Energy, Politics & Money - 25 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, we take a closer look at how, as a result of efforts to reduce Russia’s influence in the global energy markets, China’s importance is growing.
China was handed a uniquely profitable opportunity in 2022 to become a critical supplier of diesel for the world economy. It had access to discounted Russian barrels of crude oil which it could refine and then export the resulting fuels to countries that had reduced their imports of Russian crude oil. Fortunately for Europe, which is preparing to ban the import of Russian diesel at the end of next week, China intends to continue exporting higher-than-normal volumes of diesel over coming months.
With natural gas and while global demand for LNG is increasing as the flow of Russian pipeline gas to Europe was greatly reduced, China led the world in purchasing long term contracts with LNG suppliers Qatar, the US and Australia – thereby maneuvering Europe into a very difficult and likely expensive position.
All of this is of course quite ironic. The result of efforts to sideline Russia has increased the influence of China, Russia’s main partner, and who of the two, according to the US, are the West’s main geostrategic competitors.
Furthermore, we look at:
The margin crash in the global polymer markets, which we at EPM see as indicative of the global recession we have been warning of since mid-2022
The book “No Miracles Needed: How Today’s Technology Can Save Our Climate and Clean Our Air”, by Stanford University professor Mark Jacobson
Geothermal in Indonesia, where projects are taking off as international players search for ways to access green electricity for their decarbonization plans
ExxonMobil’s next push forward in “CCS as a service”, as it is about to sign a MOU with Nippon Steel, whose CO2 is to be stored in reservoirs in Australia
ExxonMobil’s call for tighter regulation – not in the area of taxation (of course) but in the area of Upstream flaring, because there the company believes it can outperform competition
French bank BNP Paribas’ decision to reduce the money it has outstanding with the oil extraction and production industries to less than one billion euros ($1.1 billion) by 2030, an 80% decline from its current balance of five billion euros
General Energy News
Over at Reuters, John Kemp notes how China has been critical in the world finding sufficient refined fuel supply for demand. As a recap for our EPM readers, during the third quarter of 2022 China increased the volume of export licenses. Demand from its domestic economy was low due to the Covid restrictions, while its refining industry had access to cheap Russian (and other) barrels. So in order to support the economy, Beijing allowed its refining segment to run at full, through allowing it to export more. This of course was great for the rest of the world, which was looking for supplies after sanctions on Russian crude oil. As Europe prepares for a new round of sanctions, this time targeting Russian refined products including diesel, Kemp notes Chinese diesel exports are likely to remain higher-than-normal for several months, following the allocation of another large tranche of export quotas at the start of 2023. Our EPM view is that all this is of course quite ironic. The West is trying to reduce the influence over global energy markets of Russian, the result of which is a growing influence of Russia main partner China, which according to the US is the West’s main geostrategic competitor of the two.
Chinese buyers account for 40% of recent long-term LNG contracts, notes Nikkei Asia. Over 2021 and 2022, China closed long-term LNG purchasing contracts worth nearly 50 million tonnes a year. Most notable are Sinopec reaching a 27-year agreement with state-owned QatarEnergy late last year to buy 4 million tonnes of LNG annually, and ENN Group signing a contract last year with Texas-based Energy Transfer to buy 2.7 million tonnes of LNG annually for 20 years.
The party’s over for polymer industry writes S&P Global as higher interest rates, inflation, and oversupply offset the COVID-fueled polymer demand increases of past three years. The COVID crisis pushed prices to record highs in 2020, 2021 and 2022. But today, economic uncertainty looms and producers and traders are facing soft demand, oversupply, and consequently razor-thin margins. At EPM we want to note that since the petro chemical industry is at the start of a wide variety of value chains, this is an early indicator of macro-demand in the global economy. The current situation in polymers is indicative of the global recession we have been warning for since mid-2022.
Over at Forbes, Mike Lynch reviews the recent comments by Jeffrey Currie of Goldman Sachs, who said about oil in 2023, “Does anyone remember what happened to oil prices from January of ‘07 to July of ‘08? The Fed takes their foot off the brake, China puts the pedal to the metal, Europe starts to grow quickly’ and oil prices rose by $100 a barrel”. Lynch is less convinced of that happening again this year. He says he is “moderately confident” that Russian exports will not drop as predicted, while Chinese demand could very well be higher than the IEA’s forecast, thereby offsetting price increases. Ultimately, then, Lynch argues, the issue will boil down to whether or not OPEC+ increases quotas if the market tightens or lets prices rise but the pressure on the market does not seem severe.
Macroeconomics
Bloomberg writes investors in Europe are scrambling as they try to refinance real estate linked debt just as higher interests have pushed the value of the underlying assets down. Loans, bonds, and other debt totaling about €1.9 trillion ($2.1 trillion) — nearly the size of the Italian economy — are secured against commercial property or extended to landlords in Europe and the UK. Roughly 20% of that, or about €390 billion, will mature this year. “Europe is going to go through the great unwind of 10 years of easy money”, one analyst is quoted as saying. “The amount of distress and dislocation is off the spectrum”.
Geopolitics
As Germany agrees to sending Leopard 2 tanks to Ukraine (according to Bloomberg it will supply 14 pieces and allow other countries to export parts of their inventory to Ukraine), Bloomberg asks a very pertinent question: Is Europe sleepwalking into a major war in the Balkans (again)? There remain unhealed wounds from the prior Balkans war, the article says, and tensions between Serbia and Kosovo have been flaring in a way that for some was reminiscent of the start of the prior Balkans war in the 1990s.
Energy Transition & Technology News
Stanford University professor Mark Jacobson has a new book out, “No Miracles Needed: How Today’s Technology Can Save Our Climate and Clean Our Air”. According to a review by The Guardian Jacobson argues wind, water, and solar can provide plentiful and cheap power. “Bill Gates said we have to put a lot of money into miracle technologies”, Jacobson says. “But we don’t – we have the technologies that we need. We have wind, solar, geothermal, hydro, electric cars. We have batteries, heat pumps, energy efficiency. We have 95% of the technologies right now that we need to solve the problem.” The missing 5% is for long-distance aircraft and ships, for which hydrogen-powered fuel cells can be developed. Jacobson considers hydrogen, carbon capture, and SMRs expensive distractions from the real solutions.
Geothermal projects are taking off in Indonesia, drawing investments from Japan’s Inpex, Singapore’s Start Energy and other players, writes Nikkei Asia. Abundant resources are the main attraction. Indonesia’s geothermal resources are estimated at 27,790 MW, which ranks second in the world only behind the US. Global decarbonization efforts are also providing tailwinds – where (and this is an EPM comment) the regulatory environment has not. Until the regulatory environment changes, EPM fears that for all its potential, Indonesian geothermal will continue to disappoint.
Nippon Steel is considering capturing carbon dioxide emissions from its Japanese steel mills for underground storage at facilities linked to ExxonMobil in countries including Australia, Malaysia and Indonesia, Nikkei Asia writes. Nippon Steel, Exxon Mobil’s Singapore unit and Japanese trading house Mitsubishi Corp. will sign a memorandum of understanding on Wednesday to start discussions on the project. Mitsubishi, which connected Nippon Steel and ExxonMobil, would handle transportation, such as by shipping liquefied CO2 to depleted gas fields and other storage sites using specialized vessels. ExxonMobil is slated to bring a new carbon capture and storage facility online in southeastern Australia during 2025. It is partnering with local energy companies in Malaysia and Indonesia to explore opportunities in those countries as well.
Climate Politics
In further evidence that the US’ Inflation Reduction Act is delivering upon its target to incentivize the supply chains of new energies to establish themselves in the US, Marvel Fusion, one of the few European start-ups trying to deliver zero-carbon fusion power, is being pushed by investors to move to the US in order to capture the IRA incentives, writes the Financial Times.
ESG
Would you believe that ExxonMobil is calling for tighter regulation? Not in the area of taxation of course. But rather in the area of Upstream flaring – because that is where the company believes it can outperform its competition. “We need strong regulations so it doesn't matter who owns the facility”, ExxonMobil’s chief environmental scientist is quoted by Reuters as saying.
Reuters reports that French bank BNP Paribas has pledged to slash the money it has outstanding with the oil extraction and production industries to less than € 1.0 billion ($1.1 billion) by 2030 which represents an 80% decline from its current balance of € 5.0 billion. The lender said it stopped financing oil projects back in 2016, but Tuesday's commitment will accelerate the pace at which it reduces outstanding financing for oil extraction and production as part of its efforts to curb carbon emission and meet climate goals.