Energy, Politics & Money - 28 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 highlight the speech by Daniel Yergin at the Energy Asia 2023 conference in Kuala Lumpur, in which he said that oil and gas will continue to be major parts of global energy supply, not for years to come but for decades to come.
Furthermore, we look at:
The recent overhaul of OPEC+ production quotas, and the production baselines from which quotas are calculated
The decline in corporate profitability in China, which is a further indicator of the weakness of its economy but raises hopes among some that Beijing will provide more support over coming months
The US efforts to bring India more firmly into its orbit, a critical element of the US strategy in its competition with China, in particular on the military front
Russia sending of two frigates to sail through waters near Taiwan
Why China has been willing to enter into military dialogue with Japan, but not with the US
The IRENA view that investment in the energy transition is currently too focused on a select few technologies, and in a select few countries
China rush into the energy storage business, and the maturing of its EV sector
The developing business of “drilling for hydrogen”
The new IFRS disclosure standards S1 and S2, with S1 being general Sustainability disclosure requirements, and IFRS S2 with Climate related disclosure requirements, that we at EPM believe will become mandatory relatively soon
General Energy News
"Oil and gas will continue to be major parts of global energy supply, not for years to come but for decades to come," Daniel Yergin said in a speech to the Energy Asia 2023 conference in Kuala Lumpur, writes Nikkei Asia. This aligns with the view that is emerging within our EPM network, namely that rather than reduce absolute oil and gas usage, the energy transition seems to be heading in a direction where the share of oil and gas is reduced. Renewables are more and more taking responsibility for the increase in energy demand, but they are not replacing the existing system.
Reuters looks at the recent reform of OPEC+ production quotas, and the production baselines from which quotas are calculated, have been a sensitive subject within OPEC for decades as most producers want a higher quota so they can earn more from oil exports. The share of Gulf producers has increased significantly over recent years. In May 2023, Saudi Arabia, the UAE and Kuwait's share of total OPEC production was over 10% higher than it was 15 years ago at 55%, according to OPEC production figures. Nigeria and Angola's total share over the same period has shrunk by over 3% to below 9%. Saudi Arabia and the United Arab Emirates have further plans in place to significantly boost their production capacity to 13 million bpd and 5 million bpd, respectively, by 2027 from current levels of about 12 and 4 million. These changes drove the most recent production quota overhaul. But, this increases tensions within the cartel.
Macroeconomics
Bad macroeconomic news keeps coming out of China at present. Reuters reports that annual profits at China's industrial firms extended a double-digit decline in the first five months as softening demand squeezed margins. Last month alone, industrial earnings contracted by 12.6% from a year earlier. Profits were down 18.2% in April. Foreign firms recorded a 13.6% decline in earnings in January-May, while private-sector companies posted a 21.3% slide, according to a breakdown of the data. Profits sank for 24 of 41 major industrial sectors during the period, with the petroleum, coal and fuel processing industry reporting the heftiest slump at 92.8%. Many economists expect policymakers to deliver more support measures to stabilise the economy.
Geopolitics
Nikkei Asia has a review of the Modi visit to the US this week. The strategic importance of this visit is hard to underestimate, in the EPM, as even US officials have said that by and large, India will decide who wins in the US – China competition. In this regard, India’s historic military relation with Russia is seen as a challenge for the US. But since 15 years, the US has worked hard to refocus India. Defense ties with Washington originally kicked off with the signing of the New Framework for India-U.S. Defense Relationship in 2005. Three years later, the two reached a deal to cooperate on nuclear energy for civil purposes. In 2016, the U.S. designated India as a "major defense partner," giving New Delhi access to sensitive and advanced military technologies. The U.S. and India have also signed a series of foundational defense agreements, including the 2016 Logistics Exchange Memorandum of Agreement, the 2018 Communications Compatibility and Security Agreement and the 2020 Basic Exchange and Cooperation Agreement. The U.S.-India Initiative on Critical and Emerging Technology launched in May 2022, meanwhile, aims "to drive co-development and coproduction of major defense platforms."
As a result, Russia's share of India's arms import for the 2018 to 2022 period was 45%, a big drop from the 64% level observed over the previous five years. Among the key outcomes of the Modi visit to the US was General Electric’s agreement to work with state-owned Hindustan Aeronautics to make F414 jet engines in India for the Tejas Mark 2 light combat aircraft now in development. India also has plans to procure General Atomics MQ-9B high-altitude, long-endurance drones, which will be a game changer as far as India's intelligence, surveillance and reconnaissance capabilities are concerned. India is not expected to completely wean itself off of Russian arms – Sukhoi Su-30 MKI fighter jets will remain the mainstay of the Indian Air Force and deliveries also started under a $5 billion deal reached in 2018 for the import of S-400 air defense systems.
Russia sent two frigates to sail through waters near Taiwan on Tuesday, Nikkei Asia reports, which says this rare move “could further heighten tensions in the region” – which we at EPM found notable since this is never said when the US or one of its (European) allies sails through the Strait. This does not indicate support for one or the other side in the competition on our part. We just intend to highlight the nature of most media organizations, which is that they tend to be aligned with a narrative, and only very rarely present all the different perspectives. In the EPM view, you need to be aware of all different perspectives to avoid being blindsided. Morally support or align with whomever you want, but make sure you have a 360 degree understanding of the subjects that will drive the markets, which includes knowing and understanding the perspectives you might not necessarily agree with, as well as those you personally might not want to be right.
Nikkei Asia looks at the question why China has been willing to enter into military dialogue with Japan, but not with the US. As you know, the EPM view is that Chinas issues with a US dialogue at this moment stem from the US sanctioning its minister of defense, general Li Shangfu. In addition, Nikkei Asia says, China hopes to be able to break some of the US allies in Asia such as Japan away from the US, hence the willingness to dialogue with them.
It’s not just nation states that China is trying to woo, but also international investors, writes Bloomberg. Chinese leader Xi Jinping again pledged that his nation would do right by foreign investors. “Development is the top priority of the Communist Party of China in governing and rejuvenating the country,” Xi told New Zealand Prime Minister Chris Hipkins during his official visit to Beijing on Tuesday. “We will continue to vigorously promote high-level opening up and better protect the rights and interests of foreign investors per the law,” Xi said.
Energy Transition & Technology News
Investment on energy transition is currently too focused on few technologies and countries, the International Renewable Energy Agency (IRENA) said in its 2023 outlook, according to Reuters. Investment in renewable energy reached $500 billion in 2022, IRENA said, adding that this was around one-third of the average investment needed each year to comply with the Paris accord. Most investments were in solar photovoltaic and wind power, with 95% channelled toward these technologies last year. "Greater volumes of funding need to flow to other energy transition technologies such as biofuels, hydropower and geothermal energy, as well as to sectors beyond power such as heating and transport," IRENA said. IRENA said that some 75% of global investment in renewables from 2013 to 2020 came from the private sector, adding that private capital tends to flow to the technologies and countries with the least associated risks. "Public funding is urgently needed to invest in basic energy infrastructure in the developing world, as well as to drive deployment in less mature technologies," the agency said. IRENA said that 85% of global renewable investment benefited less than 50% of the world's population last year. "A concerning trend is the geographic concentration [of energy transition progress], which remains limited to a few countries and regions. This pattern has excluded almost half of the global population, and particularly those in countries with significant energy access needs".
The country currently leading in the energy transition, China, has seen a recent rush of companies into the energy storage business. The number of Chinese enterprises registered as energy storage companies has more than doubled in the past three years to nearly 109,000, writes the Financial Times. Energy storage, which includes large battery packs for grid-level storage, is viewed as a key pillar in China’s energy system overhaul after Xi promised to cut net carbon dioxide emissions to nearly zero by 2060 and to hit peak carbon before 2030. Battery technology in particular supports the plan by the world’s biggest polluter to cut coal use and deploy massive amounts of solar and wind power. It provides back-up when renewable energy sources do not produce sufficient electricity.
Forbes looks at the developing business of “drilling for hydrogen”. It is based on the belief that there’s an untapped clean energy source deep underground that could provide vastly more power than we need: hydrogen created by natural geologic processes. The geologic conditions needed to generate it, iron-rich pockets of water near tectonic rifts, appear to be common and located worldwide, according to the U.S. Energy Department’s Advanced Research Projects Agency (ARPA). Big energy companies like Shell, BP and Chevron are joining a consortium created by the U.S. Geological Survey and Colorado School of Mines to study geologic hydrogen, but a handful of ambitious startups are already on the hunt. HyTerra and Natural Hydrogen Energy are preparing to drill for it in Nebraska and Kansas, and Gold Hydrogen is searching for it in Australia. French researchers believe it exists in old coal mines in the country’s Alsace-Lorraine region and are seeking it there. In Africa, Montreal-based Hydroma is already tapping a hydrogen well discovered years ago in Mali and is looking for more. Some analysts call for caution, however. While there’s a vast potential volume of geologic hydrogen globally, much of it may be too hard to get to, they say. “Most of this is going to be way too deep or too far offshore, or accumulations that are much too small that they would never be economic”.
The Electrification of Transport
China’s EV sector is matures, says Bloomberg. A group of roughly 500 registered EV manufacturers in 2019 has been whittled down to about a fifth of that size. The top four players now have a 60% market share and the Herfindahl-Hirschman Index, a measure used by antitrust regulators to decide if a market is tending toward oligopoly, suggests the industry is no longer competitive and is instead moderately concentrated. That would be terrible news if the players were dropping out because of declining sales volumes or margins across the industry. But that is not what’s happening. About 1.9 million electric and plug-in hybrid vehicles were sold between March and May, according to the country’s statistics bureau. Roughly a third of all cars sold in the country now come with a plug. That share will pass 50% by 2030 and in art due to competition, EVs in China will be cheaper to buy as soon as 2025.
Other
The International Sustainability Standards Board (ISSB) has published its standards IFRS S1 with general Sustainability disclosure requirements, and IFRS S2 with Climate related disclosure requirements. The objective of the standards, as with regular financial disclosures, is to standardize how companies measure, monitor and manage significant sustainability-related risks and opportunities and progress towards sustainability targets, particularly in relation to climate change adaptation and mitigation. The ISSB Standards are designed to ensure that companies provide sustainability-related information alongside financial statements—in the same reporting package. At EPM we believe this will in the (near) future become mandated by regulators.