Tom Whipple and Steve Andrews, Editor
Quote of the Week
“Attempts to predict what the automotive industry will look like in 2030 only serve to highlight how uncertain its future really is.”
Stephen Wilmot, The Wall Street Journal
Graphic of the Week
1. Energy prices and production
Oil: Prices declined the most last week since March as a resurgence of Covid-19 threatened the outlook for near-term global fuel consumption. Futures in New York settled at $71.81, 3.7% lower for the week. Brent ended the week at $73.59, down about 2.6% for the week. Despite the pullback, crude has surged nearly 13% over the last three months as a global vaccine rollout helps restore economic activity. Moreover, forecasters ranging from the International Energy Agency to Citigroup predict that the market will get tighter in the coming months.
The rapidly spreading delta variant is triggering renewed restrictions on movement as it sweeps across the globe. The UK is considering stricter measures due to a surge in cases, Singapore is shutting hundreds of nightlife venues, and in the US, a mask mandate has been reinstated in Los Angeles County. At the same time, crude markets face the prospect of extra supplies from the OPEC+ coalition, as the United Arab Emirates and Saudi Arabia repair a rift that has hampered the group’s decision-making process. A stronger dollar has also dimmed the appeal of commodities priced in the US currency this week.
America’s oil demand had soared to new heights in a remarkable turnaround from just a year ago when the pandemic sent the US economy into a tailspin and demolished demand. A rolling average of US total oil products supplied – an indicator of consumption – jumped to the highest seasonal level in government data going back three decades in the week ending July 2nd. Leading international energy companies are resisting the temptation to rush and spend an unexpected windfall from rallying oil and natural gas prices as they focus on longer-term energy transition challenges.
Every year, following the publication of the BP Statistical Review, Rystad Energy releases its own assessment of how the world’s energy landscape changed last year. The 2021 review deals a significant blow for the size of the world’s remaining recoverable oil resources – but it also shows that oil production and consumption can align with climate goals. Rystad Energy now estimates total recoverable oil resources at 1,725 billion barrels, a significant reduction from last year’s estimated 1,903 billion barrels. Out of this total, which shows our estimate of how much oil is technically recoverable in the future, about 1,300 billion barrels are sufficiently profitable to be produced before the year 2100 at a Brent oil price of $50 per barrel.
International Energy Agency: The failure of OPEC and its allies to agree on a plan to ease production cuts in August means oil-market investors face the contradictory worries of both under- and oversupply. The IEA said that if OPEC and its allies cannot reach a supply agreement, the oil market faces “the prospect of a deepening supply deficit.” Moreover, as the global oil market has now used up the supply glut it accrued at the start of the pandemic, potential inflationary pressures could damage the fragile global economic recovery.
Global electricity demand is growing faster than renewable energy capacity can be rolled out and will require more power to be generated from the burning of fossil fuels, the IEA said in a report on Thursday. After falling by about 1% in 2020 when the COVID-19 pandemic curbed industrial activity worldwide, power consumption will grow by close to 5% in 2021 and by 4% in 2022 as economies recover. Nearly half of the increase will have to be met by burning fossil fuels, notably coal, which could push carbon dioxide emissions from the sector to record highs in 2022.
OPEC: The cartel and its allies struck a deal to inject more oil into the recovering global economy, overcoming an internal split that threatened the cartel’s control of the crude market. An unusually public dispute that tested the group’s unity was resolved in a classic compromise — with Saudi Arabia meeting the United Arab Emirates halfway in its demand for a more generous output limit.
The deal agreed at a hastily convened Sunday meeting ahead of a long Islamic holiday, allows for monthly supply hikes of 400,000 b/d, and puts OPEC+ back in control of the market after two volatile weeks. Ministers from Riyadh and Abu Dhabi made a big show of their continuing friendship and commitment to the alliance, brushing aside the animosity that caused OPEC+ talks to collapse earlier this month.
The cartel will start raising output next month and continue until all its 5.8 million b/d of halted output has been revived. An agreement on this was only possible because the UAE, and several other countries, including Russia and Saudi Arabia, will be given higher baselines against which their production cuts are measured, starting in May 2022.
The UAE’s level was increased to 3.5 million b/d, below the 3.8 million it was demanding when it blocked an OPEC+ deal earlier this month, but above the previous baseline of 3.17 million. The baselines for Saudi Arabia and Russia both rose by 500,000 b/d to 11.5 million. The truce between the two long-time allies will ease a looming supply squeeze
As demand recovers, the deal gives consumers a clearer view of how quickly OPEC+ will revive the production it is still withholding after making deep cuts last year in the initial stages of the pandemic. OPEC+ will continue to hold talks every month, including a review of the market in December. It could adjust the schedule if required, said Saudi Arabia’s Prince Abdulaziz. The next meeting is on Sept. 1.
OPEC pumped 26.03 million b/d of oil in June, up by 590,000 from May, the cartel said on Thursday as it predicts demand for its crude at 27.7 million bpd this year, suggesting that the market will need more OPEC oil. In its closely watched Monthly Oil Market Report, the organization said that crude oil output rose mainly in Saudi Arabia, the UAE, Angola, Iran, and Kuwait. OPEC forecast on Thursday that world oil demand would increase in 2022 to reach a level like before the pandemic, led by growth in the United States, China, and India.
Shale Oil: Crude output from the seven major US shale formations is expected to rise by 42,000 b/d in August, to 7.907 million b/d, compared with a 28,000 b/d rise in July, according to the EIA’s monthly drilling productivity report. The forecast is led by growing production in the Permian Basin, where crude output is estimated to rise 53,000 b/d in the month, offsetting falling output expected from the Bakken formation of North Dakota. In addition, the EIA said that natural gas production from the major shale basins is expected to increase for the second month in a row.
New Mexico, the Land of Enchantment, was concerned when President Biden’s pause on oil and gas drilling leases took hold, but six months into the new administration, the state’s oil industry continues to go from strength to strength. New Mexico has surpassed North Dakota as the second-largest oil producer in the US following a boost in oil production this spring.
According to a trade group, American drillers have restored less than 20% of the oilfield services jobs lost due to the pandemic, with companies favoring investor returns over boosting output. The main reason that hiring isn’t coming back faster is that companies are focused more on free cash flow, paying down debt, and repaying investors than boosting production.
The companies that frack wells and make the equipment required to produce oil added 8,002 jobs in June after adding nearly 24,000 positions in the three months before that, according to an analysis of labor market data. Still, the sector has only recovered 18,600 of the 102,000 jobs lost due to the pandemic.
According to data released last week, US oil and gas mergers surged the previous quarter with the most $1 billion-plus combinations since 2014. Smaller producers are snapping up unwanted properties in a bet on continued demand for oil and gas while some big oil companies shift their acquisition emphasis to renewables. The total value of the 40 reported deals last quarter was $33 billion, according to energy data provider Enverus Inc, up from $44.5 billion for all last year.
Natural Gas: A scramble for natural gas has created pockets of scarcity in the global market, boosting prices for the fuel and the electricity generated by burning it. Rampant demand in China is sucking in chilled cargoes of gas from the US, after a year in which American energy companies throttled back production. A drought in Brazil has added to the competition by curtailing power output from hydroelectric dams. Searing heat in Canada and the Pacific Northwest has also lifted gas demand. However, some places are missing out, like Pakistan, where a shortage of gas and the delayed onset of the summer monsoon have prompted power outages.
Europe is feeling the pinch. With vessels of liquefied natural gas heading to Asia, buyers on the continent have struggled to replenish tanks and caverns after a long and cold winter. As a result, storage levels are the lowest for this time of year in a decade, said Natasha Fielding, a gas analyst at Argus Media. As a result, the price of gas at a trading hub in the Netherlands shot to a record $13.10 per million British thermal units in July. Barring mild temperatures this winter, gas prices are likely to remain elevated for at least another year. There just isn’t enough liquefied natural gas to supply Europe. The LNG predominantly coming out of the US is being diverted to Asia and Latin America.
Electricity: Senate Democrats are proposing to penalize utilities that don’t meet clean-energy targets while rewarding those that do, as part of a mandate for carbon-free power they are preparing to move through their $3.5 trillion tax-and-spending packages. The plan, known as a clean energy standard, would mandate 80% carbon-free electricity by 2030 and require sweeping changes in the nation’s power sector. The directive would help fulfill President Joe Biden’s signature climate goals — decarbonizing the electric grid by 2035 — and help satisfy his Paris Agreement pledge.
High prices for gas, coal, and emission permits in Europe—the main input costs for power plants—have fed off each other to send electricity markets skyward too. In Germany, Europe’s largest economy, power prices in July jumped to about $99.26 a megawatt-hour. That is close to their highest level in figures dating back to 2000. Likewise, UK, Spanish, and Italian power prices have shot to record highs. The moves are among the most extreme cases in a broader upswing in energy markets.
The death toll from the freezing winter weather that battered Texas and caused widespread power outages this year has risen by 59, bringing the total to 210. The Department of State Health Services, which released the latest data on Tuesday, said the numbers could rise as epidemiologists examine the causes of deaths reported from February 11th to March 5th.
Prognosis: A new oil price super-cycle — an extended period during which prices exceed their long-term trend — seems to be in the making. It’s being driven by looming supply shortages from the lack of investment that has continued since the 2014 collapse in oil prices and, more recently, reduced investment in shale oil production.
In addition, demand growth has been triggered by a strong recovery in countries such as China, a big stimulus package in the US, and global optimism about vaccines. Nevertheless, this could be the last super-cycle for oil because major economies appear committed to replacing fossil fuels, and car manufacturers have responded by committing to replacing internal combustion engine vehicles with electric vehicles. This shift will transform the oil market into one consistent with climate goals. But it also poses a risk of disorderly adjustment for economies dependent on oil, with far-reaching effects that in some cases could spill over their borders.
Even with relatively lower oil prices, extraction and exploration companies have been highly profitable. At the same time, perhaps in recognition of a less buoyant future, they have reduced their investments. As a result, production in oil fields and the number of new wells are both declining, and reserve depletion is rapid. The drop in both capital expenditure and replacement of oil reserves has persisted since 2014. This reduced investment will lessen the role of shale as swing production and plants the seeds of a super price cycle.
2. Geopolitical instability
(These are the situations that reduce the world’s energy supplies or have the potential to do so.)
Iran: Tehran is not prepared to resume negotiations on coming back into compliance with the 2015 nuclear deal until Iranian President-elect Ebrahim Raisi’s administration has begun, a diplomatic source said. Iran had conveyed this to European officials acting as interlocutors in the indirect US-Iranian negotiations. The current thinking is that the Vienna talks will not resume before mid-August. “They are not prepared to come back before the new government,” said the source, saying it was not clear whether this meant until Raisi formally takes over on August 5 or until his government is in place.
About 90% of the work on the Iran nuclear deal has been done, but the 10% that remains might prove a tough nut to crack. That’s according to the permanent representative of Russia at Vienna international organizations. Mikhail Ulyanov said that some politically sensitive issues remain and have yet to be settled by the negotiators. This includes the question of whether the US could again pull out of the deal under different leadership. Ulyanov noted that the US side had said it could not provide guarantees that would not happen because of its political system.
The US has decided to temporarily waive sanctions on Iranian oil funds abroad without returning Tehran’s access to its bank accounts in Japan and South Korea. “Allowing these funds to be used to repay exporters in these jurisdictions will make those entities whole concerning the goods and services they exported to Iran, address a recurring irritant in important bilateral relationships, and decrease Iran’s foreign reserves.” This means the government in Tehran will be unable to withdraw the funds but can use them to pay accounts outstanding to South Korean and Japanese exporters.
The US has been engaging in “indirect but active” discussions to secure the release of US detainees in Iran, State Department spokesman Ned Price said on Tuesday, adding that Washington was treating those talks independently from the nuclear negotiations. Earlier, Iranian government spokesman Ali Rabiei said Tehran was holding talks on prisoner exchanges with the US to secure the release of Iranians held in US jails and other countries over violations of US sanctions.
Despite being OPEC’s fourth-biggest crude oil producer, it faces an unprecedented summer of electricity cuts as power plant disruptions and a lack of investment in new capacity leave output far below demand. As a result, power demand exceeds supply by about 11,000 MW, forcing Tehran to impose unannounced power cuts for hours when the need for air conditioning soars amid temperatures hitting close to 50 degrees Celsius daily. Climate change has also left parts of the country in drought, leaving no water for hydroelectric power plants. In contrast, US sanctions on the country’s energy industry have discouraged domestic and international investment.
Iraq: Infections in Iraq have surged to record highs in a third wave spurred by the more aggressive delta variant, and long-neglected hospitals suffering the effects of decades of war are overwhelmed with severely ill patients, many of them this time young people.
The Iraqi Finance Ministry transferred 200 billion Iraqi dinars ($138 million) to the semi-autonomous Kurdistan Regional Government (KRG) — the first budget payment this year. The transfer was confirmed to Iraq Oil Report by officials in both the KRG and the federal government. However, with many technical and accounting details still to be worked out, it was not immediately known if this first transfer would be followed by regular payments to the KRG, which has struggled to pay its civil servants fully or on time.
The Iraqi cabinet has moved forward with plans to re-establish the Iraq National Oil Company (INOC), naming former Oil Minister Thamir Ghadhban to serve as an expert advisor to the board of directors along with three members. But with parliamentary approval of amendments to the law still not guaranteed, it isn’t clear whether and how INOC can become meaningfully operational. The move by Prime Minister Mustafa Kadhimi ahead of the October elections appears to be the latest in efforts by the Iraqi Ministry of Oil to establish facts on the ground in the face of legal and political delays.
Iraq has picked China’s state-run CNCEC to build an oil refinery at the port of Fao on the Gulf. The refinery in Fao will have a 300,000 b/d capacity and will include a petrochemical plant.
Venezuela: The US Treasury Department granted a sanctions waiver, allowing US companies to export or re-export LPG supplies to Venezuela, the first move by the Biden administration to ease sanctions on the economically hard-hit country. A propane shortage in Venezuela has forced many people to turn to wood stoves for cooking food. An industry source familiar with US sanctions enforcement said the license also appears to allow US banks to facilitate the trades, something otherwise banned under the US sanctions against Venezuela. The source said the move was “very much driven by humanitarian concerns.” “The US government is recognizing the pain of the Venezuelan people,” he said.
3. Climate change
The death toll from devastating floods across parts of western Germany and Belgium rose above 150. The search continued for hundreds of people still unaccounted for, and officials warned such disasters could become more common due to climate change. Authorities in the German state of Rhineland-Palatinate said 50 people had died there, including at least nine residents of an assisted living facility for people with disabilities. In neighboring North Rhine-Westphalia, state officials put the death toll at 30 but warned that the figure could rise further. Some 1,300 people in Germany were still reported missing.
China is telling its people to brace for another summer of dangerous floods and droughts. This month, China’s National Climate Center predicted “generally poor weather conditions” for the rest of the summer and warned that the country would face more extreme weather events than usual. In some areas, precipitation is estimated to be 20% to 50% higher than normal. As a result, some major rivers, including the Yellow River that runs through nine provinces, are set to cause severe flooding.
Not once did the center mention the phrase “climate change.” The ominous forecasts didn’t get a lot of attention on social media, either. For example, when local news organizations reported on power shortages in the manufacturing hub of Guangdong, there was no discussion of how a warming planet could play a role in the more unpredictable weather that caused factories to shut down for days.
“As someone working at China’s top meteorological department, we’re not allowed to over-stress the danger of climate change, which would be irresponsible and cause unnecessary fears,” said a National Climate Center researcher who requested anonymity to discuss details about the issue. “Whatever we write and publish has to be backed by data, but China started on climate research very late.”
While more than 80% of the largest US companies have set emissions reduction goals, less than half engaged with lawmakers to advocate for science-based climate policies — and more than 20% have lobbied against them, according to a report released Tuesday by sustainability nonprofit Ceres. “Claiming credit for making operational climate change commitments while undermining the necessary policy measures to achieve those very commitments poses significant reputational and financial risks to companies,” the report’s authors wrote.
On Wednesday, a US Senate committee passed a bill on climate and energy initiatives that is expected to be debated as part of the more comprehensive bipartisan infrastructure bill. The Senate energy panel voted 13 to 7 to pass the bill, which authorizes about $100 billion for initiatives such as helping the power grid handle more electricity from renewable sources, boosting hydrogen production, and capturing carbon from fossil fuel plants. The bill, sponsored by Senator Joe Manchin, a Democrat, and the chairman of the committee, also includes initiatives to boost nuclear power.
Democrats have agreed to include a tax on imports from nations that lack aggressive climate change policies as part of the $3.5 trillion budget plan stocked with other provisions aimed at ratcheting down fossil fuel pollution in the United States. The move to tax imports was made public Wednesday, the same day that the European Union outlined its proposal for a similar carbon border tax. This novel tool is designed to protect domestic manufacturing while simultaneously pressuring other countries to reduce the emissions that are warming the planet. The two actions in concert suggest that government leaders are turning toward trade policy to attack climate change.
4. The global economy and the coronavirus
Most experts argue that inflationary pressure is undoubtedly rising in developing economies, which are more sensitive than developed markets to rising oil prices. Fuel and food prices generally account for more consumer spending in emerging economies, hurting them more. Inflation concerns have also started to appear in the US and other developed countries. Yet, most analysts believe that oil prices—currently at around $75 a barrel —are not high enough to seriously slow down economic growth, especially in the US and Europe.
United States: “The only pandemic we have is among the unvaccinated,” President Biden said, with cases swelling in 49 US states and hospitalizations on the rise. He said that social media networks are “killing people” by allowing the spread of misinformation about vaccines. The 160 million people across the country who are fully vaccinated are largely protected from the virus, including the highly contagious Delta variant, scientists say.
Prices paid by US consumers surged in June by the most since 2008, topping all forecasts and testing the Federal Reserve’s commitment to sticking with ultra-easy monetary support for the economy. According to Labor Department data released Tuesday, the consumer price index jumped 0.9% in June and 5.4% from the same month last year. Excluding the volatile food and energy components, the so-called core CPI rose 4.5% from June 2020, the largest advance since November 1991.
Applications for US state unemployment insurance fell last week to a fresh pandemic low, indicating that dismissals are easing as business conditions improve and firms look to increase headcounts. The drop in new unemployment claims aligns with a broader economic recovery in the US, with businesses back to total capacity and demand for travel and leisure surging. Even so, initial claims remain above pre-pandemic levels. In addition, employers continue to point out trouble with finding qualified workers.
The European Union: Policymakers unveiled their most ambitious plan yet to tackle climate change, aiming to turn green goals into concrete action this decade and set an example for the world’s other big economies to follow. In painstaking detail, the European Commission set out how the bloc’s 27 countries can meet their collective goal to reduce net greenhouse gas emissions by 55% from 1990 levels by 2030 – a step towards “net-zero” emissions by 2050.
The Commission proposed a template for sharing the burden of cutting greenhouse gas emissions within the EU by setting out national targets that the 27 member states are sure to wrangle over. The new targets mean tougher binding national goals for all. Under the EU’s “effort sharing” rules, each country will have to curb emissions in specific sectors – including transport and heating buildings – by an amount calculated from its per capita economic output. That means richer EU countries have more challenging targets than poorer ones.
The European Union proposes measures that signal the end of gasoline and diesel car sales within 20 years and accelerate a switch to electric propulsion. Many carmakers have already announced considerable investments in electrification, partly in anticipation of tougher emissions targets. Still, they want to know whether the EU will back them by building public charging stations and how soon it wants hybrid electric/combustion vehicles to be phased out.
Britain will ban the sale of new gasoline and diesel heavy goods vehicles from 2040 as part of a broader package of green initiatives to achieve net-zero emissions from all forms of transport ten years later. In addition, the government said that it would ban the sale of smaller diesel trucks from 2035 and larger ones weighing more than 26 tons from 2040, or earlier if feasible. It also plans to create a net-zero rail network by 2050 and ensure net-zero domestic aviation emissions by 2040.
Brussels will set out plans this week to increase taxes on polluting fuels and introduce an EU-wide levy on aviation fuels for the first time. In addition, the European Commission will propose a revamp of its 15-year-old rule book on carbon taxes to provide an incentive for low-emissions fuel and impose levies on heavily polluting energy used in the airline and shipping industries.
Households in the UK will see their energy bills hiked to pay for the construction of new nuclear power plants. Ministers are in the process of drawing up legislation that will allow the construction of the new £20bn Sizewell C plant in Suffolk using a Regulated Asset Base (RAB) financing scheme. At its core, the RAB model, which is already used in the UK for large infrastructure projects like Thames Tideway, would allow builders to bill the eventual users of the plant’s energy during the construction phase.
China: The economic rebound slowed in the second quarter but continued to show unusual resilience more than a year after the country essentially got control of the coronavirus within its borders. Factories delivered another stronger-than-expected quarter of output while its consumers beat lowered expectations, raising hopes that domestic spending might play a more significant role in sustaining momentum in the coming months. As a result, the gross domestic product grew by 7.9% in the second quarter from a year earlier, in line with economists’ expectations.
While that growth rate was far slower than the 18.3% year-over-year GDP jump during the first three months of 2021, nobody expected China’s economy to sustain that pace of growth as the statistical distortions from last year’s pandemic crisis faded.
China’s crude oil imports fell to some 9.77 million b/d last month, down 2% on May and the lowest monthly level since the start of the year. The first-half figure was boosted by increased imports by independent refiners, commonly called teapots. Since the first quarter, however, Beijing has begun cracking down on the teapots, as production of fuels both at independent refiners and state-owned majors was rising faster than demand, undermining refining margins and creating a glut. As a result, Beijing intervened, asking state-owned oil majors to stop trading their crude oil import quotas with private refiners.
Shell signed a five-year contract with PetroChina to supply the Chinese company with carbon-neutral LNG cargos. Many companies, particularly those in the fossil fuel industry, are using tools such as carbon offsets to compensate for emissions they cannot cut in their operations. For each cargo delivered under the agreement, the two companies will “cooperate in offsetting life-cycle carbon dioxide equivalent (CO2e) emissions, using high-quality carbon credits from nature-based projects.” Nature-based offset projects such as reforestation, protect, transform, or restore land and enable nature to add oxygen and absorb carbon dioxide emissions.
Trading will commence on China’s long-awaited national carbon emissions trading scheme (ETS) later this month. The new ETS is part of China’s plans to use “market mechanisms” to help bring its carbon emissions – now the world’s highest – to a peak before 2030 and net-zero by 2060. But the long-awaited scheme has been repeatedly delayed, partly over concerns about the transparency of emissions data.
The US Senate passed legislation on Wednesday to ban the import of products from China’s Xinjiang region, he latest effort in Washington to punish Beijing for what US officials say is an ongoing genocide against Uyghurs and other Muslim groups.
Russia: President Putin told the US climate change envoy John Kerry that the two rivals have a chance to cooperate in combating greenhouse gas emissions amid efforts to improve ties following a summit last month. Putin underlined in a phone call Wednesday with Kerry, who’s in Moscow meeting officials, that climate change “is one of the areas in which Russia and the US have common interests and a similar approach.”
Rising commodity prices have strengthened the economic outlook of resource-rich countries. Russia is taking advantage of this significantly, with a particular focus on crude oil and natural gas. As Europe’s most important supplier of gas, Gazprom is well-positioned to reap significant dividends. However, the state-controlled energy behemoth’s lukewarm response to sending additional volumes to Europe could signify that the company’s strategy has changed.
During 2020, Gazprom’s exports decreased from 199 billion cm in 2019 to 170 billion. Most of this gas transits through Soviet-era pipelines from Russia to Belarus and Ukraine. Another 55 billion cm of capacity was added in 2011 with Nord Stream’s completion and will be double to 110 billion when the Nord Stream 2 pipeline is completed later this summer.
President Joe Biden and German Chancellor Angela Merkel failed to settle their dispute over Russia’s Nord Stream 2 natural gas pipeline. Still, they said they agreed that Moscow must not use energy as a weapon to coerce its neighbors. Biden said he expressed his long-standing concerns to Merkel about the $11 billion pipelines, which would deliver gas from the Arctic to Germany via the Baltic Sea, bypassing Ukraine and depriving it of valuable transit fees.
The Court of Justice of the European Union upheld on Thursday a lower tribunal’s ruling, which had said that Russia’s access to the OPAL gas pipeline should be limited. The court case is a win for Poland against an appeal of the lower court’s ruling filed by Germany. The OPAL pipeline, operated by OPAL Gastransport, is a 292-mile pipeline, linking Gazprom’s operational Nord Stream 1 gas pipeline to Germany.
The European Commission granted in 2016 an exemption to the OPAL operator from EU energy solidarity regulations, meaning that Gazprom could use OPAL to ship natural gas at an almost total capacity of the pipeline. However, the Court of Justice of the European Union, based in Luxembourg, annulled in 2019 the 2016 decision that allowed Gazprom to increase gas shipments through the OPAL pipeline.
Saudi Arabia: The transformation of Saudi Aramco from a perpetual cash-generation machine into a debt-laden giant is set to pick up pace in the coming weeks with a series of schemes to raise much-needed funding for the now-beleaguered oil and gas company. The reason for this terrible transformation is that Crown Prince bin Salman did not want to lose face in the initial public offering for Aramco upon which he had staked his political reputation.
To launch the IPO, Aramco was forced into a series of increasingly desperate measures to sell even a small proportion of the initially intended stake. The most desperate of these was the pledge to guarantee a dividend payment to shareholders in Aramco of $18.75 billion every single quarter of every single year – a total of $75 billion a year. In other words, each year, Aramco must pay out around three times the entire amount that it received from the IPO.
India: Wealthy economies must help finance India’s energy transition, according to the country’s Environment Secretary. “Every policy decision has a cost to the economy. Going net-zero or using less carbon also has a cost,” Rameshwar Prasad Gupta said in an interview. “We are not anti-net-zero. But without adequate climate finance being definitively available, we can’t commit on that part.” The official’s comments add to worries about the cost of the energy transition, especially for poorer economies.
India received no bids for 48 of the 67 mines up for sale as part of its plan to open coal mining to private companies, reflecting little investor appetite for a sector clouded by environmental concerns and low margins. Prime Minister Narendra Modi last year offered financial incentives to the private sector. It removed restrictions on the end-use of the fuel in a bid to reduce imports and make India a net coal exporter. India has the world’s fourth-largest coal reserves and is the second-largest coal consumer, importer, and producer.
Nigeria: Africa’s largest oil producer and exporter, Nigeria, passed its new petroleum bill—twenty years in the making— despite last-minute amendments that have created controversy. The Petroleum Industry Bill will overhaul how Nigeria will share its oil resources with international oil companies and aims to attract new investment in oil and gas. However, community leaders in Nigeria’s oil-rich regions wanted changes to the bill’s latest version, asking for a 5% rather than a 3% share of revenues for the community.
Nigeria’s oil output dropped 11.5% year-on-year to 1.3 million b/d in the second quarter of 2021. The decline also shows significant under-production against Nigeria’s OPEC quota. As a result, oil earnings fell short of the target by 49.5% in the first five months through May, the Ministry of Finance, Budget, and National Planning said in a report Tuesday.
Relations with the international oil companies producing the bulk of Nigeria’s crude have been deteriorating due to endemic corruption, mismanagement of facilities, and widespread theft and spillage of oil. As a result, in recent years, the company’s refineries have ground to a halt, and the country has been forced to import heavily subsidized fuel for its of 206 million people. The cost of the imported fuel has offset much of the revenue sales of crude.
5. Renewables and new technologies
Despite coronavirus pandemic-related impacts, which hit the global energy industry hard, renewable energy continues to grow, but experts say renewable energy alone will be insufficient to replace coal globally. Coal being replaced by renewables in the US is favorable for reducing emissions, “but the global picture, of course, is a lot less celebratory and is very sobering,” Meghan O’Sullivan, director of the geopolitics of energy project at Harvard University’s Kennedy School, said. “Even with renewables growing as greatly as they have within China, renewables are not growing enough to meet the increased demand for energy and certainly not enough to meet growing demand and displace coal,” she said.
President Biden and energy companies want new transmission lines to carry electricity from large solar and wind farms. However, some environmentalists and homeowners are pushing for smaller, more local systems. As a result, the nation faces a once-in-a-generation choice about how energy should be delivered to homes, businesses, and electric cars. These decisions could shape the course of climate change and determine how the United States copes with wildfires, heatwaves, and other extreme weather linked to global warming.
There is a vehement policy struggle in Washington and state capitals about the choices that lawmakers, energy businesses, and individuals make in the next few years, which could lock in an energy system that lasts for decades. The divide between those who want more power lines and those calling for a more decentralized energy system has split the renewable energy industry and the environmental movement. And it has created partnerships of convenience between fossil fuel companies and local groups fighting power lines.
Norway’s state-controlled energy company Equinor is confident that hydrogen produced from fossil fuels with carbon capture and storage has a long-term role, the company’s senior vice president for low-carbon solutions told S&P Global Platts. The development of “blue” hydrogen from fossil fuels with CCS would pave the way for green hydrogen production from renewable energy. While future supply would likely be entirely green, there was still plenty of room for blue hydrogen in a 2050 net-zero CO2 scenario. “If I’m investing in blue hydrogen facilities that can last for 30 or 40 years, then I’m happy.”
6. The Briefs (date of the article in the Daily Energy Bulletin is in parentheses)
Top oil shipping companies say they have tightened operational guidelines and deployed technology to prevent accidental breaches of sanctions, as the countries hit by ever more onerous restrictions fight back with elaborate strategies to dodge them. (7/14)
EU emissions rules are due to come into force as soon as 2025 are likely to make petrol cars less profitable than electric models, marking a landmark moment for the auto industry, according to one of Volkswagen’s most senior executives. (7/13)
CCS: In Scotland, Exxon Mobil has signed a memorandum of understanding to participate in a carbon capture and storage (CCS) project, the US oil and gas producer said on Friday. (7/17)
The UAE’s $1 billion green ammonia project in Khalifa Industrial Zone Abu Dhabi will start production in the second quarter of 2024 and target exports mainly to Europe and the US, as OPEC’s third-largest oil producer invests in a clean energy pivot. (7/14)
In Kuwait, the Future Generations Fund, managed by the Kuwait Investment Authority or KIA, is thought to be worth around $700 billion at present, after closing at $670 billion at the end of the fiscal year in March, making it the world’s largest oil fund after those of Norway and China. The fund has steadily grown in recent years as Kuwait attempts to invest money earned from oil and gas to decrease its dependency on the sector eventually. (7/15)
Kuwait was downgraded by S&P Global Ratings for the second time in less than two years after a fall in oil revenue, and increased spending pressured the Persian Gulf nation’s fiscal outlook. (7/17)
The United Arab Emirates on Wednesday become the first Gulf state to open an embassy in Israel, as its envoy hailed the trade and investment opportunities that closer ties would bring at a flag-raising ceremony also attended by Israel’s president. (7/13)
Chinese oil companies processed a record volume of crude in June, offering further signs that Asia’s largest economy may surpass the US to become the world’s biggest refining nation this year. Volumes hit 14.86 million barrels per day last month, up 3.8% from May. That compares with a daily average of 16.17 mb/d in the US in June. (7/15)
Aussie H2: Partners CWP, Mining Green Energy, and InterContinental Energy plan to build a 50 GW Western Australia renewable energy hub dedicated to green hydrogen production by 2030. (7/13)
Partnering in H2: Chevron USA and Cummins announced a memorandum of understanding to explore a strategic alliance to develop commercially viable business opportunities in hydrogen and other alternative energy sources. (7/16)
South Africa’s largest fuel refinery announced that it had suspended its operations due to force majeure. That will impact the already critical fuel situation in South Africa, particularly in inland provinces. The shutdown’s primary cause is safety concerns tied to criminal violence, looting, and riots that have crippled KwaZulu-Natal and are now spreading to other provinces. (7/15)
In 2030, Brazil expects to reach a production of 5.3 million barrels of oil per day, making it the fifth-largest exporter globally. (7/13)
In the Virgin Islands, the owners of Limetree Bay, a Caribbean oil refinery dogged by cost overruns and regulatory troubles, filed for bankruptcy on Monday after lenders balked at putting new cash into the project. (7/13)
Greenland has ended its 50-year ambition to become an oil-producing nation after announcing it would suspend a search strategy and stop granting exploration licenses. Oil exploration has taken place since the 1970s, involving major companies such as Shell, Chevron, ExxonMobil, and Eni, but most drilling came up dry. (7/12)
The US oil rig count increased by 2 to 380 units while the gas rig count moved up 3 to 104, according to Baker Hughes. The total count of 484 rigs working is up 231 units from the 253 working one year ago. Canada’s oil rig count grew by 6 to 94, and gas rigs moved up by 7 to 55. At 150 rigs, Canada’s total count is 118 more than the 32 units drilling just one year ago. (7/17)
TAP threatened: An 810-foot section of the Trans-Alaska Pipeline is under threat as the braces of the structure have begun to tilt and bend as the slope above it is slowly thawing from warming weather.
US coal production fell in 2020 to its lowest level since 1965 due to low global demand in the wake of the coronavirus pandemic, according to the US EIA. (7/15)
Singapore unveiled on Wednesday one of the world’s largest floating solar panel farms, spanning an area equivalent to 45 football fields and producing enough electricity to power the island’s five water treatment plants. The project is part of efforts by the land-scarce Southeast Asian city-state to meet a goal of quadrupling its solar energy production by 2025 to help tackle climate change. (7/14)
ME solar: The Middle East is moving ahead with solar projects, seeking to pass on soaring polysilicon costs, even as some plans have been delayed due to the pandemic, the region’s solar industry trade group said in its 2021 mid-year outlook released July 11. (7/12)
Wind in Scotland: Renewable firms, oil majors, and investors said they would bid into Scotland’s offshore wind leasing round, which closed on Friday, signaling the considerable demand globally for the rights to build new offshore wind farms. (7/17)
Windy Scotland: Scottish Power and Shell have jointly bid to develop the world’s first large-scale floating offshore wind farms in the northeast of Scotland. In all, Scotland is seeking to award leases for up to 10 GW of offshore wind capacity (including floating wind) to be built over the next decade. (7/16)
Volkswagon laid out the basics of the new Group strategy, “NEW AUTO – Mobility for Generations to Come,” which will see the Group realign from being a vehicle manufacturer to a leading, global software-driven mobility provider. The guiding principle is to develop sustainable, connected, safe and tailored mobility solutions for future generations. (7/15)
EV issues: A study from University of Michigan researchers shows that when, where, and how fleet electric are charged can significantly impact their potential to reduce greenhouse gas emissions. A vital point of the study is that both the emissions directly tied to charging the vehicles and emissions that result from manufacturing the batteries must be considered. Charging the battery only enough to complete a day’s route, a practice the researchers called sufficient charging, led to a significant increase in battery lifetime—in some cases more than doubling it. As a result, emissions tied to battery production were reduced. (7/14)
Electrify America announced its “Boost Plan” to more than double its current electric vehicle (EV) charging infrastructure in the United States and Canada, with plans to have more than 1,800 fast-charging stations and 10,000 individual chargers installed by the end of 2025. (7/14)
Golf carts market shift: The buyers driving a surge in golf cart sales aren’t traditional customers—retirees looking for a way to get from tee to tee—but rather a new, younger clientele who are using their carts for neighborhood trips. And the vehicles are different. Many sit more than half a foot off the ground, with seating for up to six, peak horsepower approaching 30, and a price tag often north of $15,000. An increasing number also come with lithium-ion batteries like those found in full-size electric cars. (7/13)
EV planes commitment: United Airlines Holdings Inc. and regional carrier Mesa Air Group Inc. each agreed to buy as many as 100 small electric-powered planes from a Swedish startup — if the aspiring manufacturer can develop the aircraft. The US airlines and Breakthrough Energy Ventures also will take an equity stake in Heart Aerospace. (7/14)
EV tugboat: Crowley Maritime Corporation will build and operate eWolf, the first all-electric powered harbor tugboat. The 82-foot vessel with 70 tons of bollard pull advances Crowley and the maritime industry’s efforts toward sustainability and decarbonization. The electric tug will replace one that consumes more than 30,000 gallons of diesel per year. (7/13)
Battery costs: According to Wright’s Law, aka the learning curve effect, lithium-ion (Li-ion) battery cell costs fall by 28% for every cumulative doubling of units produced. The battery pack is the most expensive part of an electric vehicle, and the sticker prices of EVs have been falling with declining battery costs. By 2023, the cost of Li-ion batteries is expected to fall to around $100/kWh–low enough for EVs to achieve price parity with their gas-powered brethren. (7/13)
France’s EV angle: France is resisting the European Union effectively phasing out combustion-engine car sales by 2035, advocating for a more lenient target for the end of the decade and a longer leash for plug-in hybrid models.
Automated driving standards: An international group of experts led by WMG, the University of Warwick working together as a part of an ISO technical committee, has published the first international (ISO) safety standard for Level 4 automated driving systems, taking them a step further towards being more widely available. (7/12)