Energy, Politics & Money - 29 September 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, we continue our analysis of the natural gas troubles facing Europe. Not only is its separation from Russian natural gas supplies now essentially, following the Nordstream acts of sabotage and a legal issue between Gazprom and Ukrainian gas transportation company Naftogaz also threatens to cut the remaining flow of natural gas from Russia to Europe.
Furthermore, we look at:
Russia’s proposal to OPEC+ to agree a 1 million barrels per day cut production
Concerns about “global contagion” following the UK’s implosion on the financial markets
The use of bio-technology to produce hydrogen from old, abandoned oil wells
Moves by the oil majors in solar, and by Japan in blue hydrogen / ammonia
Further warnings about an implosion of Europe’s industry, from both analysts and the EU Commission (which at the same time is pushing for an eighth sanctions package on Russia…)
General Energy News
OPEC+ PROPOSAL TO CUT 1 MILLION BOE/D?
According to Reuters, Russia is likely to propose that OPEC+ reduces oil output by around 1 million barrels per day at its next meeting in October. As EPM mentioned before, the OPEC quota has become largely irrelevant, since the cartel is producing millions of barrels less than targeted anyway. But depending on how this cut is allocated, e.g. if those countries produces at their quota like Saudi, it could provide upward support to the price. At the same time, we would argue that the October / November timeframe is a dangerous moment for OPEC+ to make big changes, as there is significant uncertainty hanging over the market related to the EU’s sixth sanctions package on Russia and the US’s price cap plan.
PEAK OIL - NOT AGAIN?
David Fickling of Bloomberg dares to call Peak Oil (again). US Federal Reserve Chairman Jerome Powell may have just delivered the coup de grace, he writes, thinking about what a global recession would do to that outlook. Oil consumption fell by more than 2% from peak to trough after the 1973 oil crisis and the 2008 financial meltdown, with output taking three years to recover to its former level. The drop was closer to 10% during the Covid-19 pandemic and in 1980, when the aftermath of the second oil crunch and the Iran-Iraq war collided with the monetary squeeze Powell’s predecessor Paul Volcker inflicted to wipe out the inflation of the previous decade. In each case, consumption didn’t just suffer a temporary blip — the direction of oil demand was permanently set back.
NORDSTREAM 1 & 2 - PERMANENTLY KAPUT?
Building on our assessment yesterday of the acts of sabotage on the Nordstream pipelines, Al Arabiya reports German security agencies fear the Nord Stream pipelines will become unusable forever. Quoting German daily Tagesspiegel, government sources said that if leaks in the two lines of Nord Stream are not repaired quickly, large volumes of salt water will flow into the pipelines and cause corrosion. We mentioned yesterday this would represent a permanent breakup between Europe and Russia when it comes to natural gas. In the short term, it greatly reduces Russia’s leverage vis-à-vis Europe, as it can no longer “dangle the carrot” of additional natural gas supplies in front of Europe as temperatures drop while we head into winter. Lastly, it will have implications for the parties on the fringes of Europe’s left and right, as it takes away their ability to incite the European populace against the established political parties by calling for a reopening of Nord Stream to lower energy prices across the continent.
LEGAL TROUBLES FOR GAZPROM
Further on natural gas, Ukrainian energy firm Naftogaz initiated a new arbitration proceeding against Gazprom, saying the Russian company has not paid transit fees for sending its gas to Europe via pipelines that cross Ukraine. In response, Russia has threatened sanction Naftogaz, the result of which would be that one of the last functioning Russian gas supply routes to Europe would be shut, reports Reuters.
Macro-Economics
CASCADING ECONOMIC TROUBLE IN THE UK
Following the implosion of UK stocks and bonds, Reuters reports concerns about contagion are increasing. As they should, in our view at EPM. Most analysts tend to look at how single disruptions can impact markets, but fail to connect the dots when multiple disruptions are occurring at the same time. This is what many countries around the world are facing today: general inflation, additional inflation in food and energy prices, a weakening currency driving a need to raise interest rates, and a weak fiscal position following the 2008 Global Financial Crisis and the Coronavirus pandemic. In this environment, small things (such as a tax reform in the UK) can create chaos in financial markets.
Geopolitics
PRE-EMPTIVE SANCTIONS TO DETER CHINA
As Taiwan and its Western partners, including the US and the EU, are discussing the possibility of imposing pre-emptive sanctions against China to deter any possible future invasion, over at Energy Intelligence Scott Ritters argues that sanctions as a policy have not been effective historically in achieving desired changes, and in the case of China, would likely fail to prevent a Chinese invasion of Taiwan and backfire on those seeking to implement them. He highlights, in particular, China’s recent successes in linking its economy with Central Asia as a possible alternative market for its goods.
Energy Transition & Technology News
HYDROGEN FROM OIL-EATING MICROBES
One of EPM’s favorite companies in the new energy technology area, Cemvita Factory, a Houston-based biotech company backed by Occidental, recently completed successful tests to produce hydrogen using oil-eating microbes. The company says it can produce hydrogen at a cost of $1 per kilogram, and it plans to sell the clean-burning fuel at market prices. But the tax credits signed into law as part of the Inflation Reduction Act will give the company an additional $3 per kilogram of revenue, Bloomberg reports.
SHELL GOES SOLAR IN AFRICA
Shell will purchase African solar provider Daystar Power as it expands its global renewables portfolio, reports Reuters. Daystar, headquartered in Lagos, provides off-grid power to commercial and industrial clients in Ghana, Nigeria, Senegal and Togo, offering solar and hybrid power solutions with battery storage. It has 300 power installations with solar capacity of 32 megawatts, but aims to boost capacity to 400 MW by 2025.
TOTALENERGIES GOES GREEN IN INDIA
TotalEnergies said it could sell a small part of its 20% stake in Adani Green Energy to cash in on the jump in the valuation of the Indian renewable energy producer, reports Bloomberg. The French company bought 20% of Adani Green in 2021 for $2 billion, building on a series of previous deals with Indian billionaire Gautam Adani. That stake was worth about $10 billion at the end of August, according to TotalEnergies.
LARGE BLUE AMMONIA PLAY ON THE TABLE IN JAPAN
Japanese trading house Mitsubishi is considering launching one of the world's largest blue ammonia production facilities in Texas, Nikkei Asia reports. The company envisions putting the ammonia hub online in the early 2030s, then gradually raising production capacity of the facility to as much as 10 million tonnes a year.
On the subject of blue and green ammonia, a task force set up by Japan's Ministry of Economy, Trade and Industry has estimated that the country's ammonia CFR price at $335-$339/mt from the Middle East, $413/mt from North America and $429/mt from Oceania as the main basis for developing its supply chain by 2030, reports S&P Global.
The Electrification of Transport
CHINESE EVS THREATEN LOCAL REFINERS
The Financial Times reports about concerns that China’s fascination with electric vehicles represents a long-term risk for its local refiners. China has already surpassed the government’s ambitious target of having 20 per cent of all new car sales as electric vehicles — two years ahead of its initial goal of 2025. We at EPM highlight that this is exactly why China is focusing on the integration of refining and petrochemicals, to reduce the output of fuels and increase that of petrochemicals.
The Global Energy Crisis
EURO ZONE MANUFACTURERS IN DANGER OF SHUTTING DOWN
At EPM we have many times forewarned that the price at which Europe is securing its energy supplies are making European industry uncompetitive in the global market place. Illuminem discusses the subject in an aptly entitle article, “Europe’s industrial sector could be wiped out by the energy crisis”.
Reuters reports among the industries considering a shutdown are Europe's generic drugmakers, who say they may cut output due to energy bills.
CAP ON GAS PRICES - RISK TO ENERGY SECURITY
Meanwhile, Reuters reports the EU has warned member countries that a cap on gas prices could be complex to launch and pose risks to energy security. A wholesale price cap for exchange transactions - covering both liquefied natural gas and pipeline supplies - could disrupt flows of fuel between EU countries, because price signals would no longer help drive flows to regions where demand is high or supply scarce, the EU’s Commission said. The EU would also need "significant financial resources" to ensure countries could keep attracting gas supplies from competitive global markets where other buyers may be willing to pay prices above the EU cap, the Commission said. Our view at EPM is that the EU Commission is of course correct in its assessment. And, we highlighted, much the same applies to the price cap proposed for Russian crude, which should therefore also be seen as “complex to launch and pose risks to energy security”. There are only two ways through which Europe can sustainably resolve its energy crisis, either lower demand significantly or increase supplies. Neither are realistic options over the coming 6 – 18 months, on our assessment. Which takes us back to the Illuminem article discussed above…
EU DOUBLES DOWN ON RUSSIAN SANCTIONS
Nevertheless, the EU is doubling down on sanctioning Russian energy. The Financial Times reports, the EU is to implement a price cap on Russian oil and widen the range of products covered by export bans as part of its eighth sanctions package.
ESG
ESG - TOO MUCH POWER TO CORPORATE EXECUTIVES & DIRECTORS
Vivek Ramaswamy is a 37-year-old Ohio-based former biotech entrepreneur, founder of a new investment firm called Strive Asset Management and polemicist author, arguing against ESG. The Financial Times reviewed his writings on the subject and found it contains some coherently constructed arguments that will offer provocative and perhaps usefully challenging reading for many in the ESG world. The core of Ramaswamy’s argument is not against action on climate change or social injustice — but rather against the hefty clout of corporate executives and directors (rather than democratically accountable politicians and institutions) in shaping how society tackles these challenges.