World Energy News for 15 July 2022
General Energy News
The headline news for today is from Financial Times, which reports that crude oil prices have fallen below $95 a barrel for the first time since Russia invaded Ukraine, “as fears of an impending global recession grip commodity markets and batter forecasts for demand.”
NikkeiAsia reports Reliance and other Indian refiners have come under the spotlight for becoming a hub for the “laundering” of Russian oil. China is buying undervalued Russian crude oil and gas for its own consumption. But U.S. officials believe that Russian crude is being refined in India and then exported to the U.S. and Europe, circumventing sanctions that have been imposed on Russian President Vladimir Putin's government for its invasion of Ukraine.
We note U.S. wasn’t pleased with neither China nor India continuing their buying of Russian oil from the very beginning of the sanctions. It even threatened India not to increase its purchases, being sensitive to the fact that the Indian economy needed the support of the Urals discount. Undoubtedly, importing Russian crude for fuels export will result in significant political pressure on New Delhi to act.
Obviously, any oil company with an interest in longevity has 3 options when thinking how to the spend its currently increased profits – shareholder returns (dividends or share buy-back), pay down debt, or making investments in the future energy systems. Reuters report on comment made by Shell CEO Ben van Beurden on the subject , which leave us with the impression the company’s focus is not on ‘investing in future energy systems’.
Energy Transition & Technology News
Probably the most important piece on energy transition you need to read today is in the Financial Times, because there Daniel Yergin examines the criticality of copper, and supply / demand balances going forward. A key highlight: “a host of operational challenges confront future copper supply. Copper mining is actually more concentrated than oil production. Just two countries — Chile and Peru — account for 38 per cent of mined copper. And Chile’s proposed new constitution includes a provision that would make the approval process for mining more difficult. Obtaining permits for mines in the US is increasingly hard, which is one of the reasons US copper production has fallen by almost half over the past 25 years. Meanwhile, China occupies a central role in the entire copper value chain, with the risk of the global trade becoming enmeshed in the great power competition between Washington and Beijing.”
According to Reuters, “BP is aiming to start producing sustainable aviation fuel (SAF) in Australia by 2025 after converting its oil refinery near Perth to produce renewable fuels”.
Bloomberg zooms in on the recent decision by European carmakers Stelantis and Volvo to exit the European Automobile Manufacturers’ Association, or ACEA, by year-end. Stelantis is horribly late in its transition to EVs, and is (probably) unhappy about the ACEA’s position of support for the electrification of transport. Volvo is owned by a Chinese company, and it feels ACEA is not pushing for the electrification hard enough. Consequently, while this might seem like small news, to us it represents a “micro-cosmos” – established players resisting an inevitable change which is wholeheartedly adopted by new players, something which usually doesn’t end well for the established players.
The Macro Environment (economics & geopolitics)
Bloomberg has a nice Quicktake on the recent decline of the euro, which it says is the result of a “combination of Europe’s front-line exposure to Russia’s war in Ukraine and the European Central Bank’s tardiness in raising interest rates”. Since energy is prices in dollars, this will certainly worsen inflation in Europe (in relative terms).
China’s real estate sector has been under significant stress for a number of months now. It became apparent when last December one of its largest players, Evergrande, defaulted on its debt. This was an important moment as China’s real estate sectors played an outsized role in the country’s economy growth miracle of past decades. The stress in China real estate was brought under control, but has not been resolved.
On the Bloomberg opinion pages, meanwhile, Shuli Ren analyses what this might mean for the country’s financial system. Key conclusion: “It opens a Pandora’s box and poses direct threat to the stability of Chinese banks.”
The Electrification of Transport
NikkeiAsia reports that while Hyundai and Kia were already the second-biggest EV shippers globally excluding China in January to May this year, with a combined 13.5% market share (trailing only Tesla with 22%), Hyundai on Thursday launched its first electric sedan, Ioniq 6, to compete head-to-head against Tesla's bestselling Model 3 sedan.
ESG
Special features – The Global Energy Crisis
We are of the opinion that Europe is mostly too optimistic about the energy crisis it is facing. At best, prices remain at current levels, which make large segments of Europe’s industry uncompetitive globally. At worst, supply will have to be rationed, which would result in war-like devastation of European industry and the economy. In between is the scenario where Russian supplies are cut further, but Europe remains able to supply, just at prices even higher than today’s. This is the scenario Shell’s CEO warns for as reported by the Financial Times: “I think we will be facing a really tough winter in Europe. Maybe some countries will fare better than others, but I think we will all be facing very significantly escalating pricing, so there will be a lot of pressure on industry and therefore there will be a lot of pressure on the economy”.
As a major LNG importer, Japan is significantly exposed to the global energy crisis. It has also been affected by the Russian response to sanctions, as Russia nationalized Sakhalin II in which the Japanese held significant shares. NikkeiAsia reports that in response, “Japan will have as many as nine nuclear reactors in operation this winter” as it seeks to ensure stable power supplies during peak winter demand. With five reactors currently running, the additions would boost combined capacity from nuclear power to around 10% of the country's electricity needs.
The Financial Times has an interesting opinion piece arguing a price cap on Russian oil, as called for by the Biden administration, would be a bad idea.