Today’s Key Takeaways: Berkshire Hathaway invests big in Chevron and Occidental Petroleum while Goldman Sachs prefers Exxon. Certifying low-emissions natural gas? Mining by the numbers. Build Back Better Redux.
NEWS OF THE DAY:
The EU Is Ramping Up Efforts To Ban Russian Oil
Irina Slav, OilPrice.Com, May 2, 2022
The European Union may agree to a ban on Russian oil imports by the end of this week, despite concerns that this would further boost oil prices.
Bloomberg reported this weekend that EU members were discussing a phase-out approach that would see Russian oil imports decline gradually until the end of the year.
The Financial Times, however, later reported that the timeline for phasing out Russian has been moved up to several months.
According to the FT report, Germany, one of the biggest importers of Russian crude, had initially asked for more time to prepare for the phase-out of Russian oil, or until the end of the year. Now, the German government appears to have become bolder and ready to give up Russian oil in several months.
“We’re asking for a considered wind-down period,” Jörg Kukies, adviser to German Prime Minister Olaf Scholz, told the Financial Times. “We want to stop buying Russian oil, but we need a bit of time to make sure we can get other sources of oil into our country.”
On Sunday, German Economy Minister Robert Habeck told DW that complete independence from Russian oil was possible by late summer.
Early on Monday, German Foreign Minister Annalena Baerbock said that such a ban, once imposed, could last for years.
Despite wide agreement on the oil embargo, it could still fail because there are EU members, notably Hungary, which has since the very beginning opposed measures against Russian energy imports.
Decisions on sanctions need to be approved unanimously by all EU members.
The aim of the sanctions is to reduce Russia’s oil and gas revenues, which funds the Kremlin’s war chest, but without causing turmoil on international oil markets. Unfortunately, right now it looks like the turmoil cannot be avoided given the volume of Russian energy exports. Russia is the largest exporter of crude oil and oil products, and also the largest exporter of natural gas.
Besides Russia’s fossil fuel industry, the next round of sanctions will also target more banks as well as access to consultancy and cloud services
Berkshire loves its oil stocks, but Goldman thinks another one is a better buy
Brian Sozzi, Yahoo! Finance, May 2, 2022
Berkshire Hathaway recently bought billions of dollars’ worth of Chevron and Occidental Petroleum shares, but Goldman Sachs thinks another oil major is a better buy than both.
The investment bank reiterated a buy rating on Exxon and lifted their price target to $104 from $103.
“Overall, we are positive on the capital allocation strategy, leverage to a significantly improved refining backdrop, and outlook for production growth from key projects,” Goldman analyst Neil Mehta wrote.
Mehta’s call on Exxon — which sits alongside a neutral rating on Buffett’s Chevron — reflects potential several catalysts.
Goldman Sachs sees $125 a barrel oil by the summer amid tightening supplies in part caused by the Russia/Ukraine war. Exxon, meanwhile, announced a new $30 billion stock buyback plan amid earnings last week that Goldman thinks should help support the stock price.
“While the quarter was mixed, the stock still outperformed the XLE and the S&P 500 on Friday,” Mehta noted, “contributing to our view that the stock could be a relative out-performer in a less constructive market backdrop.”
As for Chevron, Buffett’s Berkshire Hathaway reported over the weekend it holds roughly $25.9 billion in Chevron’s stock. Chevron marks Berkshire’s fourth largest stock investment as Buffett bets on a future of higher oil prices.
“I think it’s going be very precious stuff over the next 200 years,” Berkshire Vice Chairman Charlie Munger said at Saturday’s meeting.
Goldman’s Mehta listed a few reasons why Chevron is a less attractive investment than Exxon.
“We emerge from 1Q22 results with our Neutral view on Chevron intact,” Mehta stated. “As we have previously discussed, while we maintain a bullish view on energy equities and recognize that the U.S. majors are an important part of the energy benchmark, we continue to see more compelling value at buy-rated Exxon with 26% total return vs neutral-rated Chevron with 6% total return. We also highlight we see less leverage to the more constructive refining setup given Chevron’s reduced relative Downstream exposure vs Exxon, with Chevron global refining capacity of 1.8 million barrels per day vs Exxon of 4.6 million barrels per day. In addition to Chevron’s reduced relative refining exposure, we view the company’s upstream project queue as less advantaged vs buy-rated peer Exxon’s, with Exxon offering attractive growth opportunities such as Guyana, as well as LNG projects including Golden Pass and Coral FLNG in the near term.”
Get ready to start hearing about “certified natural gas”
Alan Neuhauser, Axios May 2, 2022
The nonprofit MiQ wants to create the standard for certifying so-called low-emissions natural gas.
Why it matters: In theory, the effort could create a shared playbook — and new market incentives — for natural gas suppliers and consumers to reduce the sector’s emissions.
Yes, but: It might also create a natural gas version of the “organic” sticker on produce, a label that doesn’t mean nearly as much as consumers might think.
Driving the news: Last month, Alan reported that fuel-cell maker Bloom Energy planned to use only “certified natural gas,” sourced from the country’s largest natural gas supplier, EQT.
- They’re far from the only ones adopting the label: ExxonMobil in September, for example, declared that it would certify natural gas produced in New Mexico.
The details: The group doing all this certifying is MiQ — as in “Methane IQ.”
- The organization was founded by the environmental advocacy and research group RMI (née the Rocky Mountain Institute), and the sustainability consulting firm SystemIQ.
The big picture: The approach is based on the growing recognition that fossil fuels, and natural gas in particular, are going to remain integral parts of the global economy, even as companies and countries push to address the climate crisis.
- “We have the issue of methane emissions in oil and gas, and it’s a very large problem — about 7 billion tons of CO2e [carbon dioxide equivalent] per year,” MiQ CEO Georges Tijbosch tells Axios.
- “That needs to be addressed now, today. One of the ways this can be addressed is by creating that transparency around methane emissions, because what you measure is what you manage.”
How it works: A natural gas company seeking MiQ certification will pay for an MiQ-accredited auditor to examine the company’s current emissions, its monitoring technologies, and its operations.
- Based on the findings and how they compare to MiQ’s set of standards, the company will be issued a grade, from A to F.
- The company will pay a fee to MiQ to be included on its online registry of certified natural gas.
The intrigue: A company can declare that its gas is “certified” no matter what grade it receives.
- Additionally, once listed on the MiQ registry, the company can sell its certificates in addition to the natural gas — and the two products can be bundled or unbundled.
- In short, the company can sell the certificate itself with the natural gas, and perhaps charge a premium for the “certified” imprimatur. Or it can sell the two separately.
What they’re saying: MiQ intends to create a free-flowing market for the certificates — and, it hopes, ultimately a shared regulatory framework for reducing emissions from the natural gas sector.
- “We want the trading to start, but quite soon we will be disclosing the grades,” Tijbosch tells Axios. “We’re starting a market from zero — this is like oil trading in the 1970s.”
The other side: Environmental advocates remain critical of the idea.
- “The truth is that [responsibly sourced gas] on a large scale is just another false solution that the fossil fuel industry is pushing to try to stay relevant and extend the lifespan of its product at a time when the science is clear that we need to be winding down production of all fossil fuels, including gas, if we want to avert the worst of the worst of the climate crisis,” Patrick Grenter, associate director of the Sierra Club’s Beyond Dirty Fuels campaign, tells Axios.
Mining by the Numbers
Energy Matters, May 2, 2022
In 2015, there were three battery manufacturing gigafactories. In 2017, Tesla’s gigafactory opened; today, there are 285 gigafactories globally (some under construction). However, there has been very little increase in the mining of rare earth raw materials for the manufacture of batteries at these gigafactories. Consequently, the price for rare earth metals have gone up significantly, and many see that trend continuing. However, COVID prevention lockdowns in China are causing the largest consumer of rare earth metals to slow down — for instance, copper prices are falling. Below: price changes for rare earths in the last five years:
- Lithium +700%
- Nickel +250%
- Cobalt +100%
- Manganese +100%
- Graphite +25%
From the Washington Examiner, Daily on Energy:
BUILD BACK BETTER, REDUX: A small, bipartisan group of senators is slated to convene tonight to discuss a possible path forward on passing a climate and energy spending bill. The talks are a last-ditch effort to revive action on stalled legislation before both parties pivot to the midterm elections this fall. The group first met last week.
Expectations management: Questions remain as to how negotiators will appease Sen. Joe Manchin, who is leading the talks alongside Sen. Lisa Murkowski, but who is also responsible for single-handedly tanking Biden’s partisan social welfare and climate spending bill last fall. Any new package would also have to pair priorities on U.S. energy security with progressives’ goals on fighting climate change and investing in clean energy.
The Wall Street Journal reported last week on some of the actions Manchin might require before he throws his support behind a new bill, including using federal funds to spur domestic fossil fuel production and helping European allies build out new LNG terminals to accept more U.S. imports.
“I think we will have a better idea of what people are considering, and more people have been asked to provide ideas through this, and then put it all on the table,” Sen. Kevin Cramer told reporters last week. “And then maybe we can see if there’s something of a skeleton.”
The view from progressives: “What I worry about is doing something that is not significant, and people will say ‘We’ve dealt with climate,’” said Sen. Bernie Sanders. “My perception is that there are very few Republicans who are prepared to tackle that crisis in a way that’s appropriate.”
Others have taken a decidedly more bipartisan approach: “It’s time to cut a deal and get it done on climate that we can put into reconciliations,” Sen. Elizabeth Warren said, according to Politico. “And continue broader talks in multiple directions.”