Energy Politics & Money for 22 July 2022
Curated news from the worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money newsfeed of Friday, 22 July 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we dive deeper into:
The recent drop in oil price and how IOC profits will result in more dividend payments and less investment;
How oil production will move to areas that support use of renewables;
How Australia’s hydrogen ambitions don’t match their actions;
Europe’s challenges exacerbated by rising interest rates and default risk, tight energy supply and dependency on Russia, a fractured approach to responding to these challenges, and its diminishing influence in Asia;
EV market developments - Rivian is supplying Amazon’s demand for delivery trucks, Porsche is betting on customers willing to pay more for EVs, and Ford has concluded contracts for batteries to support the production of 600,000 EVs per annum.
General Energy News
Oil prices fell more than $3 a barrel on Thursday to $103 (Brent), which, according to Reuters, was due to higher U.S. gasoline stockpiles, the European Central Bank (ECB) rate hike stoking demand worries, while returning oil supply from Libya and the resumption of Russia's gas flows to Europe eased supply restraints.
Saudi Arabia officially announced that its ultimate production capacity is 13 million barrels per day. This is only 1 million barrels higher than its current capacity. Javier Blas, at Bloomberg, mentions this might come as a surprise to some analysts because the Kingdom declared some time ago that it could go as high as 15 million barrels. This is not a surprise to us, and, in fact, confirms our assessment of Biden’s visit to the Kingdom where we predicted the outcome would do little in terms of significantly increasing crude oil supplies in the short-, medium- or long-terms and that it was mostly for “optics” (and to continue discussion on a series of geopolitical subjects such as the integration of Israel into GCC’s economic sphere and developing a common position vis-à-vis Iran). Remember, in the GCC, “over committing and under delivering” and “Tell the market what it wants to hear, figure out how to actually deliver it later” is the norm.
As we approach quarterly earnings announcements from International Oil Companies (IOCs), expectations are that most of the additional cash generated from (near) record high oil, gas and refining margins will result in greater dividends – rather than the acceleration of investments in conventional or renewable energy.
Energy Transition & Technology News
Wood Mackenzie provides a new, interesting perspective on how the energy transition will affect the oil industry. The energy transition is not just about demand for oil, but also about the supply of oil. Bloomberg reports that oil majors focused on reduce their carbon footprint will have to shift activities to energy basins where drilling rigs can be powered by renewables and which have ample space for carbon sequestration. This shift will mean that several oil and gas fields currently dominating the today’s energy landscape - Alaska’s North Slope and Russia’s Yamal Peninsula and Venezuela’s Orinoco Belt - will face disadvantages and face the risk of future capital flight risk. Fields located in these geographies and environments have limited infrastructure to develop renewables at scale. Meanwhile, regions with easier access to clean energy, such as the US Gulf Coast and Permian Basin, Australia’s North Carnarvon, and the Rub al Khali in the Middle East, are more likely to flourish.
RenewEconomy summarized Rystad Energy’s recent presentation at the Clean Energy Summit on Australia’s hydrogen ambitions. The interesting conclusion they reach, is that despite a combination of Australia’s advantages for producing hydrogen such as vast wind and solar resources, a large and relatively unpopulated continent, combined with ‘local’ technical know-how and expertise – the hopes for hydrogen expressed by business and politicians has yet to be matched to actual projects and investment.
As far as nuclear is concerned, Nikkei Asia reports African countries who are turning to nuclear power to meet their local energy needs are finding willing partners in Russia and China.
The Macro Environment (economics & geopolitics)
The big macro news from yesterday is the European Central Bank’s (ECB) announced rate hike – and what it accompanied. The ECB raised its benchmark deposit rate by a higher-than-expected 50 basis points to zero percent, non-negative territory for the first time in eight years. It also announced another rise as early as 8 September.
And it announced a new bond purchase scheme to provide additional help to the Euro Zone's big debtor nations, in particular Italy, Spain and Portugal. This objective of the new bond purchase scheme - the Transmission Protection Instrument (TPI) - is stopping excessive rise in borrowing costs for governments across the currency bloc as ECB policy tightens. The TPI will allow the ECB to buy unlimited amounts of the bonds from countries when it sees a need to. Bloomberg reports details remain sketchy, and, probably as a consequence, the introduction of the “safety net” wasn't enough to convince the market to reduce the spreads on Italian debt. The 10-year yield spread of Italy over Germany widened by more than 20 basis points on Thursday to over 230 basis points closing in on the four-year high reached in June.
What does this all mean? The Euro Zone faces a variety of interconnected and massive challenges. Inflation post-Covid was the trigger. European sanctions against Russia worsened the inflationary environment and created the risk of industrial meltdown in Europe as energy becomes unaffordable or is simply unavailable. The ECB’s policy of tightening monetary supply that is needed to bring inflation under control may cause significant trouble for the most indebted countries (primarily in the South) due to debt default. This is cause for significant concern and explains why the Euro has imploded versus the US dollar.
Building on the current challenges faced by Europe, over at Nikkei Asia William Bratton, author of “China's Rise, Asia's Decline” argues that despite the level of bravado emanating from across Europe and the European Union about the need to maintain influence in Asia, the reality is that Europe is being steadily moved to the margins of Asian politics, economics and finance. The main reason, according to the author, is that Europe's domestic issues, both social and economic, are now so substantial that they overwhelm any international aspirations. As European countries, companies and institutions are being marginalized, if not completely excluded, Asia's economic and financial systems, technological dependencies and political structures all become more regional in nature and more China-centric.
Continuing in Asia, Nikkei Asia reports the Asian Development Bank published a report on Thursday projecting slower growth for Asia than predictions made earlier this year. Growth is predicted to achieve 4.6% rather than April’s prediction of 5.2% as the effect of the prolonged war in Ukraine has pushed commodity prices higher and triggered monetary tightening.
The Financial Times identified Sri Lanka - a developing country - as example of a worst-case scenario and what it means for the global economy, “No food, no fuel and no jobs”.
Transport Electrification
On Thursday, Rivian unveiled the EDV-700 delivery van developed for Amazon. According to the company, the RCV platform underpinning Amazon’s van - which Rivian is building in Normal, Illinois - will be used to develop a host of other vehicular applications.
According to Bloomberg, ahead of its planned landmark listing Porsche is telling investors that it can become more profitable focusing on battery power. The car maker sees greater potential for raising prices of its EVs than for its internal combustion engine (ICE) models because customers are willing to pay more for new technology.
We have agreed with this assessment since 2015. Our overarching investment thesis is not bullish on the electrification of personal transport for sustainability reasons, but because the overall “offering” of EVs will comprehensively outperform that of ICE vehicles once battery costs come down to the level that make EVs “manufacturing cost competitive”. When that time comes, EVs will offer lower cost of purchase, lower cost of ownership, higher reliability, lower maintenance, more comfortable acceleration and deceleration, less (noise) pollution, and greater alignment with a sustainability-conscious lifestyle.
Ford has signed contracts with suppliers representing 60 gigawatt hours of annual battery capacity, enough to build 600,000 EVs a year as of next year. It also said it has secured 70% of the battery capacity it needs to build more than 2 million EVs annually starting in 2026. According to Bloomberg, suppliers include CATL.
ESG
Nothing to report today.
The Global Energy Crisis
Yesterday, Nord Stream 1 started operations at the same 40% of capacity level it was operating at before maintenance started on 10 July. This is relatively good news for Europe, as it means they won’t have to draw down their reserves. For now. But, operating at 40% of capacity also means there is little room for Europe to build out its reserves for the coming winter and leave Europe at the mercy of Russian energy geopolitics.
Yesterday we highlighted that as the EU energy crisis worsens, the likelihood of the block’s member state to agree and collaborate actually goes down and not up. Responses to the EU’s plan for reducing gas consumption across the bloc by 15% confirmed our view. Reuters reports Portugal is totally opposed to the EU proposal.
Other
Nothing to report today.