January 30, 2022
Natural Gas Prices Lead to Heating Shortages in China
DRIVING THE NEWS: Unusually cold winter temperatures and municipal budget shortfalls are colliding to produce a massive “artificial” natural gas and heating shortage across large parts of northern China (South China Morning Post and NY Times).
Weather stations in the northernmost province are reporting record low temperatures, and China’s meteorological agencies have issued nationwide cold warnings this week.
Areas where temperatures are above or below normal this winter. This map illustrates both the heat wave in Europe (that is currently helping reduce gas supply there) and the unusually cold weather in China and around Central Asia (Source: NY Times and ClimateEngine.com)
THE CONTEXT: Two key problems are creating the situation:
First, China has been buying large quantities of natural gas from Russia over the last year, which although slightly cheaper than the inflated global market prices has still been expensive. Under current energy regulations, extra costs for distributors can be passed only to industrial and business customers, not individuals. The wholesale cost of gas is currently 3x the price that distributors are allowed to charge residential customers, incentivizing many distributors to halting supply to individuals in favor of their industrial and business customers who can be charged more.
Second, municipal government budgets have been drained due to expensive zero-COVID implementation and the real estate market crash (one of the main revenue sources for local government). As a result, cities and municipalities are unable to provide the subsidies they have in the past to keep gas flowing to residential customers.
WHY IT MATTERS: This gas shortage is the third domestic energy crisis in just five years that can be attributed to poorly planned energy policies[1], which raised questions and puts pressure on Xi’s administration as well as the ability of provincial and local governments to meet their residents’ needs.
China remains an energy importer (importing 109.25 million metric tons of natural gas in 2022), which leaves them vulnerable to global price fluctuations (Time.com). This current situation illustrates how regulatory design can translate that vulnerability into real harm for citizens given the current conditions.
The central government is also still concerned about the threat of further unrest after major protests challenged the highly restrictive zero-COVID policies last fall. Many experts say that further unrests from the heating shortage is unlikely based on past events, but incidents like this can serve to undermine trust over time.
[1] In 2017 the central government abruptly banned coal-fired boilers and required a switch to gas ones across areas in northern China as a quick fix for air pollution. But insufficient amounts of gas for the all the new boilers led to widespread shortages. Then in 2021 the price of coal rose above the regulated cap at which utilities could sell coal generated electricity, causing many utilities to temporarily close power plants and causing waves of widespread blackouts.
UK Expands Undersea Power Interconnections with Viking Link
WHY IT MATTERS: The project, a joint venture project between National Grid and the Danish government’s transmission system operator, will greatly expand the ambitious pursuit of a Europe-wide electricity grid in which renewable intermittency challenges can be smoothed out over broad geographies.
THE CONTEXT: The 765 km, 1400 MW high voltage Viking Link is set become the world’s longest interconnector when it opens in December 2023.
The line connects the electricity grids of the UK and Denmark, allowing the UK to export power when wind generation is high and Denmark to help make up UK shortfall through biomass generation when the winds are low to help smooth renewable energy intermittency challenges (Financial Times).
The UK currently has eight interconnectors (to Ireland, France, Belgium, the Netherlands, and Norway) with a combined
capacity of 8.4 GW. Ofgem, the UK energy regulator, wants to increase capacity to 18 GW by 2030 as electricity demand continues to rise.
THE GEOPOLITICS: While the project will help further Britain’s energy transition, it also highlights the UK’s continued dependence on power imports and broaden the grid’s exposure to security threats such as last year’s attack on the undersea Nord Stream pipelines.
Such dependence was evident this week as National Grid was forced again to ask the Netherlands for emergency electricity supplies to avoid blackouts in the southern network after faults with the domestic transmission network (Daily Mail). While the Netherlands was able to meet the request this time, the incident calls into question what might have happened if Europe were facing a cold snap and electricity supplies where more scarce.
There is a “huge vulnerability in the UK relying on external energy supplies in the face of shocks,” said Dieter Helm, economic policy professor at Oxford university. “Instead of being part of the development, co-ordination and rules of a pan-EU grid, we are playing a unilateral game… The UK post-Brexit wants its cake and to eat it — it wants to benefit from the links to France and to north European countries, whilst not having to follow the internal energy market rules and regulations.”
Interconnectors could be used as political bargaining chips, as France threatened to cut power to Guernesey over fishing rights in 2021 and of course Russia’s use of natural gas as a geopolitical tool.
On the other hand, “We don’t see this as a risk,” said Cordi O’Hara, president of National Grid Ventures. “There is a clear recognition that our interconnectors to Europe are mutually beneficial.”
Colombian President Seeks to Reduce on Oil Exploration
DRIVING THE NEWS: Colombian President Gustavo Petro’s government has suspended fracking operations and said that there is no need for further oil exploration, citing climate concerns. “The only way to halt the climate crisis is through zero consumption of carbon and petroleum,” said Mr. Petro in Davos earlier this month (Wall Street Journal).
President Petro said he hopes to transition Colombia from fossil fuels to renewable energy in roughly 15 years, though he has yet to develop a plan for such a transition.
WHY IT MATTERS: Colombia is Latin America’s third-largest exporter of oil (currently producing 749,000 bpd per EIA) and is heavily reliant on petroleum revenue for roughly one-third of the country’s export earnings. A national shift away from the fossil fuel sector is a major gamble for a developing country.
The President’s announcements, however, are in line with the IEA’s 2021 Net Zero by 2050 report which calls for a ban on new fossil fuel projects, and with UN Secretary General António Guterres’ remarks in Davos that any expansion of oil production would be “insanity” (CNBC).
This move now represents an fascinating instance of a fossil-fuel dependent nation making a top-down commitment toward actually achieving the transition that many climate experts and intergovernmental agencies are calling for. At this point, no other major oil exporting nation is following this path.
THE CONTROVERSY: The oil sector is predictably livid, with the Colombian Oil Association responding that the country could run out of oil within a decade if it rejects new exploration deals.
Francisco Monaldi, director of the Latin America Energy Program at Rice University’s Baker Institute: “It’s irrational for Colombia to not explore or produce oil because as long as the demand is there it will be produced by Brazil or Venezuela or someone else.” He suggests instead that the country should use policy tools that reduce demand before cutting supply.
On the other side, Irene Vélez, Colombia’s mines and energy minister, argues that as the energy transition takes hold globally, oil demand will soon plummet and any new major investments in the sector would saddle Colombia with stranded assets.
US House Moves to Limit Presidential SPR Access
The House on Friday approved a bill that would require any non-emergency releases from the US Strategic Petroleum Reserve to be accompanied by a plan from the Secretary of Energy to lease more federal lands to oil and gas producers (Wall Street Journal).
WHY IT MATTERS: Although the bill will be “dead on arrival” to the Senate and has a guaranteed veto by the President, the effort by House Republicans to curb Presidential access to the SPR sends a message from the right about to how it views use of the resource and illustrates a clash of politics with federal energy policy in the US.
Energy Secretary Jenifer Granholm said the bill: “needlessly aims to weaken the Strategic Petroleum Reserve’s usefulness as a tool to ensure energy security in America.”
Republicans, however, see President Biden’s use of the SPR last year as politically motivated to reduce gas prices ahead of the midterm elections with little regard for maintain the resource for future emergencies. “If there’s a hurricane that hits the Gulf [and] disrupts the oil markets, you’ve got oil there to make sure you can continue to flow oil to your refineries to keep the supply going. It’s not there to mask bad policies,” said Majority Leader Steve Scalise (R-La.) in his defense of the bill (Politico).
THE CONTEXT: Biden last year authorized the largest release in history, which resulted in the withdrawal of 266 million barrels, bringing the current stockpile from 638 million barrel when he took office to 372 million barrels today (EIA).
However, the EIA also notes that Congress-mandated drawdowns, not release orders from presidents, have largely contributed to declines in SPR stocks in recent years.
For example, past legislation mandated a 147 million barrel sale from the SPR between 2024 and 2027 to raise revenue for the federal government. This sales order was recently cancelled by subsequent legislation in the December 2022 omnibus spending package (Reuters), but shows that SPR withdrawals extend beyond presidential use.
Weekly ending stocks of crude oil in the SPR (Source: EIA)
ON A RELATED NOTE: Earlier this month the House passed a bipartisan bill to prohibit sales of federal petroleum to China (Reuters), with the Senate Republicans expanding the ban to Russia, Iran, and other “hostile” nations.
DIVE DEEPER: See the text and summaries for Strategic Production Response Act (H.R.21) which seeks to tie non-emergency SPR drawdowns to increased federal land leasing, and text and summaries for Protecting America’s Strategic Petroleum Reserve from China Act (H.R.22) and associated Senate Secure Auction for Energy Reserves (SAFER) Act.
EIA Projection: US Crude Oil Production Will Increase to New Record in 2023 and 2024
DRIVING THE NEWS: In its January 2023 Short-Term Energy Outlook, the EIA forecasts an increase to record crude oil production in 2023 and 2024 due to a combination of high crude oil prices and infrastructure additions.
The EIA forecasts crude oil production in the US will average 12.4 million bpd in 2023 and 12.8 million bpd in 2024, passing the previous record of 12.3 million bpd in 2019 and far exceeding the 2022 average of 11.9 million bpd.
Increased production will mostly occur in the Permian region and the Federal Offshore Gulf of Mexico.
They also forecast WTI prices will average $77 per barrel in 2023 and $72 per barrel in 204, down from an average of $95 per barrel in 2022.
WHY IT MATTERS: While these forecasts of course remain highly uncertain in today’s volatile global oil markets, the key takeaway here is that US oil production likely is not going away in the near-term despite efforts to accelerate the energy transition.