Energy, Politics & Money - 22 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
Welcome to the Energy, Politics & Money news feed of Monday 22 August 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 look at:
The ebbs and flows of the crude oil market
Inflation continues to stress markets in Europe, Asia, and China
Canada’s need for a pipeline - LNG or Hydrogen - they must be built
Six scenarios for the Paris Climate Accord - and they don’t look good
Saudi plans for the EV - integrated production and manufacturing
The EU’s ESG proposal is knocked - private sector players argue for a ‘voluntary code of conduct’
German support for Russian sanctions will wane in the face of increasing energy costs
And, so much more!
General Energy News
Crude oil prices fell during early trading on Monday, indicating that concerns over economic growth remain top of traders’ minds. Brent crude futures for October settlement declined $1.17, or 1.2%, to $95.55 a barrel by 0054 GMT, while WTI futures for October delivery were down $1.15, or 1.3%, to $89.29, reports Reuters.
According to Bloomberg, President Biden’s conversation with leaders from France, Germany, and the UK about reviving the nuclear deal with Iran - which could lead to a surge in supply from the OPEC producer - was another factor in the negative sentiment. If indeed a deal is reached to restore the 2015 nuclear accord, Julian Lee writes for Bloomberg, the Persian Gulf nation’s production increase could offset the approximately about 1.2 million barrels a day of Russian crude Europe is still importing, which it plans to stop doing December on wards. According to Nikkei Asia, Tehran could ramp up sales within months, raising supply by as much as 900,000 barrels a day within three months of sanctions being eased.
Russia held its spot as China’s top oil supplier for a third month in July, as independent refiners stepped up purchases of discounted supplies while cutting shipments from rival suppliers such as Angola and Brazil, according to Reuters. Officially registered imports of Russian oil, including supplies pumped via the East Siberia Pacific Ocean pipeline and seaborne shipments from Russia's European and Far Eastern ports, totaled 7.15 million tonnes, up 7.6% from a year ago, data from the Chinese General Administration of Customs showed.
Warren Buffett is looking to acquire up to 50% of Occidental. Bloomberg has an explainer as to why he might be interested to do so. One reason is inflation - it looks to be the mega-trend for the first half of the 2020s, Bloomberg says, and crude oil is one of the best natural hedges out there. Another important reason appears to be cash, as in too much of it. Too much cash has been Berkshire’s biggest investing challenge over the past few years – so why not use some of that on an oil company that is not only one of the biggest producers in the Permian Basin, the largest US oilfield, but also has one of the lowest costs, needing an oil price of just $40 a barrel to sustain dividend. We at EPM would add Occidental’s strategic push into CCUS. This early bet strategic bet by Vicky Hollub, to make the company ready to becoming a CCUS service provider, is likely to pay off with support from the US climate bill.
The Macro Environment (economics & geopolitics)
Germany’s central bank chief has warned that interest rates need to keep rising despite the risk of recession as inflation reaches double-digit levels for the first time since 1951, writes The Financial Times. Bundesbank president Joachim Nagel told the Rheinische Post the recent surge in energy prices caused by Russia’s squeeze on gas supplies was likely to drive German inflation above 10 per cent this autumn and keep it elevated next year. “The issue of inflation will not go away in 2023”. He added that “the probability is growing that inflation will be higher than previously forecast and that we will have an average of six before the decimal point next year”. We are covering this news under macro-economics because of its implications for ECB monetary policy. In section The Global Energy Crisis we cover what this is likely to mean for Germany’s stance regarding the conflict in Ukraine.
Over in China, a need to stimulate economic activity led the country to again cut its benchmark lending rate on Monday, adding 0.05% to last week’s easing measures. Reuters reports that China’s economy narrowly avoided contracting in the second quarter as widespread lock downs and a property crisis took a heavy toll on consumer and business confidence. Beijing’s “zero-COVID” strategy also remains a drag on consumption, as over recent weeks cases have rebounded again. Adding to the gloom, a slowdown in global growth and persistent supply-chain snags that undermine the chances of a strong Chinese revival. The country also announced a (deeper) cut to the mortgage reference rate, underlining efforts by policymakers to stabilize the real estate sector in particular.
As to geopolitics, a senior Russian diplomat has warned that Moscow sees no possibility of a diplomatic solution to end the war in Ukraine and expects a long conflict, The Financial Times reports. The failure to restart peace talks, combined with continued western military support for Ukraine, meant it was impossible to forecast how long the conflict could last said Gennady Gatilov, Russia’s permanent representative to the UN in Geneva. He also said it was “unfortunate” that the UN was not playing a larger role to mediate talks.
As to the west’s military support for Russia, Responsible Statecraft has a comprehensive overview of the military support the United States has provided Ukraine since the start of the war. It concludes that since Russia invaded Ukraine, the United States has sent over $9 billion worth of military aid to support Kyiv’s war effort.
Nikkei Asia takes a deep dive on the question, What would happen if Taiwan triggered sanctions on China similar to those imposed on Russia for Ukraine? A report by the China's Ministry of Public Security and Ministry of State Security provides an answer: a $2.6 trillion hit to the global economy, coupled with food shortages in China due its dependency on soy bean imports that are an important feed for pig farming in the country.
Energy Transition & Technology News
Reuters reports that Canada’s natural resources minister - Jonathan Wilkinson - said late Thursday that providing clean hydrogen to Germany and the rest of Europe is a better opportunity for Canada than trying to build liquefied natural gas (LNG) terminals as the world moves away from fossil fuels. The costs of transporting gas from Alberta in the Canadian west to the East Coast would be high. It would require a new pipeline and the global shift away from fossil fuels means the terminal's lifetime would be too short to be profitable unless converted into a hydrogen terminal when gas demand declines. We at EPM say the pipeline issue raised by the honourable minister is a red herring. Albertan natural gas will always need to be transported to the coast for export - whether in the form of LNG or hydrogen - so a pipeline investment must be made regardless. Beyond this, we argue that in recognition of the difficulties (and consequently) the costs associated with transporting hydrogen over long distances it makes most economic sense for Canada and Europe to agree on a long term deal. Under the terms of the deal, Canada would export LNG to Europe, where the LNG be converted the LNG to hydrogen closer to the end-users (more economic and far safer). Under this deal, both parties could be partners in both facilities.
In India, the State-run Hindustan Petroleum Corporation (HPCL) is pushing ahead with a two pronged strategy: Continuing with its refinery expansion and upgrading plans by investing millions of dollars in its oil portfolio; and, tying up with leading global auto and other companies to expand its footprint in the electric mobility space in India. S&P Global writes that this dual strategic push by the refiner is a sign that while peak oil demand in the country is nowhere near to being reached, creating the need for oil-focused companies to still ensure investments in refining and diversify into other forms of energy in order to prepare for the changing energy landscape.
The US climate bill could help to expand the bio-gas industry that seeks to capture gases from rotting food and farm waste and convert them into fuel and other forms of energy, writes Reuters. But there’s push back from environmental groups, based on unspecified doubts as to the climate support this technology will bring, and the potential it will incentivize large farms to grow further. Neither of these arguments make much sense to us, we must say…
Climate Politics
According to Robert Brecha and Gaurav Ganti, writing for The Conversation, the “Paris Climate Accord aligned” energy outlook scenarios produced by the oil gas industry are not really Paris Climate Accord aligned. The researchers found that BP’s, Shell’s and Equinor’s scenarios overshoot the 1.5°C limit of the Paris Agreement by a significant margin, with only BP’s having a greater than 50% chance of subsequently drawing temperatures down to 1.5°C by 2100. Only the International Energy Agency’s Net Zero by 2050 scenario sketches out an energy future that is compatible with the 1.5°C Paris Agreement goal. We note that this scenario was greatly criticized by the oil and gas industry for being unrealistic.
Over at Project Syndicate, Sultan Al Jaber, the United Arab Emirates’ Minister of Industry and Advanced Technology, CEO of the Abu Dhabi National Oil Company (ADNOC), and Chairman of Masdar, shares his views on the Energy Transition. While noting that renewables accounted for over 80% of all new power generating capacity in 2021, unsurprisingly, his key point is that “global energy security will require oil and gas to remain a significant part of the mix for decades to come”.
The conclusion that should be drawn from the above is that the oil & gas industry is not truly behind the Paris Climate Accord. It argues this Accord can not be realistically achieved, at least not without causing major disruption to energy supplies. And they might well be right. But clearly, this position creates a significant ESG risk for these companies.
The Electrification of Transport
Bloomberg carries an opinion piece that goes into the details of Saudi Arabia’s plans to become a battery and EV manufacturing powerhouse. The country has drawn in lithium miners and battery makers to set up operations, and even Foxconn, the largest assembler of iPhones, is in talks to establish a $9 billion facility that could make chips and EV parts. It is trying to monetize its mineral wealth, estimated at $1.3 trillion, as well as the lithium content of the brine that is a by-product from oil production.
The emission scandal involving Toyota trucking subsidiary Hino Motors is spreading from its HDVs to its smaller models, writes Nikkei Asia – something eerily reminiscent of what happened at Volkswagen a few years back.
ESG
The leading providers of ESG rating services are pushing back to the European Union’s proposals to regulate the sector. MSCI, Moody’s, Fitch and RepRisk all rejected the legislation and argue a “voluntary code of conduct” would suffice and more appropriate than fully-fledged regulation, while Sustainalytics parent company Morningstar said it had no opinion on regulation but backed voluntary rules, writes Responsible Investor.
According to Reuters, BlackRock too is not supportive of the SEC proposed regulations around ESG reporting. BlackRock says the proposed rules aimed at fighting “greenwashing’ will confuse investors.
The Global Energy Crisis
According to Reuters, Germany has finally decided whether or not to extend the lifetime of country's three remaining nuclear power plants. The answer is, “no”. The German government concluded an extension would save at most 2 percent of gas use, which was considered not sufficient to be worth reopening the debate about the exit from nuclear energy.
Russia will halt natural gas supplies to Europe via Nordstream 1 for three days at the end August, Gazprom said on Friday. Gazprom said the unplanned shutdown rom August 31 until September 2 was because the pipeline’s only remaining compressor requires maintenance, reported Reuters.
Some among Germany political leadership are beginning to realize that their decision to launch economic war against Russia over Ukraine is causing catastrophe at home, and must be reconsidered before winter begins. According to Politico, Wolfgang Kubicki, vice president of the German parliament, said on Friday that Germany should allow the blocked Nordstream 2 pipeline to begin pumping Russian natural gas, so “people do not have to freeze in winter and that our industry does not suffer serious damage”. This is, of course, exactly the response that Russia management of gas supplies to Europe since the launch of Europe’s economic war has been trying to achieve.
We see it as likely that voices such as those of Kubicki will grow in strength over coming weeks and months, as Europe’s gas demands increase and its overall energy situation worsens. Many people in Europe, across all layers of society, want to morally support Ukraine. But few signed up to devastating European society and industry for this noble objective. Once it becomes clearer as to how devastating the current policy is for Europe, we expect a pullback.
And it is becoming very clear how devastating the current policy is for Europe. The Financial Times reports that heavy industries have warned the British government they are at risk of permanent closure this winter if sudden emergency measures to curb usage are introduced, and if there is no support when their energy supply contracts are renewed.
A recent report by the Kiel Institute for the World Economy supports our assessment that this is affecting the stance of Europe’s politicians regarding Ukraine and Reuters more broadly. Reported on by Politico, it identified that throughout July, Europe’s six largest countries offered Ukraine no new bilateral military commitments, the first month this has happened since Russia invaded in February.
According to Nikkei Asia, which reports on an analysis by Tokyo-based cybersecurity analytics company Terilogy Worx of the Twitter-sphere, there sentiment is equally shifting. Following the Russian invasion of Ukraine in February many in the West showed far more interest in pro-Ukrainian Twitter posts than pro-Russian tweets. But now they have become more receptive to pro-Moscow voices as fears of inflation grow.