers like China Evergrande Group go under shows that China is unwilling to bail out everyone. This appears similar to the US decision to allow Lehman Brothers go under, which is the essence of the Lehman Moment. But state-backed companies have been treated differently in recent years, and most large financial companies in China have ownership links with local authorities or the central government. As such, if the economic situation were to worsen, Chinese authorities are likely to at some point be confronted with the difficult decision to either support or drop one of its state-backed companies in financial distress. Absent an unlikely rapid property market rebound, Chinese policymakers may need to bail out a systematically important financial institution in the coming months. Most probably, however, the Chinese authorities know well who these institutions are. In addition, it has the resources to provide the necessary funding. As such, the author believes a Lehman Moment, as in a government decision to let a financial institution go under, thereby triggering a systemic crisis, is unlikely in the case of China.
It’s not only China where the real estate sector is facing challenges. For the first time since the Federal Reserve started raising interest rates, every part of the US housing market is now poised to worsen, Bloomberg writes. The resale market has been slumping since early 2022 as potential sellers sit on their homes rather than give up low mortgage rates. New houses had offered buyers some respite, but the recent surge in mortgage rates to as high as 8% has been too much for homebuilders. They will likely reduce construction in the months ahead as profit margins fall. Apartment construction has also rolled over in recent months as developers are hit with a combination of sluggish rent growth and high financing costs. As to the macroeconomic implications Bloomberg says subdued residential construction should limit how fast the economy can grow, but not trigger a recession over the next couple of quarters it says.
Geopolitics
While the US already has, and the EU is looking at the possibility of adding, “punitive tariffs” to a wide range of Chinese “new energy solutions” (EVs, wind turbine, solar panels, etc), the two economic blocs are working with Japan to set shared standards for their own subsidies for sectors of the economy deemed critical for national security. Nikkei writes discussions on the subject could start as early as this year, including through "two-plus-two" meetings of foreign and economic ministers from Japan and the US, as well as through the high-level economic dialogue between Japan and the European Union. This development, EPM notes, aligns with the view that the global economy is experiencing a trend towards “regionalization”, with the different geostrategic blocs working to cut their competitors off from the economic areas they control.
Energy Transition & Technology News
Bloomberg writes that the global biofuel push has created a boom for the US soy bean producers and crushers. America’s soy meal, which is created along with oil during crushing of whole soybeans, is forecast to reach exports of 13.9 million tons in the 2023-24 season. That would exceed the record 13.2 million tons valued at almost $7 billion that was hit in the season ended in September. Important is the fact that earlier this year, for the first time more US soy oil was used for biofuel production than food and other domestic uses.
The Electrification of Transport
The head of design at Porsche and Volkswagen has applauded the design choices being made by China’s EV startups. “These startups, with no heritage, they can do things completely different,” Michael Mauer said in an interview with Bloomberg. “I consider it a positive thing actually, as a designer, because that makes the decision-makers — i.e., the management board — more open-minded.” In the EPM view this further proves that in the EV space, China is a real leader, not just an imitator. That really proves that the established OEMs in the western markets will be facing a massive competition challenge over coming years, if their governments do not come to their rescue via additional tariffs on Chinese exports.