Energy Politics & Money - 30 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we look at:
Aramco’s first international Upstream venture
The tentative deal to suspend the US federal government's debt ceiling
The recession in Germany, which in the best case is to be a long, drawn out, moderate one
The likelihood of India’s economy developing to its potential over the coming decades, which in the EPK view is lower than commonly assumed
Confirmation of EPM’s original assessment last week of the decision to train Ukrainians fighter pilots in the use of western made jets, which was that this is the outcome of a long and thought through process, that targets even further support for the Ukrainian military, which would establish a permanent military threat on Russia’s western border, and thus lead to escalation in the current war
The US complaint that China’s banning of Micron memory chips is “economic coercion” that can not be tolerated, which exposes one of the main US geostrategic weaknesses in the EPM view, namely the country’s hypocrisy in global affairs
The overview of the 10 different pathways to biofuels; where we share the EPM perspective that only aviation and marine should use biofuels, made from waste
A review the potential of sodium-based batteries
A review of the sectors of energy demand where green hydrogen could play a role, and what it would cost to enabled that
The continuing debate around offsetting, this time in the form of a spat between the UN and the Carbon Capture Coalition (CCC)
The withdrawal of the world’s largest insurers from the Net-Zero Insurance Alliance (NZIA), following accusations from U.S. Republican attorneys general that insurers are violating antitrust laws
General Energy News
Oil advanced in early morning trading on Monday, after President Joe Biden and House Speaker Kevin McCarthy reached a tentative deal over the weekend on the US debt ceiling (more on that below in Macroeconomics). Brent for July settlement advanced 0.7% to $77.49 a barrel and WTI for July delivery rose 0.8% to $73.28 a barrel, writes Bloomberg.
Saudi oil giant Aramco will develop a gas field in Iraq that could produce more than 400 million cubic feet of gas per day, says Iraqi Oil Minister Hayan Abdel-Ghani according to Reuters. Aramco will invest and develop Akkas gas field in the western Iraqi Anbar province, according to a statement from the Iraqi oil ministry. The statement added that there was also an initial agreement with Saudi Arabia to invest in the Nebras project, "one of the most promising strategic projects in the petrochemical industries in Iraq and the region". EPM notes this would represent the company’s first international Upstream venture (not counting the neutral zone it shares with Kuwait), and raises a host of questions as to what its strategy might be in this area.
Macroeconomics
U.S. President Joe Biden and top congressional Republican Kevin McCarthy reached a tentative deal to suspend the federal government's $31.4 trillion debt ceiling, writes Reuters. The deal suspends the debt limit through January of 2025, while capping spending in the 2024 and 2025 budgets, claw back unused COVID funds, speed up the permitting process for some energy projects and includes some extra work requirements for food aid programs for poor Americans.
Germany’s slipped into recession and everyone in Europe should be worried, says Politico. The latest first-quarter growth estimate showed the German economy contracting by 0.3 percent. That followed a shrinking of 0.5 percent in the final quarter of 2022. It also quotes an analyst as saying "A fundamental improvement is not in sight”, as all important leading indicators in the manufacturing sector are now falling. Another analyst says "The optimism at the start of the year seems to have given way to more of a sense of reality", pointing to declining purchasing power, thinned-out industrial order books, as well as expected drags of tighter monetary and weaker U.S. growth. “On top of these cyclical factors, the ongoing war in Ukraine, demographic change and the current energy transition will structurally weigh on the German economy in the coming years.”
The South China Morning Post has an opinion piece with the title “Why India will continue to lag behind China as a global economic power”. It says that India’s “old power structures and vested interests continue to shackle economic change”, blocking the radical political or economic changes that turbocharged China’s economic growth from the late 1970s. It is an assessment that EPM agrees with. True development requires more than just “potential”, measured in population or natural resources. It requires a strong central state, that wisely guides the nation without succumbing to the pressures of influential minority groups. (For more on this subject see “Why Nations Fail” by Acemoglu and Robinson.) We have seen to little of that in India, as a result of which we believe its changes of truly developing its potential remain limited.
Geopolitics
Politico says that exactly as we at EPM said last week in response to the announced training of Ukrainians fighter pilots in the use of western made jets, this has indeed been in the making for months. It says the US policy has been to gradually increase support for Ukraine, in order to prevent it being seen as escalating the conflict. That is why floats an idea to supply a new kind of weapon, to then communicate resistance and hesitancy, but after a while it supports it and makes it happen. This process has played out with Stinger anti-aircraft missiles after the start of the full-scale invasion last year, the Patriot missile defense system in December, M1 Abrams tanks in January, and now again with F-16s. The US believes that Russia rarely escalates beyond rhetoric, even as the West has introduced more military offerings into Ukraine over the past year, and therefore feels comfortable to supply Ukraine with weapon system that make the Ukrianian military “future ready”. “However this war ends, and whenever it ends, Ukraine is going to have one of the largest militaries on the continent, and they’re going to have a long border with Russia going forward,” one US official is quoted as saying. “So they’re gonna need a modern air force for that effort no matter what happens.” In the EPM view this clearly communicates an ambition on the US side to establish a permanent military threat on Russia’s western border.
Responsible Statecraft explains why the decisions around the F-16 for Ukraine are so dangerous. They require enormous amounts of maintenance, and they require long and relatively well-maintained runways. The Ukrainians can’t maintain them, and don’t have the necessary runways. So either the “Ukrainian” F-16 will have to be operated from NATO bases in eastern Europe, or the West is going to have to put Western maintenance crews in Ukraine to do the maintenance there at airports that have been upgraded with western support. Both these options make NATO personnel an active part of the war.
Just when we thought we had heard and seen it all, we read in Nikkei Asia that the US "won't tolerate" China's ban on purchases of Micron Technology memory chips, and is working closely with allies to address such "economic coercion". US Commerce Secretary Gina Raimondo said the Chinese "target a single U.S. company without any basis in fact, and we see it as plain and simple economic coercion and we won't tolerate it, nor do we think it will be successful". At EPM, our minds are drifting off to Huawei, and the US efforts over the past 18 months to make The Netherlands and Japan end sales of critical inputs into the semiconductor industry. Therefore, we believe that if an unstated objective of the Chinese was to highlight US hypocrisy, they succeeded spectacularly. And this is the bigger geostrategic picture. Both the US and China need international alliances in their competition. The current weakness of the US is that over the past 20 years it has acted hypocritically (wars in the Balkans and Iraq without UN support; economic coercion on Cuba, Iran, Venezuela, Russia and China; even a threat of sanctions on Germany over the Nordstream 2 pipeline), which has caused significant levels of distrust among some of the key nations the US needs to ally with, such as India. We expect this to become a major issue for the US, as undoubtedly the Russians and Chinese will work to bring global awareness of the differences between US words and actions, to worsen the distrust in the western camp.
The above-mentioned distrust has been clearly visible in the response of the “Global South” to the US narrative around the Ukraine War. A recent example is Malaysia's former Prime Minister Mahathir Mohamad, who after watching the G-7 in Japan said that these countries will not throw their weight behind it. Nikkei Asia quotes Mahathir as saying, "Brazil, India and Indonesia, these people do not want war. They will not be supportive of the war between Russia and Ukraine." He also said that at the G-7 it felt as if the rich economies were "trying to persuade the Global South that they should support the war." He also stressed the need for Asia to "free ourselves from Western domination in the economic field as well as in the political field." Mahathir suggested creating an East Asian currency for trade, arguing that this would blunt the influence of the U.S. dollar.
Energy Transition & Technology News
Over at CleanTechnica, Michael Barnard has summarized the pathways to biofuels. He identifies 10 in total: #1 stalk cellulosic to ethanol to marine biodiesel or sustainable aviation fuel (SAF); #2 switchgrass to stalk cellulosic approaches; #3 corn ethanol; #4 sugarcane ethanol; #5 palm oil SAF; #6 livestock dung; #7 pyrolysis of biomass; #8 food waste; #9 anthropogenic biomethane; #10 green hydrogen. The EPM perspective on the subject is, first, that from a purely techno-economic perspective, the only segments of energy demand that should be using biofuels are aviation and marine. All other sectors of demand will be economically better off switching to electrification. Second, that biofuels from waste have the biggest potential, in particular agricultural waste. All other forms of biofuels will attract significant pushback from the environmental movements for the adverse impact they have on food production and/or biodiversity.
The Financial Times reviews the potential of sodium-based batteries. Lithium accounts for about 40 per cent of the cost of a lithium-ion battery cell. Sodium costs less because the earth’s crust contains about 1,300 times more of it than lithium. Sodium currently trades at about one-tenth the price of lithium. But, sodium has a lower energy density than lithium. Adjust for that factor and sodium’s true price advantage looks closer to 10 per cent versus currently popular lithium iron phosphate (LFP) batteries. On the plus side, sodium-based batteries tend to retain their charge longer, especially at low temperatures, than either LFP or energy-dense lithium nickel-manganese cobalt power cells. Sodium batteries are also less prone to overheating than lithium alternatives. The FT concludes that sodium-based batteries make more sense for some applications, such as smaller EVs and scooters which require less energy. And this is the key take away for EPM. The different battery chemistries have different strengths and weaknesses. We can see this developing into a battery market where the different chemistries live alongside of eachother, each targeting a different sector of battery demand.
The Financial Times also has analysis of what it would cost to make the green hydrogen available that is needed for a decarbonized energy system. The assumptions in the analysis are appropriate. It is assumed a decarbonisation solution only where direct electrification is not feasible. This means it plays a role in the hydrogen-based chemicals reactions of the refining and petrochemical industries, and the production of fertilizers, and fuel for ships in the form of ammonia. The FT adds to the pile of “likely solutions involving green hydrogen” two which we at EPM do not agree with: synthetic jet fuel (which we at EPM believe will always be the most expensive decarbonization solution for aviation) and industrial heat (which we at EPM will be electrified). The last use for green hydrogen is in energy storage, the FT says. All of these use cases together leads to 500 million tonnes of green hydrogen demand by 2050. The cost for this supply breaks down into three buckets: the renewable electricity needed to make the gas, the electrolysers used to split water into oxygen and hydrogen, and the infrastructure — pipelines, ships and storage sites — required to take the hydrogen where it is needed. Generating this amount of hydrogen will need almost 25,000TWh of renewable electricity a year, meaning 10TW of infrastructure, at an average cost of $800 per kW, so a total the investment of $8tn. The FT assumes electrolyzer costs will come down from $1,500 per kW today to $250 per kW by 2050. Using a midpoint of $875 per kW implies an investment requirement of $7tn. When it comes to infrastructure, the FT assumes $5tn without explaining. A total of around $20tn for a solution that is to meet some 10% of global energy demand by 2050 – which the FT notes is significantly more expensive than the current system for this same 10% of energy demand.
Climate Politics
Last week EPM covered the horrible PR regarding the offsetting industry, with the CEO of the largest accreditation body resigning after a scandal, and Chevron being accused of greenwashing through its offsetting practices. This week the debate around offsetting continues this, this time in the form of a spat between the UN and the Carbon Capture Coalition (CCC). Reuters reports that a United Nations scientific body named the Article 6.4 Supervisory Body released a report that casts doubt on the usefulness of CO2 removal technologies such as direct air capture in efforts to limit global warming. Obviously, the CCC strongly disagrees. "Scaling available engineered carbon dioxide removal (CDR) methods is increasingly recognized as a central component to both offsetting emissions in those sectors with challenging-to-abate emissions, such as shipping and aviation, and post-2050, reducing the concentration of CO2 remaining in the atmosphere," it says.
Other
Lloyd's from the UK, Australia's QBE Insurance, Germany's Allianz, France's AXA and SCOR, and Japan's SOMPO Holdings have all withdrawn from the Net-Zero Insurance Alliance (NZIA), following accusations from U.S. Republican attorneys general that insurers are violating antitrust laws, writes Reuters. A total of 10 have quit since March, when it counted 30 members.