Energy, Politics & Money - 31 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, EPM looks at the Biden administration’s plan to develop hydrogen as another export commodity. This inspired EPM to share our view on the most likely outlook for hydrogen over the next decades. Our base case includes increase in global hydrogen demand, but, one that is significantly lower than current expectations. We therefore recommend to anyone thinking about developing their (blue) hydrogen strategy to move faster than competition and focus marketing efforts on existing sources for hydrogen demand rather than potential sources which might not materialize.
Furthermore, we look at:
The shorter-term outlook for crude oil
The reasons for distillate inventories in the US being at their lowest levels since 2008
The 3rd quarter profits of ExxonMobil and Chevron
The likely forward trajectory of Chinese energy demand growth, in particular fossil fuel energy demand, and its plans to ensure energy security
Threats by Qatar to reduce its LNG supplies to Europe if the continent goes ahead with its price cap plan for natural gas
The changes to global natural gas flows in 2022, and how these will fundamentally restructure the market going forward
Indonesia’s plans to establish an OPEC-like cartel for nickel and other key battery metals
Warnings from the copper industry that future supplies are unlikely to meet demand, and will thereby hold back the energy transition
The other fallout of the energy crisis we predicted here at EPM, namely the decrease in discretionary spending by consumers in Europe
Offers of money from the G7 to India, Indonesia, Vietnam and Thailand, to finance a move away from coal
Britain’s embarrassments when it comes to climate politics, as after organizing COP26, its new prime minister decides to not even attend COP27
Tesla’s efforts to secure sufficient supplies of critical materials for itself, which have included an outreach to Glencore to discuss a possibly tie-up
General Energy News
Crude oil is up about 10% in October, as the OPEC+ quota cut and a strong increase in Chinese purchases (which EPM covered earlier) offset the impact of China’s continuing Zero Covid policy and fears about a global recession. Brent for December settlement is at around $95, while WTI for December delivery is around $87, writes Bloomberg.
At EPM we explained before why we believe the OPEC+ in and off itself will not be driving prices much higher. But, the new round of sanctions on Russian liquids, planned for December, certainly will. Economic growth is significantly slowing, as evidenced by recent news about low port utilization rates in the US, lower factory activity in Vietnam, and inventories builds in the semiconductor sector, but on the whole, we expect the supply side to dominate over recent, pushing the crude oil price up.
Last week, the Energy Information Administration (EIA) reported that distillate inventories (mostly diesel, jet fuel and heating oil) were at their lowest levels since 2008. In 2008, however, distillate levels were low coming out of spring. Currently, they are low going into fall. That’s far worse than the situation in 2008. Forbes analyses why this is the case. US refinery capacity has fallen in the past few years as several unprofitable refineries were closed. And, sanctions have removed the nearly 700,000 barrels per day of liquids which prior to Russia’s invasion of Ukraine the US was importing from Russia.
Last week at EPM we covered the (close to) record profits of Shell and Equinor, today we cover the earnings of ExxonMobil and Chevron. ExxonMobil made $20 billion in the 3rd quarter of 2022, reports Reuters, a record. The company is spinning this as “the result of continued investment”, but we all know it is purely due to the markets for crude oil, natural gas and refined products, where sanctions have wreaked havoc, pushing prices up. In response to the cash bonanza, ExxonMobil will maintain its $30 billion share buyback through 2023 while increasing dividends – clearly prioritizing shareholders over investment, just as its competitors in Europe. Chevron reported its second-highest ever quarterly profit of $11 billion. Chevron has pledged to put the profits into raising shareholder dividends first, fossil fuel and clean energy investment and cutting debt second, and share buybacks third, reports Reuters.
An opinion piece in Nikkei Asia investigates at the potential implications of the remarks of China’s president Xi that the country would be targeting “high quality” growth henceforth. Combined with the Chinese government’s ongoing drive to lower the energy intensity of its gross domestic product, and grow the share of renewables and other greener energy sources in its consumption mix, this means China’s total energy demand will not grow at the 5% to 7% annually that was the norm over the past two decades.
As to LNG, Qatar is very unhappy with the European idea to cap natural gas prices. In an interview with Bloomberg, Qatar Energy CEO Saad Al Kaabi said interfering in markets contradicts the competition rules that Europe previously applied to producers. At EPM we see this as a clear example of what we forewarned about, the second-degree consequences Europe’s uninformed and rash judgements in the energy crises. Qatar had pledged to refrain from diverting cargoes away from Europe, even though it’s contractually allowed to re-route supply, after Russia’s invasion of Ukraine in February sent European gas prices rocketing. Qatar is sticking to that, but “nothing is permanent and we have the right to do what we like with our volumes,” said Kaabi. “But it was a promise that we made for a certain duration. When it’s appropriate for us to divert, we will.”
Further to natural gas, S&P Global has a piece explaining how in 2022 global product flows were disrupted, and another piece explaining how this is driving a complete restructuring of the global natural gas markets.
On coal, Bloomberg reports China is building a vast array of new coal-fired power stations, at least 165 gigawatts, as a backup energy system for cases of emergency. China’s strategy is designed to avoid the pitfall of halting investment in fossil fuel production and infrastructure before renewables were ready to take over. In other words, it’s all about ensuring energy security.
Macro-Economics
According to The Financial Times, European consumers have begun to cut back on discretionary spending as rising energy bills and interest rates push up the cost of living. Car sales, box office revenues and hotel bookings are all falling, according to high-frequency data indicators, while consumers have rapidly scaled back plans to make major purchases. Although the overall amount spent by consumers has continued to rise in recent months, the quantity of goods purchased is falling as inflation bites, sales data show.
Geopolitics
US Secretary of State Antony Blinken spoke on Saturday with his counterpart in India, External Affairs Minister Subrahmanyam Jaishankar, about Russia’s war on Ukraine, writes Nikkei Asia. Undoubtedly, India’s large increase in purchases of Russian oil was on the list of discussion topics. No details were provided of the content or outcome of the discussion, though. Jaishankar will next visit Russia on November 8.
Energy Transition & Technology News
The US plans to invest more than $7 billion to develop hydrogen production hubs with a goal of 10 million tonnes per annum by 2030. The objective is to become “a pillar of the hydrogen economy for decades to come”, David Crane, US President Joe Biden's nominee for undersecretary of energy, told Nikkei Asia. Crane said public investments related to decarbonization will reach $26 billion while the private sector will match that, bringing the total investment to about $50 billion. Among the export markets targeted by the plan is Japan, Crane also indicated.
The EPM view on hydrogen is as follows. Borrowing the vocabulary from Gartner’s “hype cycle”, we are of the opinion hydrogen remains firmly in the “peak of inflated expectations”-phase, where use-cases are greatly exaggerated. For most the use-cases discussed there are simpler and more cost-effective solution on the market already, that will have built out to scale by the time the hydrogen-based solutions become properly mature (~2030). Consequently, we expect future demand for hydrogen to be less than what most experts today predict. Our base case outlook is, therefore, an oversupply of (mostly blue) hydrogen during the 2030s, and consequently strong competition for the placement of hydrogen in the few markets that are putting a lot of money into developing their hydrogen economies, firstly Japan, secondly the European Union. Our advice to you is, therefore, if you want to play in Hydrogen, especially in case of blue, make sure you provide supply to the market soon, sooner than your competition, such that you can establish customer relations before your competition. Secondly, don’t overly focus your marketing efforts on new demand areas such as hydrogen for power or transportation, but rather target existing (black and grey) hydrogen demand centers, such as fertilizers, and refining and petrochemical operations. And of course, those few pockets of energy demand for which there are no proven alternatives for decarbonization aside hydrogen yet, such as large scale steel and aluminum.
Indonesia is studying the establishment of an Opec-like cartel for nickel and other key battery metals, writes The Financial Times. Indonesia is the world’s largest nickel producer, generating 38 per cent of global refined supply, and holds a quarter of the world’s reserves of the metal. The country has not yet approached other nickel producers with the idea, apparently, meaning it is in very early stages. Russia supplies a fifth of the high-purity nickel used in batteries, while Canada and Australia are also big producers. Indonesia is following Chile, Argentina and Bolivia, who have previously touted forming an Opec-like group to control global supply and pricing of lithium.
While these countries consider ways to manage supplies, the heads of the world’s largest producers of copper are warning the global plans to electrify economies and cut carbon emissions will be slowed down by copper supply shortages. “There is going to be a very significant shortage in copper” Freeport-McMoran CEO Richard Adkerson told The Financial Times. “It’s going to be very difficult to meet the aspirations that have been set.” Mining executives say the supply challenge is compounded by the downturn in the global economy, which has dragged copper prices lower and makes companies hesitant to invest in future supplies.
Climate Politics
Britain’s climate leadership unravels under Rishi Sunak, writes Politico. New Prime Minister Rishi Sunak won’t attend the next edition of the U.N. climate talks in Egypt, focusing on “pressing domestic commitments” instead. And, it has failed to pay out more than $300 million it promised to two key climate funds, leaving it facing further international embarrassment.
The G7 and its partners have made multi-billion dollar offers to wean Vietnam, Indonesia and India away from coal — but it has yet to convince these emerging economies to quit the dirtiest fossil fuel, writes Energy Voice. The three deals have been under negotiation for much of 2022 and at least two new partnerships could be announced during the COP27 UN climate talks in Egypt starting 6 November. Talks with Vietnam and Indonesia have progressed to the point where initial cash offers of around $5 billion and $10 billion, respectively, have been made. Talks with India have not progressed as far with Delhi more keen to discuss backing for renewable energy rather than phasing out its coal industry.
The Electrification of Transport
The concerns over material supplies has left EV manufacturers and battery makers scrambling to secure feed stocks. According to The Financial Times, this led Tesla to reach out to Glencore to talk about taking a stake in the Swiss commodities group. In the end, no deal was reached, as Tesla had concerns over Glencore’s extensive coal mining business, deemed incompatible with the car maker’s environmental goals, and was reluctant to take a minority equity stake.