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Energy Pulse | Ed Crooks' week in energy

The blockade on Libya’s oil exports

Libya’s crude production has slumped, oil CEOs have been debating emissions cuts, and surging LNG supplies has driven down world gas prices. This and more from Ed Crooks.

What you need to know this week:

  • Almost all of Libya’s crude exports blockaded

  • Oil CEOs debate emissions cuts at Davos

  • Tesla passes a stock market milestone

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Looking back on his almost completed presidency in 2016, Barack Obama had no hesitation in naming the worst foreign policy mistake of his time in office: Libya. His decision to intervene militarily to support the rebellion against Colonel Muammar Gaddafi in 2011, but not to help stabilise the country after his death, had left the country “a mess”, he admitted.

Nine years on from that intervention, Libya is still riven by conflict. Khalifa Haftar, a military commander who opposes the country’s UN-backed government, has been waging a nine-month campaign to capture the capital, Tripoli. Attempts to broker a ceasefire have faltered. Angela Merkel, Germany’s chancellor, has warned that Libya could follow Syria into prolonged and vicious civil war that creates millions of refugees.

Last Friday, Haftar attempted to step up the pressure ahead of the ceasefire talks by cutting off at least 800,000 barrels a day of oil exports, forcing Libya’s National Oil Corporation to shut down production. Reuters reported that Haftar’s forces had stormed an oil port in the territory he controls in the east of the country, and ordered all export terminals to close. Mustafa Sanalla, the NOC’s chairman, told the Financial Times that production had been cut from about 1.3 million b/d to about 400,000 b/d, and was set to fall further to just 72,000 b/d unless the export blockade was lifted. Prime Minister Fayez al-Sarraj warned that continuing the blockade would be “catastrophic” for Libya.

In world oil markets, however, the response has been muted: a sign of how ample global supplies are enough to outweigh even a reasonably sizeable disruption. As Fatih Birol, executive director of the International Energy Agency, put it: “The world is awash with oil, mainly coming from the United States.” Concerns about the impact of the new coronavirus in China are also having an effect. Brent crude ended Thursday a little below $62 a barrel, down from a high point of about $66 soon after the Libyan blockade was first reported a week ago.

Hazel Seftor and Ann-Louise Hittle of WoodMac suggested Haftar was likely to allow exports to resume fairly soon, not least because some of the NOC’s export revenues go to his faction, the Libyan National Army. However, Seftor and Hittle noted, Haftar is “known to be unpredictable”, and there is a possibility the blockade could drag on. The result is that Libya is going to be a wild card for oil supplies this year and beyond, with a risk of sustained disruption but also a possibility of a jump in exports if lasting peace can be agreed.

Oil companies discuss new emissions goals at Davos

The standard criticism of the World Economic Forum’s annual meeting at Davos is that it is merely a forum for the privileged elite to feel good about themselves. The news that Neste’s “sustainable aviation fuel”, produced from waste plant oils and animal fats, has been available at Zurich Airport to help the Davos attendees reduce the carbon footprints of their private jets has apparently done little to deflect those attacks. (Beef tallow and other waste from the meat industry can be used as feedstocks for aviation biofuels, although the industry is still in its infancy and would require huge expansion to make a significant difference to emissions.)

Some of the discussion of climate change and emissions fell into the usual patterns of grandstanding and showmanship... Behind the knockabout, however, there were some more substantive conversations going on.

At the meeting, some of the discussion of climate change and emissions fell into the usual patterns of grandstanding and showmanship. President Donald Trump noted that Greta Thunberg, the 17-year-old climate activist, had “beat me out on Time magazine” (to be its Person of the Year), and described her to the Wall Street Journal as “very angry”. His treasury secretary Steven Mnuchin, meanwhile, described Thunberg’s call for divestment from fossil fuels as “a joke”, and suggested that she might be able to explain her argument “after she goes to college and studies economics”. Thunberg hit back on Twitter, saying: “It doesn’t take a college degree in economics to realise that our remaining 1.5°C carbon budget and ongoing fossil fuel subsidies and investments don’t add up.”

Behind the knockabout, however, there were some more substantive conversations going on. The chief executives of oil companies including Royal Dutch Shell, BP, Chevron, Total and Saudi Aramco met behind closed doors to discuss potentially adopting more ambitious targets for curbing emissions, Javier Blas of Bloomberg reported. The executives were said to have focused on the question of whether they should set objectives for Scope 3 emissions, created by their supply chains and the use of their products. (Scope 1 and 2 emissions come respectively from the companies’ own operations and from the energy they buy.)

Only Shell, Repsol and Total have goals that include Scope 3 emissions. A wider move to set objectives defined in those terms would mean a huge change for the industry, but more companies seem to be moving in that direction. Bernard Looney, BP’s new chief executive, plans to adopt new carbon targets that include Scope 3 emissions, Reuters reported this week. One consequence of the new targets could be moves by BP to sell higher-carbon operations such as assets in Canada and Angola, Reuters suggested.

The growing pressure on companies to think about emissions was highlighted by a new report from the International Energy Agency titled The Oil and Gas Industry in Energy Transitions. “The industry can do much more to respond to the threat of climate change… and solutions cannot be found within today’s oil and gas paradigm,” it argued.

As Luke Parker, WoodMac’s vice president of corporate research, put it last year: “Whatever the final destination, staying put is not an option.”

One thought-provoking chart in the IEA report showed expected earnings for international and national companies from oil and gas out to 2040. The really sobering set of bars is on the righthand side, showing the IEA’s Sustainable Development Scenario, consistent with achieving the Paris Agreement goal of limiting the rise in global temperatures to well below 2°C. In that world, profits from gas are expected to be healthy and growing, while profits from oil fall.

In brief

One of the most intense debates for years over electricity regulation in the US was sparked last month when the Federal Energy Regulatory Commission set out its proposed new rules for prices in PJM, the power market that runs from New Jersey to Tennessee. The new regulations set minimum prices for bids into the wholesale capacity market, putting restrictions on generators receiving subsidies from the states. The two Republican-appointed members of the commission said the new rules were essential to preserve competition in the capacity market. The sole member chosen by the Democrats said they would have the effect of “nullifying state policies” intended to support renewable energy. The rules would also add to the cost of other state subsidies, and the greatest burden may fall on Ohio, which is trying to prop up coal and nuclear plants. State officials and energy groups are calling on the FERC to reconsider its plans, E&E News reported this week.

Meanwhile, utilities across the US are continuing to make plans to shift further towards renewable energy. Arizona Public Service announced on Wednesday that it planned to source 45% of its electricity from wind and solar power by the end of the decade, and 100% from zero-carbon sources by 2050. Jeff St. John of Greentech Media looked at four case studies of how large US utilities are “grappling with climate change and the energy transition”.

Geothermal energy has lagged behind wind and solar in California, but its ability to supply electricity when needed means it is picking up momentum again.

More than 3,500 US economists have signed on to a statement from the Climate Leadership Council, arguing that “a carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.”

Nearly a quarter of US energy companies’ high-yield debt is distressed.

Palladium prices have risen about 80% over the past year, as fears have grown about the risk of a chronic shortage.

Elon Musk and Tesla reached a significant milestone as the company’s market capitalisation rose past $100 billion. By comparison, General Motors’ market capitalisation is about half of that at $50bn. Ram Chandrasekaran, WoodMac’s principal analyst in transportation and mobility, pointed out that this impressive share price performance has come even though Tesla has not yet made a profit.

Last year was the worst on record for power outages in South Africa. The state-owned electricity monopoly Eskom has been hit by a series of problems, including design flaws and cost overruns at two new large coal-fired power plants.

Petrobras, Brazil’s national oil company, has made only very limited moves towards diversification into green energy, unlike its European peers.

BlackRock, the world’s largest fund manager, earlier this month announced a radical shift in strategy to “place sustainability at the centre of our investment approach”. This week it took a practical step towards that goal, if only a relatively small one. It is backing a group that plans to raise $500 million for a private equity fund to invest in climate-linked infrastructure in emerging economies.

And finally: science fiction stories are often interesting for the speculation about future energy systems that is built into them, and it seems the new Star Trek series Picard is no exception. A shot in the first episode appears to show the Golden Gate Bridge covered by a solar roadway. It is a technology that has captured the public’s interest from time to time, but it faces great practical difficulties. A solar road project in France last year was described as “a complete failure”. Perhaps by the 24th century, which is when Picard is set, the technical difficulties will have been ironed out.

Other views

Simon Flowers — Global upstream investment: the trends in 2020

Gavin Thompson ⁠— The US-China trade deal flatters to deceive

Ted Nordhaus — Ignore the fake climate debate

Philip Stephens ⁠— How populism will heat up the climate fight

FT View — The energy transition will not come cheaply

Robert Shrimsley — The ideal time not to buy an electric car

Gillian Tett — The world needs a Libor for carbon pricing

Adam Tooze —⁠ Activists invest hope in a greening of finance

Liam Denning —⁠ For oil, there’s a green swan lurking in this plastic bag

Quote of the week

To embrace the possibilities of tomorrow, we must reject the perennial prophets of doom and their predictions of the apocalypse. They are the heirs of yesterday’s foolish fortune-tellers… They predicted an overpopulation crisis in the 1960s, mass starvation in the ’70s, and an end of oil in the 1990s.

President Donald Trump

Speaking at the World Economic Forum in Davos, President Donald Trump did not mention the issue of global warming, but gave an implicit defence of his administration’s rejection of climate policy.

Chart of the week

This comes from a WoodMac Insight report looking ahead at what to expect in gas and LNG markets in 2020. Gas is in abundant supply right now, and prices have fallen sharply, driven in part by the warm winter in much of the US. The US Henry Hub benchmark this week dropped briefly below $2 per million British Thermal Units (BTU), for the first time in almost four years, while LNG prices in Asia fell below $4 per million BTU. Our analysts do not expect any sustained recovery this year. As Giles Farrer and his team put it: “The big suppliers — Qatar, Russia and the US — are locked in a battle for market share, waiting to see who blinks”.

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