Energy, Politics & Money - 25 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you
In this roundup, we discuss the lower natural gas prices in Europe, which we at EPM believe creates an opportunity for Eurozone to act decisively to establish a workable temporary solution for Europe’s energy crisis which could calm markets by providing clear forward guidance. We also believe, however, Europe is likely to squander this opportunity – setting the continent up for another crisis if and when the weather makes a turns for the worse.
Furthermore, we look at:
The two topics dominating boardroom-conversations in the refining industry at present
Natural gas discoveries in China
The pain felt by working Americans as inflation reduces real wages
The waiver given by the US to South Korean semiconductor manufacturers with operations in China, which cause more concern rather than relief as they indicate the US is serious about forcing all non-Chinese semiconductor companies out of China
The practical obstacles to the development of offshore wind in the US
The EU’s last-ditch attempts to deliver on its decarbonization commitments ahead of COP27 next month in Egypt
Continued focus on decarbonization among some of the world’s largest investors and financial institutions
General Energy News
THE US TO IMPLEMENT HYDROCARBON PRODUCT EXPORT CONTROLS?
S&P Global looks at the two topics dominating boardroom-conversations in the refining industry at present. On the positive side, margins remain stubbornly high, due to tight diesel supplies while the Northern Hemisphere is heading into peak winter heating season. On the negative side are concerns the US will indeed, as we at EPM have predicted, implement product export controls to manage energy prices on the domestic US market.
SIGNIFICANT INCREASES IN CHINA’S NATURAL GAS RESERVES
As to natural gas, in two separate reports, Energy Voice discusses discoveries reported by the Chinese national oil companies CNOOC and Sinopec. CNOOC says it has found its first deep-water gas field in South China Sea, with proved gas in place of over 50 billion cubic metres. Sinopec, meanwhile, has said it has discovered major shale gas reserves in the country’s Sichuan basin. According to the company, “with a daily natural gas production reaching 258,600 cubic meters and an evaluated resource capacity of 387.8 billion cubic meters, it is a major breakthrough for China’s shale gas exploration”.
Macro-Economics
INFLATION HITTING AMERICAN WORKERS HARD
As an indication of how hard inflation is hitting consumers, Bloomberg reports over half of working Americans have considered holding multiple jobs to pay their living expenses as inflation causes real wages to fall. About 38% of workers have looked for a second job, while an additional 14% have plans to do so, according to a survey. At the same time, 18% of working adults said they had moved to an area with a lower cost of living to cut expenses, and another 13% plan to do so.
Geopolitics
KOREAN MEMORY CHIP PRODUCTION WAIVER EXTENDED FOR 1 YEAR BY US
Nikkei Asia reports Samsung Electronics and SK Hynix have received a waiver from the US to continue their chip manufacturing in China for another year. But both companies, which have big production footprints in China for memory chips, see the waiver as a deadline to make changes, rather than a sign that they will be allowed to continue to operate in the country. At EPM we have referred to the semiconductor industry as the “canary in the coalmine” for how the US – China Trade War is likely to affect the global economy (regionalization) and the companies operating in it (forced to join between two competing blocks and not allowed to operate in both).
ADDITIONAL US LIMITS ON CHINA PLANNED
Further evidence that what is happening in the semiconductor industry will be happening in other industries is the news that the Biden administration is considering limits on Chinese business deals in the US, as well as investments by US companies in China, also reported by Nikkei Asia.
Energy Transition & Technology News
BIDEN’S GREEN ENERGY PLANS FACE HEADWINDS
The Financial Times writes, the Biden administration wants to spark an American offshore wind power boom, growing the industry from less than 1 gigawatt today to 30GW by the end of the decade — enough to serve 10mn homes. But industry executives are increasingly concerned that a myriad of challenges facing the sector are pushing that target beyond reach: permitting is too slow, leases are too expensive, equipment is in short supply and becoming more expensive as inflation is soaring, they say.
Climate Politics
SAUDI ESTABLISHES VOLUNTARY CARBON MARKET
Saudi Arabia’s sovereign wealth fund PIF has started a voluntary carbon market firm and plans to auction a first million tons of credits on Tuesday, October 25, reports Bloomberg.
EUROPE RACING TO CODIFY GREEN LAWS BY COP27
The European Union is aiming to clinch deals on three new laws to fight climate change in time for COP27 next month, writes Reuters. The policies being fast-tracked are a law to ban sales of new fossil fuel cars in the EU by 2035, expand Europe's natural CO2-absorbing “sinks” like forests, and set binding national emissions-cutting goals.
SINGAPORE PLANS TO BE NET ZERO BY 2050
Singapore follows the pathway of China when it comes to decarbonization, planning to achieve peak carbon emissions by 2030 and net zero by 2050. According to Reuters, Deputy Prime Minister Lawrence Wong said on Tuesday the city-state has decided to bring its peak emissions in 2030 down from 65 to 60 million tonnes of CO2 equivalent in 2030.
The Electrification of Transport
AUSTRALIAN LITHIUM PRODUCER HEDGING BETS
In Australia, the world’s largest producer of lithium, the mining industry is hedging its bets, developing partnerships with both US and Chinese companies for the refining of the minerals to battery components, writes Nikkei Asia. Australia holds a 53% share of world lithium production, according to a 2021 estimate from the US Geological Survey. Most of the country's raw lithium is shipped to China, the top processor of the battery material. Processing lithium on Australian soil was long considered unprofitable because of high electricity and labor costs. But with the rise of the EV industry, the business environment has changed. Australian miner IGO in May started up a plant for battery-grade refining plant in Western Australia in partnership with Chinese company Tianqi Lithium. Mineral Resources, a mid-tier Australian miner, entered lithium refining through a partnership with US-based Albemarle.
The Global Energy Crisis
IEA – WORLD FACING FIRST TRULY GLOBAL ENERGY CRISIS
Fatih Birol, head of the International Energy Agency (IEA), said the world is at present in its “first truly global energy crisis”, writes Reuters.
EUROPEAN PLANS FOR THE ENERGY CRISIS – WHAT PLANS?
Europe continues to try and deal with the crisis, with still no clear view on the path forward. Reuters reports the EU will gather today to discuss options – a process that is likely to weeks.
EPM ANALYSIS
EUROPE’S OPPORTUNITY FOR RESOLVING THE ENERGY CRISIS
We at EPM believe the fact that natural gas prices on the continent have decreased significantly over recent days – less than euro 100 per megawatt hour and the lowest since the Russian invasion of Ukraine – creates an opportunity for the EU to act decisively.
However, we do not expect Europe to leverage this opportunity. The lower price has been attributed to lower demand due to relatively mild weather for this time of year, according to The Financial Times. In the case of the EU, this is likely to reduce the sense of urgency among policy makers and thus turn out to be an obstacle to progress toward a solution / workable temporary fix for Europe’s energy solution. The lower current prices should be used to push through a workable temporary fix – anticipating that the crisis situation Europe faces is a very real possibility as we progress through winter. Lower energy prices provides the EU with an opportunity to calm markets as it clarifies what will be done to provide relief to consumers and business in specific scenarios. But again, in the case of the EU, it is more likely this opportunity will go to waste, leaving policy makers scrambling if in November or December the weather happens to be worse than typical.
EUROPE – THE TIME TO ACT IS NOW
The need to act urgently and decisively is clear also to Peter Mandelson, former EU trade commissioner and UK business secretary writing for The Financial Times. Europe and the UK are at a crucial inflection point, he says. Policymakers in the European Commission know the region is facing a two to four-year energy crunch, given heavily constrained global liquefied natural gas markets, meaning the US, Qatar and other non-Russian sources of LNG are not going to “ride to the rescue” anytime soon. Quoting Winston Churchill’s exhortation to “never let a good crisis go to waste”, Mandelson calls for more regional collaboration, such as through interconnecting the natural gas and power systems, a new push to increase fossil fuel production from the North Sea, as well as wind power in that area.
NATURAL GAS PRICE CAP – A BAD IDEA?
As we mentioned here at EPM, the proposed price cap for natural gas has significant negative implications. Its first-order implications are clear and well understood, writes Reuters, quoting an EU document warning that an increase in gas use and exports of EU-subsidised electricity could result. EPM discussed the second-order implications of this policy. European governments will have to: subsidize gas purchases, as no international seller will move its product to Europe if it installs a price cap; and, compensate those who lose money on futures positions established before the price cap. Third-order implications include sending signals to power markets that the reliability and trustworthiness of Europe’s regulatory environment is questionable and will decrease trust in the power markets in the business community.
ESG
DECARBONIZATION TO BE BASED ON SCIENCE – BANKING COALITION
Although many investment firms have scaled back their focus on decarbonization, due to the current energy crisis, the subject has not gone away completely. Bloomberg writes a coalition of banks, asset managers and insurers overseeing a combined $36 trillion of assets have told some of the world’s biggest corporate emitters to make sure their targets for reducing CO2 emissions are based on science. Credit Agricole, Pacific Investment Management and UBS are among 317 financial firms that have written to over 1,000 companies urging them to set goals through the Science Based Targets initiative. Companies to receive the letter, which include BASF, Qantas Airways and Rio Tinto, are being asked to set emissions goals in line with the Paris agreement’s ambition of limiting global warming to 1.5C.