Energy, Politics & Money - 26 June 2023
Providing independent, objective, & always politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we take a closer look at how EV adoption will affect the oil & gas industry. China is the proverbial “canary in the coal mine” when it comes to this subject, as the country is world leading in both refining and petro-chemical capacity and EV adoption. In response, its refiners are switching to petrochemicals output, to reduce production of gasoline. As a result, a glut in petrochemicals supply is developing. Instead of being an export destination for other petro-chemical manufacturers, China is becoming a major exporter, which will have far reach implications for petro-chemical players around the world.
Furthermore, we look at:
The continued dominance of fossil fuel in the global energy equation, despite the rise in renewables, according to the Statistical Review of World Energy report
Aramco’s outlook for 2023 oil demand
The “back to the future” for natural gas, as natural gas demand outlooks are upgraded by the IOCs
The outcome of the rebellion by Wagner boss Yevgeny Prigozhin against the heads of the regular Russian army
The clear communication by the world energy majors that they will not be the ones leading the energy transition
The venturing by the IOCs into lithium production – from brine, such that they can leverage their conventional upstream production capabilities
Why hydrogen does not have a future in road transport
The latest trend in Climate Politics, which is about opening up the developing world for private investment in climate solutions
The most concrete outcomes of the climate financing summit in Paris
The call to the EU by some of the world’s largest corporations leading to set more ambitious emissions standards for trucks, with the argument that more zero emission vehicles are urgently needed to reach the bloc’s climate goals
General Energy News
Global energy demand rose 1% last year, and record renewables growth did nothing to shift the dominance of fossil fuels – oil, gas and coal – which still accounted for 82% of supply, writes Reuters on the basis of the Statistical Review of World Energy report released on Monday. The annual report, a benchmark for the industry, was published for the first time by the Energy Institute together with consultancies KPMG and Kearny after they took it over from BP, which had authored the report since the 1950s.
Global oil market fundamentals are expected to remain sound for the rest of the year, says Saudi Aramco CEO Amin Nasser according to Reuters. Nasser told the Energy Asia conference.
Overall, we believe that oil market fundamentals remain generally sound for the rest of the year. Despite the recession risks in several OECD countries, the economies of developing countries – especially China and India – are driving healthy oil demand growth of more than 2 million barrels per day this year.
Beyond oil and 2023, Bloomberg says the IOCs are upgrading their demand outlooks for natural gas. The world’s top producers plan to accelerate investments in the fuel, it says. And China keeps signing deals to buy liquefied natural gas past 2050. This is another area where forecast-thinking has returned to where it was before, i.e. a “back to the future”. LNG was at one stage hailed as a “bridge fuel”, a lower carbon alternative for coal and liquid fuels for the period when renewables would not be sufficiently scaled. This idea was attacked by the environmental lobby, which led to the view that there might be a gas glut as the energy transition would develop faster than expected. But now the bridge fuel vision is firmly back in the driving seat.
China is the true “canary in the coal mine” when it comes to the impact of EV adoption on the oil & gas business. Other countries such as Norway may have higher EV adoption rates at present, but unlike China they do not have a large refining industry. So if you want to get an early glimpse of how depressed demand for gasoline due to EV adoption will play out across oil & gas, it’s China you need to be looking at. The country is relentlessly adding new petrochemical capacity despite a global demand glut, writes Reuters, because its refiners need to diversify away from transport fuels. Newly launched refinery complexes by state giant PetroChina's Guangdong Petrochemical and privately-run Jiangsu Shenghong Petrochemical have added to surging petrochemical supply from mega refiners Zhejiang Petrochemical Corp and Hengli Petrochemical that has come online in recent years. Despite resulting margin pressures, these Chinese producers are likely to keep plants operating to protect market share and prevent deeper losses that would result from shutting units. The world's largest producer and consumer of petrochemicals, China has been unable to absorb the extra output domestically, and thus Chinese exports are growing. To get a sense of the scale of the coming problem for the global petrochemicals industry, global demand for ethylene and propylene is forecast to grow 29% by 2030, while capacity is expected to jump 25%, Wood Mackenzie estimates. New capacity in China is expected to make up more than half of that growth, according to the International Energy Agency. "The surplus of olefins will be pushed onto the water to clear elsewhere in Asia or further afield in Europe and the U.S. at steep discounts," Energy Aspects analysts said in a note.
Geopolitics
The situation inside Russia seems to have been brought under control, writes the South China Morning Post. The head of Russia’s Wagner mercenary force, Yevgeny Prigozhin will move to Belarus, under security guarantees from Russian president Vladimir Putin. The criminal case that had been opened against Prigozhin for armed mutiny will be dropped, and the Wagner fighters who had taken part in his “march for justice” will not face any action, “in recognition of their previous service to Russia”. Wagner-fighters who had not taken part, meanwhile, will sign contracts with the Defence Ministry, which has been seeking to bring all autonomous volunteer forces under its control by July 1. A few notes from the EPM perspective. First, we note that Prigozhin never rebelled against Putin. Instead, his tirades were directed at the leadership of Russia’s military, Defence Minister Sergei Shoigu and Chief of the General Staff Valery Gerasimov. In fact, Prigozhin had demanded they be handed over to him, and he said his men were on their “march for justice” to remove corrupt and incompetent Russian commanders he blames for botching the war in Ukraine. Second, we note that the situation is now truly and firmly resolved. Shoigu and Gerasimov remain in their position, and their position is in fact strengthened by the departure of Prigozhin and the integration of the Wagner units into the regular Russian army. In other words, according to The Conversation, exactly what triggered Prigozhin has now been concluded.
Energy Transition & Technology News
Bloomberg says the global energy majors have over recent weeks answered the question how they will spend the windfall profits from 2022. The options were extract more oil and gas, move their businesses into renewable power and energy transition assets, or return money to shareholders. ExxonMobil, Chevron, BP, Shell and TotalEnergies “choose cash over climate”, it says, supported by shareholders who overwhelmingly voted against tesolutions that would have forced the companies to align with Paris Agreement climate targets. At EPM we agree with this assessment. Energy Transition Strategy is dead at the IOCs, because its shareholders are not interested in it, as evidenced by the fact that BP and Shell were never rewarded for taking the lead in the area. As a result, at EPM we believe the IOCs are now setting themselves up to die along with the demand for fossil fuels – because it will be the Nation Oil Companies that will be supplying whatever demand remains. Investors justify their demand for maximum cash returns by the IOCs at the expense of investing in the longer-term by arguing that they prefer to invest in energy transition focused companies, rather than companies with a legacy in fossil fuels. This would have been different, we at EPM believe, if the IOCs had much earlier developed a new energies arm, and ran it as a separate company away from core fossil fuels – something we advised them as early as 2015.
ExxonMobil, Schlumberger, Occidental Petroleum and Equinor are exploring whether their core skills of pumping, processing and re-injecting underground fluids such as oil and water could be deployed to process lithium from unconventional brine resources, writes the Financial Times. It quotes an analyst as saying, “It’s a natural evolution for oil companies. Lithium brines are an obvious one as unlike charging networks and wind farms, where they have no skills besides project management, they are skilled at subsurface pumping and fluids.”
Mining company BHP has made up its mind on the drive train debate, writes The Drive. The company said:
Our view that an electrified mining fleet is more economical and more achievable than the alternative fuel sources. Each year our Australian operations use roughly 1,500 mega litres of diesel in over 1,000 pieces of equipment. Over half of this is used in our truck fleets. Electrification is the preferred pathway to eliminate this diesel. Part of the reason for this is energy efficiency.
BHP says it will have its first battery electric haul truck for trials in 2024. The company also said it does not expect operating costs to be affected by its decision.
Our initial modeling suggests the cost [of electric] will be the same or less to operate compared to diesel.
According to Alexander Vlaskamp, CEO of Europe's second-largest truck maker MAN, hydrogen-fuelled trucks will only play a small role in Europe’s zero-emissions transport future, with the vast majority of logistics vehicles set to be battery electric, writes Hydrogen Insight. “E-mobility is coming now. The technology is mature and most efficient. In our estimation, 80[%] or even 90% of logistics trucks will be electrically driven,” he told Austrian newspaper Der Standard. “We see today that [green] hydrogen is far too expensive,” he said, adding that it is about four to five times as costly as what customers are willing to pay. “Therefore, hydrogen will only be used in a small segment in Europe, such as for special transport,” Vlaskamp explained.
Finnish biofuel producer Neste in May completed a 1.6 billion-euro ($1.7 billion) expansion of its biofuel refinery in Singapore and has started producing sustainable aviation fuel (SAF) from used cooking oil and waste animal fat, writes Nikkei Asia. The market leader, already producing SAF in Europe, will have an annual capacity of 1 million tons (1.26 billion liters).
Climate Politics
Last week EPM reported on the climate financing summit in Paris, where we said its objective was to move the conversation away from aid for the developing world, toward public and private “investment” – i.e. “for profit” undertakings – in the developing world. The leaders of the developed world, including US president Biden, the EU’s Ursula Von Der Leyen, and France’s president Macron, have put their names below an article on Project Syndicate that explains in more detail what this entails. “A top priority is to continue ambitious reform of our system of multilateral development banks, building on the existing momentum. We are asking development banks to take responsible steps to do much more with existing resources and to increase financing capacity and private capital mobilization”, it says. “Public finance will remain essential to achieving our goals… But we acknowledge that meeting our development and climate goals will require new, innovative, and sustainable sources of finance … Achieving our development goals, including climate mitigation, will also depend on scaling up private capital flows.”
Bloomberg has a summary of the most concrete outcomes of the climate financing summit in Paris. First, many rich countries will reallocate a portion of their own IMF Special Drawing Rights (SDRs) to benefit countries with greater needs for emergency funding. The sums committed added up to around $100 billion. France was the frontrunner, giving away 40% of its SDRs. As a result, the IMF announced that its the Resilience and Sustainability Trust, a tool that enables developing countries to fund green projects, now has $41 billion available, much of that money coming from the reallocation of SDRs. The IMF has now set a new goal to grow the trust to $60 billion. Another outcome of the Paris summit was that most countries in attendance agreed that multilateral development banks must be reformed. The talks set out a timetable to get it done, outlining major achievements that can be touted at COP28 in Dubai in November. As EPM went through the details of the Bloomberg article, we found this was about all that came out of the summit. Bloomberg notes, as EPM has done before as well, that none of the agreements get the world close to the $100 billion in climate mitigation support originally promised to the developing world.
Dozens of leading companies including PepsiCo, Heineken and Nike, are calling on the EU to set more ambitious emissions standards for trucks, arguing that more zero emission vehicles are urgently needed to reach the bloc’s climate goals, writes the Financial Times. In a letter to EU environment ministers seen by the Financial Times, 41 businesses argue that if the bloc is to achieve its overall goal of reducing emissions by 55 per cent by 2030 it is “essential for us that a rapidly growing number of zero emission trucks become available for purchase in the next few years”. Nestlé and Maersk are also among the signatories.