Energy, Politics & Money (EPM) - 03 Mar. 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, EPM takes a closer look at a challenge to the notion that oil and gas earnings will be reliably higher than returns from renewables and other less advanced challengers to fossil fuels. This view is based on the past, and the argument can be made that the future will be radically different from what the world experienced over the past 40 years – deregulation, globalization, lower interest rates and corporate taxes, and demographic growth are all about to come to an end. EPM’s view is that on this basis, oil and gas companies should re-consider their strategies for the future. But, we agree, that is something that short-term focused Wall Street investors will not want to hear during investor day strategy updates…
Furthermore, we look at:
How Shell’s backtracking on its plan to reduce oil output by 1% to 2% per year by 2030, together with other recently announcements, we at EPM see as the abandonment of the Ben van Beurden energy transition strategy
Nouriel Roubini repeated warnings that financial markets are at risk of a major slump in 2023
Bloomberg’s review of China’s new top economic policy makers
Energy Intelligence’s analysis of Russian president Putin’s recent Presidential Address, which we at EPM believe is likely the best review of Russian thinking and plans we have seen in a long time
The Quad’s declared unity on Ukraine, Russia and China
The US plan to add sanctions on China if it provides military support to Russia – something China has said it has no intention of doing while US officials have not publicly provided evidence for their assertion (and Biden even publicly downplaying it)
Plans of the Ambani and Adani, Indian conglomerates, for developing 25 gigawatts of renewable power in the southern Indian state of Andhra Pradesh
Profit warnings in Germany’s petrochemical industry due to the (relatively) high price of natural gas
General Energy News
Against the backdrop of rival BP recently rowing back from hydrocarbon output reduction aims, Reuters reports Shell too is reviewing its current plan to reduce oil output by 1% to 2% per year by 2030. New Chief Executive Officer Wael Sawan said
I am of a firm view that the world will need oil and gas for a long time to come. As such, cutting oil and gas production is not healthy.
Sawan is also exploring a sale of the company retail power business in Europe, which, we at EPM note, means he is challenging important pillars of the energy transition strategy inherited from his predecessor.
Russia’s ruptured undersea Nord Stream gas pipelines are set to be sealed up and mothballed. There are no immediate plans to repair or reactivate them Reuters reports. Gazprom has said it is technically possible to repair the ruptured lines, but Moscow sees little prospect of relations with the West improving enough in the foreseeable future for the pipelines to be needed.
Macroeconomic
In an interview with CNN, Nouriel Roubini warns about the prospect of higher than anticipated rates of inflation. He says this will leave central bankers torn between raising interest rates to fight inflation or lowering interest rates to alleviate debt burdens. The latter option would cause prices to spiral out of control and hit the economy with a major recession. His assessment is that in this scenario stocks could crash by as much as 30%.
China is about to see its biggest reshuffle in decades as a generation of internationally respected economic officials makes way for a new group of politicians which are, in the view of most western media, are better known for strong ties with President Xi Jinping than academic credentials or overseas exposure. This, Bloomberg says, is ratcheting up anxiety from Wall Street and Washington to the UK and Japan, with concerns the new lineup will prove to be Xi yes-men who take China further toward state intervention and international isolation — away from the path set by a dynasty of pro-market officials that have called the shots since Deng Xiaoping first opened the door between China and the world. Bloomberg offers an alternative perspective, which is that the new group could be seen as hardened pragmatists, rather than textbook academics, which might make them better suited to lead China’s economy into the future.
Geopolitics
Over at Energy Intelligence, Scot Ritter provides his analysis Russian president Putin’s recent Presidential Address. It told the careful listener much about where the Russian leader stands on the conflict and the anticipated trajectory of the country going forward. According to Ritter, what the informed listener should take away from Putin’s speech was that Russia firmly believes that in the Ukraine conflict, it is the aggrieved party, and that the perceptions shaped by this belief will dictate Russia’s perspectives on how this conflict will end. The Russian leader made the strategic goals of the Ukrainian conflict quite clear — the “social restoration” of the territories of the Donbas and “Noyvo Rossiya” (New Russia, comprising the districts of Kherson and Zaporizhzhia) that were annexed last year and will serve as an industrialized bridge connecting Crimea with the rest of Russia.
As for Russia’s military goals, the Russian leader emphasized that these would be set by the nature of the military assistance being provided by the West to Ukraine, in particular long-range artillery systems. Putin noted
The greater the range of these systems the further away we will be forced to move the threat from our borders.
Putin placed significant emphasis on what he called a war of “economic aggression” being waged by the West against Russia, the goal of which is to “destabilize our society from inside.” Putin claimed that, from the Russian perspective, this effort has failed miserably; he declared Russia stabilized its economy, preserved employment, solidified its financial system, created an economy capable of sustaining business and developing the nation as a whole. Putin’s emphasis of the economy over the military, and of economic and social growth over geopolitical expansion, should be noted by those trying to define the West’s support for Ukraine as resistance to a new era of Russian imperial power says Ritter.
India’s External Affairs Minister S. Jaishankar hosted US Secretary of State Antony Blinken, as well as Japan’s and Australia’s ministers of foreign affairs, Yoshimasa Hayashi and Penny Wong, for a Quadrilateral Security Dialogue meeting in New Delhi on Thursday, writes Nikkei Asia. In a communique, the quad members declared current nuclear threats were acceptable and that peace should be achieve in Ukraine, but, “in accordance with international law, including the United Nations Charter”, while also noting the rules-based global order “must respect sovereignty, territorial integrity, transparency and peaceful resolution of disputes.” The communique also noted the Quad’s opposition to “any unilateral attempt to change the status quo” – a clear and obvious reference to China’s recent diplomatic efforts. All these statements are closely aligned with the US narrative, we at EPM note, which indicates unity among the Quad members when it comes to Ukraine and Russia. It also indicates the US and its allies do not want China to engage in the conflict, in whatever way and through whatever means, military or diplomatic.
Russia responded to the Quad’s communique notes the Nikkei Asia. Russian Foreign Minister Sergey Lavrov complained the Ukraine conflict was being used to hijack multilateral platforms. At Thursday’s gathering of G-20 top diplomats, he said:
Our Western friends were shouting [on] microphones, ‘Russia must, Russia must, Russia must’. (Developing countries’) delegates were also saying, ‘We want to stop the war, when Russia is ready to negotiate?’
Calling out the hypocrisy of this, he said he asked current chair India and previous host Indonesia whether the grouping had ever reflected conflicts in Iraq, Libya, Afghanistan or Yugoslavia in its declarations.
Meanwhile, Reuters writes Germany’s chancellor Olaf Scholz is in Washington to discuss the Biden administration’s plan to sanction China if it provides military support to Russia. We at EPM China has said it has no intention of providing arms to Russia, while US officials have not publicly provided evidence for their assertion (and is downplayed by Biden).
Energy Transition & Technology News
The notion that oil and gas earnings will be reliably higher than returns from renewables and other, less advanced candidates to replace fossil fuels ignores the fact that when things are good in the oil patch, they can be very, very good, while when they are bad, they can be horrid, writes Sarah Miller for Energy Intelligence. She notes that most of what drove a very healthy business environment over the past 40 years – deregulation, globalization, lower interest rates and corporate taxes, and demographic growth – is about to come to an end. This is likely to translate into fundamentally different returns for all businesses in the future, including oil and gas. But, she says, the notion that consistent double-digit returns probably aren’t achievable from hydrocarbons — any more than they are from renewables or anything else — doesn’t have to be seen as a negative for oil and gas companies trying to navigate the transition. On the contrary, lowering the profitability bar for everybody lowers the pressure, which is surely a good thing for companies in a time of change as intense as the energy transition.
Indian conglomerates run by billionaires Mukesh Ambani and Gautam Adani said they will develop a combined 25 gigawatts of renewable power in the southern Indian state of Andhra Pradesh, writes Bloomberg. Ambani’s Reliance will build 10 gigawatts of solar power, while Adani is committed to constructing 15 gigawatts of renewables capacity over the next few years.
The Electrification of Transport
Mercedes-Benz has laid the foundation stone for a sustainable battery recycling factory in Kuppenheim, southern Germany, writes Reuters. The pilot plant will have an annual capacity of 2500 tonnes and will contribute to the production of more than 50,000 battery modules for new electric Mercedes-Benz vehicles. Recycled batteries will come from test vehicles and start-up batteries. Based on the pilot's success, production volumes could be scaled up in the medium to long term.
The Global Energy Crisis
German chemical companies Evonik and Covestro, which together employ more than 50,000 people, have warned profits will fall as they adapt to high energy prices in Europe, writes the Financial Times. Earlier, rival BASF announced it is downsizing in its home region. This is exactly in line with what EPM predicted and has consistently warned over the past 6 months; we expect news like this to continue to be a regular occurrence in Europe during 2023.