Energy, Politics & Money - 21 July 2022
Welcome to the Energy, Politics & Money news feed of Thursday, 21 July 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we examine: continuing global energy - oil and gas - challenges facing Governments (Europe, Asia, and the Americas), industry (Germany and China), and consumers (everyone); the risk of sovereign default in Asia and higher interest rates for Europe; Europe’s ineffective leadership and policy to deal with energy supply issues; examine movements in the EV production and charging markets; and, the political challenges of going Net Zero experienced by the US (Manchin throws yet another curve ball) and the UK where environmentalists successfully argued the Government’s Net Zero goals were vague and likely unachievable.
General Energy News
The Middle East Institute has looked at the ability of OPEC+ to raise capacity. It’s key conclusion is exactly as we argued last week in response to the Biden administration promise that the president’s trip to Saudi would translate into increased oil production – it won’t happen in a significant manner. “Seven cartel members have the potential to boost production with the current infrastructure”, but MEI highlights that “each of them suffers from deficient asset integrity and maintenance, internal political and security issues, and a lack of long-term consistent capital investment. These factors are now limiting their production capacity growth.”
Bloomberg highlights an excellent piece of work done by Goldman Sachs explaining why Europe has been fortunate (relatively speaking, at least) that China has been in and out of Covid lock downs so far this year. If they had not been, the global competition for energy would have been even worse.
Related, Bloomberg also reports Asian efforts to secure LNG supplies for winter. Gas buyers in Asia want to lock in winter shipments before a potential global price spike or Russia-induced shortage. Spot prices for natural gas in Europe and Asia are trading at an all-time high for this time of year.
Meanwhile, Energy Voice & Bloomberg both report Cheniere Energy, the largest US exporter of liquefied natural gas (LNG), has signed a deal with PetroChina laying the groundwork for another expansion of Cheniere’s Texas export terminal as global demand for the fuel surges.
The Financial Times meanwhile interviewed Ben van Beurden CEO of Shell CEO. He argues governments too often set emissions goals without a plan of how to achieve them and push for cuts in oil and gas production without taking (sensible?) measures to curb consumer demand.
Energy Transition & Technology News
An opinion piece from researchers of Aberdeen university - reported by Energy Voice - argues that blue hydrogen can complement and accelerate other technologies required to deliver net-zero by 2050.
The Macro Environment (economics & geopolitics)
We’ve been warning of emerging market stress these past weeks. As reported by Bloomberg, concerns are now growing over the potential of sovereign defaults among Asia’s frontier markets. The Economist Intelligence Unit (EIU) and the Malayan Banking Bhd warn of default risk growing amid faster inflation and rising borrowing costs. The EIU reported Thursday, they believe Laos has the highest chance of non-payment in the next four years followed by Mongolia, adding that Myanmar is also a potential risk.
In Europe, meanwhile, an opinion piece at Bloomberg highlights the challenges the ECB is facing. Draghi’s resignation in Italy, the yield spread between the north and south, Putin’s energy brinkmanship, and Europe’s “weaker” banking system make choosing the right rate hike a headache for Lagarde.
The Electrification of Transport
The electrification of personal transportation during the 2020s is an important element of our overall investment thesis, and an area where our forecast has proven right consistently since we originally formulated it over 2014 – 2015. We said at the time, and continue to believe, the period 2020 – 2025 is the early kick-off stage, as OEMs plan to bring dozens of electrified models to market, greatly increasing customer choice. Around 2025, we expect the cost of manufacturing an EV to achieve parity with ICEV due to battery cost optimization. Consequently, during 2025 – 2030, the uptake of EVs will accelerate. Past 2030 and EVs will become the standard in developed economies. During that decade, autonomous driving will enter a similar S-curve based market adoption.
As one of the few countries in the world with a comprehensive industrial policy (the only, maybe?) we expect China to be a leading player in electric, autonomous personal transportation future. With this in mind, Reuters reports China's search engine giant Baidu on Thursday unveiled its new autonomous vehicle (AV) with a detachable steering wheel, with plans to put it to use for its robotaxi service in China next year.
Connected to the rise of EV’s is the need for expanded EV charging. While most media attention focuses on oil companies establishing chargers at retail gas stations, our investment thesis always assumed a majority of charging to take place either at home, the office, or shopping malls / parking lots. As such, we see EV charging to be a big opportunity for real estate developers to collaborate with utility companies and charging systems manufacturers.
According to Reuters, the scramble for market share among startups selling home chargers is heating up and that will feed further deal making in the sector as tens of millions of units are installed globally over the next decade. According to analysts, “the real winners will be those with superior software to manage power in the home and ‘bidirectional’ charging, allowing EV owners to charge cheaply overnight and sell power back to the grid at higher rates during peak hours, ‘turning the battery from a cost centre into a profit centre’.”
As for EV batteries, Tesla’s Elon Musk is reported by Bloomberg as urging entrepreneurs to enter the lithium refining business, “Mining is relatively easy, (while) refining is much harder”, adding there are software-like margins to be made in lithium processing. Of course, battery innovations such as CATL’s venture into sodium-ion batteries or solid state batteries with their greatly enhanced energy density could change the outlook for the Lithium supply / demand balance significantly over the medium- to longer-term.
ESG
In the world of ESG, the concept of Impact Investing is being promoted. The difference, you may wonder? Conceptually, ESG focuses primarily on risk management and, therefore, does not necessarily include in its considerations the real-world impact of company’s services or products - in other words, “is my current business exposed?” The concept of Impact Investing aims to deliver a measurable, real world impact – “can my business be changed to improve the world we live in”.
The Global Energy Crisis
Europe is closely watching what happens with Nord Stream 1 today, as it is scheduled to return to service following a 10 days maintenance-related shutdown. First indications are that flows have returned. According to Reuters, sources familiar with Gazprom, said flows were likely to restart at levels of 40% of the pipeline's capacity prior to the maintenance shut down. The head of Germany's energy regulator, however, on Wednesday said he expected the pipeline to resume at around 30% of capacity based on nominations, or requests, for gas at Lubmin, where Nord Stream 1 makes landfall in Germany.
According to Reuters, Europe - still running continuously behind the curve on the subject - was told by the European Union on Wednesday that member states should be prepared to cut gas consumption by 15% until March only AFTER Russian President Putin warned supplies sent via the biggest pipeline to Europe could be reduced further and might even stop. Plans to achieve the reduction this should have been developed months ago – perhaps this is what Kissinger meant when stating, that unlike in previous times, contemporary Europe lacks competent leadership able to manage a war-like situation such as the present? Nevertheless, according to the Financial Times, many governments still have questions and are skeptical about the modalities and targets of the EU plan.
In fact, the list of things Europe should have done is long and goes back decades. It chose to align with Russia on energy, but failed to develop the (military) power that could safeguard its interests in this area. It chose to align with the US on the matter of Ukraine, although US energy and broader economic interests are not nearly as exposed to Russia as Europe’s. It failed to foresee the impact sanctions on Russia would, or to act pro-actively to minimize the likely fall-out (which is happening now). A Bloomberg opinion piece rightly calls for European collaboration to deal with the resulting crisis. We highlight that the UK and Hungary have already communicated their intention to not come to the support of any other European country in cases where supply disruptions were experienced. And, we see a real risk of more European countries joining them the moment at which acute supply stress emerges and impacts their constituents.
Reuters reports Japan ran a US$10 billion trade deficit in June, its 11th straight month, mostly due to high energy and other commodity prices, and a declining value of the Yen vis-à-vis the U.S. dollar. While this is problematic for Japan - certainly the trade deficit is something to be fixed – at least it can afford it. Many other countries, however, will simply have to reduce imports of critical energy and other basic commodities, which will throw their economies into chaos a-la Sri Lanka.
Other
A few days ago we highlighted that in the U.S. efforts to establish a legally binding strategy around climate change and the energy transition failed as Senator Manchin of West Virginia withdrew his support. Most likely in response to Manchin’s move, President Biden said Wednesday climate change is an emergency, but stopped short of a formal declaration, and announced a modest package of executive actions while promising more aggressive efforts sometime in the future. We are not optimistic Biden’s initiatives will succeed; we are take the view, that the U.S.’s continued clinging to 20th century technologies will not help it to compete with China in the 21st century geo-strategically.
The UK is experiencing similar challenges with its Net Zero strategy. Bloomberg reports the UK government lost the first legal test of its much hyped net-zero strategy. The legal challenge was brought by a group of environmental campaigners who called for greater scrutiny of the Government’s proposals to zero out greenhouse-gas emissions. They argued targets were too vague and that they did not comply with the Government’s s own climate-change legislation. They said the proposals for meeting mid-term targets were likely to be inadequate. The judge agreed with the challenge and has forced the UK government back to the drawing board.