Bedlam in Belgium: Ill-advised energy transition policies increase geopolitical risks

Introduction of a geopolitical risk framework for the energy transition

There is a growing risk that ill-advised energy transition policies will drive an increase in geopolitical turmoil as we are seeing in the EU-Russia natural gas mess. While it was never reasonable to think a growing share of new energies and technologies would magically do away with classic geopolitical tensions, what is increasingly clear is that certain policy prescriptions are making matters worse. As I have argued in both my ROCE Deep Dive and ESG 2.0 & Energy Transition series, we are currently on-track for a worst of all worlds outcome (from the perspective of global citizens) of high and volatile energy commodity prices yet no meaningful change to our CO2 trajectory. This post focuses on geopolitics and how those same unfortunate policy choices are increasing the odds of structurally higher geopolitical turmoil that risks undermining the dual challenge of further reducing energy poverty with as small of a climate and environmental footprint as possible.

From the perspective of the oil & gas sector, the combination of virtue signaling ESG initiatives coupled with increased geopolitical turmoil from ill-advised energy transition policies is likely to exacerbate a “high and volatile” commodity price environment. This risk specifically (i.e., energy transition-driven geopolitical turmoil) is both transitory but likely repeatable given the perplexing climate policy steps taken by some countries/regions. I believe my Energy Transition Resilience framework discussed (here), (here), and (here) provides a road map for how companies should deal with transitory price spikes, but I am planning a follow-up note to dive into the issue in more detail (i.e., how to turn transient cash flows into sustainable value creation).

From the perspective of global citizens, in particular the least fortunate 90%-95% of people on Earth, a bungled energy transition causes real harm via a lack of abundant, affordable, secure energy supply. Even the lucky 5%-10% need energy availability, even if they can absorb price spikes more easily. A former colleague appropriately corrected me on how best to describe the situation: climate imperialism (as opposed to colonialism, which I had been using), which all non-global elites should work hard to resist.

EU-Russia natural gas: Ill-advised EU policy choices the original sin

I think the obvious example to start with is the energy crisis conditions that exist in Europe, most notably exemplified by super high and volatile natural gas prices. I believe the consensus geopolitical narrative that is either explicitly or implicitly blaming Russia for the EU natural gas crisis is off base. The original sin, from my vantage point, are a series of steps taken that voluntarily and unnecessarily reduced alternative sources of energy supply resulting in a greater dependence on Russia to fill inevitable shortfalls that arise. The fault would appear to lie with the original policy choices; Russia is ultimately pursuing policies and actions that it perceives to be in it its interest, as one would expect with any independent nation. It's not relevant what a European or American wants or thinks Russia should do; it is doing what it wants to do.

The specific steps that the EU or various member states took include (not a complete list):

• Prematurely retiring otherwise viable nuclear plants;

• Taking steps to wind down production from the super giant (albeit mature) Groningen natural gas field in The Netherlands;

• Taking steps to reduce potential domestic natural gas supply via frac bans;

• Demanding European oil companies address "Scope 3" emissions (i.e., society's use of crude oil and natural gas), which de facto reduced incentives to pursue exploration and development projects in the North Sea.

A fifth example of mis-guided policy choices include the much-heralded cancelling in November 2020 by France's ENGIE of a contract to purchase US LNG due to concerns over methane emissions (source). To be clear, I share the concerns and believe the US shale oil and gas industry needs to show a much greater sense of urgency in dealing with its methane emissions issue. But the "cancel culture" tactic that came with the ENGIE deal was never logical for anyone that cares about European consumers. One company cancelling an LNG contract owing to methane concerns did nothing for European consumers other than ensure an increased dependance on Russia and without any change to the methane profile of US shale gas.

A framework for geopolitical turmoil: traditional versus self-inflected

In my ESG 2.0 & Energy Transition deep dive series, I differentiated between “substantive” ESG, which I think is critically needed, and the "virtue signaling" variety that I think is contributing to the worst of all worlds outcome of high and volatile prices with no change to our carbon trajectory. I think an equivalent framework can be used for geopolitics, but perhaps with the terms "self-inflicted" versus "traditional" geopolitical turmoil.

I would characterize traditional geopolitical turmoil as the classic country-specific issues that arise in important commodity producers. Historic examples are well known and include the Arab Oil embargoes of the 1970s, the Iran-Iraq War of the 1980s, Gulf War 1 in the early 1990s, Venezuela under President Hugo Chavez in the 2000s and Libya in the 2010s. In all those examples, crude oil supply declined from an important producer and contributed to upside oil price volatility.

In the energy transition era, we could see analogous geopolitical turmoil arise in other commodity sectors. For example, copper and rare earth minerals are important to electric vehicles and other new energy technologies. It is possible, if not inevitable, that a disruption could occur in an important supplier that effects pricing or availability. While no one that I can recall has ever lost too much sleep over copper producer turmoil like they have with crude oil, I would put this in the traditional bucket of unavoidable, or traditional, geopolitical turmoil.

Far more concerning are the self-inflected wounds, perhaps something European footballers would call "own goals". It is the equivalent of ESG virtue signaling and manifests in a similar outcome: Taking steps to limit traditional energy supply well before the new stuff is remotely ready for prime time leading to commodity price spikes and diminished energy abundance and security.

The issue isn’t necessarily over-investment in renewables as is often articulated by those especially relaxed about the need to deal with climate concerns; as I have said repeatedly, all forms of new energy supply are welcome. Rather it is the steps to dismantle, disincentivize, or otherwise prohibit traditional energy supply developments. I will guess (a fuller discussion is beyond the scope of this post) that the apocalyptic mindset of the die-hard climate crowd is a major driver motivating the abrupt and imprudent energy supply shift being forced on increasingly large segments of society. The backlash is starting and it is needed.

Regarding Russia, I should also be clear that traditional geopolitical risks of course exist. The situation between Russia and Ukraine is highly uncertain and it is difficult to predict what the ultimate ramifications will be on crude oil and natural gas markets (my focus is of course from the perspective of an energy analyst; humanitarian concerns are paramount but beyond the scope of this post). It is quite easy for western leaders to paint Russia as the evil bogeyman for energy price volatility. Based on everything I have looked at, I don't believe the current energy crisis environment in the EU qualifies as being predominantly of Russia's doing.

Pretty sure we don't need more of the same

One of the oft-suggested solutions to Europe's energy crisis conditions is, amazingly, "more of the same". Huh?!? They are not serious, are they? Does any non-elite for one second believe that the answer to the supply volatility that comes from intermittent power generation is that we should pursue even greater quantities of intermittent power? There is no chance that makes any sense. Yes, all energy supply needs to grow, including renewables. But until the combination of renewables, battery storage, and high speed transmission lines are ready, if ever, for prime time, it is simply not logical to suggest we need more of the same and to not specifically and forcefully call for other forms of energy supply such as nuclear and natural gas.

From a European perspective, where are the calls from global elites for greater investment in geopolitically friendly countries like the US and Canada to not just redirect the odd LNG cargo, but to call for structural growth in LNG infrastructure? How about an incentive program to pursue North Sea field redevelopments? What options exist to create long-term LNG import opportunities from Qatar and various African nations?

If global elites and policy leaders are unwilling to recognize the mistakes they are making, the broader population that depends on abundant, affordable, available energy is in big trouble. The least fortunate, especially those in energy poor regions of Africa and Asia, are most at risk. At the end of the day, Europeans are free to pursue energy and climate policies they believes are in the best interests of Europeans. It is up to the European people to support or change its leaders based on the choices they ultimately prefer.

What does not seem reasonable, however, is taking a series of actions that created significant energy supply vulnerability and then blaming a foreign entity, Russia, that is not part of the EU. Like Europe, Russia is free to pursue what it believes is in its best interests. It is under no obligation, contractually or otherwise, to offset Europe's “own goals”.

From a societal perspective, Europe’s questionable choices are increasing competition for LNG cargoes at the direct expense of developing Asian countries. Is this the kind of “climate justice” global elites are calling for? Where is the equity in European climate policies for the less fortunate in developing African and Asian nations? This will be a recurring theme of Super-Spiked: resist climate imperialism.

Including crude oil and natural gas production in a country's NDC is as mis-guided as Scope 3 accounting

A challenge I have previously highlighted with energy supply is that domestic production sources are included in nationally determined contributions (NDCs) to carbon reductions. Including energy supply, in particular global commodities like crude oil in and natural gas, in NDCs I believe is a policy and accounting mistake. The outcome is bad policy choices that seek to limit domestic energy investment.

We see this most clearly as it relates to Canadian production and the bizarre attempts to keep Canadian oil and gas in the ground. It is an ongoing mystery Super-Spiked will continue to try to uncover: Why would anyone have a problem with Canadian oil and gas production when you can so clearly see what the alternatives are?

Lessons for USA & Canada: Just say no to European-style energy & climate policies

North America is blessed with a robust and sizable energy industry across all sources—crude oil, natural gas, coal, nuclear, and renewables. However, crude oil and natural gas are under pressure from environmental/climate groups and US coal long ago was out-competed by shale gas while also facing pressure from enviros.

Over the last decade, North America has been fortunate to be home to a booming shale gas and shale oil industry that has transformed our energy landscape. If we start with shale gas, it clearly could be used to help address both domestic needs (e.g., New England) and shortfalls in Europe, if not stymied by activists.

In the case of crude oil, the key opportunity is in a faster expansion of Canada crude oil supply. Right now, US shale oil is king. But North America's energy position would be strengthened by a more accommodating policy toward Canadian crude oil supply along with long-hoped for and oft-delayed reforms in Mexico that allowed its oil industry to get back on track. It is probably not worth holding our breath for the latter given a long history of disappointments in promised reforms. But Canadian oil could well grow at a much faster clip with infrastructure policy encouragement, rather than hostility. I ❤️ Canada. How could anyone not love Canada?

I will expand on this in a future post, but I believe that core OPEC and Russia oil producers are nearly out of spare capacity, which coincides with very low levels of above-ground crude oil and refined product inventories. To be clear, there is plenty of known, reasonable cost (i.e., <$65/bbl required) oil projects that could be pursued within both OPEC+ and many non-OPEC areas. The issue is the overhang of energy transition and ESG virtue signaling is on-track to result in a slower-than-needed ramp in capital spending. Hence, my expectation we have entered a multi-year period of "high and volatile" oil prices.

One final point: I don't believe we have an energy taxonomy here in the USA. Let's hope that remains the case. A price on carbon? Yes, I am a supporter. An energy taxonomy? No way. As you know, I am pro-capitalism, anti-socialism.

On a personal note…

I do hope this note does not come across as anti-European. Nothing could be further from the truth. My family has deep ties to England, Scotland, Ireland, and Germany and my cis-gendered life partner (a.k.a., wife) and I were engaged in Italy. My favorite beer is Belgian beer. I have always said that if I wasn't of Indian heritage, I would have liked to have been either Italian or Scottish. In recognition of this week’s Super-Spiked Energy Transition Playlist addition, I could easily be Angus MacMurti. We are a pro-Europe family!

But I am firmly anti-EU energy policy. As I stated above, it is Europe's right to have the policies they want. But North America should strongly resist going down that road. There is no justice or equity in denying any person abundant, affordable, secure energy, either directly, or, worse, through purposeful policy choices driven by Malthusian ideologies.

Important update regarding my Spotify feed!!!

Super-Spiked (Substack) and Super-Spiked by Arjun Murti (YouTube channel) are jointly announcing that Super-Spiked Videopods will remain on Spotify (here) and will not be following Neil Young and Joni Mitchell down the censorship road. Goodness gracious people, what the heck? For me, a free form 3 hour-ish podcast is not something I am looking to regularly listen to. As a result, I have taken the radical step of not being a frequent listener of Joe Rogan’s podcast. Seems like a more appropriate course of action than demanding Spotify silence him.

But seriously, I am grateful to Mr. Rogan and Spotify for standing up to woke American cancel culture. There is zero chance silencing voices, including comedians with uber-successful podcast streams, makes any sense. Resist American woke cancel culture censorship! Resist climate imperialism! In that spirit, here is a link to The Joe Rogan Experience so you can decide for yourself.

Disclaimer

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.

Regards,

Arjun

Appendix: Super-Spiked Energy Transition Playlist

In recognition of the insanity that is otherwise known as EU energy & climate policy, I present the sixth addition to the Super-Spiked energy transition playlist, AC/DC’s 1983 classic Bedlam in Belgium. The lyrics aren’t a perfect match, but I can’t think of a better song title to represent EU energy & climate policy. As a former Director of Research, I was usually leery of the over-use of songs making their way into report titles. Therefore, I won’t make it a habit. I think in this case the reference is obscure enough and uses a title that especially fits the post.

The video below comes from the December 11, 1983 concert in Landover, Maryland, held just two days after I attend my first ever rock concert of the same tour at Brendan Byrne Meadowlands Arena. We had ninth row seats and the show cemented AC/DC as my favorite band during my teenage years. Nice to see the late Maclolm Young on rhythm guitar in this video.

In my view, Flick of the Switch capped the peak of AC/DC’s Brian Johnson era following the blockbuster albums Back in Black and For Those About To Rock (We Salute You). Believe it or not, AC/DC actually continues to put out new music to this day, but there is no comparison to this time period. Unfortunately, the Bon Scott era was before my time. I became an AC/DC fan when Santa Claus brought me For Those About To Rock for Christmas 1981.

Super-Spiked energy transition playlist

1. Concert for 2 Cellos in G Minor, RV 531: I. Allegro Moderato. Given Germany is at the center of energy transition policy controversy, it seemed appropriate to use this song from Wolf Hoffman, lead guitarist of Accept, as the intro/outro for Super-Spiked Videopods.

2. Whiplash. Energy transition is driving a new era of commodity price volatility.

3. Amazonia. All of us here at Super-Spiked (i.e, me) are on board with saving the Amazon Rain Forest and being more respectful of Indigenous Peoples.

4. Creeping Death. Signifies the risk of decreasing capital market access for companies that ignore substantive ESG principles.

5. I Can't Drive 55. A step change in fuel economy is the key for oil demand moderation this decade, but doesn't seem on-track to happen. Apparently no one outside of Europe and perhaps Japan can drive 55.

6. Bedlam in Belgium. In honor of the insanity otherwise known as EU energy and climate policy.

On Spotify, you can now follow here the Super-Spiked Energy Transition Playlist. I will work on adding the list to my YouTube channel as well for that prefer the great videos.