Fossil Fuel Subsidies Spiked To Record High In 2022

1. Fossil Fuel Subsidies Peaked Last Year Amidst Surging Prices

- According to the IEA, global spending on fossil fuel subsidies surpassed $1 trillion last year as governments across the globe sought to mitigate the impact of soaring commodity prices.

- As such, spending on fossil fuel subsidies was more than double the total global investment in renewable energy sources, with the most marked increase coming from the power sector.

- Arguably the most price-impacted region amidst the Russia-Ukraine war, the European Union alone spent $349 billion to reduce consumer energy bills.

- Emerging markets and developing economies spent a total of $114 billion on fossil fuel subsidies, highlighting the fact that advanced economies have played an oversized role in these expenditures.

2. Nigeria Confronts Heated Presidential Debate

- Nigeria will hold general and presidential elections on the 25th of February, and with former military dictator Muhammadu Buhari stepping down there are at least three candidates that could snatch victory.

- Following years of sabotage attacks and unplanned force majeures, the African country’s oil industry has just begun to recover with liquids output rising to 1.46 million b/d last month.

- Despite several units still underproducing (Bonny Light), February exports have finally surpassed the 1.5 million b/d threshold for the first time in a year, driven by strong demand from Europe.

- Sabotage attacks on pipelines have recently subsided, too, although any post-election escalation in violence might immediately derail Nigeria’s fragile recovery.

3. China and Australia Finally See Eye to Eye

- As Chinese and Australian officials have relaunched talks to resolve tensions, the freeze on several deals is over and the two sides are moving to a “warm spring”.

- According to Kpler, three Glencore-delivered coal tankers have already reached the Chinese ports of Zhanjiang and Taishan in February, marking the first deliveries since the October 2020 ban.

- At the same time, other tankers have failed to discharge their coal cargoes in China amidst uncertainty over Chinese customs policies, forcing the seller to divert them to Vietnam instead.

- The value of bilateral trade between Australia and China did not see any material decline from 2021 to 2022, though most of it was driven by higher iron ore prices.

4. Collapsing Gas Prices Worsen LNG Arbitrage Profits

- The looming restart of Freeport LNG, which has officially asked for regulatory permission to restart this week, is poised to weigh heavily on European landed LNG prices.

- The plunge in European natural gas prices, with TTF still trading in the €50-55 per MWh range, means that the spread between regional prices and US LNG contract formulas keeps on shrinking.

- 2022 might go down as the most profitable year for US LNG exporters as total natural gas, liquefaction, and delivery costs brought the annual average to $12.6 per MMbtu, marking a firm $20/mmBtu spread between it and the average landed European price.

- At the same time, last year it was long-term off-takers who were taking cargoes based on non-LNG-based pricing that profited the most (with a margin of 160%), the plunging of natural gas prices in 2023 might change that soon.

5. Canada’s Oil Producers Underperform the Market

- The collapse in natural gas prices has worsened the overall outlook on Canada’s oil producers, a market segment that many expected to be the most resistant to volatility shocks.

- Since November, spot natural gas prices in Canada have plunged by some 65% and are currently one-fourth of their 2022 peak, with AECO trending around C$2.50 per GJ.

- In its Q4 results call, oil sands producer Suncor Energy said it expects a 19% decline in earnings in 2023, a huge downward revision from the previously expected 8%, stemming from lower gas prices.

- Canada’s energy industry has struggled to keep up with its peers in the U.S. and globally, with the S&P/TSX index increasing 12% over the last 12 months whilst the MSCI World Energy index rose by 22%.

6. Chinese Steel Prospects Not As Rosy After All

- Chinese steel production is still yet to surpass pre-pandemic levels as this month’s output has been hamstrung by negative mill margins and marginally weakening demand.

- S&P Platts estimates February steel production to come in at 79 million tonnes, 1 million tons higher than January but in line with December, with the property sector lagging growth expectations.

- Compiling the 15 provinces that have already announced their infrastructure investment plans for 2023, it seems incremental expenditure for new projects will be only 1% higher than last year.

- Absent an immediate government stimulus, the steel sector is set for an 11 mtpa year-on-year decline with production tallying 1 billion tons in 2023 amidst falling home and land sales.

7. Peru Protests Disrupt Country’s Copper Industry

- Protests across Peru are increasingly impacting copper production in the second-largest producer of the base metal, with the country still roiling after the December ouster of President Pedro Castillo.

- Daily electricity usage data, as reported by Reuters, indicates that Glencore’s (LON:GLEN) Antapaccay and MMG’s Las Bambas mines regularly draw only half their normal power.

- With electricity provision seesawing from one day into another, mining operations still continue even though the arrival of supplies into mines and the transport of copper concentrate is hindered.

- The Las Bambas mine used to account for 2% of global copper production, but the wave of protests triggered a hefty revision of production guidance, down by 25% year-on-year to 250,000 tonnes.