Tom Whipple and Steve Andrews, Editors.
Quotes of the Week
“Natural gas prices have already reached the level which destroys demand and growth. While no shortages have yet been detected, the market is currently being driven by panic… Without a response from producers, the only other option is for prices to reach levels that triggers demand destruction, and that is the phase we have now entered.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank
“In a strategy document outlining prospects for Russia’s critical oil and gas industry, the government said its “base case” — or most likely — scenario, is that Russia’s oil production will never again hit the record levels recorded in 2019.”
The Moscow Times
“Remarkably, the energy models used by policymakers, investors and most researchers don’t properly account for the Moore’s Law effect. Leading authorities such as the International Energy Agency have systematically underestimated the cost declines of renewables every year for 20 years. We analyzed the projections of 2,905 major energy models and found on average the cost of solar dropped at a rate almost six-times faster than forecast. So it’s not surprising there’s a misperception that zero-carbon will cost more.”
Eric Beinhocker, J. Doyne Farmer and Cameron Hepburn: Oxford University
Graphic of the Week
Source S&P Global Platts
1. Energy prices and production
Oil: West Texas Intermediate crude closed above $80 a barrel on Monday for the first time since late 2014 as a growing power crisis from Europe to Asia boosts demand for oil ahead of winter.
U.S. crude futures advanced 1.5% New York to $80.30, while its global counterpart Brent rose closer to the $85-a-barrel mark and closed on Monday at 83.59. Prices of coal and natural gas have surged globally with stockpiles running low before the Northern Hemisphere winter, prompting some switching to oil products such as diesel and fuel oil.
It is quickly tightening the market as the Organization of Petroleum Exporting Countries and its allies are sticking with their plan to roll back production cuts only gradually. The oil market’s price structure is flashing bullishness, with the difference between New York crude’s front two contracts hit the widest in more than two years, indicating shrinking supplies in the U.S. storage hub of Cushing, Oklahoma. Prices have risen as more vaccinated populations are brought out of lockdowns, supporting a revival of economic activity, with Brent advancing for five weeks and U.S. crude for seven. On top of that, the extensive offshore oil supply shut-ins since Hurricane Ida have held down supply. Coal and gas prices have also been surging as economies recover, making oil more attractive as a fuel for power generation.
The benchmark’s surge came after the US Energy Department said that it had no plans “at this time” to tap the nation’s oil reserves, cooling fears that the rally would be tempered with an emergency supply. The US may be heading into winter with the lowest stockpiles of heating oil to meet increasing demand in more than two decades. According to the Energy Information Administration, inventories of distillates — used as diesel for both transportation and heating oil — are enough to meet 31.2 days of demand. That’s the tightest it has been for this time of the year since 2000.
Oil explorers need to raise drilling budgets by 54% to more than half a trillion dollars to forestall a significant supply deficit in the next few years, according to Moody’s Investors Service. Crude and natural gas drillers chastened by last year’s unprecedented collapse in demand and prices haven’t responded to the recent market rebound as the industry typically does by expanding the search for untapped fields. As a result, while international crude and US gas prices have risen more than 50% and 120% this year, respectively, drilling outlays are only forecast to increase have risen by 8% globally, Moody’s said in a report. That’s too little to replace what those companies will pump from the ground during 2022.
Meteorologists are predicting a cold winter in the US, and it could send energy prices even higher. Record-high natural gas prices could force some utilities to switch to oil derivatives instead, boosting demand for crude. The forecasts by bank analysts that oil could go higher before the year is over were also expected.
International Energy Agency: The head of the IEA said Russia could send substantially more gas to Europe and alleviate the energy crisis gripping the continent. Fatih Birol told the Financial Times that the agency’s analysis suggested Russia could raise exports by roughly 15% of peak winter supply to the continent. Speaking the day after President Vladimir Putin hinted at a boost to shipments, Birol urged Russia to prove it is a “reliable supplier” by helping alleviate a supply crunch that has rocked energy prices and threatened the global recovery from pandemic lockdowns.
Governments need to move faster and more decisively on a wide range of policy measures to enable low-carbon hydrogen to fulfill its potential to help the world reach net-zero emissions while supporting energy security, the IEA says in a new report. Currently, global low-carbon hydrogen production is minimal, its cost is not yet competitive, and its use in promising sectors such as industry and transport remain limited. However, there are encouraging signs that it is on the cusp of significant cost declines and widespread global growth, according to the IEA’s Global Hydrogen Review 2021. For example, when the IEA released its special report on The Future of Hydrogen for the G20 in 2019, only France, Japan and Korea had strategies for using hydrogen. Today, 17 governments have released hydrogen strategies, and more than 20 others have publicly announced they are developing plans.
Global oil demand is set to recover to its pre-pandemic level toward the end of 2022, supported by demand growth in Asia, and increase for “several more years to come” without additional significant government policy changes, the head of the IEA told Global Platts.
OPEC: The reason the cartel stuck to its 400,000 b/d monthly increase was, unsurprisingly, the higher revenues that all oil-producing countries are enjoying because of the price rally, Reuters sources said. “Everyone is happy,” said an OPEC+ delegate. However, a larger supply addition of 800,000 b/d was considered ahead of last Monday’s OPEC+ meeting, the Reuters source also said, adding that eventually it was dropped.
The cartel+ holds both the knife and the cake in the oil market, especially as the group boasts the lion’s share of the world’s remaining unused supply capacity. That’s what Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said in a statement sent to Rigzone following the latest OPEC+ meeting. “The supply capacity control makes OPEC+ the only market player that can significantly redirect market conditions, apart from any unplanned outages or weather phenomena. So, the outcome of the OPEC+ meeting was no surprise, Tonhaugen noted.
Shale Oil: US shale oil production will expand at a “modest rate” over the next 18 months even as prices touch multi-year highs, according to BloombergNEF, leaving OPEC in a powerful position as the world cries out for more barrels. Producers are using cash flow to pay down debt and reward shareholders rather than invest in new drilling, BNEF said in a report published Wednesday. Yet energy demand is rising around the world. US crude futures reached a seven-year high this week after OPEC and its allies declined to alter their supply agreement to raise output.
Natural Gas: Russian President Putin said Moscow was ready to work on stabilizing the global energy market, causing a sudden reversal in natural gas prices, which had earlier soared to their highest level on record. The Russian leader appeared to be flexing his geopolitical muscles by signaling that he could help tamp down a growing crisis in Europe caused by a shortage of natural gas. High prices in Europe have spilled over to the US as well, with natural gas trading at its highest in over a decade.
Gas traders say one of the drivers of the price rally is that Russia is limiting its European gas supplies to the levels in long-term contracts and has let Gazprom’s storage facilities in the continent fall to very low levels.
Putin’s remarks appeared to stave off criticism from Europe that Russia is holding back supplies as it awaits approval for the controversial new Nord Stream 2 pipeline, which bypasses Ukraine to send gas to Germany. That project edged closer to going live on Wednesday after a judicial opinion in the EU. The European Commission is looking into complaints that Russia is using its position as a significant supplier to propel the soaring gas price in Europe, the bloc’s energy policy chief said on Tuesday. Russian supplier Gazprom has been fulfilling its sales obligations under long-term contracts but not adding more.
The US has been shielded from that global crunch because it has plenty of gas supply, most of which stays in the country since US export capacity is still relatively small. As a result, the benchmark US natural gas contract has been rallying, lately hitting seven-year highs, but it is only $5.62 per million British thermal units. This price is a far cry from the $30-plus being paid in Europe and Asia. However, the US market is worried. Regional natural gas markets in the US see prices for this winter surging along with global record highs – suggesting that the energy bills causing headaches in Europe and Asia may hit the world’s top gas producer before long.
Some of the world’s biggest importers of liquefied natural gas are reducing orders in the face of a 500% price surge during the past year, raising concerns among producers about potential long-term destruction of demand. LNG buyers, including numerous emerging economies in Asia, are balking at prices that have doubled just within the past month, while a growing number of exporters in North America are straining to boost export capacity that will still take years to come online.
Thanks to higher natural gas prices, US oil producers are generating a larger share of their revenues from natural gas. The percentage of natural gas in revenues jumped to 14% in the first quarter of 2021—the highest since at least 2018, the EIA says. Excluding the integrated majors, a total of 54 listed producers primarily engaged in crude oil production have seen their revenues from natural gas at a double-digit share of total revenues so far this year.
Coal: Supply shortages are pushing prices for the fuel to record highs and laying bare the challenges to weaning the global economy off one of its most important—and polluting—energy sources. The crunch has many causes—from the post-pandemic boom to supply-chain strains and ambitious targets for reducing carbon emissions. And it is expected to last at least through the winter, raising fears in many countries of fuel shortfalls in the months ahead.
Australia’s Newcastle thermal coal, a global benchmark, is trading at $202 a metric ton, three times higher than at the end of 2019. Global production of coal, which generates around 40% of the world’s electricity, is about 5% below pre-pandemic levels. In Europe, the rising prices of coal and other energy resources have hit factory output and driven household energy bills higher while major coal importers in Asia, including Japan and South Korea, are jostling to secure supplies.
Australian coal exports took a hit when China imposed a ban late last year but have quickly recovered as other Asian buyers purchased their exports. In China, dwindling supplies and surging costs have resulted in electricity shortfalls on a scale unseen in more than a decade, hitting industry and prompting some cities to turn off traffic lights to conserve power. Beijing, the world’s second-largest economy and its biggest coal consumer, is at the heart of the current crunch. As Beijing has sought to meet climate targets, it allowed coal inventories to dwindle. Repercussions of the decision last year to halt imports of Australian coal decision are still redrawing global coal supply chains, luring new buyers to Australia, and prompting China to venture as far as Latin America, Africa, and Europe in its hunt for alternative suppliers.
Analysts say the world’s reliance on coal has tended to fluctuate with economic growth rather than governments’ climate ambitions. For example, global coal use dipped last year during the pandemic but is expected to exceed 2019 levels this year.
“When economic growth gets crunched, coal demand slows, and everyone thinks we’re transitioning away from coal, but as soon as growth comes back, coal use accelerates again,” said Rory Simington, an analyst at energy researcher Wood Mackenzie. “There’s a difference between what people perceive happening in energy transition and what’s happening.”
Electricity: From hydropower failures in South America to natural gas shortages in Europe and coal prices soaring in Asia, the electricity crisis has gone global. Recent news from the worldwide electricity sector looks grim. South Americans, heavily dependent on hydroelectricity, face drought-induced scarcity. The alternatives for South American electricity users are an increased reliance on fossil fuels or turning off the lights.
Winter is coming—when the existing natural gas shortage pushes prices even higher. And there is China. Electricity demand rose, coal usage increased, and coal prices went way up. But the government puts a ceiling on the price of electricity which causes generators to lose money on power sales in periods of rapidly escalating fuel prices like the present. After experiencing blackouts and other usage reduction measures, the electric companies went to purchase more coal. However, world coal markets are now tight.
In addition, we’re also now witnessing rapid fuel price increases, which are driving escalating electricity prices. Installing individual, non-fuel power generation and storage systems provides the energy user with long-term price stability. Once installed, a solar and battery storage system offers long-term price stability. This is a gigantic inflation hedge— although not looked at that way at present. Moreover, in inflationary times self-generation permits power users to cap their (self-generated) rates for an extended period—a considerable benefit against a backdrop of volatile energy prices.
Prognosis: Global energy demand and energy-related carbon emissions will continue to rise, with oil the most significant energy source just ahead of surging renewables, the US EIA said in its latest International Energy Outlook. The 2050 projection underscores the stark challenges ahead for transitioning away from fossil fuels and curbing global warming emissions. EIA expects global energy demand to increase 47% in the next 30 years, driven by population and economic growth, particularly in developing Asian countries. This will require increased oil and natural gas production, absent technological breakthroughs or significant policy changes.
Americans are spending a dollar more for a gallon of gasoline than they were a year ago. Natural gas prices have shot up more than 150% over the same time, threatening to raise food, chemicals, plastic goods, and heat this winter.
The energy system is suddenly in crisis worldwide as the cost of oil, natural gas, and coal has climbed rapidly in recent months. Fuel shortages and panic buying have led to blackouts and long lines at filling stations in China, Britain, and elsewhere. The situation in the US is not quite as dire, but oil and gasoline prices are high enough that President Biden has been calling on foreign producers to crank up supply. He is doing so as he simultaneously pushes Congress to address climate change by moving the country away from fossil fuels toward renewable energy and electric cars.
2. Geopolitical instability
(These are the situations that reduce the world’s energy supplies or have the potential to do so.)
Iran: Tehran said its demand that the US unblocks $10 billion of its oil funds trapped overseas is one example of what Washington could do to generate goodwill before big-power talks aimed at reviving the 2015 nuclear deal can restart. Iran’s Foreign Minister Amirabdollahian told Iranian State TV that he’d relayed a message to US officials that Washington had to release at least $10 billion of oil remittances that are frozen in Iran’s foreign accounts.
Iraq: The last few days saw the first meeting of the new iteration of the Iraq National Oil Company (INOC), with the agenda being “the five-year plan for the oil exploration sector, and interim and future production and export plans.” In theory, having a national oil company is a good idea in that it can coordinate otherwise disparate and sometimes counter-productive development initiatives by a range of state entities. However, in practice, in Iraq it remains a truism that the greater the concentration of power over oil and money in one place, the more monumental the scale of corruption becomes.
This is not the first time Iraq had created a National Oil Company, with the first iteration being in 1966 before it was incorporated into the Ministry of Oil in 1987. However, the new law’s language is highly concerning, given Iraq’s history of endemic corruption in business, especially in that part of the business that accounts for around 90% of all state revenues – the oil sector.
The Oil Ministry is in advanced talks with international oil companies over boosting its production capacity to 8 million b/d by the end of 2027, its oil minister, Ihsan Ismael, told the Energy Intelligence Forum. “We have completed 90%-95% of discussions with them to change the plateau from 12 million b/d to around 8 million.” Several oil majors operate the country’s biggest oil field in the south, including BP’s Rumaila, Lukoil’s West Qurna 2.
The Iraqi cabinet has approved the National Oil Company becoming a financial partner with TotalEnergies in its projects as the country seeks to bolster the role of the reestablished state-owned firm. Ismael said that the cabinet also approved its support of INOC’s commercial operations and planned to boost Iraq’s oil and gas production. In September, Iraq signed four energy and power agreements worth $27 billion with France’s TotalEnergies as OPEC’s second-biggest producer seeking to attract foreign investment to its oil, gas, and electricity sectors.
Libya: The resignation of Libya’s deputy oil minister, Refaat al-Abbar, threatens to make the current uneasy situation in Libya’s oil sector even worse. As it stands, Libya is currently producing around 1.2 million b/d of oil but has plans to increase this to 1.45 million by the end of this year, 1.6 million within two years, and 2.1 million within three to four years. All other factors being equal, these targets would be entirely achievable, as Libya has around 48 billion barrels of proved crude oil reserves – the largest in Africa. Moreover, before the removal of long-time leader Muammar Gaddafi, in 2011, the country had been easily able to produce around 1.65 million b/d of mostly high-quality light, sweet crude oil.
Libya has been in conversation with various international oil companies to invest in Libya, with Abbar playing a part in those initiatives. Given this continued factionalism across the country, there is no reason to believe that even if an agreement is made, it will last any longer than previous agreement. This means that Libya’s oil production will be as subject to sudden supply drop-offs as it has been since 2011, with blockades the most likely response of both sides to any perceived slight to their interests.
Venezuela: With more than 10,000 oil-related installations and a network of close to 16,000 miles of underwater pipelines in operation, slicks have been a constant occurrence at Lake Maracaibo. But leaks have never occurred at the rate seen these days, said Eduardo Klein, director of the remote-sensing laboratory at Simón Bolívar University, where he uses NASA satellite images to document the oil slicks.
In recent years, a lack of maintenance, a brain drain of technicians, and corruption have crippled oil production, making oil accidents more common. As a result, thousands of wells are broken beyond repair within the lake, allowing raw crude and natural gas to bubble to the surface.
3. Climate change
Last week’s news was not encouraging. First, Chinese officials ordered more than 70 mines in Inner Mongolia to ramp up coal production by nearly 100 million tons as the country battles its worst power crunch and coal shortages in years. The proposed increase would make up almost 3% of China’s total thermal coal consumption. So now it seems that for Beijing, the needs of coal and natural gas and their effect on industrial production are driving climate concerns to a back burner, thus there may be little real progress at the Glasgow summit.
Current demand for coal and natural gas has exceeded pre-COVID-19 highs, with oil not far behind, dealing a setback to hopes the pandemic would spur a faster transition to clean energy from fossil fuels. Global natural gas shortages, record gas and coal prices, the power crunch in China, and a three-year high on oil prices all tell one story – energy demand has roared back, and the world still needs fossil fuels to meet most of those energy needs.
“The demand falls during the pandemic was entirely linked to governments’ decision to restrict movements and had nothing to do with the energy transition,” the head of oil demand analysis at FGE told Reuters. “The energy transition and decarbonization are decade-long strategies and do not happen overnight.” According to the IEA, over three-quarters of global energy demand is still met by fossil fuels, with less than a fifth by non-nuclear renewables.
Let a molecule of carbon dioxide escape into the atmosphere, and it stays for centuries. However, methane locks in far more heat in the short term and has been leaking just as relentlessly. Atmospheric concentrations of methane are 2.5x higher than in pre-industrial times.
Thawing earth, once thought to be permanently frozen, is springing to life and threatening Russia’s economy. The melting of the layer known as permafrost is a result of climate change. Two-thirds of the country, which is largely uninhabited sits on such soil, including much of its oil and gas infrastructure. Since 1976, government data shows that Russia’s average temperature has risen 0.92-degrees F. per decade or 2½ times the global pace.
Mines, power plants and factories are experiencing increasing corrosion leaks and cracks, stemming in large part from defrosting ground. According to ecologists and other researchers, braces and other mechanisms, previously anchored into permafrost, often corrode, twist, and bend when the earth below changes. As a result, companies are pouring millions of dollars into reinforcing buildings, monitoring soil temperatures, and installing high-tech cooling systems.
Russian economic officials and scientists estimate that thawing permafrost could affect more than a fifth of Russian infrastructure. The economy stands to lose more than $68 billion by 2050, a government minister said. The government says that 40% of buildings and infrastructure facilities in permafrost-covered areas have already been damaged.
Across the countryside, the effect of permafrost is plain to see. Local scientists said that thawing ice had transformed farmland into swamps, and rivers swell in springtime with up to 30% more runoff compared with the 1980s. In villages, locals who previously stored meat and other perishables in cellars dug deep into the ground now must use ordinary deep freezers because of wet subsoil.
According to Morgan Stanley, around 90% of the gas production of state-controlled energy giant PAO Gazprom is in permafrost-covered provinces. At its Bovanenkovskoye field, a vast facility in Northern Russia that Gazprom hopes will last for another century, the company has installed 1,000 vapor-liquid cooling units and underground pipes to circulate a refrigerant compound and ensure the ground stays frozen.
After years of publicly dismissing climate change, President Vladimir Putin is finally prodding officials to take the threat it poses to Russia’s economy more seriously. The shift in thinking means the Kremlin is likely to come to the COP26 climate change summit in Glasgow in November with proposals to synchronize its efforts to measure carbon emissions with those in Europe, according to people familiar with the plans.
While the moves hardly amount to the kind of ambitious new emissions-reduction target for Russia that western capitals were hoping for, it’s a significant step for Putin as the leader of one of the world’s largest hydrocarbon producers, who until recently belittled climate issues.
Less food. More traffic accidents. Extreme weather hitting nuclear waste sites. Migrants are rushing toward the United States, fleeing even worse calamities in their own countries. Those scenarios, once the stuff of dystopian fiction, are now driving American policymaking. Under orders from President Biden, top officials at every government agency have spent months considering the top climate threats their agencies face and how to cope with them. On Thursday, the White House offered a first look at the results, releasing the climate adaptation plans of 23 agencies, including Energy, Defense, Agriculture, Homeland Security, Transportation, and Commerce. The plans reveal the dangers posed by a warming planet to every aspect of American life and the difficulty of coping with those threats.
The global freshwater supply is dropping the World Meteorological Organization warned in a report released last week. By 2050, about 5 billion people will have inadequate access to water at least one month per year, the report said. Overall, global warming is intensifying the planet’s water cycle, with an increase of 134% in flood-related disasters since 2000. The number and duration of droughts have grown by 29% over the same period. Most of the deaths and economic losses from floods are in Asia, while Africa is hardest hit by drought.
4. The global economy and the coronavirus
United States: North American fertilizer prices soared to a record high last week, driving up costs for farmers and threatening to worsen food inflation. The North America Fertilizer Price Index rose 7.9% to $996.32 per short ton, soaring past its 2008 peak to set a new benchmark for the index that began in January 2002. This year, the fertilizer market has been hit hard due to extreme weather, plant shutdowns, sanctions, and rising energy costs in Europe and China, pushing prices past levels that traders and farmers hadn’t seen since the global financial crisis.
Europe: European industry is being pushed closer to a breaking point as the region’s energy crisis worsens by the day. Power and gas prices are hitting new records, and some energy-intensive companies have temporarily shut operations because they’re becoming too expensive to run. As winter approaches and Europeans start to turn on their heaters, the squeeze will intensify, pushing more executives into tough decisions about keeping plants open.
In Europe, natural gas prices have rocketed almost 600% this year on worries that current low storage levels will be insufficient for the winter. In the US, natural gas futures recently hit a 12-year-high. Uncertainty over whether surging energy prices will spur inflation and interest rate rises hit global equity markets and bonds in Europe, particularly Britain, where several energy companies have already collapsed.
As energy prices soared, inflation in the eurozone accelerated in September to the highest level since 2008. The annual inflation rate in the 19 countries of the euro area—including the most significant EU economies Germany, France, and Italy—hit 3.4% in September 2021, up from 3.0% in August. Energy prices surged by 17.4% in September, compared with a 15.4% jump in August. Among individual countries, inflation in Germany, Europe’s biggest economy, is expected to have accelerated to 4.1% in September from 3.4% in August. Surging natural gas and power prices are the main drivers of inflation in the eurozone. However, the European Central Bank (ECB), the central bank for the euro, has said that it sees inflationary pressures as transitory.
On Wednesday, the European Union said it would scrutinize its power market design and consider proposals to revamp EU regulation, as the bloc seeks to keep its plans to tackle climate change on track amid record-high energy costs. This year, European electricity and gas prices have rocketed as tight gas supplies have collided with solid demand in economies recovering from the COVID-19 pandemic. Soaring energy prices topped the EU’s political agenda on Wednesday, with environment ministers and European Parliament each meeting to debate the issue, after EU country leaders discussed their response on Tuesday evening.
Germany and the rest of Europe are bracing for an expensive winter as power contracts for the next couple of months climb to unprecedented highs because of tight gas and coal supplies. September power prices on the German day-ahead market averaged the highest in at least 20 years as surging gas, coal, and carbon costs make it more expensive to generate electricity at the nation’s fleet of fossil-fired plants. Yet traders expect the charges to increase even more this winter.
German industrial output suffered its steepest drop in August since April last year due to supply chain disruptions holding back growth in Europe’s biggest economy and hitting the auto sector particularly hard. The Federal Statistics Office said industrial output fell by 4.0% on the month after an increase of 1.3% in July.
After leaving the European Union, the UK emerged from the pandemic without enough workers and facing a winter tougher than any since the 1970s. Lines of cars snake from gasoline stations. Fights break out among angry motorists trying to get fuel. Grocery staples are out of stock on store shelves. A charity warns that doubling heating bills will force a million households to rely on extra blankets to stay warm. This was supposed to be the year the UK broke free of the European Union and forged ahead as a buccaneering free trader, delivering the benefits of a new, confident “Global Britain” to workers and companies at home. Instead, that picture of Brexit utopia is looking more like a dystopia.
Britain’s retail energy sector will see more failures from suppliers and increased market consolidation due to a sharp rise in wholesale energy prices, rating agency Moody’s said on Wednesday. The agency added that the sector faces pressures on profitability and an increased risk of credit harmful political intervention. Nine British energy suppliers ceased trading last month alone. Smaller suppliers with less capital are struggling amid record wholesale power and gas prices across Britain and Europe. In contrast, price caps prevent the total rises from being passed on to consumers.
A lobby group warned that the UK government must roll out emergency measures quickly to help industrial energy users cope with the gas crisis or face business shutting down this winter. Europe’s gas crunch has hit sectors from fertilizers to metals, and there’ll likely be production halts and disruption to supply chains without government action, the Energy Intensive Users Group said Tuesday.
China: The hit from China’s energy crunch is starting to ripple throughout the globe, hurting everyone from Toyota to Australian sheep farmers and makers of cardboard boxes. The extreme electricity shortage caused by soaring coal prices in the world’s largest exporter is set to hurt China’s growth, and the knock-on impact to supply chains could crimp a global economy struggling to emerge from the pandemic. The timing couldn’t be worse, with the shipping industry already facing congested supply lines that are delaying deliveries of clothes and toys for the year-end holidays. It also comes just as China starts its harvest season, raising concerns over sharply higher grocery bills.
China said on Saturday it pressed the US to eliminate tariffs in talks between the countries’ top trade officials that Washington saw as a test of bilateral engagement between the world’s biggest economies. The virtual discussions between US Trade Representative Katherine Tai and China’s Vice Premier Liu He followed Tai’s announcement on Monday that she would seek “frank” talks and hold China to its commitments under a “Phase 1” trade deal.
The government is scrambling for energy supplies ahead of the winter, with a global shortage of natural gas and coal that has led to record-high prices for the fuels in Asia. China last week ordered its state energy companies to secure supply “at all costs” despite the rallying prices of liquefied natural gas and coal. The world’s second-largest economy is looking to prevent further power outages, rationing, and blackouts that could slow its economic growth and exacerbate global supply chain problems. Last week, China restricted power use in at least 20 regions and provinces that contribute more than half to the Chinese economy.
Beijing is so desperate for coal amid a power crunch threatening the economic growth that it has released Australian coal sitting in storage because of the spat between the two countries. Moreover, Chinese officials have ordered mines in Inner Mongolia to increase coal production by nearly 100 million tons which runs counter to pledges to reduce coal consumption.
Much has been made of Beijing’s efforts to meet its environmental emissions targets — the country states it will hit peak emissions before 2030 and carbon neutrality by 2060 — and its restricted steel and aluminum production. But a recent Reuters post by John Kemp suggests output is being impacted more by a widening electricity crisis than by enforced shutdowns to meet environmental goals. Kemp explains that China is in the grip of a severe shortage of both coal and electricity. Coal output has not kept up with rising electricity demands from a rapidly recovering economy.
Rows of residential towers, some 26 stories high, stand unfinished in Lu’an, a provincial city about 350 miles west of Shanghai, their plastic tarps flapping in the wind. Elsewhere in the city, golden Pegasus statues guard an uncompleted $9 billion theme park that was supposed to be bigger than Disneyland. Central to local leaders’ economic dreams, a planned $4 billion electric vehicle plant remains a steel frame with overgrown vegetation spilling into the road.
The structures are monuments to the once-grand ambitions of China Evergrande Group, now among the world’s most indebted property companies, and a case study in how China’s dependence on real estate as an economic engine helped feed those ambitions. Evergrande is in trouble in part because it developed properties aggressively in places such as Lu’an, where its debt-fueled building spree came as the city’s population dwindled. It launched hundreds of projects across more than 200 Chinese cities.
Russia: The Kremlin’s ambassador to the EU has called on Europe to mend ties with Moscow to avoid future gas shortages but insisted that Russia had nothing to do with the recent jump in prices. Vladimir Chizov, Russia’s permanent representative to the EU, said he expected Gazprom, the state-controlled exporter that supplies 35% of European gas needs, to respond swiftly to instructions from President Vladimir Putin to adjust output. Action which would help curb skyrocketing wholesale prices, was likely to come “sooner rather than later,” Chizov said. Putin “gave some advice to Gazprom, to be more flexible. And something makes me think that Gazprom will listen,” Chizov told the Financial Times.
Chizov said Europe’s choice to treat Moscow as a geopolitical “adversary” had not helped.
“The crux of the matter is only a matter of phraseology,” he said. “Change adversary to partner and things get resolved easier . . . when the EU finds enough political will to do this, they will know where to find us.”
Russia reported 957 coronavirus-related deaths on Monday, close to the all-time high of 968 reported two days earlier. The government coronavirus task force also said it had recorded 29,409 new cases in the last 24 hours, an increase from 28,647 cases on Sunday. Moscow, which reported 5,002 cases on Monday, said it was launching free “express” antibody-based tests for COVID-19 at several locations including shopping malls to avert a new wave of restrictions. The number of people hospitalized over the last two weeks in the capital has doubled in comparison with the previous fortnight, the Interfax news agency quoted the city’s COVID-19 task force as saying. However, non-governmental observers place the toll as being much higher than the government says.
Saudi Arabia: Oil revenues are flowing in at the highest rate in three years, and the kingdom is already close to pre-pandemic production levels of 9.8 million barrels daily. Oil demand is still rising fast. This bodes well for next year’s revenues, too. As a result, Saudi Arabia expects to shrink its budget deficit to just 1.6% of GDP in 2022.
Saudi Arabia booked its highest-ever quarterly foreign direct investment (FDI) in the second quarter, thanks to a large oil pipeline infrastructure deal that state oil giant Aramco closed in the period. The key driver for the record foreign investment was a $12.4 billion deal that involved Saudi Aramco. In April, the company reached an agreement with a consortium led by US EIG Global Energy Partners to sell it a 49% stake in Aramco Oil Pipelines Company for $12.4 billion. Aramco Oil Pipelines Company is a new business entity, formed to keep—or trade—the rights to 25 years of payments for crude transportation across Aramco’s pipeline network.
India: The coal ministry said there is enough of the fuel to meet the demand of power plants and that concerns about electricity disruption are misplaced. The ministry is pushing back after Delhi Chief Minister Arvind Kejriwal warned Prime Minister Narendra Modi of an energy shortage in the capital. Coal dispatches were constrained due to a prolonged monsoon, the ministry said in a statement Sunday. Power plants have 7.2 million tons of coal reserves that can last four days and Coal India Ltd., a supplier to such stations, has a stock of 40 million tons, the ministry said. The average coal requirement at power plants is about 1.9 million tons per day, compared with supply of around 1.8 million tons a day, it said. Coal-based power generation in India this year rose by almost 24% as of last month.
India’s power ministry has set a revised policy to use biomass pellets in coal-burning thermal power plants, encouraging the use of agricultural waste otherwise burned by farmers, causing air pollution. The decision, announced on Friday, makes it mandatory for three categories of thermal power plants to use a 5% blend of biomass pellets along with coal.
A new study published last week in the Proceedings of the National Academy of Sciences offers troubling data about the future of India. The researchers found that more than half the people on Earth who face life-threatening heat stress caused by climate change live in India. Urban dwellers in the world’s second-most populous nation have borne the brunt of global warming over the last three decades, and the risks to their health are poised to rise.
India has 17 of the 50 cities most affected by heat stress. New Delhi ranked second, while Bangladesh’s capital Dhaka topped the list. The researchers conducted a statistical analysis of 13,115 cities worldwide using the so-called wet-bulb index — a measure that accounts for temperature, humidity, wind speed, and radiant heat. When that measure exceeds 86 degrees Fahrenheit, the International Standards Organization says that workers face heat-related illnesses that can lead to death.
5. Renewables and new technologies
Electric vehicles still only make up about 1% of the global fleet of passenger cars, but sales are taking off rapidly. Within four years, one-quarter of new cars bought in China and nearly 40% of those purchased in Germany are expected to be electric, according to BloombergNEF. Global sales of EVs are forecast to reach 10.7m by 2025 and then 28.2m by 2030.
General Motors announced the Wallace Battery Cell Innovation Center. This all-new facility will significantly expand the company’s battery technology operations and accelerate the development and commercialization of more extended range and more affordable electric vehicle batteries. GM will also use the facility to integrate the work of GM-affiliated battery innovators, helping the company reach its stated goal of at least 60% lower battery costs with the next generation of Ultium.
6. The Briefs (date of the article in the Daily Energy Bulletin is in parentheses)
ANGEA: Chevron, ExxonMobil, JERA, JGC Corp., Mitsubishi Heavy Industries, Santos, and SK E&S have banded together to establish the Asia Natural Gas and Energy Association (ANGEA). ANGEA will advise governments as they develop energy policies and solutions, including renewables and energy conservation, to meet their national needs and achieve global climate goals. (10/8)
In Nigeria, the waste of its most prized natural resource continued in July. The country lost 7.193 million barrels mainly to deteriorating facilities at the country’s offshore and shallow waters assets. It was the highest loss in months, primarily because of shut-ins due to ongoing repairs and disruptions arising from community workers’ protests and fire incidents. (10/6)
Offshore Guyana, ExxonMobil has increased its estimate of the discovered recoverable resource for the Stabroek Block to around 10 billion oil-equivalent barrels after striking oil there one more time. (10/8)
Brazil’s Petrobras said Monday it had completed overhauls to its compliance program, ending a settlement agreement with US authorities over Brazil’s vast bribery and kickback scheme. The company agreed to pay $853.2 million in settlements with US and Brazilian authorities in 2018. (10/7)
Colombia on Friday signed exploration and production contracts for four offshore blocks with energy company Anadarko, a subsidiary of Occidental Petroleum, with expected investment commitments of $1.4 billion. The four blocks are located off the Andean country’s Caribbean coast. (10/9)
In Canada, oil and gas companies have asked the government to design a tax credit to pay for 75% of the cost to build carbon capture facilities that will curb greenhouse gas emissions. (10/8)
Canada invoked a 1977 treaty with the US to request bilateral negotiations over Enbridge Inc’s Line 5, escalating a long-running dispute over one of Canada’s major oil export pipelines. Line 5 ships 540,000 barrels per day of crude and refined products from Wisconsin to Ontario. The state of Michigan ordered Enbridge to shut it down due to worries a leak could develop in a four-mile section running beneath the Straits of Mackinac in the Great Lakes. (10/5)
The US oil rig count increased by five to 433 this week, according to Baker Hughes’ numbers. That’s roughly double the count from one year ago. Gas rigs held steady at 99. (10/9)
Orphaned wells: Who should be responsible for plugging abandoned oil and gas wells–Big Oil or the government and taxpayers? That’s the question being raised as the US faces a growing abandoned oil well problem, with 2 to 3 million unplugged wells across the country. (10/8)
Slowing Exxon: Activist fund Engine No. 1 says Exxon Mobil had reduced oil and gas production in a “meaningful” way since the beginning of its successful proxy campaign last year. (10/5)
The US Department of Justice is investigating suspected manipulation of energy pricing benchmarks published by S&P Global Platts, expanding the agency’s crackdown on misconduct in the global commodities market. (10/4)
CA oil leak: Democratic members of Congress from California seized on the oil spill off the state’s coast to promote federal legislation to ban all offshore oil drilling, as investigators searched for what caused the pipeline to burst. About 3,000 barrels of crude oil spilled into the Pacific Ocean, killing wildlife, soiling the coastline, and forcing officials to close beaches in several cities in Orange County, just south of Los Angeles. (10/6)
Source of oil leak? Offshore California, the Coast Guard is investigating whether a ship anchor might have snagged and bent the pipeline owned by Amplify Energy. A 13-inch lateral gash was found in a 16inch concrete-encased pipeline. (10/7)
General Motors set an ambitious financial target on Wednesday, telling investors it aims to more than double revenue by 2030 with an influx of new battery-electric models and auto-related services. The Detroit automaker took direct aim at Tesla Inc., saying it plans to take the lead in electric-vehicle sales in the US. GM also said it would release a new electric SUV priced at about $30,000, undercutting the cheapest version of Tesla’s Model 3 sedan. (10/7)
Batteries: The US is narrowing the gap on China’s dominance of the $46 billion lithium-ion battery industry thanks to investments from Tesla Inc. and the Biden administration’s policy push to drive the growth of electric vehicles. (10/8)
The South Korean battery giants powering many of the world’s electric vehicles face a skills shortage that could slow the global race towards zero-emission transport. The country’s three primary players, which command a third of the global electric vehicle (EV) battery market, told Reuters they were all grappling with a shortage of research and engineering specialists as demand for the technology balloons.
German utility Steag halted its coal-fired power plant Bergkamen-A after it ran out of hard coal supplies amid an energy crunch globally and logistics challenges domestically. In recent weeks, utilities across Europe have fired up more coal-powered generation as natural gas prices continue to surge. (10/4)
Japan is set to fire up its nuclear power plants as it looks to expand its renewable energy offering amid a push to slash its emissions, its new industry minister has said today. The efforts are to cut 46% of its carbon output from 2013 levels by 2030, while the country has also pledged to be carbon neutral by 2050. (10/9)
H2: The US Department of Energy (DOE) is awarding millions in funding to a project to demonstrate technology that will produce clean hydrogen energy from nuclear power. This approach will allow clean hydrogen to serve as a source for zero-carbon electricity and represents a significant economic product for nuclear plants beyond electricity. (10/8)
In Norway, Equinor ASA, the flagship producer of oil and gas, is investing billions of dollars in blue hydrogen on a bet that it can make the fuel more cleanly than anyone else, in part because it leaks less methane than its competitors. (10/9)
Hydro hijacked: Following last year’s war with Armenia, Azerbaijan retook much of the territory it had lost in the first war between the two sides in the 1990s, including most of the 36 hydropower plants in Nagorno-Karabakh. Only six remain under Armenian control of the 36 plants that operated in Armenian-controlled territory before the war. (10/8)
Trains account for a third of the ton-miles—that is, a ton of weight carried a mile—that freight travels in the US every year. That’s almost as much as is carried by trucks. The US has the most extensive rail network of any country on earth by miles of track—yes, even more significant than China’s—and it’s currently facing some of the same snarls and congestion as seemingly every other part of the country’s supply chains, on account of unusual activity at ports and record demand at some rail hubs. Making trains fully autonomous in the US may help on several fronts. For starters, a future of autonomous trains could mean putting a lot more freight onto America’s existing rail network without adding new lines. (10/9)
The $14 trillion shipping industry, responsible for 90% of world trade, has left in its wake what appears to be a record number of cargo-ship castaways. Abandonment cases are counted when shipowners fail to pay crews two or more months in wages or don’t cover the cost to send crew members home. (10/9)
Clean energy startups have raked in $11 billion this year, nearly double the total amount from 2020. One of the largest funders of clean energy startups has been Big Oil, with the fossil fuel giants eager to stay ahead of the energy transition. Ironically, it seems that there is still very little interest in oil and gas startups. (10/7)
European banks are beginning to drop clients that pose a climate risk rather than face the possibility of higher capital requirements, according to the watchdog overseeing the development. Banks are raising prices, denying loan requests, “de-selecting industries and in some cases clients. (10/5)
An intense complex of thunderstorms stalled over northwestern Italy on Monday, unleashing a torrent unrivaled in the history of European weather observations. In just 12 hours, 29.2 inches of rain fell in Rossiglione in Italy’s Genoa province, south-southwest of Milan, and north of the Mediterranean coastline. Climatologists expect that such extreme weather events will become more frequent with advancing climate change. (10/6)
$100 billion lost to disasters: The US has endured 18 significant weather and climate disasters so far this year that killed a combined 538 people and inflicted more than $100 billion in damage, according to the National Oceanic and Atmospheric Administration. The calamities that cost $1 billion or more included Hurricane Ida, the most expensive event during the January-to-September period at $60 billion. (10/9)
Disasters are nothing new. Assigning blame for them is. Is climate change involved or not? A breakthrough out of the UK is providing better, more nuanced answers faster with powerful implications for citizens, first responders, and the media. (10/8)