Daily Energy Report

EU gas imports, Russia pledges additional oil data, Exxon in Guyana, Big Oil & energy transition, Saudi power to switch fuel, India’s dirty air, Saudi projects delayed, Saudi GDP shrinks, and more.

Dec 07, 2023

Summary

Figure (1) above shows piped gas imports by EU members in November vs. October. While imports are virtually the same as those of October, it is clear that Norway is taking the lion’s share of the piped gas. It is also clear that the EU still imports significant amounts of gas via pipelines from Russia.

EOA’ Main Takeaways

Even with a mild winter (so far), the EU cannot get rid of Russian gas. Russian piped gas exports to the EU represent about 9% of total gas imports. But that is half of the story. The EU imports LNG from Russia, too. Last month, the EU’s LNG imports from Russia accounted for about 6.3% of total gas imports. That brings EU dependence on Russian gas imports to more than 15%. This percentage might sound small, especially relative to 50%+ dependence before the Russian invasion of Ukraine, but we must remember that in any market, prices are determined at the margin.

Several back-to-back cold snaps would reduce storage significantly and raise prices, but the increase is expected to remain limited because of recession, low economic growth, and lower industrial demand in several EU countries. Ironically, and predictably, the negative impact on growth is occurring in part due to climate policies.

Story of the Day

Reuters: Russia Pledges More Oil Data to Ship Trackers to Soothe OPEC+ - Sources

Summary

Russia has agreed to increase transparency on its fuel refining and export data. Russia, unique in OPEC+ for contributing through export rather than production cuts, has faced scrutiny over the accuracy of its reported cuts. Russia has promised to provide additional data to clarify its compliance with the OPEC+ agreement. Consulting firm Rystad confirmed its participation as a secondary source for OPEC.

EOA’ Main Takeaways

Again, we are ahead of the curve. Five days ago, we posted a note entitled: Why is OPEC+ Cutting Output while Russia Exports?

We stated that the focus on exports is related to the “verification” that the Saudis requested while using the carrot and stick policy. Some officials raised doubts about our story by alluding to Russia’s inability to cut production in the winter, hence the focus on exports. While Reuter’s story above supports our analysis, the ultimate test will be in February of next year. If it is winter-related, storage must increase and be full by then. If storage does not increase meaningfully, then our analysis is correct.

Figure (2) below shows that Russian oil exports recovered strongly after the halt in exports from ports in the Black Sea because of a severe storm. A large part of this came from oil accumulated in storage facilities when shipments were halted. In other words, this is only weekly data and is not a new trend. Also, it is not a violation of the agreement with Saudi Arabia on previous cuts (the new cuts will start at the beginning of the year).

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News of the Day

Bloomberg: Exxon Boosts Buybacks as Hunt for More Oil Accelerates

Bloomberg: Exxon’s ‘Fairy Tale’ Guyana Discovery Turns Dark

Summary

Exxon Mobil is enhancing its share buybacks by 14% following its acquisition of Pioneer Natural Resources, with a plan to repurchase $20 billion of stock next year. Capital expenditure is set to increase to $23-$25 billion to advance operations in the Permian Basin and Guyana. Amidst falling share prices, Exxon aims to slash $6 billion in costs by 2027 and invest $20 billion in low-carbon technologies over the same period. However, Exxon’s plans for Guyana are now moving toward a high-risk category with Venezuela’s Maduro looking to seize Guyana’s land that includes Exxon’s assets.

EOA’s Main Takeaway

When we discussed the impact of the acquisition of Pioneer by ExxonMobil the day it was announced. We argued that such an acquisition does not serve the long-term interest of ExxonMobil, the oil industry, or the world because it does not add reserves or production. We considered it a diversion of investment from a long investment cycle to a short investment cycle. The fact that the merger was in stocks, which has tax benefits to Pioneer equity holders, and not in cash, does not change our view of investment diversion for the reasons mentioned in the story above. Stock buybacks before and after the merger are an indirect way of paying in cash. Therefore, it is an investment diversion.

As for Guyana, as we discussed in a previous report, while the risk in the region has increased, we do not expect an escalation.

Bloomberg Opinion: Big Oil Shouldn’t Lead Energy Transition

Summary

The IEA has called for the fossil fuel industry to increase its role in this transition by reducing operations. The thinking is that transition success requires lower oil and gas demand. However, currently, a minuscule fraction of clean energy investments come from the oil/gas sector. Javier Blass argues that oil companies should maintain focus on their profitable traditional operations while leaving green innovation to others in the sector.

EOA’s Main Takeaway

Javier Blass is partially correct. The transition that politicians want is something that is going to take many decades. What is called “success” in this transition will undoubtedly be redefined downward as energy reality interrupts political desires. While the transition (as incomplete as it is likely to be) slowly moves forward, we need oil and gas companies to produce a LOT of these resources to keep the world running. However, the industry is fully capable of working in more than just the oil/gas sector.

This is the point that was missed. The history of the oil and gas industry tells two stories. It is a story of control of competition as well as a story of subsidy grabs when offered. Big oil has always controlled the competition. When subsidies were offered by governments in the 1970s, Big Oil was at the forefront of controlling new technologies and projects and getting the subsidies. The fact is, Big Oil is the only business that has money and can undertake tough projects. Even offshore wind projects are using oil industry equipment and expertise to install wind turbines in rough seas where the oil industry has been operating for decades. In short, while the oil industry wants to control the competition, it is also capable of making solid steps in the renewable energy space.

Bloomberg: China Crude Output Surges 300% in Taliban-led Afghanistan

Summary

China's Xinjiang Central Asia Petroleum and Gas Co. has significantly increased crude oil production in Afghanistan, drilling 10 new wells to raise output to about 5,000 barrels per day. This development follows the Taliban's first international oil contract with the Chinese firm, which is set to invest $690 million over four years potentially generating $500 million annually for the Taliban from the estimated 87 million barrels in the contracted blocks.

EOA’s Main Takeaway

Using percentages here is a clickbait. Any time you start from zero or near zero, the increases look huge, percentage-wise. The fact is the numbers remain small. The significance is more political than economic as Afghanistan’s interests are more aligned with China after a long occupation and the hasty withdrawal of the US.

Reuters: Germany’s Budget Crisis Leaves Struggling Solar Industry in Limbo

Summary

Germany's financial challenges are putting the government support for domestic solar manufacturing at risk. Despite aspirations to generate 80% of its electricity from renewables, Germany remains dependent on imported solar components. Plans to bolster local production with a 2.5-billion-euro fund have been stalled by a court ruling that prevents transferring 60 billion euros into the climate fund. This ruling has put on hold commitments for subsidy-supported solar projects.

EOA’s Main Takeaway

This is always the problem when subsidies create massive industries. The recession hits and money dries up. One of the ironies here is that taxes on gasoline and diesel remain a big supporter of the German budget!

If we had a time machine, we could go into the future and read what historians are saying about the collapse of the German economy caused by a fanatical devotion to unrealistic climate policies. Then again, we don’t need to get a historian’s assessment of what German politicians are doing. We are watching it happen right in front of us. The situation will continue to get uglier for the German people until they tell their politicians to face energy and economic realities.

Reuters: Woodside Talks with Santos about Forming Gas Giant

Summary

Woodside Energy and Santos, two of Australia's largest oil and gas firms, are discussing a potential merger to form an A$80 billion energy giant amid a wave of sector consolidation. This merger would create Australia's largest LNG producer and the world’s second-largest exporter, aligning with Asia's growing energy demands. The move is a strategic effort to gain scale and increase profits, which is crucial for investing in the energy transition.

EOA’s Main Takeaway

Analysts and others have been wondering for a while about the lack of mergers and acquisitions (M&A) in the LNG sector and what the trigger would be for such events. Australia’s regulations make the nation stand out among various LNG exporters and M&A Drivers. In other words, if this merger takes place, it may not start a new trend around the world.

Power-Technology: GE to Switch Saudi Power Plant from Liquid to Gas

Summary

GE Vernova is transitioning SEC's Power Plant 10 in Riyadh to natural gas, enhancing fuel efficiency and output. The plant, powered by 40 gas turbines, generates 3.5GW of electricity, enough for 875,000 homes. This shift to natural gas will cut carbon emissions by 1.7 million tons per year and improve turbine efficiency.

EOA’s Main Takeaway

The objective of Saudi Arabia is to stop burning oil in power plants. This will enable Saudi Arabia to divert the additional oil to exports without investing in additional drilling activities. Saudi gas reserves and production have been increasing in recent years after a series of discoveries. While Saudi Arabia does not export any gas now, there is potential after developing the tight gas in the Al Jafura field.

About three weeks ago, we posted a report entitled: Aramco’s First Unconventional Gas at South Ghawar: Major Step to Increase Gas Production where we discussed the impact of such discoveries, which includes the use of gas in power generation, petrochemicals and desalination plants that lead to reduction in oil use.

Here is the conclusion of that report:

“Aramco’s ambitious gas production target is needed to meet growing demand for gas-fired power generation, water desalination, and to support growth in the petrochemical sector. Moreover, the Kingdom’s plans to increase gas production by the end of this decade by 50% compared to levels in 2021 will direct crude oil currently burnt for power generation to global oil markets instead without any additional investment in oil fields. It might also enable the Kingdom to export electricity and LNG.

Finally, it might enable Aramco to spin off the gas business and bring more foreign investment to Saudi Arabia.”

Bloomberg: China Cleaned its Dirty Air, but India Still Chokes

Summary

India and China have struggled with severe air pollution, especially during winter. While China has made progress in cleaning its air, India still faces high pollution levels, with PM2.5 levels in New Delhi, 14 times higher than in Beijing. Last year, India had 65 of the 100 most polluted cities globally. India's pollution crisis is not a central issue in its climate policy or upcoming elections, despite air pollution causing an estimated 2.18 million deaths annually in the country.

EOA’s Main Takeaway

This story is a continuation of the China story that we covered yesterday along the same lines. China is rich and centrally planned. It spends more on renewable energy than any other country in the world and by a significant margin. India does not have this capability at a time when the nation’s power sector is so dependent on cheap coal. See Figure (3) below.

Last July, we published a report titled: Back to Earth: Reality of the Energy Transition

In this report we discussed the points mentioned above and what the Bloomberg story highlights.

We wrote: “If you think China is a problem, wait until you see India. If China needs at least 211 years at current spending on renewables, India will require more than 400 years.”

We also wrote: “Given that India’s economy is growing and expected to continue to grow in the next two decades, spending more on wind and solar will be barely enough to meet demand, and for this reason, it will not substantially reduce its share of coal.”

Bloomberg: Saudi Arabia Says Some 2030 Projects Delayed

Summary

Saudi Arabia has postponed some initiatives of its Vision 2030 economic transformation plan beyond the initial deadline. The delay aims to enhance capacity building and mitigate inflation and supply issues. Projects are being reassessed for their economic and social impact, with some being accelerated and others extended in their execution timeline.

EOA’s Main Takeaway

Yes, we have seen this cycle several times in the past in all oil-producing countries. Plans are made during periods of high prices and they are either delayed or cancelled. However, we must be mindful of two lessons:

OPEC members are flexible. They can delay or cancel projects when oil prices decline. They can borrow from domestic and foreign markets. They can cut spending. The implications of such flexibility are important for certain groups of participants in the oil market that are obsessed with the idea that oil prices will remain high because the budget breakeven is high. We noted numerous times in the past, especially on social media, that the budget break-even number that the IMF publishes has no impact on the oil market. The oil price used to estimate revenues has no relation to the oil policy or the oil market.
We are seeing “energy transition” projects being delayed worldwide. Some of these projects in Saudi Arabia are in this category.

Reuters: Saudi Q3 GDP Shrinks

Summary

Saudi Arabia's GDP saw a 4.4% decline in Q3 due to a 17% drop in oil activity, a result of OPEC+ production cuts. The government projects a marginal GDP growth of 0.03% for 2023 and a more robust 4.4% for 2024. This economic setback follows a significant growth spurt last year, fueled by high oil prices, which positioned Saudi Arabia as the fastest-growing economy among the G20 and led to its first budget surplus in nearly ten years.

EOA’s Main Takeaway

Our own Dr. Alhajji tweeted about this news earlier today:

The idea is that the Saudi economy was not affected much given the government’s conservative spending while the oil is still there. When oil is produced, it is counted in the GDP. When it is not produced, it is not counted at all, not even as inventory. The same applies to all natural resource extraction in any country. The issue is more of an accounting problem than a real problem on the ground. If Saudi Arabia had adopted a new national accounting system a few years ago that did not count oil extraction as part of the GDP where all proceeds go to a certain fund, Saudi Arabia’s GDP would not have declined as reported.