Energy, Politics & Money - 22 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, EPM takes a closer look at the European Commission’s plan to allow sales of new cars with internal combustion engines after 2035, if they run only on lower carbon e-fuels.
The German automobile industry might consider this a victory, one for which they lobbied hard, but we at EPM expect they will come to regret it. The idea might be that e-fuels extend the lifetime of the internal combustion engine.
However, considering the cost curve battery tech and consequently electric vehicles are on, on a cost of ownership basis we see no way that ICEV + e-fuels will be able to compete with EVs. Not today. Not ever.
The “regulatory victory” of the German car industry is therefore a pyrrhic victory, as the sense of urgency to deal with the electrification of transport will now decrease at these automakers.
And, from a policy perspective, if e-fuels were to be available at a reasonable cost by 2035, it would be a “climate crime” to use them for road transport. Road transport can easily electrify, namely, but aviation and marine cannot, meaning the latter should really be the priority and focus area for lower carbon fuels.
Furthermore, we look at:
Plans of US refiners to deal with projected decline in demand for gasoline due to the electrification of transport
Plans of the US majors to diversify into oil and gas trading
Outcomes of the Xi – Putin summit in Moscow, which EPM sees as evidence of strongly developing and deepening ties
Another report warning the global biofuel boom is set to drive a shortage of vegetable oils
A set of new reports issued by the Biden administration offering a detailed insight into its thinking about what form decarbonization will take and how it intends to address the challenges
The sodium-ion battery, brought to reality by China, for which a viable pathway exists toward a cost that is half that of lithium iron phosphate today
General Energy News
US refiners are expected to focus on maximizing diesel and bio fuels production for exports, in response to a projected decline in demand for gasoline due to the electrification of transport, writes Reuters.
There is one piece of the business that the Europeans have mastered and the Americans very much envy, writes Javier Blas for Bloomberg: oil and gas trading. European majors Shell, TotalEnergies and BP have Wall Street-like trading units taking speculative positions on the prices of oil, gas and power, making billions of dollars each year in much the same way as hedge funds generate profits. BP told shareholders in February that trading lifted its annual return on capital employed by an average of 4 percentage points during the last three years, which equates to $4.5 billion each year — producing a cumulative total of $13.5 billion in three years.
After disdaining trading for years, Exxon and, to a lesser extent, Chevron, want a piece of that action now, but both face large obstacles because:
It is unclear whether the top of the companies is truly comfortable with a business that’s so high risk, albeit potentially high reward.
Exxon and Chevron will struggle to attract the best talent.
Trading consumes quite a lot of working capital, which the companies might not be willing to commit.
EPM’s perspective is that ExxonMobil’s recent flip-flop on the subject – it announced big trading plans after Darren Woods became CEO, only to backtrack once oil prices declined a few years later – will not make it easier for the company to overcome the challenges. Still, they can do it, if they have a longer-term perspective – you can not become a Shell-like trading house overnight.
Reuters summary of international oil companies plans for decarbonization.
Geopolitics
At the end of their 3-day summit, Chinese President Xi Jinping and Russian President Vladimir Putin issued a joint statement calling for deeper bilateral ties and outlining plans to deepen ties in eight fields from trade to logistics, writes Nikkei Asia.
Putin told reporters that the countries had essentially fully agreed on building a second gas pipeline from Russia to China. The goal is to transport at least 98 billion cubic meters of natural gas to China by 2030. And in a signal of the two nations’ united front against the US, the leaders called for a multipolar world order, and expressed concerns over the AUKUS security pact, while Russia declared opposition towards Taiwan’s independence and support for Chinese actions to protect its sovereignty and territorial integrity.
EPM’s assessment is that the meeting between Xi and Putin indicates a real step-change forward in the relations between the two countries. Which, in turn, reminds us of the Brzezinski thesis from A geostrategy for Eurasia, in which he said:
a country dominant in Eurasia would almost automatically control the Middle East and Africa.
The tie up between Russia and China certainly creates a power that could dominate the region.
Energy Transition & Technology News
A global biofuel boom is set to drive a shortage of vegetable oils — used for cooking and now increasingly to power trucks and planes — intensifying a debate over food versus fuel, writes Bloomberg.
Since we at EPM have previously articulated our view that biofuels that are not produced from some kind of waste material (either cooking oils, or industrial waste, or agricultural waste) will eventually face heavy ESG pressures. The IEA warns:
swelling demand for biofuels and a looming feedstock crunch, if not addressed, will undermine the potential for biofuels to contribute to global decarbonization efforts.
EPM’s view? We agree that feedstock supply is likely to remain a bottleneck, preventing biofuels from having the impact in marine and aviation decarbonization these industries hope they will have – especially if some of the biofuels are used to decarbonize ICE cars and trucks, instead of electrification.
According to Vandita Pant, Chief Commercial Officer at BHP, as much as $250 billion in mine investments could be needed by 2030 to meet heightened demand for copper resulting from the energy transition, S&P Global reported. Copper is one of the most efficient electricity conductors and it is an essential driver of the energy transition due to its widespread uses in electrification including electric vehicle charging infrastructure. BHP’s assessment is that for the next two-three years there will be surplus in copper markets because many projects coming online. But, in the last third of this decade, a wedge between supply and demand is likely to grow and will force prices higher.
Climate Politics
On Tuesday the Biden Administration released a series of reports that provide insight into the thinking behind US energy policy, writes HeatMap News. The reports, named “the Pathways to Commercial Liftoff”, focused on three technologies the Biden administration believes are crucial for decarbonization: clean hydrogen, long-duration energy storage, and advanced nuclear reactors. Another report on the fourth technology deemed critical, capturing and storing carbon pollution, is due soon.
According to the founder and chief executive of RockCreek, which manages $16bn of institutional investors’ money, the banking crisis has the potential to strain clean energy companies’ ability to access finance — which in turn could stymie the rapid rollout of the Inflation Reduction Act, writes the Financial Times.
Following German pressure, the European Commission drafted a plan to allow sales of new cars with internal combustion engines after 2035. But only if they run only on climate neutral e-fuels, writes Reuters. The German automobile industry, which lobbied aggressively for change, might consider this a victory; but we at EPM expect they will come to regret the victory.
The major premise of the German automobile industry is the idea that e-fuels might extend the commercial life of the internal combustion engine. However, considering the cost curve battery tech and consequently electric vehicles are now on, we see no way that ICEV + e-fuels will be able to compete with EVs based on a “cost of ownership” basis. Not today. Not ever.
The “regulatory victory” of the German car industry is therefore a pyrrhic victory, as the sense of urgency to deal with the electrification of transport will now decrease at these automakers.
And from a policy perspective, if e-fuels were to be available at a reasonable cost by 2035, it would be a “climate crime” to use them for road transport. Road transport can easily electrify, namely, but aviation and marine cannot, meaning the latter should really be the priority areas for lower carbon fuels.
The Electrification of Transport
A year ago, CATL revealed that it was working on battery packs that would use lithium-ion and sodium-ion cells. Bloomberg notes that while sodium is more abundant and offers potential safety benefits over lithium, the latter is dominant in EV batteries. Lithium-ion chemistries offer superior energy density, enabling drivers to travel further between charges. In a turn of events, Chinese automaker JAC last month unveiled a test version of its Sehol E10X electric car powered by sodium-ion cells.
Supplying the cells was HiNa Battery Technologies, a small and relatively new player to China’s battery scene, founded in 2017, following years of work at a Chinese scientific research institute.
The debut of a vehicle using HiNa’s cells has battery experts reconsidering the potential for sodium-ion chemistries to play a role powering future EVs. Sodium-ion batteries can leverage the same manufacturing processes as the lithium-ion industry, meaning the former could benefit from advances that the latter had made over the last decade. The use of similar materials and components — from electrolytes and separators, to aluminum current collectors — means this emerging technology also could benefit from the existing economies of scale. Sodium-ion batteries are more expensive than lithium-ion today because of low volumes and underdeveloped supply chains.
But BNEF sees potential for material savings and energy-density improvements that would provide a viable pathway for sodium-ion cells to cost half what lithium iron phosphate cost today.