Energy, Politics & Money - 23 September 2022
Independent analysis of global developments in energy, geopolitics, and money curated just for you!
In this roundup, we discuss the impact the Russian crude oil price is likely to have. Our conclusion: higher crude oil prices for everyone who agrees to the cap, and lower prices for anyone who doesn’t.
Furthermore, we look at:
The announcement of Petronas’ new, Renewable energy focused subsidiary Gentari, as well as the rumours about Shell’s new CEO Wael Sawan targeting a big acquisition in Renewables
The mea culpa by World Bank President David Malpass on the subject of climate change, which indicates the continued strength of the energy transition agenda
The warning to Europe by the IEA’s chief to avoid competing over energy supplies and to continue to form a unified block, which confirms our assessment early on that the energy crisis is existential for the EU project
General Energy News
CHINA’S COSTLY COVID STRATEGY
In what is a clear indication of the country’s economic weakness, due to its Zero Covid strategy and real estate weakness, based on an analysis of official statistics Reuters concludes China has been building up crude oil and refined product inventories despite relatively low imports.
CAP ON RUSSIAN OIL WORKING?
The planned Western price cap on Russian oil is already making a difference, US Treasury Secretary Janet Yellen said on Thursday, noting that Russia was now offering China and India “enormous discounts” while looking for other outlets for its oil, reports Reuters.
RUSSIAN OIL CAP TO FAIL?
Bloomberg highlights another way in which the price cap plan could fail. Volumes currently heading to Europe, Japan and South Korea will need to find a new destination, as these countries are unlikely to offer Russia anything other than the price cap, for political reasons. But, for these volumes to find new homes requires additional or longer shipping. And there’s a big question if Russia or the remaining buyers will be able to organize this. Ships are in short supply, as is insurance. As a consequence, at least some part of Russia’s current crude sales will not be able to find a new home, which will push up prices.
EMP ON RUSSIA’S STRATEGY
As we mentioned before at EPM, we believe Russia will make good on its promise to not sell to its crude oil to countries that abide by the price cap. This will mean that the supply demand balance will be disturbed by the price cap plan, raising prices. At the same time, for the countries that will continue to buy Russian oil, this is an opportunity as they will be able to secure additional discounts from Russia. The energy cost gap between China and India on the one hand, and Europe (and the rest of the world) on the other, which gives the prior an advantage in the global economy, will therefore widen.
Macro-Economics
CHINA’S REAL ESTATE BAILOUT
China has enough ammunition to salvage its beleaguered property sector, as total bailout funds could reach $501 billion with central government support, reports Bloomberg. This confirms our initial hypothesis here at EPM that the Chinese government would not allow an implosion of its real estate sector.
Geopolitics
RUSSIA INCREASES ITS MILITARY BUDGET
Russia is looking to spend far more on the military over the next two years than initially planned, reports Bloomberg, as Russia tailors the budget to the needs of a longer and increasingly costly war in Ukraine. This indicates that in Russian thinking, there is no quick resolution of the Ukraine conflict, and thus no quick resolution of the energy crisis that has resulted from the energy sanctions that resulted from it. Or, they’re beginning to realize replacing lost weapons, re-stocking ammunition, and soldier salaries will cost them much more?
Energy Transition & Technology News
PETRONA’S NEW ENERGY SUBSIDIARY
Petronas today announced a new subsidiary, Gentari, which is to be a one-stop integrated clean energy solutions provider, reports Hydrocarbon Processing. The new company is to offer a suite of renewable energy, hydrogen and green mobility solutions for commercial, industrial, and retail customers. Gentari will build an overall energy capacity of 30-40 GW in key markets by 2030, through utility-scale projects across solar, onshore and offshore wind, and battery storage, targeting commercial, industrial, and retail customers. For hydrogen, GENTARI targets to offer cost-competitive low carbon hydrogen solutions via a comprehensive global supply network for both export and domestic demand, with an aspiration to produce up to 1.2 MMtpy of clean hydrogen by 2030. GENTARI’s Green Mobility commitments include supporting the electric vehicle (EV) ecosystem by capturing 10% market share. To deliver this, it is estimated GENTARI will need to pursue the delivery of 25,000 public charging points across key markets in Asia Pacific by 2030, with a mid-term target of up to 9,000 public charging points by 2026, anchoring its presence in Malaysia and India. It is also offering Vehicle-as-a-Service (VaaS) solutions starting with Light-duty Electric Vehicles, as well as value-added services such as digital platforms, data analytics and advertising.
SHELL’S CEO TO BUILD RENEWABLE BUSINESS
Shell's incoming Chief Executive Wael Sawan is set to accelerate the group's drive to build its renewable energy business, including through a possible “transformative” clean power acquisition, company and industry sources said according to Reuters. Our EPM perspective is as follows. After announcing an ambition to become the largest electricity player in the world a few years back, Shell quite quickly backtracked on this through its most recent strategy update under which it is essentially dropped any electricity generation ambitions to focus instead on the trading and marketing of electrons. It has done a number of smaller- to medium-size acquisitions in this area, and attempted some bigger ones as well as in the case of its failed offer for Eneco back in 2021. We are therefore closely watching where in the “electron value chain” Sawan will put his money. If it is in transmission, distribution and marketing he will communicate a continuation of the current strategy. If, instead, he goes into electricity generation in a big way, his appointment can be said to mark a change in the company’s strategy. Since the above explains that Shell has already changed its strategy a few times over recent years, we at EPM believe another strategy change is unlikely – and would not reflect well on the company.
33% OF CHINA’S ENERGY FROM RENEWABLES BY 2025
China is on track to meet its 33% electricity consumption target from renewables by 2025 and could comfortably exceed it amid ongoing efforts to debottleneck the power grid to accommodate more renewables, reports S&P Global.
Climate Politics
WORLD BANK PRESIDENT FLIP FLOPS ON CLIMATE SCIENCE
World Bank President David Malpass came under heavy criticism on Wednesday after he declined to say whether he accepts the scientific consensus on global warming, writes Reuters. Malpass appeared at an event hosted by the New York Times at Climate Week in New York City. After the criticism morphed in calls for resignation, Malpass on Thursday changed his perspective, saying it was clear greenhouse emissions are causing climate change, Reuters also reports. This story clearly indicates the continued strength of the energy transition agenda in international politics, despite the global energy crisis.
The Global Energy Crisis
EUROPE OVEROPTIMISTIC IN FACE OF ENERGY CRISIS
Over the summer, at EPM we argued against the sense of optimism that dominated reporting on Europe’s energy crisis. We said at the time that the availability of supply was not the critical issue, but rather the price at which this supply could be made available. And, that this price would be too high to keep households above water and industries in competitive. On this, we have been proven right. We also forewarned that Europe’s planned intervention would struggle to manage the situation, as the cost to do so will quickly become prohibitive. When that moment arrives, European solidarity becomes key, regarding which we said it is likely to be too weak to keep the bloc together when the going really gets tough. Hungary’s outreach to Russia was a first indication we were correct on this too. The Financial Times reports, IEA chief Fatih Birol has used exactly our scenario to warn Europe against a scramble for energy security this winter, that would shatter EU unity and trigger social unrest. “The implications will be very bad for energy, very bad for the economy, but extremely bad politically,” Birol said.