THE POLITICS OF ENERGY

COMMONWEALTH NORTH ENERGY POLICY STUDY GROUP

LARRY PERSILY – NOV. 4, 2022

EVERYONE NEEDS SOMETHING

• The haves, have-nots, winners and losers include every country
• Russia needs the money from high oil prices to fight its war and pay bills
• Saudi Arabia needs money to pay for economic transition away from oil
• U.S. oil and gas companies need the money to attract, reward investors
• Europe needs hope it will get better and industries can go back to work
• President Biden needs a miracle of $3 gas at the pump

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HIGH PRICES INFLICT PAIN

• Not just high-profile fertilizer, petrochemical, glass and smelters in Europe
• Pakistan, Bangladesh and others cannot afford gas to run power plants
• Blackouts, brownouts and economic blues can destabilize nations
• Some countries subsidize energy, but that dissuades people from using less
• Some don’t pay subsidies — yet — but limit rate increases, forcing domestic suppliers to lose money on energy sales

MUCH REVOLVES AROUND RUSSIA

• China, India, Turkey take advantage by buying Russian crude at discount
• S&P Global reports $22 discount to Brent in September
• China importing record volumes of coal, LNG from Russia
• Russia hasn’t lost that much in sales volume, merely redirected the flow
• Europe plans to ban Russian crude starting next month
• U.S./European plan would allow some Russian crude, but under price cap
• Shippers and buyers that violate the cap would lose insurance coverage

OTHER SUPPLY PROBLEMS

• OPEC+ made headlines cutting production target 2 million barrels a day
• Saudis miffed at U.S. over Iran and other issues; wanted to send message
• But OPEC+ nations were short of targets by 3.6 million barrels in August
• Africa is struggling — production down 2 million barrels a day since 2010
• UAE argued against cut — UAE policy is to produce as much as possible as soon as possible before the world stops needing as much oil
• U.S. even thinking of making nice with Venezuela to bring on new supply

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OPEC BLAMES UNDERINVESTMENT

• OPEC wants to shift blame for tight crude supply to everyone else — political leaders, oil companies, investors, climate-change activists
• OPEC secretary-general says oil has been “needlessly demonized”
• Says transition to cleaner energy will take time, and world needs more oil
• Accuses everyone else of “chronic underinvestment” in new production
• This is self-preservation; OPEC knows countries would be more likely to stick with oil longer after making trillions of dollars in investment

CLOSER TO HOME

• U.S. has been selling oil from Strategic Petroleum Reserve to help hold down election-year prices at the gas pump
• Petroleum Reserve now at lowest level in 38 years; creates worries
• Biden proposes U.S. will buy back crude to starting refilling reserve when price drops under $70 a barrel — that’s similar to saying I’ll buy all the new cars you want to sell me at last year’s prices
• President talks of asking Congress for windfall tax on oil company profits — about as likely as the Alaska Legislature passing an income tax

NATURAL GAS IN TURMOIL, TOO

• European and Asian buyers were paying nearly $60 per million Btu on the spot market this summer; equivalent to $400/barrel oil
• Since then, a warm fall, ample gas storage inventories in Europe and drop in China demand has knocked down prices by about half
• European buyers are not looking forward to reselling expensive gas from storage into lower-priced market
• LNG tankers stacked up off Europe, waiting for regasification slots and hoping for higher prices before they costly unload cargoes

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FALL-OUT FROM COSTLY GAS

• Coal-fired power up worldwide, setting back decarbonization efforts
• France talks of adding nuclear power; Japan wants to restart more plants
• LNG imports into China declined in 2022 for the first time ever, while overall gas consumption in China set to decline 2% this year
• Zero-COVID policy has cut deeply into economic, industrial activity
• IEA forecasts China’s gas demand growth will slow to 2% this decade, down from a 12% annual average growth rate since 2010, as the country moves toward electrification and renewables

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MORE LNG ON ITS WAY

• Freeport LNG in Texas could restart by end of the year
• First cargo from Mozambique LNG expected in days
• Russia still says Arctic LNG-2 will start operations next year
• Qatar/Exxon Golden Pass LNG in Texas plans 2024 start-up
• Calcasieu Pass in Louisiana close to commercial deliveries
• Shell-led LNG Canada in British Columbia working toward 2025 start-up
• Qatar lines up partners for 60% expansion to 126 million tonnes by 2027

FUTURE POLITICS AND ECONOMICS

• Almost 4 million barrels a day of global refinery capacity closed since 2020
• Supply crisis and high prices may have accelerated shift to renewables
• Capital spending on wind and solar projected at $494 billion in 2012, eclipsing $446 billion on upstream oil and gas, says Rystad analysts
• IEA forecasts natural gas demand could plateau by end of the decade
• BP buys U.S. producer of renewable natural gas for $4.1 billion to grow its bioenergy business and meet decarbonization targets — close to the price for all of its Alaska assets in 2020 at $5.6 billion

THE BIGGEST VARIABLES

• End to war on Ukraine, and Russia oil and gas welcomed back
• Will Russia’s output suffer from gap in Western technology and equipment
• China’s economic growth — or not — and a second big Russian gas line
• Worldwide recession will cut into demand, but for how long
• Is demand destruction from high prices permanent, and will the lessons and fears of high prices accelerate shift to renewables
• Will U.S. producers ever return to the growth years of shale

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