Energy, Politics & Money - 28 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In what is a light news day, in this roundup we look at:
Russia’s seaborne crude flows, which are holding steady at above 3 million barrels per day, which means the planned 500,000 barrel per day cut the country announced earlier has yet to show up in cargo data
The change in traders’ fundamental outlook on oil prices, sparked by the Russian oil exports and the banking crisis
Aramco’s new investments in China
China’s energy security priorities, and the visit by former Taiwan President Ma Ying-jeou
An informed assessment of the cost of green hydrogen by 2050, which comes in at $2 /kg rather than the much touted $0.5 /kg
The EU “Euro 7” proposal, which includes tighter limits for car emissions – for diesel cars, but not petrol – and for heavy-duty trucks and buses, including nitrogen oxide and carbon monoxide
General Energy News
Russia’s seaborne crude flows are holding strong, says Bloomberg. The nation’s shipments slid by 123,000 barrels a day to 3.11 million barrels a day in the seven days to March 24. It’s the sixth straight week they’ve held above 3 million a day. This means the planned 500,000 barrel per day cut the country announced earlier, has yet to show up in cargo data.
Portfolio investors sold oil-related futures and options contracts at the fastest rate for almost six years as traders prepared for the onset of a recession driven by tighter credit conditions in the aftermath of the banking crisis, writes John Kemp for Reuters. Hedge funds and other money managers sold the equivalent of 142 million barrels in the six most important contracts in the seven days ending on March 21, after selling 139 million barrels in the week to March 14, the fastest for any two week period since May 2017. Underlying the event is a change in outlook: credit creation and loan growth is now expected to decelerate more abruptly as financial institutions, especially smaller ones, attempt to fortify their balance sheets hurriedly to reduce the risk of runs. This, while Russia’s crude and diesel exports have continued largely uninterrupted, has fundamentally lowered the outlook for oil prices.
Javier Blas of Bloomberg looks at the new Aramco investments in China. On Sunday, it announced that construction of a new 300,000 barrel-a-day refinery in China would go ahead in the second quarter after securing all administrative approvals. Aramco owns 30% of the project, and said it would supply 210,000 barrels a day of crude to the new complex. On Monday, it said it would buy a 10% stake, worth $3.6 billion, in a Rongsheng Petrochemical, which co-owns the largest refinery in China, one with a capacity of 800,000 barrels a day. As part of the deal, Aramco said it would supply 480,000 barrels a day to the refinery. It’s a well-worn strategy, he says, as the Saudis did the same in other big petroleum markets, investing in refiners from Japan to the US to South Korea. In exchange for their equity, the Saudis locked in sales of their oil. It’s a money-for-crude investment that guarantees the Saudis steady demand for their oil.
Geopolitics
The fact that energy security is taking a backseat at China’s most important political meetings of the year, means that recent efforts to bolster energy security through domestic mechanisms have been successful and China feels it is able to weather any immediate disruptions to supply or markets, writes S&P Global.
During the first session of the 14th National People’s Congress March 13, Xi said
We need to better coordinate development and security. Security is the foundation of development and stability is the prerequisite for prosperity.
For the energy sector, this translated to maximizing domestic sources like coal and ramping up investment in domestic production across hydrocarbons, including oil and gas. In China’s view, excessive dependence on oil and gas imports, an LNG sector increasingly dominated by the US and Australia, and a global payments system dominated by the petrodollar pose challenges to energy security.
Former Taiwan President Ma Ying-jeou is visiting China where he said, according to Reuters
People on both sides of the Taiwan Strait are Chinese people, and are both descendants of the Yan and Yellow Emperors
Descendants of the Yan and Yellow Emperors is an expression referring to a common ancestor for Chinese people, i.e. Chinese ethnicity rather than nationality. This is noteworthy because most Taiwanese no longer identify as Chinese, according to polls. The EPM perspective on this is that it indicates there are forces in Taiwan that wish to steer clear of war, through maintain ties with China.
Energy Transition & Technology News
Commodities analyst CRU argues hydrogen is unlikely to reach the prices levels that are commonly assumed for the period 2030 – 2050. It says,
Projections of $0.5 /kg costs do not stand up to rigorous, techno-economic assessment, (and that these projections) are misleading because they imply that no great change to the economics of the global energy system is needed and that the energy transition will be easy.
CRU believes that even for green hydrogen production facilities in very favourable renewable energy locations, ~$2 /kg is already a stretch goal for 2050. This is equivalent to a 50–70% fall from current levels, depending on the country measured, and is largely due to halved renewable power costs and a 75% reduction in electrolyser system CAPEX. Further, apart from the EU, the UK, and China, which are expected to have access to low-cost renewable energy by 2050 and/or relatively high carbon prices, most countries exhibit green hydrogen costs by 2050 that are above current costs for blue and grey hydrogen.
The Electrification of Transport
European Union countries and lawmakers will negotiate “Euro 7” proposals this year on tighter limits for car emissions - for diesel cars, but not petrol/gasoline - and for heavy-duty trucks and buses, including nitrogen oxide and carbon monoxide, reports Reuters. The Commission’s proposal widens real-driving emissions (RDE) testing and adds continuous testing of emissions via an on-board monitoring system. Euro 7 would take effect in mid-2025 for cars and in mid-2027 for trucks and buses. The rules would also cover tyre/tire and brake emissions. European carmakers are fighting back against proposed emission regulations they argue are too costly. The EPM perspective is that these emissions targeted regulations will offer much more support to the electrification of transport than “bans” on the sale of ICEVs in some distant future, as it supports the EV cost advantage over ICEV.