Energy, Politics & Money - 28 July 2022
Welcome to the Energy, Politics & Money news feed of Thursday 28 July 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we review:
Record profit statements for International Oil Companies;
US monetary policy and how its been balanced - its neither contractionary or expansionary but will negatively impact countries buying USD priced commodities;
How Chinese consumer spending is not expected to rebound significantly and some saber rattling in the South China Sea;
US legislation - backed by House Democrats - will result in 40% fewer emissions;
How NOC views of decarbonization will lead to legal action in green activist countries;
Europe is out bidding developing countries in Asisa for energy; and,
Germany will charge consumers an energy levy that will add 1,000 Euro to the cost of living for the average consumer.
General Energy News
Shell and TotalEnergy reported record earnings for the second quarter of 2022. According to Reuters, Shell earned $11.5 billion, while TotalEnergies earned $9.8 billion. As predicted, the record earnings are translating into record share buybacks and balance sheet optimization, but far less is diverted to increase investment in conventional or new energy solutions.
Over in Spain, Repsol posted record earnings, totaling 2.54 billion euros ($2.59 billion) between January and June 2022, below market expectations primarily due to a 1.84 billion euros impairment in its refining business. According to Reuters, Repsol also announced the earnings increase will primarily be used for additional share buybacks.
Austrian energy and chemicals group OMV reported second quarter clean current cost of supplies (CCS) earnings before interest and tax (EBIT), which exclude special items and inventory gains or losses, of 2.94 billion euros ($3 billion) on Thursday, double last year’s, and beating analyst expectations for 2.79 billion euros.
In Finland, Neste, one of our favorite companies, reported April-June 2022 operating profit of 769 million euros ($785.61 million), beating the 700.8 million euro forecast.
French power group EDF, meanwhile, issued a new profit warning on Thursday. EDF said it now estimated the negative impact of lower nuclear production on its 2022 core earnings at 24 billion euros ($24.5 billion), a bigger hit than the 18.5 billion euros previously assumed. This news increases the likelihood of the French Government will nationalization the company (as reported earlier).
The Macro Environment (economics & geopolitics)
The Federal Reserve raised its benchmark overnight interest rate by another three-quarters of a percentage point on Wednesday, reports Reuters. The Fed has now raised its policy rate by a total of 225 basis points this year. Analysts are now at the stage of wondering if this will be it or whether more is to follow? Over at Bloomberg, Mohammed El Arian highlights that in an unscripted remark Powell said interest rates have reached a “neutral level”, which is shorthand for the crucially important notion that the level of interest rates is consistent with monetary policy being neither contractionary nor expansionary. Markets strengthened on the assumption this could mean no further rate increases, and a “soft landing” for the US economy. In another report, however, Bloomberg highlighted Powell also said the Federal Reserve will press on with the steepest tightening of monetary policy in a generation to curb surging inflation, without giving specific guidance as to how much a future rate increase could be.
The Fed’s act will provide further support for strengthening the dollar, which is already trading at record levels. This strong dollar boosts profits for oil producers and exporters of raw materials, as well as international companies that book a large chunk of their earnings in the US. But, it hammers almost everyone else. As Bloomberg reports, tech behemoths that repatriate part of their global earnings back to the US are taking a hit. We note the issue left undiscussed in the article is the impact the high US dollar has on countries relying on the import of US dollar traded commodities – amidst high market prices; their bill in local currency just gets higher and higher.
As to the crisis in China’s real estate sector, as we predicted, the Chinese Government is not going to let this lead to an implosion of the economy. The Financial Times reports Beijing is seeking to mobilise up to Rmb1tn ($148bn) of loans for millions of stalled property developments, in its most ambitious attempt to revive the debt-stricken sector and head off a backlash by homebuyers.
An opinion piece over at S&P Global argues that these and other planned post Covid-19 lock downs economic measures may not be enough to drive Chinese consumer demand back up.
As to geopolitics, in what we see as a sign of ever increasing tension between the US and China, the USS Ronald Reagan, a Nimitz-class nuclear-powered super carrier, and its strike group entered the South China Sea amid rising tensions with China over a potential Taiwan visit by House Speaker Nancy Pelosi. In the past, China ramped its military activities around Taiwan up to signal its displeasure with high-profile visits. While the People’s Liberation Army could step up sea and air patrols during Pelosi’s potential visit to Taiwan, anything more severe is unlikely, defense policy specialists believe.
Transport Electrification
Nothing to share today.
ESG
The Economist notes that while climate activists love to vilify ExxonMobil and Shell, the extent to which the energy transition is successful, will depend in a very large part on the behaviour of the world’s National Oil Companies, such as ADNOC of the United Arab Emirates (UAW), Saudi Aramco (KSA), PDVSA (Venezuela) and QatarEnergy (Qatar) who together produce three-fifths of the world’s crude and half its natural gas. The Economist observes that decarbonization strategies of the NOCs differ from climate activist expectations. We expect, eventually, the climate lobby will catch on and all these companies will face legal challenges in the countries where they sell they products.
The Global Energy Crisis
Pretty much as we predicted a few weeks back, the developing world is slowly but steadily being squeezed out of energy markets. Europe is willing and able to outbid the developing world on any tender of natural gas, crude oil, or its derivatives. And, as Bloomberg reports, the resulting high cost of energy is causing traders to shun sales to countries such Pakistan, Sri Lanka, and Bangladesh - they are demanding upfront payment to manage payment risk while banks are cutting financing for these countries.
Bloomberg also reports that over in Germany, the Government will end its efforts to shield consumers from the energy price increase from October onward. German households will have to start paying an energy levy thereby adding as much as 1,000 euros ($1,020) per year to the cost of living. We predicted that eventually consumers would be made to feel the pain of the Russian sanctions policy. When that happens it will be important to note the response -- will the general public signal willingness to contribute financial to the support of Ukraine, or will the cost of living increase translate into a demand for rethink on Russian sanctions?
Other
Reuters reported Wednesday, U.S. Senate Democrats finally agreed to nearly $370 billion in climate and energy security measures. Early versions of the bill had $555 billion in tax breaks for clean wind and solar power energy, batteries, and nuclear reactors. Wednesday's package is expected to result in a reduction of U.S. emissions of 40% by 2030. According to Bloomberg, the agreement left in-tact a proposal to charge oil and gas companies for excess methane emissions. Methane leaking from oil and gas wells, pipelines, and an array of other infrastructure would lead to fees rising to as much as $1,500 a ton in 2026 for some operators, according to the text of the agreement.