G20 New Trade Corridor Promises Enhanced Energy Security
At the G20 summit in India this weekend, the U.S., India, Saudi Arabia and the UEA announced a new trade route that intends to connect India to the Middle East and Europe, with ports and rail, in a direct challenge to China’s Belt and Road ambitions. The proposed trade route–dubbed by U.S. President Joe Biden as the beginning of a “new era of connectivity”–envisions an eastern corridor that connects India to the Gulf Cooperation Council (GCC) nations and a northern route that connects the GCC to Europe. While the new trade corridor could counterbalance China’s Belt and Road initiative, it will also give Saudi Arabia and the UAE more options as they navigate stronger relations with China and shaky relations with the U.S. On the sidelines of the G20, Reuters quoted Biden as saying the new trade route would create “endless opportunities for clean energy, clean electricity, and laying cable to connect communities”. Saudi Investment Minister Khalid Al Falish likewise praised the corridor’s ambitions, calling it “the equivalent of the Silk Route and Spice Road”, and heralding “greater energy connectivity, green materials and processed and finished goods that will rebalance the global trade,” Reuters reported. Beyond that, the geopolitical implications are wide-ranging. Not only will the massive project serve as a direct response to the Chinese level of infrastructure spending worldwide, but it also seeks to provide another push to Washington’s attempts to normalize relations between Gulf Arab states and Israel. It could also be a boost for Saudi Arabia, the world’s largest exporter of crude oil, by creating a direct link to India, one of the fastest-growing economies in the world. Beijing, in the meantime, has said it welcomes the new trade route, but warned against using it as a geopolitical tool. The new trade corridor comes as China’s multi-billion-dollar Belt and Road Initiative is faltering over investment issues. Adding to those woes, Italy recently announced it would withdraw from the project, under pressure from political parties.
At What Level Will Saudi Arabia And Russia Stop Pushing Oil Prices Higher?
The decisions last week by Saudi Arabia to continue its 1 million barrel per day (bpd) production cut to the end of this year and by Russia to extend its 300,000 barrels per day export cut for the same period conspired to push oil prices to their highest level since last November. This in turn has added to the inflationary pressure threatening the economic health of the U.S. and many countries allied to it. The question for these net oil importers (and gas importers too, given that historically 70 percent of gas prices have been comprised of the price of oil) is at what level the two leaders of OPEC+ will halt their efforts to keep pushing prices higher? The first part of this equation revolves around the necessity or not of higher prices to keep these two economies afloat, or whether it is simply greed at work, or a geopolitical power play, or any combination thereof. It is a common conception that Saudi Arabia’s economy is a powerhouse, fuelled by vast revenues from oil. The latter part has some truth to it, helped by having (along with Iran and Iraq) the lowest lifting cost per barrel of oil in the world, at just US$1-2. This said, much of these revenues are deducted almost at source, through the massive dividend repayment obligations that must be made every quarter by Saudi Aramco. Even with Brent oil price averaging around US$80 pb in Q2, 65 percent of its net income went on this debt payment to shareholders. If its net income stayed the same in Q3, this debt payment would rise to 98 percent. What is left after these deductions is the foundation stone of all Saudi Arabia’s spending, which includes not just the basic functions of state – such as health, education, and defence – but vast socioeconomic and vanity projects as well, as analysed in depth in my new book on the new global oil market order. In theory, then, Saudi Arabia’s fiscal breakeven oil price is US$78 pb of Brent. In practice, however – as the fiscal breakeven oil price is the minimum price per barrel that an oil-exporting country needs to meet its expected spending needs while balancing its official budget – its true fiscal breakeven oil price has no set limit. The same applies to Russia. For around 20 years, it had a fiscal breakeven oil price of around US$40 pb. Following its invasion of Ukraine on 24 February 2022, though, officially this has jumped to US$115 pb. Unofficially, as wars do not adhere to easily quantifiable and strictly adhered to budgets, the unofficial fiscal breakeven oil price is whatever President Vladimir Putin thinks it should be at any given moment. The first part of the equation, then, is that both Saudi Arabia and Russia absolutely need to keep pushing oil prices higher, which moves the equation into its second part – at what level will they face overwhelming pressure from their customers to stop doing so? The first group of customers are the U.S. and its core allies, in which ever-increasing oil and gas prices have caused dramatic spikes in inflation and the interest rates required to combat it, which in turn make economic recessions more likely. For the U.S. itself, these fears have very specific ramifications: one economic and one political, as also analysed in my new book on the new global oil market order. The economic one is that historically every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline. For every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost, and the U.S. economy suffers. The political one is that, according to statistics from the U.S.’s National Bureau of Economic Research, since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. This is not a position sitting President Joe Biden, or the Democratic Party, wants to be in one year out from the next U.S. election. Russia has increasingly less to do with these countries than Saudi Arabia, given the ongoing escalation of sanctions against its energy exports to them. Saudi Arabia has moved so far into China’s sphere of influence now that it appears not to care at all what the U.S. wants in any respect. This was perhaps most personally and palpably underlined when Saudi Crown Prince Mohammed bin Salman refused even to take a telephone call from U.S. President Joe Biden just after Russia’s invasion of Ukraine in which he wanted to ask Saudi Arabia for help to bring down economically-crippling energy prices. However, this does not mean that the U.S. is powerless to cause Saudi Arabia to change its mind. The mechanism to cut off much of its oil revenues by effectively destroying Saudi Aramco is already in place in the U.S, in the form of the ‘No Oil Producing and Exporting Cartels’ (NOPEC) bill, as also analysed in depth in my new book. This legislation would open the way for sovereign governments to be sued for predatory pricing and any failure to comply with the U.S.’s antitrust laws. OPEC is a de facto cartel, Saudi Arabia is its de facto leader, and Saudi Aramco is Saudi Arabia’s key oil company. The enactment of NOPEC would mean that trading in all Saudi Aramco’s products – including oil – would be subject to the antitrust legislation, meaning the prohibition of sales in U.S. dollars. It would also mean the eventual break-up of Aramco into smaller constituent companies that are not capable of influencing the oil price. This leaves the big Asian customers, especially China
Indian government collects Rs 26.42 billion in dividends from IOCL and BPCL
The Indian government on Monday (September 11) said it has received Rs 26.42 billion as dividend tranches from two central public sector enterprises, namely Indian Oil Corporation Ltd (IOCL) and Bharat Petroleum Corporation Ltd (BPCL). “(The government has respectively received about Rs 21.82 billion and Rs 4.60 billion from IOCL and BPCL as dividend tranches,” Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey tweeted. In the current financial year, the government expects a 17 percent higher dividend at Rs 480 billion from the Reserve Bank of India (RBI), public sector banks, and financial institutions. In FY23, the government had aimed to collect Rs 409.53 billion from RBI and public sector financial institutions. This is much lower compared to the Budget Estimate (BE) of Rs 739.48 billion for FY23. It is to be noted that RBI approved a dividend payment of Rs 303.07 billion to the government post its board meeting in May 2022. As per the Revised Estimate (RE) for FY23, the dividend from public sector enterprises and other investments was higher at Rs 430 billion than the BE of Rs 400 billion.
IOCL’s Panipat plant to reach 100 percent utilisation soon
Indian Oil Corporation’s (IOCL) 2G ethanol plant is set to reach 100 percent capacity utilisation in a few months, from the current 30 percent. The Rs 900-crore plant is expected to reach full capacity shortly, as the feedstock collection process has been initiated. The plant will need 1,50,000 tonne of feedstock every year. Also, part of the 2G ethanol will go towards the production of sustainable aviation fuels (SAF), which is also coming up near the Panipat refinery, under the company’s joint venture (JV) with Lanzajet, a subsidiary of Lanzatech. In green hydrogen, the company’s JV with L&T and ReNew Energy would bid for projects, going ahead. Besides, IOCL would set up 5,00,000 tonne a year of green hydrogen capacity by 2040. The Carbon Offsetting and Reduction Scheme of International Aviation (CORSIA) of the International Civil Aviation Organisation mandates two percent SAF blend for airlines.
Why India must speed up efforts to support Green Hydrogen Economy
In an era where sustainability has taken center stage, the global race towards a greener energy future has intensified, with nations vying for a dominant stake in the energy landscape. Central to this endeavor is green hydrogen, a bridge to achieving ambitious global decarbonization targets. India, with its growing commitment to renewable energy, is at a pivotal juncture to harness the power of green hydrogen and carve a sustainable energy future for itself. The International Energy Agency (IEA) estimates low-carbon hydrogen to constitute 10-15 per cent of global primary energy supply in 2050 in a net-zero scenario. As per this scenario, the world needs 150 MT of low-carbon hydrogen (including about 80 MT of green hydrogen) annually by 2030. This will require nearly $1.2-trillion investments for the supply and use of low-carbon green hydrogen from 2021 to 2030. In response, nations have embarked on a race to solidify their roles in shaping the energy world of tomorrow, recognizing the transformative power of green hydrogen. India’s pursuit of a dominant position in the green hydrogen landscape places it in direct competition with formidable counterparts such as the U.S., Australia, China, Saudi Arabia, the UK, Spain, Egypt, and Latin American countries like Chile, Argentina, and Brazil. Amid this competition, India holds several natural advantages that could position it as a viable contender in this global race and enable global trade participation: cost-efficient renewable generation and a scaled-up renewables ecosystem, a capacity for low-cost electrolyser manufacturing, and robust port and logistics infrastructure. The nation is thus positioning itself to capitalize on the hydrogen revolution, with the Indian Government taking steps to establish a hydrogen ecosystem in the country with a significant INR 19,744-crore ($2.3- billion) support program. These efforts underscore the nation’s commitment to nurturing a hydrogen-powered future. However, a concerted effort will be required to enhance our capabilities, infrastructure, and policy frameworks, ensuring that we can seamlessly transition from these initial steps to large-scale deployment of hydrogen technology. Early Mover Advantage versus Cost Curve Wait As with any innovation, the age-old dilemma of being an early adopter versus waiting for cost curves to mature looms large. From a national perspective, establishing the green hydrogen supply chain early would give India a head-start in terms of two specific long-term economic advantages. First, it will help us rapidly scale up and reduce costs, securing India a substantial market share in global supply markets. Second, it will enable the domestic end-use sectors to switch early, safeguarding their long-term competitiveness. For example, our steel and auto sectors, that face the looming specter of decarbonization pressures, will be able to prepare early when supported by a robust domestic hydrogen supply chain.
GAIL India poised for sustained outperformance with multiple growth drivers
GAIL (India) Ltd, the country’s largest gas distributor, appears set for a period of sustained outperformance over the next 2-3 years, driven by multiple favorable factors, according to a report by ICICI Securities. The company’s strong performance is expected to be underpinned by growing domestic gas supplies, LNG liquefaction capacity, moderate pricing, normalisation of LPG prices, and an improving petrochemical segment. The report highlights the prospect of rising earnings in each of GAIL’s key segments over the next few years. Notably, the increasing gas supply and favorable price differentials between US Henry Hub prices and spot LNG are identified as key drivers of potential upside. ICICI Securities has reiterated a “BUY” rating for GAIL India with a revised Sum of the Parts (SOTP) based target price of ₹154 (from ₹149). Domestic gas supplies in India have been on the rise in recent months, with domestic gas output reaching approximately 99 million metric standard cubic meters per day (mmscmd). Reliance Industries Limited (RIL) has played a significant role in this increase, with a substantial rise in its gas output and further expected growth. The imminent commencement of ONGC’s KG basin asset and the potential for more affordable LNG supplies in the coming years are anticipated to boost domestic gas consumption by approximately 20 mmscmd by FY25E, thereby positively impacting GAIL’s transmission segment earnings and trading segment volumes. LPG and petrochemical segments on the rise The report indicates that the upward trend in LPG (propane) prices witnessed over the last two months is expected to continue in the medium term. This development is significant for GAIL, as every USD 50 per metric ton rise in LPG prices is projected to improve segment EBITDA by ₹4.1 billion. Additionally, an increase of USD 100 per metric ton in HDPE prices is expected to enhance petrochemical EBITDA by ₹5.5 billion. The gas costs for the LPG segment are forecasted to remain flat over FY24-25E, increasing only by USD 0.5 per Million Metric British Thermal Units (MMBtu) thereafter. The petrochemical segment is also expected to benefit from improving realizations, moderated spot LNG prices, and enhanced utilization, leading to a sharp rise in EBITDA from these two segments by FY25E.