“Protecting America's Strategic Petroleum Reserve from China Act”: Assessing the US Congress’ new idea for depleting Chinese oil markets
On January 12, 2023, the United States House of Representatives passed Bill H.R. 8488, titled the "Protecting America's Strategic Petroleum Reserve from China Act." If enacted, the legislation would prevent the Secretary of Energy from exporting the US strategic petroleum reserve (SPR) “to any entity under the ownership, control, or influence of the Chinese Communist Party”.
The bill received approval with 331 favourable votes and is currently awaiting deliberation by the Senate ever since. The Upper House can either reject or approve the bill and if approved, it would proceed to the President for consideration. This spotlight attempts to clarify the potential impacts on China (if any) in case the Act ever becomes law and restricts its access to imported SPR reserves.
The road ahead on Capitol Hill
The Bill had significant bipartisan support in the Lower House to secure a comfortable majority, with all the 218 present Republicans and about half (113) of present Democrats voting “yes”. Analyst Benjamin Salisbury from Height Capital Markets argues that approval in the Senate might not be so smooth as the Upper House is controlled by Democrats, but it’s still feasible under “tough compromises” - and under greater pressure from voters for a stronger stance against China. The greatest obstacle, however, might arise from the President's Office
President Joe Biden has been depleting the SPRs at an unprecedentedly faster pace to manage oil prices driven up by the war in Ukraine. However, some argue that the move is more about political concerns involved in alleviating inflationary pressures on fuel ahead of an election year. Since the SPRs are only meant to be used in times of great uncertainty and with due restraint - only enough to secure minimal levels of energetic security - critics point out that the President might be compromising the country’s long-term energetic security for short-term political gains. From this point of view, the Executive would hardly sanction a bill that would constrain its influence on oil markets.
But even in a scenario where the Act is approved by both the Legislative and Executive branches, current data suggests that its effects on China’s energy markets are likely to be minimal.
How will China be impacted?
China is the world’s second-largest consumer of crude oil in total volume, and the commodity accounts for roughly 20% of the country’s total energy generation. This figure is roughly comparable to other large emerging economies like India (23%) and Russia (19%). Nevertheless, China represented only one-fifth of the total foreign purchases of SPR released in 2022, while the US itself accounts for only 2% of China’s total crude imports.
Source: S&P Global Commodity Insight
As evident from the chart above, China depends more on oil producers in the Middle East and Eurasia and has concentrated its diplomatic efforts accordingly. It has expanded economic and financial ties with Saudi Arabia, mediated an agreement with Iran, and continues to purchase Russian oil in large quantities. These efforts are likely to provide China with greater resilience against disturbances that may affect energy supplies and limit the US' ability to manipulate oil markets to harm the Chinese economy. Rather than a practical purpose, the act’s eventual approval would likely serve a rhetorical one: Washington is taking a tougher stance against Beijing.
North African Energy Market Analysis: Algeria
This report serves as an overview of the risks – mainly political, economic, social – in the Algerian energy market. It will look at natural gas, as well as crude oil and green energy. The report is also part of a broader series of analyses on North African energy markets.
The Piano Mattei lands in Brazzaville: A Look at Italy's Latest Quest for Energy Security.
On 25 April 2022, Italy moved one step further in consolidating its energy diplomacy across Africa. After securing gas deals in Libya, Morocco and Algeria, the state-owned energy group Ente Nazionale Idrocarburi (Eni) signed a US$ 5 billion deal gas liquefaction project with the Republic of Congo, from whom it had previously acquired the Tango FLNG liquefaction station in early August of 2022. Together, the facilities make up the Marine XII joint venture project along with 31 drilling wells, 10 platforms and 1 gas pre-treatment plant logistically integrated off the shores of Pointe-Noire.
Eni has been the flagship of Rome’s new foreign policy towards Africa dubbed as the Piano Mattei, initiated by Prime Minister Giorgia Meloni as a strategy to reduce dependency on Russian gas imports by projecting its influence just below the Mediterranean Sea. Since the Piano could be pivotal for the EU to fulfil its energetic security objectives (as we previously discussed in this must-read Spotlight!), this article identifies key drivers of risk and success emerging from Eni’s new undertaking in the Republic of Congo and what is its contribution to Italy’s greater energetic security planning.
How Eni did it: Managing Political Risk in Congo
After almost 60 years in Congo, one could expect that Eni would have nurtured an engagement with the country’s most influential stakeholders in order to create an identity of interest that would later pay off as the company’s most competitive aspect to secure the resilience of its business. Interestingly, Congolese law largely centralizes the administration of oil and gas exploration projects - including the issuance of permits, renewal of contracts, and local content requirements - under the Minister of Hydrocarbons’ authority and discretion. Minister Bruno Jean-Richard Itoua, the current incumbent, not only oversaw the signing of the new LNG project but actively supports it as a potential driver of Congolese economic growth and energy self-sufficiency. Such good deeds bode well for the project's stability and are likely to work as a preemptive measure against any major regulatory disruption for the foreseeable future.
The Republic of Congo’s stable relations with Italy, the European Union and major continental powers such as France are also likely to play a stabilizing and supportive role in the operation as they currently show little signs of major degradation, even if thorny issues such as corruption, autocratic practices, and environmental degradation should be kept on a close watch for precaution’s sake.
On the other hand, the majority of installations comprising the Marine XII project - including the ones designed to export liquefied gas - are located on the Gulf of Guinea where piracy activities targeting cargo ships happen, thus remaining a relevant risk to be observed along with the possibility of criminal violence against foreigners in Pointe-Noire. Whether Eni's previous incidents in Nigeria will foster greater investment in maritime security against piracy remains something to be seen.
Was it really all for nothing?
Despite positive outlooks, Eni’s new undertaking in Congo is likely to do little for Italy’s energy security. Congo’s LNG production is expected to reach a peak of 4.5 billion cubic meters per year by 2025, which would only correspond to roughly 6.5 per cent of Italy’s total LNG imports in 2022. More broadly, the experience is telling of Piano Mattei’s fundamental weakness of over-pulverizing supply among possibly more reliable sources while still relying on other major individual actors.
Figure 1: Share of Italy’s Natural Gas Imports by Country (2010-2021). Based on data compiled by the Ministry of Environment and Energy Security (2021),
For example, in 2020, it would take the combined gas supply of 4 countries (Netherlands, Libya, Netherlands and Qatar) to match Algeria’s participation totalling 24 per-cent in that year. While it should be recognized that Russia’s participation suffered sharp drops in 2022 and that logistical impediments could certainly hinder alternative solutions, data seems to indicate that Piano Mattei's current supply diversification strategy currently seems more like a substitution: by trading Moscow for Algiers, Rome’s new diplomatic undertaking might still be falling short of its ambitions. Nevertheless, the pursuit of risk hedges could be recognized.
Since Meloni has veiledly thrown her support behind Algeria on the Western Sahara conflict before, further signs of support in this and other issues could indicate an appeasement with Algeria for the short term. Likewise, the share of renewable energy consumption consistently grew from 2018 to 2021 as well as their participation in Italy’s total energy consumption, despite still accounting for the smaller share. Thus, in the long term, the return of investment flows to renewables production capacity could become pivotal for Italy to achieve its desired - and fiercely pursued - energetic security.
Petrobras: Balancing Risk and Opportunity in Brazil's Oil Industry
Petróleo Brasileiro S/A - or simply called Petrobras - is the leading player in oil and gas production in Brazil. The majority-state-owned company has a net revenue of R$ 452 billion (approx. USD$90bn), outputs approximately 2.77 million barrels of oil equivalent per day, and is a publicly-listed company traded on the New York Stock Exchange (NYSE:PBR), Nasdaq (NASDAQ:PBR), and the London Stock Exchange (LSE:0KHP), and several others. Despite its relevance to the global energy markets and its considerable growth potential, investors’ sentiment towards Petrobras usually contains extra grains of salt. The company is often embroiled in domestic wrangles and power struggles that shed uncertainty about its corporate governance and was at the centre of a major corruption scandal involving high-rank Brazilian policymakers in 2015.
After the election of Lula da Silva as president, markets again reacted badly due to a perceived high potential for undesired political influence over the appointment of Petrobras’ Board of Directors, for changes in its dividend distribution, and a revision of the company’s pricing policy (which currently follows a parity with international import prices). One year later, a scanning of those three issues and of the newly appointed Board might still prove revealing of Petrobras' future and better prepare investors to hedge against associated risks.
Currently, the State-owned Companies Act (2016) prohibits figures with a potential conflict of interest due to previous positions inside public administration from being appointed to the Board for a period of 3 years after leaving the previous function, which is also endorsed in Petrobras’ statute. A Bill reducing the “quarantine” period to 1 month is stalled in the Upper House of Congress since 2022, prompting many to wonder if the Bill’s approval could be pushed to ensure greater coalition support in times of political turbulence. Despite being a possible strategy, it is far from being the likely one. A Supreme Court decision has already suspended the proposed 3-year quarantine period of the Bill, and 3 of the government’s 6 appointees were confirmed on the Board despite alleged concerns about their ties with partisan politics. However, other bills and reforms are among Lula's top priorities with Congress, making it unlikely that he would create an unnecessary conflict with the Upper House over Petrobras, especially when opposition forces are strengthened.
Acting as Petrobras's CEO is Jean-Paul Prates, who has vaguely commented on the possibility of changing the dividend distribution policy, but both Lula’s and Bolsonaro’s defence for greater taxing in dividend yield distributions likely does little to appease markets. Still, a recent judicial attempt of halting Petrobras’s dividend distribution shed even more uncertainty about how alternative ways of interference - ones that do not even involve the Board’s discretion - can be overreaching, indicating a high likelihood of taxation in the future.
The potential for a change in the company’s policy of maintaining parity with international oil prices also cannot be discarded, as key figures inside the Board have signalled they desire its revision. Nevertheless, in a continued scenario of high oil prices due to external shocks, the Board is likely to be interested in retaining a part of Petrobras’ profitability by not announcing major changes in the parity policy for the near future.
While the prospects for stable dividend yield distributions and insulation from rent-seeking dynamics appear less optimistic, posing increasing risks for investors, Brazil's potential to become a major player in clean energy production presents an opportunity. Petrobras is actively exploring cutting-edge technologies in renewable energy markets, such as wind-powered energy and green hydrogen production, which could enhance its long-term profitability. While the company’s issues span across multiple incumbencies and require careful assessment of long-term tolerance for loss, the most risk-appetite investors can still find creative ways to offset the balance and - with some stroke of luck - profit from the undertaking.
Photo credit: Global Business Outlook