Energy, Politics & Money - 29 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in these chaotic times.
In this roundup, EPM takes a closer look at:
The failure of the European Union to agree on the exact price cap for Russian energy exports, which creates a tremendous risk for the global energy equation as apparently the position that will be defaulted to in case a price cap cannot be agreed is a complete ban on the import of Russian oil and refined products
The reaction by the Chinese government to protests against its Zero COVID policy, which we reported on yesterday; it is indeed as we foresaw a reaction of additional repression, indicating Zero COVID is most likely here to stay for the foreseeable future, and thus as well its impact on Chinese economic activity and energy demand
The plans of the UAEs ADNOC to grow its energy portfolio
The data coming out of the US Shale patch, where drilling & completing is picking up again, after a few years of completing mostly previously drilled but uncompleted wells, without there being a decline in average well productivity
The indications the US is organizing a broad military alliance in Asia against China; putting additional pressure on Europe to cut its economies ties to China; and wat this means for international business
What the euro 700 billion Europe has already spent on energy affordability really means for the outlook in Europe
Germany’s 15-year deal for 2 million tons of LNG supply annual starting 2026
BP’s Statistical Review of World Energy, for after over 70 years, the company is considering ending its publication because of its shift towards renewables
General Energy News
European Union governments failed to agree on Monday on a price cap on Russian seaborne crude oil, reports Reuters, with some countries calling for a higher cap to prevent their supplies of crude oil from being disrupted, while others with a focus on seriously affecting Russia’s fiscal position call for a lower cap. Bloomberg reports the EU is willing to go down to $62, but Poland and the Baltic countries deem that still too high. The members of the latter camp argue that if there is no agreement on the price cap idea by next Monday, the EU will need to implement the harshest measures agreed at the end of May, which is a complete ban on all Russian crude oil imports from December 5 onward, and on petroleum products from February 5 onward. EPM’s view is that this clearly indicates some in the European Union want to see actions against Russian energy exports that are as damaging as possible for Russia – irrespective of the fact that they will be very exceptionally damaging to the global energy equation as well (for reasons we explained over previous weeks). Because, it seems, the position that will be defaulted to in case a price cap cannot be agreed is a complete ban, this group of nations is in a strong negotiation position, and thus has the ability to negotiate the price cap down. This increases the likelihood of the price cap being agreed at a level that is closer to the Russian cost of production, i.e. the $40 per barrel that was floated earlier.
Yesterday in the General Energy News section we reviewed the protests in China against the country’s Zero COVID policy. At the time we mentioned the most likely path forward was additional repression, and continuation of Zero COVID, simply because China cannot afford any other policy at this stage – its vaccination rate is low in particular among the most vulnerable groups, the effectiveness of its vaccines is low, and the virus has not yet spread among the population in a natural manner as it has in Europe and North America because the Chinese have been so much more effective in their lockdowns policies. Today, Reuters reports Chinese police are out in force in Beijing and Shanghai to prevent more protests against Zero COVID restrictions. This indicates Zero COVID is most likely here to stay for the foreseeable future, and thus as well its impact on Chinese economic activity and energy demand.
The United Arab Emirates ADNOC will boost investment to $150 billion over the next five years, speed up an increase in oil-production capacity and list some of its natural gas business. It also said it would expand its international gas, chemicals and clean-energy operations, writes Bloomberg.
Mike Lynch looks at the US Shale production potential in an opinion piece for Forbes. Because shale drilling is highly responsive to prices and wells decline sharply, production can be added quickly but also declines rapidly if drilling is not maintained, he says. Thus, its trajectory is harder to predict than, say, deep-water, which once it is online will stay online for years. Lynch notes that following the crash of 2020, shale operators used their inventory of Drilled but Uncompleted (DUC) wells to maintain production levels. But over recent months, the number of new wells has kept par with the number of completions. He also notes the productivity per well completed is not declining in recent months, and even appears to be increasing slightly. This is interesting in light of the fact that the pessimistic outlook re US Shale is often based on the assumption that the best locations are drilled first, meaning that over time productivity and thus overall production must decline. Our EPM view is that this underestimates the power of human ingenuity that drives innovation. And that we believe is fundamentally what the data presented by Mike Lynch points to.
Macroeconomics
Euro zone inflation has not peaked and it risks turning out even higher than currently expected, European Central Bank President Christine Lagarde said according to Reuters. Consequently, more rate hikes should be expected in 2023.
Geopolitics
Nikkei Asia reports the top commander of the Indonesian military, General Andika Perkasa, is seeking more and wider joint military drills with other countries in the Indo-Pacific region, including Brunei, Malaysia and all four members of the Quad. The EPM view on this news is that it is clear evidence the US is organizing a military alliance against China in Asia. Perkasa himself is an alumnus of the Military College of Vermont in the US, and seen by the US as a strong supporter of close relations between the Indonesia and the US. For this reason, in 2020 the US bestowed upon him the Legion of Merit, Degree of Commander medal. In the Nikkei Asia interview Perkasa further mentioned that the more detailed planning for the joint military drills will be done together with US officials when they visit Indonesia early December.
Meanwhile, the Financial Times reports the US is also pushing its European allies to take a harder stance towards Beijing. In Europe, the US is trying to leverage its position on Ukraine to gain more support from NATO countries for its efforts to counter China in the Indo-Pacific. The Times reports the vast majority of NATO countries, including Germany and France, are reluctant to fully align their China postures with that of Washington. But at EPM we note, because of their dependency on the US military, Europe does not have much room to negotiate with the US on the subject.
As to what the likely future of Europe – China relations (influenced by the US) will mean for European industry, the Financial Times writes Dutch company ASM International (it develops and produces equipment used to produce semiconductor wafers and chips) has complained about US pressure on The Netherlands and Japan to make them abide by US restrictions targeting China. ASMI said this would affect about 40 per cent of its sales to China, which account for 16 per cent of group revenue. This confirms an earlier EPM warning that the US – China conflict will end globalization as we know it. All international organizations should expect to be put under pressure, at some moment in the future, to cut off ties to China if they want to continue to do business with the US-led western bloc.
Energy Transition & Technology News
A consignment of blue ammonia has left Saudi Arabia for South Korea, which according to Arab News is the world’s first independently certified blue ammonia shipment. The vessel Seasurfer is carrying 25 kilometer-tons of low-carbon blue ammonia, and is expected to reach its destination between December 9 and 13. Supplied by SABIC, it will be processed by Lotte Fine Chemical.
The Global Energy Crisis
On the subject of the affordability of Europe’s energy market intervention, to maintain energy affordability for households and industry, Bloomberg reports the tab has soared past €700 billion this month. To put that into context, this spend is almost equivalent to the EU’s landmark joint bond issuance program, launched to help cushion the region’s economy from the coronavirus pandemic. Germany spent already 7% of GDP, Italy and the Netherlands 5%, and the UK 4%. At EPM we warned, from the very beginning, that this plan would quickly turn out to be fiscally unsustainable. These numbers only strengthen our conviction that something will give in 2023 – either there will a sovereign debt crisis triggering and ECB intervention, which would crash the euro; or the prices paid by households and industry will be raised, causing massive social unrest with political consequences.
Undoubtedly influenced by its current energy crisis, Germany has agreed to a 15 year 2 million metric tonnes per annum natural gas deal with Qatar. Reuters reports, QatarEnergy and ConocoPhillips signed two sales and purchase agreements to export liquefied natural gas (LNG) to Germany from 2026. It is first such supply deal to Europe from Qatar's North Field expansion project. The LNG will depart from Ras Laffan in Qatar and arrive at Germany's northern LNG terminal of Brunsbuettel (the terminal is still under construction). At EPM we noted previously that the Europeans were not willing to sign such long-term deals for natural gas because long term deals were considered to be in conflict with Europe’s energy transition plan.
Other
BP is considering ending the publication of its Statistical Review of World Energy, over 70 years after it first published the benchmark report. The reason is the company’s shift to renewables, according to a Reuters report.