Europe Shares its Green Deal Industrial Plan in hopes of counteracting the US Inflation Reduction Act
Plus Venezuela's potential role as an oil supplier to the Caribbean, artificial heat shortages in northern China, and the UK left without a deal on much-needed natural gas storage.
Europe Responds to IRA with Green Deal Industrial Plan
DRIVING THE NEWS: The European Commission last week announced the launch of the Green Deal Industrial Plan “to enhance the competitiveness of Europe's net-zero industry and support the fast transition to climate neutrality” (European Commission).
Under the new policy, the European Commission will loosen state aid rules that have precluded member states from implementing their own manufacturing incentives to compete with the US (Wall Street Journal).
The plan also includes the possible reallocation of €270 billion in unused COVID recovery funds toward supporting energy transition needs.
EC President Ursula von de Leyen said that the new policy aims to “level the playing field” globally (CNN). The EC released a press statement noting: “In particular, the Commission is proposing to address the productive investment gap in sectors strategic for the green transition” (separate piece from the European Commission)
WHY IT MATTERS: The new policy is intended to counteract the dual threat of American domestic manufacturing subsidies introduced through the IRA and China’s ongoing industrial policies; both of which have European governments worried about their ability to keep firms from relocating to more favorable manufacturing markets.
EU leaders have been expressing concern over asymmetric competitive landscapes after the US’s IRA was passed, including threats to file a complaint with the WTO late last year (Reuters).
European firms are already struggling to compete globally due to high energy prices, but under current EU rules member states are limited in their ability to direct funds to domestic industries.
THE DETAILS: The new policy, aimed at complementing existing efforts under the European Green Deal and REPowerEU, will allow state investments in renewable energy deployment, industry decarbonization, and equipment production for clean energy technologies while “preserving the integrity and level playing field on the Single Market”. It involves four pillars:
A predictable and simplified regulatory environment, which includes proposing a Net-Zero Industry Act and a Critical Raw Materials Act
Faster access to funding, through mechanisms like public financing and the proposed Temporary State Crisis and Transition Framework[1]
Enhancing skills through Net Zero Industry Academies and other up-skilling/re-skilling programs
Open trade for resilient supply chains, including supporting trade with EU partners through expanded Free Trade Agreements and a Critical Raw Materials Club, among other programs
LOOKING FORWARD: Over the longer term, the plan is to set up a European Sovereign Fund to avoid wealthier European countries from vastly outspending less resourced ones, which has the potential to further fracturing the bloc’s industrial sector.
THE CONTROVERSY: Lots of parties don’t think this response goes nearly far enough in meeting the challenge of the IRA spending. Politico EU published a nice summary of problems with the policy, citing two key issues: “It's largely drawing from existing, not new, funding lines; and it risks casting smaller EU countries against big powers Germany and France over fears that the bulk of subsidies will benefit the latter two”.
The governments of Denmark, Finland, Ireland, the Netherlands, Poland and Sweden all sent a paper last week in protest, stating: “State aid for mass production and commercial activities can lead to significant negative effects including the fragmentation of the internal market, harmful subsidy races and weakening of regional development”
Venezuela Oil and Gas for Caribbean
DRIVING THE NEWS: Trinidad and Tobago received a license from the US Treasury Department last month to develop a Venezuelan gas field (called the Dragon gas field), issuing in hope that the oil giant could help relieve high energy prices for Caribbean island states and new calls for the US to ease sanctions on the oil giant (Wall Street Journal).
The license, however, bars Trinidad and Tobago from paying cash for Venezuelan gas. Instead they will pay through humanitarian goods such as food and medicine.
Venezuelan President Nicolás Maduro criticized the ban on cash payments: “I call on sovereign countries and governments in the Americas and the Caribbean to denounce this colonial model… If you produce something and sell it to a company, you expect to be paid.”
WHY IT MATTERS: Many Caribbean countries are struggling with high energy prices as global oil and natural gas prices have been driven up by European buying and a persistent lack of supply. Venezuela could be a much-needed source of fuels, but countries still need US approval to avoid being caught up in sanctions.
“Once the valve is released for Venezuela to provide the fuel we will see a very significant downward trend in the cost of fuel,” said Bahamas Prime Minister Philip Davis, who was joined by Antigua, Barbuda, and Trinidad and Tobago in calling for the lifting of US sanctions.
But some island states are hesitant to rely on Venezuela due to political and economic instability. “While in theory Aruba could certainly benefit from re-establishing energy ties with our neighbor, we do not see this as a viable option under the current circumstances,” said the Aruba Chamber of Commerce and Industry.
THE IMPACT: Trinidad and Tobago needs gas to supply its LNG and petrochemicals industry, which has been partially closed for years due to fall domestic gas production.
If supplied enough gas, the country could double its annual LNG production up to 30 million cubic meters and increase its production of ammonia and methanol, according to the Energy Chamber of Trinidad and Tobago.
The Dragon gas field, however, could take 3-4 years before supplies begin flowing.
ON A RELATED NOTE: State energy companies Petroleos de Venezuela (PDVSA) and National Iranian Oil Refining and Distribution Company (NIORDC) have announced a new partnership to start a 100-day, €460 million improvement project at Venezuela’s largest refining complex to restore crude distillation capacity (Reuters).
The project is also aimed at reducing Venezuela’s reliance on US refining technology. Project success will likely lead to more facility overhaul agreements in the coming years.
China’s Heating Shortage Exacerbated by Russia
TOP LINE: The Wall Street Journal drew a causal link between Russia’s weaponization of energy and the troubling heating shortage China is facing right now, which are causing “economic and political problems for Beijing”.
While in the long term Russia’s expulsion from the European market promises to provide China with a source of relatively affordable and accessible gas, the pipelines needed to fully enable that supply chain are still years away.
In the meantime, China’s piped natural gas import prices were up 57% and LNG import prices 49% in December 2022 from September 2021.
In contrast, Europe has been able to weather the energy storm due to a combination of lucky warm winter temperatures and major efforts to find and mobilize new gas suppliers.
WHY IT MATTERS: While China remains Russia’s biggest and most powerful ally since the invasion last year, some see that alliance as potentially tenuous, especially if Russian actions begin to adversely impact Beijing’s domestic affairs.
That said, no animosity seems to be showing. At a recent regular press conference, when asked about the Russian-Chinese relations Foreign Ministry Spokesperson Mao Ning mentioned nothing out of the ordinary, stating: “both sides will continue to advance cooperation in various fields and deliver more benefits to the two peoples” (China Ministry of Foreign Affairs).
In addition, the Global Times (Chinese news outlet under the People’s Daily umbrella) reported on the growth of China-Russia trade, which rose 34.3% year-on-year in 2022 and for the first time surpassed the 1-trillion yuan threshold to reach 1.28 trillion yuan ($190 billion).
Shell Sued over Nigeria Environmental Damages
Driving the News: A class action lawsuit is being brought against Shell by Nigerian communities in the High Court of London on the basis that oil spills from Shell’s Nigerian operations contaminated drinking water, damaged air quality, and destroyed resources including farm land and fishing stocks (Bloomberg).
Why it Matters: As the Financial Times summarizes, this lawsuit “could establish precedent for the responsibility of international oil and gas companies for past pollution, particularly as many seek to divest older assets as they shift to cleaner forms of energy.”
If Shell is held responsible in the UK court, it could open UK incorporated firms (including energy firms) to major lawsuits against their subsidiaries from around the world.
The Context: A Shell subsidiary, Shell Petroleum Development Company of Nigeria (SPDC) was central in developing Nigeria’s oil industry, at one point producing 40% of Nigeria’s oil while operating 6,000km of pipelines and 1,000 wells.
SPDC has had to contend with major challenges to its operations including oil spills, theft and sabotage. In a statement, Shell explained: “The Niger Delta was and remains a highly complex operating environment,” and maintains that it cannot be held liable for “illegal third-party interference”.
Two lower courts had denied the lawsuit in the UK, but in 2021 the Supreme Court ruled that there is a “good arguable case” that the Shell parent company could be held liable for the damage, opening the door to this new legal challenge.
UK Natural Gas Storage Negotiations Fail to Reach Deal
WHY IT MATTERS: With the UK and Centrica unable to come to an agreement for expanding the country’s largest natural gas storage facility, the Rough, the UK will find itself much more vulnerable to high energy prices and shortages next winter.
Michael Bradshaw, global energy professor at Warwick Business School, said “this leaves the UK dependent on having to attract LNG cargoes during winter months when prices tend to be high and competition is greater; a situation exacerbated by the lack of firm long-term contracts that would guarantee deliveries to UK terminals.”
DRIVING THE NEWS: Centrica, owner of British Gas, was asking the government for “consumer-funded minimum revenue guarantees” to backstop its £150 million investment to double the Rough’s storage capacity to 60 bcf by next winter. However, negotiations seem to have fallen apart, with Centrica now saying that they will be unable to complete the work in time (Financial Times).
Centrica spokesperson: “We have done as much as we can but this is a long-term strategic decision and to do more we need a regulated model so it underpins the investment for years to come.”
The Context: Centrica reopened the Rough gas storage facility off the Yorkshire coast last October at the request of the UK government after five years of dormancy.
The facility is only operating at 20% capacity, however, and requires major upgrades to get back toward its full operating potential.
At current operation, the UK has only 9 days of gas storage, compared with 89 days in Germany, 103 days in France and 123 days in the Netherlands.
EIA: US Natural Gas Consumption Reached All-Time High In December 2022
A new report from the EIA shows that US natural gas daily consumption in the lower 48 states reached an all-time high of 141.0 bcf this past December, driven by “below-normal” temperatures driving demand for residential and commercial space heating and electricity generation.
This period included the major December cold snap that spread across much of the continental US around the holidays, during which residential and commercial natural gas consumption was 55% higher than the five-year average.
WHY IT MATTERS: Studies by NOAA and other organizations have tracked a causal relationship between climate change, destabilization of the artic polar vortex, and the extreme cold events such as December’s deep freeze. As these types of winter events get more common in the coming years, short-term winter gas demand spikes like this one may also become more common.
As the US works to electrify end uses and move away from natural gas in the coming years, the role of gas for these sorts of high-demand situations may remain critical through the energy transition.
[1] This framework expands on the existing Temporary Crisis Framework which was adopted in March 2022 in response to Russia’s war. It was subsequently updated in July 2022 to complement the Winter Preparedness Package, and is now being expanded again to include green transition provisions.