Energy, Politics & Money - 27 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, we look at:
Aramco’s new investment in China – with Chinese arms manufacturer NORINCO
The outlook for crude oil in Iraq
The state of US bank deposits, which carries a shorter-term story (record withdrawals from smaller banks over recent weeks) and a longer-term story (big withdrawals from all banks since early 2021)
Russia’s decision to station tactical nuclear weapons in Belarus
Details of what Chinese during president’s Xi’s and Russian president Putin agreed in Moscow last week
The visit of Brazilian president Lula da Silva to China this week
Seymour Hersh’s response to the York Times story about the Nordstream 2 sabotage, which the American newspaper argued was due to “non-governmental Ukrainians”
The EU’s new Critical Raw Materials Act (CRMA) which aims to “significantly improve” Europe's domestic extraction, processing and recycling capacity for metals such as lithium and rare earths
The electricity transmission grid upgrade required by Germany’s plan to become 100% renewables based by 2035, which has a $150 billion price-tag
The growing focus of politicians on cows, to be precise the methane they produce in their digestion process
Renewed investor pressure on Europe’s chemical companies to decarbonize
General Energy News
Oil prices slid (again) on Friday, writes the Financial Times, after US energy secretary Jennifer Granholm said it would take “years” to replenish the country’s strategic stockpiles, undermining hopes that the federal government would soon return to the market as a major buyer.
Saudi Aramco signed an agreement with Chinese partners for an oil refinery and petrochemical project in northeast China, writes Reuters. The facility is expected to start in 2026 to meet the country’s growing demand for fuel and chemicals. The project in Liaoning province's city of Panjin will be Aramco's second major refining-petrochemical investment in China. Joint venture Huajin Aramco Petrochemical Company (HAPCO) will build and operate the complex that will house a 300,000 barrels per day (bpd) oil refinery and a cracker with annual production capacity of 1.65 million tonnes of ethylene and 2 million tonnes of paraxylene. The project is expected to cost 83.7 billion yuan ($12.2 billion). State-owned NORINCO Group, a Chinese military equipment maker, owns 51% of HAPCO while Aramco and Panjin Xincheng hold stakes of 30% and 19%, respectively. Aramco will supply up to 210,000 bpd of crude oil as feedstock for the plant.
Iraq's oil output and capacity may peak following growth of around 25% over the next five years, analysts said, falling short of 2027 targets, writes Reuters based on various consultant analyses. Since 2016, Iraq's output has stalled at around 4.5 million barrels per day (bpd). The country has repeatedly delayed a target to reach 7-8 million bpd capacity, from this current level. Capacity is likely to peak and plateau at 6.3 million bpd by 2028, before declining, FGE says. Politics, security and the investment environment were all contributing to prevent Iraq from pushing output higher than that. Rystad Energy expects production to be limited to 5.5 million bpd by 2027 as a result of midstream growth limitations and because projects that are crucial to boosting output are stuck.
Macroeconomics
Deposits at small U.S. banks dropped by a record amount following the collapse of Silicon Valley Bank on March 10, Reuters reports, by a total of $119 billion to $5.46 trillion in the week ending March 15. Over the same period, deposits at large US banks rose $67 billion to $10.74 trillion. But, and this we at EPM believe is important, overall US bank deposits have been in sharp decline since rising due to the pandemic aid in 2020 and early 2021.
The CEO of the Australia and New Zealand Banking Group has said that the latest turmoil in the global banking system has the potential to trigger a financial crisis, though it was early to predict it could bring one similar to that in 2008, writes Reuters:
… it’s clearly not over. I don’t think you can sit here and say, ‘Well, that’s all done, Silicon Valley Bank and Credit Suisse and, you know, life will go back to normal’. These things tend to roll through over a long period of time.
Geopolitics
Undoubtedly the biggest geopolitical news came from Russia this weekend, which said it will station tactical nuclear weapons in Belarus. Putin likened his plans to the US stationing its weapons in Europe and said that Russia would not be transferring control to Belarus. Although not unexpected and not in violation of nuclear non-proliferation promises, Reuters says it is one of the Russia's most pronounced nuclear signals since the beginning of its invasion of Ukraine 13 months ago. It is unclear where in Belarus the weapons would be stationed, but the transfer will expand Russia’s nuclear strike ability along NATO’s eastern border.
The South China Morning Post has some more details about what China and Russia agreed during president’s Xi’s visit to president Putin in Moscow. More energy cooperation is planned before 2030 and both agreed to work together in areas of technology where they are being strangled by the US. In addition to civil aircraft construction, shipbuilding and car manufacturing, the two countries will join hands in research and artificial intelligence, the Internet of Things, 5G and the digital economy, many of which are facing bans from the US. The two countries also vowed to steadily increase the proportion of local currency settlement in bilateral trade.
On Sunday, President Luiz Inácio Lula da Silva headed to China for a visit set to last an entire week – a sharp contrast to the roughly forty-eight hours Lula spent in Washington during his visit last month, writes Responsible Statecraft. It says, “The Brazilian president will be meeting with a Chinese head of state who just met personally with Putin to impress upon him the need for a negotiated settlement”. Lula will almost certainly restate his support for that outcome, it predicts, as only recently Lula praised China’s framework for peace and criticized the US reluctance to push for an immediate negotiated settlement.
Meanwhile, over at his substack, Seymour Hersh has written a response to the recent New York Times story about the Nordstream 2 sabotage, which the American newspaper argued was due to “non-governmental Ukrainians”. “I was told by someone with access to diplomatic intelligence”, Hersh says, that during the recent meeting between Us president Biden and German chancellor Scholz “there was a discussion of the pipeline exposé and, as a result, certain elements in the Central Intelligence Agency were asked to prepare a cover story in collaboration with German intelligence that would provide the American and German press with an alternative version for the destruction of Nord Stream 2”. The EPM perspective on this focuses on the question “would Europe be angered if the US was indeed behind the sabotage?”. The answer, we believe, is now a clear “No”. Because if Hersh is right, the Germans are well aware of what happened to Nordstream, and possibly even involved – why otherwise would they collaborate with the US to create and promote a cover story?
Energy Transition & Technology News
The European Union has unveiled the accelerator in its drive to reduce its import dependency for critical minerals and metals, writes Reuters. The Critical Raw Materials Act (CRMA) “will significantly improve” Europe's domestic extraction, processing and recycling capacity for metals such as lithium and rare earths, the EU says. The CRMA covers a subset of the EU’s critical minerals list, with particular focus on battery metals like lithium, nickel, cobalt and manganese and magnet inputs such as boron and rare earths. For those metals on the list the target is for the region to mine 10%, process 40% and recycle 15% of what it consumes annually by 2030. By which time not more than 65% of any strategic metal's consumption will be able to come from a single third country.
Germany wants to obtain 80% of its 2030 power output from renewables such as wind and solar energy to meet a target of a 65% cut in overall CO2 emissions compared with 1990. Berlin also wants the power sector to be 100% green by 2035, while assuming a doubling of power demand by 2045. To get there, installed power capacity must rise five-fold from today’s level to reach 700 gigawatts in 2045. Boosting German power transmission lines to accommodate this shift to zero-carbon electricity will require 14,197 km of new networks, costing billions of euros, the country’s high voltage grid firms (TSOs) said according to Reuters. A plan of action calls for additional investments of 128.3 billion euros ($137.72 billion) from now up to 2045, of which 41.6 billion for onshore and 86.7 billion euros for offshore measures.
The global wind sector will face a supply chain crunch this decade, as looming bottlenecks for key components and ships are set to squeeze the sector, industry body the Global Wind Energy Council said according to the Financial Times. The squeeze will hit the US and Europe particularly hard as they both target an ambitious rollout of domestic renewable energy projects even as much of the wind industry’s supply chain is concentrated in China, the group said. GWEC said 2022 had been the third best year for new wind capacity installations despite the tough conditions, and forecast that 2023 would be the year the world reached 1TW of total installed wind capacity. However, it warned that policymakers “need to act now to avoid a supply chain bottleneck stalling the deployment of wind energy from 2026”.
Climate Politics
To meet the 2021 Glasgow pledge to reduce methane in the atmosphere by at least 30% by 2030, European Union states are discussing a proposal to impose emission limits on farms. In New Zealand, the government is looking to tax farmers based on factors like the number of animals kept, the fertilizers used and energy efficiency. Reuters says this is because digestion and waste from cows and other ruminants produce methane, the gas which is 80 times more powerful than carbon dioxide in trapping heat in the atmosphere in the first 20 years after its release. Methane emissions from agriculture hit 142 million metric tons in 2022, triple the amount of those from the oil sector, according to the International Energy Agency. What are the ways industry is trying to capture these emissions and use them productively, we ask.
Other
Investors managing more than $4 trillion in assets have told European chemical companies they must set out a path to move away from fossil fuels, saying that the sector's role in greenhouse gas emissions has been overlooked, reports Reuters. “Europe’s chemical companies need to know that action on decarbonization isn’t optional”, one investor is quoted as saying. The investors said the chemicals firms should establish credible decarbonization plans that include efforts to electrify chemical production processes and switching to greener energy sources. Other recommendations include chemical firms changing the raw materials used in chemical production processes to emissions-neutral materials instead of fossil fuels, and eliminating woody biomass as an energy source.