You don’t read much about commodities these days. But underneath the calm, plenty has been going on. In fact, global energy markets are about to be turned on their head in all sorts of surprising ways.
In the US, the shale boom has got a new investor – Saudi Arabia’s oil company Aramco. The Saudis are looking to fund existing firms based in the major basins, and even buy up the rights to some of the exploration land.
Why on earth the world’s largest oil and gas exporter is looking to buy into the American oil and gas boom is a mystery. Sure, geographic diversification is a good idea. But funding your competitors’ projects is a bit odd.
Until now, the narrative had been that the Saudis were forcing the oil price down to put the shale operators out of business. But it looks like they just wanted to buy in on the cheap.
Closer to home we have BP’s transition away from oil. The surprising part is exactly what it’s transitioning to.
Once the second largest oil company in the world, BP has made an extraordinary shift to renewables, as its name change to Beyond Petroleum suggests.
But that’s simply wrong. It’s not renewables, it’s gas that’s taking over from oil. Gas now makes up half of BP’s production, and it’s growing fast. “Of the 16 new BP projects due on stream between this year and 2021, 12 involve gas rather than oil” reports the Financial Times.
It’s not just BP that’s changing its tune on gas. Ukraine is too.
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The country has long been a gas importer and pipeline pass through. In fact, it has the biggest gas infrastructure in the world. Last year, 46% of Russian gas passed through Ukraine on its way to the EU and Turkey. Despite all this, the country imports about a third of its own gas consumption.
Those two factors made the country both energy dependent and geopolitically important – not a good combination. Especially when you’re stuck between Russia and Europe, with the population split on who to ally with. As Cramer put it while playing Risk in Everybody Loves Raymond, “The Ukraine is weak!”
But with a pro-European government running things, Ukraine has liberalised its energy markets. Not just the pipelines and storage infrastructure, but the production of its own gas. And boy does it have potential. BP estimates there are about 600 billion cubic meters in proven reserves. That’s about nine times the UK’s total consumption in 2015 and 20 times Ukraine’s own total consumption in 2016. Remember, proven reserves are just a fraction of the potential.
With a $4 billion investment, Ukraine could become energy independent by 2022. And an exporter thereafter.
All this would completely change the geopolitical situation in Europe. Russia would no longer have a stranglehold over Europe via gas. Competition could reduce the price dramatically. And Ukraine’s gas would compete with Russian over the same pipelines.
The alignment of Ukraine with Europe and against Russia would become far stronger.
Sanctions just a lot of hot gas
For now, though, Europe remains reliant on Russia when it comes to gas. Even the UK is included in that, as the news recently illustrated.
The Telegraph summed up the reason for extraordinarily high gas prices at home:
Around 40pc of the UK’s domestic supplies have been wiped out until the new year due to the emergency shutdown of the North Sea’s Forties pipeline, operated by Ineos. Supply from Europe has also been constrained by the explosion at a hub in Austria and technical problems in the Norwegian North Sea.
As a result, the UK bought the first load of gas off a brand new Russian project in the Arctic. A project which happens to be under sanctions from the US and EU.
Specifically, it’s the financing of such projects that’s sanctioned. Western governments prevented their own companies from funding the Russian project now delivering gas to the UK.
The sanctions had worked well to prevent some projects from going ahead. But many have just sought alternative funding instead. Like the one delivering gas to us in a time of need. You’ll never guess who the Russians turned to according to The Telegraph:
The Yamal project, which is majority owned by private Russian gas company Novatek, was threatened in 2014 when Gennady Timchenko, the company’s second-biggest shareholder, was targeted by US sanctions following Moscow’s annexation of Crimea.
That forced a rapid rethink of the project’s financing. Capital expenditure plans on Yamal’s construction were converted from dollars to euros. Chinese banks provided loans to cover two-thirds of its external financing needs. The Russian government and state-owned Sberbank provided the balance.
Sanctions that bring together Russia and China are serious blowback for the US and EU. When Britain agreed to purchase gas off the project, that added insult to injury.
But it’s not just old-fashioned gas that’s revolutionising energy. In Australia, a political stunt has rescued the local power grid.
I never thought I’d write anything like that. Then again, this is also further proof of what the private sector can do in the face of government nincompoopery.
After years of trouble with South Australia’s ability to deliver enough electricity in a stable way, Tesla’s Elon Musk tweeted he could solve the problem in 100 days. The politicians didn’t believe him. But he confirmed “Tesla will get the system installed and working 100 days from contract signature or it is free. That serious enough for you?”
In an incredible move, the whole thing went ahead. The politicians lined up to be pictured alongside Musk like sports fans.
And then Tesla delivered the project on time too. But did it work?
The state energy minister Tom Koutsantonis confirmed that the Loy Yang power plant went offline unexpectedly and the Tesla battery plant delivered 100 megawatts to the grid in 140 milliseconds to make up the shortfall. That’s about 6,500 times faster than firing up the old emergency generators.
Tesla’s battery revolution is now officially real.
All this is just a taste of how the world’s energy markets are changing, fast.
The good news is, we have the perfect man to keep on top of all this. Returning to Southbank Investment Research is James Allen. After a stint covering energy markets in New York, he’ll be working on turning news like the above into profitable ideas for you.
Stay tuned for more from him…
Until next time,
Nick Hubble,
Capital & Conflict
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Category: Geopolitics