Energy, Politics & Money - 23 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we look at:
Vitol’s expectation regarding oil demand growth in the second half of this year, 2 million barrels per day
Chevron’s acquisition of US shale producer PDC Energy
The decline in LNG spot prices in Asia, the root cause for which is China
The real value of a barrel of Brent crude oil at $75, in a historical context
The status of the US debt ceiling talks, together with a review of the “worst-case scenario”
The further increase in China’s pace of solar installations
Saudi Arabia's NEOM $8.4 billion green hydrogen project, scheduled for startup in 2026
The assessments that the switch to SAF or hydrogen will place the cost of air travel at a structurally higher level, which in our assessment means that a decarbonized aviation industry will be a smaller aviation industry
The bill for a country such as France, to deliver upon its energy transition and emissions reduction targets, which is €66 billion ($71 billion) yearly, until by 2030
Germany’s decision to earmark around 4 billion euros ($4.40 billion) annually to subsidize electricity prices for energy-intensive industries, to discourage firms from moving offshore
The plans by a majority of European CEOs to increase presence in North America amid growing concerns about Europe’s loss of competitiveness, primarily due to energy costs and geopolitical instability
General Energy News
In the second half of the year the world is going to need about 2 million bpd more than it needs now, Vitol says, with Asia expected to lead the demand growth. Such an increase could potentially lead to a shortage of supply and drive up prices, writes Reuters, but EPM wants to remind our audience that following its last two rounds of quota cuts, OPEC has sufficient spare capacity to meet such an increase. However, and this is the base case outlook for us, OPEC is more likely to allow oil prices to rise before it adds production.
Chevron has agreed to acquire US shale producer PDC Energy in a stock-and-debt transaction worth $7.6 billion, writes Reuters. The acquisition will add 260,000 barrels of oil and gas production per day (boed) to Chevron's output in the Denver-Julesburg basin, making its operations in Colorado one of the company's top five business assets in terms of production. Chevron will also add 10% to its proved reserves, at a projected cost of less than $7 per barrel, the company said.
The spot price for liquefied natural gas in Asia dipped to $9.80 per million British thermal units on Friday, falling below $10 for the first time since May 2021, writes Nikkei Asia. It is now down 90% since hitting the $70 range last summer at the height of the global energy crisis. China is at the root of this reversal, it says, through changes to its gas procurement. It reduced LNG imports from Australia by 30% in 2022 while boosting gas imports from Russia by more than 40% that year, including LNG and gas by pipelines. It also increased coal usage. Natural gas fell to 8.5% of China's energy consumption in 2022 from an 8.9% share in 2021, the first decrease in 20 years, as coal increased for the first time in 10 years, edging up to 56.2% from 56%. Lastly, Beijing has shifted toward long-term gas contracts that reduce its activity on the spot market. China has now contracted nearly 50 million tonnes of gas a year under long-term deals signed in 2021 and 2022.
Javier Blas of Bloomberg looks at how inflation has affected the value of crude oil. Brent is priced at $75 per barrel right now, but what does that really mean in a historical context? According to the Prebisch-Singer hypothesis, over the long-term, the price of primary goods, such as commodities, falls relative to the price of manufactured goods. No matter how high producers raise prices, the cost of everything else eventually climbs faster That’s why Raul Prebisch and Hans Singer, the two economists behind the hypothesis, argued that commodity-producing countries must diversify their economies, industrializing if they wanted a healthier future. Blas says that when adjusted for inflation, the $75-a-barrel oil of 2023 has the same purchasing power as the $55-a-barrel a decade ago. Back then, nominal oil prices were above $100 a barrel.
Macroeconomics
Reuters has summarized the reasons why the US debt ceiling talks have the financial world on edge. The U.S. Treasury has warned that it could run out of cash as early as June 1 if no deal is reached by then, and the Reuters report explains what would happen if that were to happen. On the first day, the US government would stop paying medicare, social security benefits, and pensions and salaries to government employees including the military. After about a week, it would stop paying contractors and suppliers, including weapons suppliers to the military, and educational grants. But, Reuters says, the Treasury would try to borrow to enable payment of obligations on debt, to keep Wallstreet whole throughout. If, however, investors would decline to lend that money, out of fear they wouldn't get paid back, America would start missing payments and enter default on its debt as soon as June 7. This would, obviously, rock the global financial system.
As to the likelihood of this scenario actually happening, Reuters says no deal has been reached yet, as President Joe Biden and House Speaker Kevin McCarthy could not reach an agreement Monday. EPM mentioned before we expect a deal to be reached in time to prevent the above worst-case scenario from occurring, because the damage to the US economy, military and overall standing in the world would be just too big. Both political parties will continue to “haggle” over coming days, to get as much of what they want as possible, but we don’t think either will want to see the worst-case materializing.
Geopolitics
Newsweek carries an interview with Chas Freeman, a veteran U.S. diplomat, principal interpreter for President Richard Nixon on his visit to China in 1972, deputy chief of mission at the time of first US embassy in communist China, and former US ambassador to Saudi Arabia. "The world is changing; the kaleidoscope is in motion”, he says. "The basic aim of our foreign policy is retention of primacy, which is impossible. Nothing is forever. No great power is always supreme forever." He added, “It's not just that the Pax Americana, the American Century, which turned out to be about 50 years long, is over, but the 500 years of Euro-Atlantic global ascendancy are over."
Energy Transition & Technology News
China’s solar sector is accelerating an already world-beating pace of installations, writes Bloomberg. The country installed almost three times the volume of solar capacity between January and the end of April than in the same period in 2022. The nation could now install 154 gigawatts of solar capacity this year, BloombergNEF said on Monday, raising its China forecast from a previous total of 129 gigawatts. Installations in China could surge to 200 to 300 gigawatts next year, 2024.
Saudi Arabia's NEOM Green Hydrogen Company (NGHC) has signed financial documents with 23 local, regional and international banks and investment firms on a green hydrogen production facility at a total investment value of $8.4 billion, writes Reuters. The planned facility will produce 600 tonnes a day of carbon-free hydrogen by the end of 2026, using 4 GW of solar energy.
Boeing’s boss has warned that new climate-friendly biofuels will “never achieve the price of jet fuel”, the Financial Times reports. “We will create scale and get more economic,” Boeing chief executive Dave Calhoun said. But he added: “No, I don’t think we will ever achieve the price of Jet A. I don’t think that will ever happen.” Meanwhile, the Financial Times also reports that the NGO Transport & Environment says the cost of developing a hydrogen supply chain for aviation in Europe would be €299bn between 2025 and 2050, largely made up of the cost of green hydrogen production, liquefaction and distribution. This high cost would make hydrogen planes 8 per cent more expensive than jet-fuelled aircraft in 2035. If jet fuel was taxed and a price on carbon emissions introduced, however, hydrogen planes could be 2 per cent cheaper to operate, the study found. At EPM we note this really means aviation will be more expensive under decarbonization scenario, because the proposed way to make it “cheaper” is by raising the price of non-decarbonized aviation, i.e. make that even more expensive. As you know, no value judgements at EPM, so our main take-away is that decarbonization will affect access to aviation, i.e. a smaller industry.
Climate Politics
French authorities, companies and households need to increase their annual spending on everything from building renovation to electric vehicles by €66 billion ($71 billion) by 2030 to meet European Union emission-reduction targets, writes Bloomberg. The required boost represents 2.3% of France’s gross domestic product in 2030, and will probably have “an economic and social cost”, the French government believes, as the extra spending would come as the EU’s second-biggest economy is already struggling to rein in public debt swollen by the cost of containing the Covid and energy crises. Indeed it will, we believe at EPM, as it will necessitate a redirection of spending, meaning there will be “winners” and losers”. This is the moment, in other words, when the energy transition will start to experience pushback, which increases uncertainty over how the Net Zero agenda will develop from here.
The Global Energy Crisis
Germany plans to earmark around 4 billion euros ($4.40 billion) annually to subsidize electricity prices for energy-intensive industries, to discourage firms from moving offshore, writes Reuters. The government last year introduced electricity and gas price caps to shield industry and households from rising energy prices, but companies in Germany say electricity prices are still too high.
Germany’s move might not be sustainable (this, at least is our view at EPM…), but it is urgently needed. Bloomberg writes that at present, a majority of CEOs in an influential group of European businesses say they’re planning to increase their presence in North America amid growing concerns about Europe’s loss of competitiveness. According to a survey conducted by the European Round Table of Industrialists and the Conference Board, a large majority of company chiefs of European multinationals — more than 80% — say they believe Europe is losing competitiveness as a base for industry, as the continent reels from geopolitical risks, inflation and energy costs, along with skills shortages and supply-chain disruptions. Some 57% are eying shifting investments or operations — or both — across the Atlantic over the next two years.
Other
Oil giant Shell braces for shareholder revolt over climate plans after record profits, writes CNBC. As EPM discussed last week, Follow This, a small Dutch activist investor and campaign group with stakes in several Big Oil companies, has tabled a resolution at Shell’s shareholder meeting. Climate Resolution 26 calls on Shell to align its climate targets with the landmark Paris Agreement and commit to absolute carbon emissions cuts by 2030, including Scope 3 emissions. Proxy shareholder ISS has recommended a vote against the resolution.