Tianfeng 2022 medium-term outlook | Energy: The storm eye of traditional energy sources – Russia, Ukraine and ESG
【Abstract】
The previous decade could have become the "shale age", with U.S. shale oil and shale gas dominating the global energy market. In the years since, the dominant logic of the energy market is changing, and the geopolitical problems brought about by ESG and Russia and Ukraine, supply shocks may become the new dominant factors in the market.
Main line one: The decoupling of Russian-European energy triggered by the Russo-Ukrainian war is a long-term problem. The degree of absolute impact of the difficulty of trade reshaping: natural gas > refined oil > crude oil.
Main line two: energy transition and ESG bring long-term underinvestment. The increase in capital expenditure on new energy is far from offset by the decline in fossil energy investment. The global energy Gini coefficient (energy expenditure/GDP) has risen sharply, and Europe is already very close to the level of the 1980 oil crisis.
Balance sheet analysis and outlook of major varieties:
1) Crude oil: 2022H2 is expected to have a slight accumulation of 200,000 barrels / day, the historical low state of inventory is difficult to effectively accumulate, the second half of the year oil prices are expected to remain relatively high, we predict that oil prices in the second half of the year in the range of 100-120 US dollars / barrel running.
2) Natural gas: The international LNG market will remain very tight this year, resulting in China's imported LNG resources being re-exported to the international market. Domestic natural gas will be a "supply-constrained demand" market environment, and the annual demand growth rate is expected to be only 4%.
3) Petrochemical products: 2022 is the last year of China's major petrochemical product capacity expansion cycle, and 2023-2024 will enter a low-speed period, and the industry boom is expected to show an inflection point.
Investment view: We may need to break a little obsession about the logic of energy investment - new and old energy are not contradictory at the moment; Upstream and downstream are also not contradictory. Key recommendations: 1) The profitability repair of the large refining and chemical, as well as the opening of the second growth curve, recommend Rongsheng Petrochemical, Hengli Petrochemical, Oriental Shenghong, Hengyi Petrochemical, Tongkun Shares. 2) Upstream companies continue to benefit from the high price of energy products, optimistic about CNOOC, China Shenhua, Guanghui Energy, and Zhongman Petroleum.
Risk warning: the risk of negative demand feedback intensity, or the end of the Russian-Ukrainian war, the end of relevant sanctions, or the rapid release of surplus production capacity by OPEC, resulting in a rapid decline in oil prices and international LNG prices; The further escalation of the intensity of Russian sanctions has led to a further rise in international crude oil, refined oil and natural gas prices, affecting the risk of terminal demand; Risk of a longer downturn in the petrochemical industry than expected; The risk that the new material project of the big refining and chemical company will be slower than expected; The calculation is subjective and is for reference only.
【Text】
1. 2022 – a watershed year for the energy sector
2022 could be a watershed year for the energy industry, with supply shocks becoming the dominant logic. The previous decade could have become the "shale age", with U.S. shale oil and shale gas dominating the global energy market. In the years since, the dominant logic of the energy market is changing, and the geopolitical problems brought about by ESG and Russia and Ukraine, supply shocks may become the new dominant factors in the market.
1) The geopolitical impact of the Russo-Ukrainian war is not a short-term one, and the decoupling of Russian-European energy is a long-term problem.
2) The underinvestment caused by ESG is beginning to be exposed.
3) The impact of the epidemic is also an important turning point in 2022, with demand "digging holes" in 2020, "repairing" in 2021, and returning to pre-epidemic levels in 2022.
1.1. Supply shocks (not demand shocks) dominate the market
Several supply shocks are happening at the same time and dominating the market – the impact of the Russo-Ukrainian war on the energy market, supply chain problems caused by the epidemic, and a longer cycle of energy transition. Crude oil price increases since July 2020 have basically reached the increase in oil prices since OPEC imposed an embargo on the West in 1973.
Blackrock argues that unlike demand shocks, where monetary policy can strike a balance between inflation and growth, where supply shocks dominate the market, where monetary policy must choose one or the other, it is difficult to have both. If the Fed wants to maintain its 2% inflation target, it may need to pay the price of an unemployment rate of more than 10%.
Looking back at the performance of oil prices in the past several rounds of interest rate hikes, oil prices are less susceptible to negative feedback from interest rate hikes in the case of supply shocks. 1) In the two demand shock cycles of 2004-2006 and 2015-2018, the federal rate and oil prices rose almost simultaneously. From the beginning of the interest rate hike to the fall in oil prices highs, there have been 2-3 years of events. 2) In the case of the supply shock of the 1970s, the impact of interest rate hikes on oil prices was more lagging behind. By the end of 1978, the federal interest rate had increased to more than 10%, while oil prices climbed all the way to $112 a barrel (inflation-adjusted) in 1980. It was only when the federal interest rate rose to nearly 20 percent in 1981 that oil prices began to fall slightly.
1.2. Material properties give way to energy properties
Oil, gas and coal all have both energy and material properties. In the long period of history, the added value of material properties is usually higher than that of energy properties, and the price of oil is usually higher than that of natural gas and coal because of its certain material properties and high energy density in terms of energy. Since 2022, this law has been broken.
Since the beginning of 2022, the top 3 absolute price increases of major energy products are international natural gas, international diesel, and international coal (all of which are European pricing indicators). It is worth noting that the calorific value of natural gas in Europe has significantly exceeded that of crude oil, and has approached 2 times that of crude oil. Even the calorific value of coal is gradually approaching that of crude oil.
In terms of chemical materials, olefins, as a representative of the downstream material varieties of oil and gas coal, the price of ethylene has actually fallen by 7% since the beginning of 2022. Conversely, the price of PX has risen 41% since the beginning of the year, not because of its downstream polyester industry boom, but actually because of its upstream MX as a gasoline component price rose sharply by 65%.
This article will be divided into the following parts: First, we explore the impact of the Russo-Ukrainian War on the energy products market, in order of the difficulty of reshaping the trade chain, the biggest impact is natural gas, followed by refined oil, and then crude oil, the impact on the international coal market is mainly reflected in the secondary impact of natural gas. Second, explore the impact of ESG or energy transition. Judging from the performance of the energy products market this year, it is clear that we have entered an unbalanced transition state, that is to say, the capital expenditure of traditional fossil energy for many years has not been effectively compensated by the growth of capital expenditure from renewable energy, resulting in a gap in overall energy investment. Third, specifically landing on the balance sheet of major products, we predicted the balance sheet of global crude oil, Chinese natural gas, and China's major petrochemical products, and listed the main assumptions behind them. Finally, in terms of stock investment, we look back at the changes in the investment logic of traditional energy companies in the international and domestic markets in the past two years (2021-2022).
2. Main line 1: Russo-Ukrainian War
2.1. The degree of absolute impact of the difficulty of reshaping trade: natural gas > refined oil > crude oil
Since the outbreak of the Russo-Ukrainian War at the end of February 2022, Western energy sanctions against Russia have gradually deepened.
As of the sixth round of sanctions, the sanctions imposed by Western countries on Russia do not involve secondary sanctions (Secondary Sanctions, also known as secondary sanctions, refers to the sanctions that the initiator of the sanctions restricts the financial and trade transactions between companies or individuals in third countries and the target parties while sanctioning the target party, and imposes penalties on third-country companies or individuals that violate the regulations). Theoretically, as long as trade routes can be adjusted and reshaped, Russia's energy exports can be diverted to other countries, ultimately rebalancing trade without affecting the overall global balance of supply and demand.
But the above assumptions can only stay in theory, and the reshaping of trade routes cannot be complete. The magnitude of the impact of specific varieties mainly depends on the difficulty of the actual adjustment of trade routes.
2.2. Crude oil vs. refined oil: the embargo has little impact on the former and the latter on a large impact
The russian crude oil export trade route has been fully adjusted. Russia's crude oil exports increased by 520,000 bpd month-on-month in April, an increase of 630,000 bpd compared to january-February levels. Exports to Europe fell by 65,000 barrels, and the share of exports to Europe fell from 49 percent to 37 percent. But the volume of exports to India increased significantly, with the share rising from 0 to 14%.
The impact of sanctions on Russia's refined oil products is more obvious. In April, russian refined oil exports to the United States, the European Union, and the United Kingdom fell by 45, 21, and 140,000 barrels per day, respectively.
The sixth round of sanctions will exacerbate the impact on refined oil products. On June 3, the sixth round of sanctions landed, and the EU will stop buying Russian seaborne crude oil within 6 months and stop buying Russian petroleum products within 8 months. It is expected that the import of refined oil products from Russia by EU countries will further decline in the next 8 months. Nearly 1.5 million bpd of refined products imported from Russia were at risk in the EU in April.
Russian refinery processing volumes fell by 1 million bpd, and the impact is expected to continue to expand. Affected by the sanctions, the EU, the United States, and the United Kingdom have reduced their imports of refined oil products from Russia, and the impact of the sixth round of EU sanctions may continue to expand. Russia's exports of refined products are blocked, and even the future faces the risk of complete stagnation. According to the IEA, Russian refinery processing fell by 310,000 bpd in April, a cumulative decline of about 1 million bpd since January, the lowest level since 2011.
U.S. refineries also face a shortage of raw materials. U.S. refineries and oil refineries do not purchase Russian oil, mainly affecting the feed of some refineries. As the U.S. refinery PBF noted in its conference call that "after the Russian sanctions, we faced shortages of some raw materials, such as VGO and fuel oil, which made it impossible for our set of catalytic cracking to drive." According to EIA forecasts, U.S. refinery operating rates will remain at a high level of 94-96% in June-August.
Europe faces both crude oil and natural gas problems, supply shortages, and soaring prices. Natural gas in Europe has risen significantly, and natural gas is the feedstock for hydrocracking in refineries. According to Valero, "if the European gas price is $30/mmbtu and the U.S. gas price is $5/mmbtu, the U.K. Pembroke refinery costs $8 more than the U.S. Gulf of Mexico refinery."
2.3. Natural gas: the eye of the storm in the Russian-Ukrainian conflict
The focus of the Russian-European energy decoupling is on natural gas. Under the EU's REPowerEU plan, the EU will reduce its dependence on imported gas from Russia by 66 percent during the year. Another goal , to fill European gas stocks at 80 % by November – is a difficult one to achieve.
In 2021, Europe will import 155 billion cubic meters of natural gas from Russia, accounting for 31% of the eu's total natural gas supply. It is very difficult to impose a reduction in dependence on Russia, which will have a great impact on the people and economy of Europe, as well as on the role of natural gas in the energy transition. At the same time, this will change the international LNG market and drive the demand for energy security and supply in Europe.
Analysts at Rystad Energy said that "the shortage of LNG will make Europe sad this winter." For producers, it means that LNG will usher in a big development. However, this phase is bound to see insufficient supply, sharp price increases, high volatility, and LNG-related geopolitical changes."
The three major natural gas price indices are all at historic high levels. Since 2022, under the background of Russian-European natural gas decoupling, European natural gas imports from Russia have been limited, and European natural gas prices have remained high, and the price of JKM in the Asia-Pacific region has risen sharply. The U.S. LNG export terminal was put into operation, which also drove the HH of natural gas in the United States to rise sharply.
The recent explosion of freeport, a U.S. export terminal, and the short supply of natural gas on the Nord Stream-1 line. Europe's concerns about natural gas supply have pushed Europe up further to ensure that more LNG resources flow to Europe.
2.4. Coal: The decoupling of natural gas from Russia and Europe is good for the demand for "coal gas"
Russia occupies an important position in the global coal market. Russia's coal recoverable reserves are as high as 162.2 billion tons, ranking second in the world, after the United States; In 2021, coal production will be 437 million tons and exports will be 212 million tons. Since China and India's coal production is mainly domestic for its own use and basically does not export, and the United States produces coal for most of its own use, Russia is the world's third largest coal exporter, accounting for 15.5% of the global coal export trade.
According to BP data, Europe accounted for 35% of Russia's coal export structure in 2020, which means that about 74 million tons of coal will flow to Europe in 2021. According to the EU announcement that the import of Russian coal will be completely banned from August, the market expects Russia to reduce exports by at least 40 million tons in 2022, because international dry bulk cargo flow ships will generally stop berthing in Russian ports for a long time before the embargo, and due to conflict issues, baltic and Black Sea routes cargo will be affected. If the late ban continues, the reduction in 2023 will be as high as 70 million tons.
On the demand side, the "coal gas" in the international power generation field is reversed. U.S. coal consumption in the power sector has continued to grow since 2021. The price comparison between gas and coal has always been the core economic driver of power plant selection. In the era of the shale gas revolution, it brought gas instead of coal. The excessively high gas price in the past two years may be the main factor leading to the reverse replacement of "coal gas".
According to IEA data, North American natural gas demand will only increase by 0.3% in 2021, mainly due to the impact of high gas prices, and the United States has seen a reverse replacement of "coal gas". The IEA predicts that European gas demand will fall by 6% in 2022, mainly due to the high price of gas caused by the Russo-Ukrainian war, which makes gas and electricity less economical than coal power. In the Asia-Pacific region, Pakistan and Bangladesh have also seen fuel switching and reduced use of natural gas.
According to the IEA's EU response to gas de-Russia, a total of nearly 100 billion parties of natural gas imports from Russia will need to be reduced. How to replace the gap of 100 billion square meters? Among them, the increase in non-Russian gas sources can solve 30 billion square meters; New renewable energy projects can solve 6 billion square meters; Delayed withdrawal of nuclear energy, etc. can solve 13 billion square meters; The use of heat pumps can solve 2 billion square meters; Turning down 1°C for heating air conditioners can solve 10 billion square meters. The above methods add up to a total of 61 billion square meters of shortfall, and the remaining part may only turn to coal or oil power generation.
"Coal/oil generation gas" will be the solution that will have to be adopted. Switching from gas-fired power generation to coal/oil-fired power generation will solve the 28 billion square meter gap. Specifically, coal-fired power generation can increase by 120 Twh, which can solve the gap of 22 billion square gas. In addition, nearly one-quarter of the gas-fired power plants in Europe are able to use alternative fuels (mainly fuel oil), which is expected to solve the 6 billion square gas gap. Corresponding to Europe, coal consumption increased by about 48 million tons, and crude oil consumption increased by about 400,000 barrels per day.
3. Mainline 2: Energy Transition and ESG
3.1. The overall problem of the underinvested energy sector
The underinvestment we are currently facing is a holistic problem, not only for new or old energy sources, nor just for upstream or downstream.
Although the cost of renewable energy is close to that of coal/gas power generation, the cost is close to that of capital expenditures that can be offset 1:1. The capital expenditure of renewable energy generation is highly front-ended, with large capital expenditures and low operating costs. Conversely, the cost of traditional fossil fuels, in the case of shale oil, accounts for only a little more than half of the total cost in cash. Coal mining requires lower capital expenditure, taking a leading domestic coal company as an example, its cash cost in 2021 accounts for most of the total cost, while the DDA cost related to capital expenditure only accounts for less than 10% of the total cost. Therefore, replacing fossil energy with renewable energy sources of equal calorific value requires much larger capital expenditures.
According to the NGFS (Network for Greening the Financial System), if the net zero target is reached by 2050, it requires an increase of about 20 trillion$ in green electricity and related investments while capital (cumulative) expenditures on fossil energy extraction fall by about 10 trillion$. That is, renewable investment in fossil fuel investment, we need to achieve about 2:1 investment offset ratio, we can achieve a smooth energy transition.
However, the actual offset ratio is only about 0.35:1. Global PV and wind capital expenditure increased by about 60 billion$ in 2015-2020, while global oil and gas capital expenditure fell by more than 200 billion$ over the same period.
This long cycle of insufficient capital expenditure, superimposed on the Russo-Ukrainian War, led to an energy shortage crisis. According to Blackrock's analysis, the global energy Gini coefficient (energy expenditure/GDP) has climbed sharply, reaching 9.1% and 4.4% in Europe and the United States, respectively, and Europe is even very close to the level of the 1980 oil crisis.
3.2. Crude Oil: Shale oil is weakened in elasticity and the long-cycle price center is rising
Chronic capital expenditure in the oil and gas sector has been around for years. "Long-term capital expenditure" refers to conventional onshore or offshore capital expenditure, as opposed to short-term capital expenditure on shale oil and gas.
After oil prices peaked and fell in 2014, international capital expenditure fell by 45% for two consecutive years from 2015 to 2016. After a slight recovery in 2017-2019, the 2020 pandemic led to another sharp -32% of capital expenditure. Despite a marked correction in oil prices in 2021, international capital expenditures are projected to grow in single digits (according to the IEA).
Shale oil is affected by factors such as ESG, making U.S. crude oil production expected to show only moderate growth in the next few years. Although the cost of shale blocks is relatively low, financing is not as available as in the early years of the shale revolution. The major players in the industry are larger, and larger companies have adopted a more conservative investment strategy than the early small shale oil companies, paying more attention to ESG and the policy pressure after the Biden administration took office.
ESG requires shale oil companies that lead to listings having to spend more on controlling methane emissions, reducing methane combustion, carbon capture, and more. Federal lands will stop new leases for shale oil development, although it will have little impact in the short to medium term, but if a permanent freeze of new drilling permits is approved, it may lead to a decline in shale oil production after 2024.
3.3. Refining: Under the impact of the pandemic and ESG, there has been a global wave of refinery shutdowns
We are experiencing the third round of refinery shutdowns in history.
The first and largest round came in the 1980s, when 12 million barrels of refining capacity were closed worldwide, about half of which occurred in Europe. Between 1979 and 1983, global demand fell by 6.3 million bpd due to the switch of fuel oil to natural gas and nuclear energy due to high oil price shocks. The shutdown tide coupled with a subsequent rebound in demand in the mid-1980s, and refinery utilization rebounded from 70% to 80%.
The second round of shutdowns was due to the 2008 financial crisis, when 7 million barrels of refining were permanently shut down between 2009 and 2015 due to deteriorating refining economics.
A third round of shutdowns is taking place. Covid-19 is the main catalyst, with global refinery operating rates falling to 73% in 2020. According to the IEA, the number of refineries announcing the closure of 2020-2026 reaches 3.6 million barrels.
3.4. Natural Gas: LNG Long-Term And FID needs to be further returned
In the international gas market, the signing of long-term agreements and the issuance of investment decisions are usually highly correlated. LNG international trade related infrastructure investment is very large, including liquefaction, gasification, shipping and other links. Lenders often prefer projects with long-term guarantees.
1) Long-term association: The energy transition is expected to bring difficulties to the long-term association.
In 1996, the United Kingdom took the lead in completing the reform of natural gas marketization, established a national virtual equilibrium point (NBP) and gradually developed into a regional benchmark price, and later successively built more than ten natural gas trading hubs such as the Dutch TTF and the German GPL. At present, TTF is the most mainstream LNG trade into the era of gas-gas competition linked to the hub gas price. In 2019, 32% of European LNG imports were linked to oil prices, and gas-gas competition accounted for 68%.
Although the institutions providing financing prefer projects with long-term guarantees, international natural gas buyers are reluctant to sign long-term agreements because the energy transition requires fossil energy to gradually withdraw from the market, and long-term demand has high uncertainty.
Entering 2021, affected by the tightening of the international energy market, the signing of the LNG long-term agreement has rebounded. China is the most dominant SPA buyer, with a total of 26 million tons of contracts.
2) Investment decision-making (FID): It is easy to add import terminals, but it is even more difficult to add new export terminals
In 2020, due to the impact of the epidemic, some LNG liquefaction export terminal projects were postponed or cancelled, including projects in the United States, Canada, Qatar and Mozambique.
By 2021, although demand and prices have rebounded significantly, investment in LNG facilities has not risen significantly due to the lack of long-term coverage. Only three projects were approved in 2021, including qatar's Northland Expansion Project, the Baltic LNG Project and the Pluto LNG II Project. However, the Baltic LNG project may be cancelled due to Russian sanctions.
Since the Russo-Ukrainian War in 2022, more than 10 LNG import terminal construction plans have been introduced. Among them is mainly the FSRU (Ukiyo Natural Gas Storage and Transportation Platform), which has a relatively short modification time, usually only a few months.
This means that European import terminals can increase import capacity relatively quickly, but export terminals still face the problem of insufficient investment in FID postponement or even cancellation. This may make the next 2-3 years, the rush for LNG resources will still be more intense, and the international LNG spot price is expected to remain high.
4. Balance sheet analysis and outlook of major varieties
4.1. International crude oil supply and demand balance and price outlook
Key assumptions for the 2022H2 crude oil market operation:
1) Demand side, expected to repair in 2022 to close to the previous high 2019 level. Recently, after the European and American Obi Kejong, there has been retaliatory travel. Especially in the peak travel season in the northern hemisphere from June to August, not only gasoline and diesel have recovered significantly, but also aviation kerosene has recovered under the impetus of the opening of international routes. We expect that in the second half of the year, the demand side will be further repaired under the expectation of improving the epidemic in China. EIA expects full-year demand growth of 1.9 million barrels, with a co-increase of 500,000 barrels in 2022H2.
2) U.S. shale oil production will have a more significant increase in 2022 on the basis of 2021, but it has not yet returned to the previous high 2019 level. According to EIA forecasts, U.S. crude oil production will be +700,000 barrels year-on-year in 2022 and +900,000 barrels in 2022H2. We expect that in the second half of 2022 and 2023, with the increase in the number of shale oil drilling and the number of completions, the drilling and completion of the two are expected to accelerate upwards synchronously, helping to increase the growth rate of shale oil production.
3) Russia is affected by sanctions, 2022Q2/3 is expected to decline sequentially, and Q4 is expected to recover with route adjustment. After the first five rounds of sanctions were implemented, Russia's output declined, but the adjustment of the beneficial trade route and the decline in actual export volume were not obvious. The sixth round of sanctions landed, and after Q3 we expect to still affect a certain range of Russian oil production and exports. But with the emergence of buyers and shipping companies willing to take risks, Russian production and exports are expected to recover somewhat in Q4.
4) On the OPEC supply side, it is expected to fully implement the increase in production in accordance with the production increase plan. Previously, in January-May 2022, the actual increase in OPEC production was less than expected, mainly due to the fact that some small oil producers have reached the upper limit of production capacity, and the more conservative attitude of large oil producers such as Saudi Arabia. Recently, the US Biden administration plans to visit Saudi Arabia, Saudi Arabia, the United Arab Emirates and other countries do not rule out speeding up production increases, how specific the wishes of these major countries are, how the actual increase in production is, it remains to be seen. Our model carefully assumes that the actual increase in Q3 production fully meets the upper limit given by the OPEC meeting, that is, 64.8 * 2 = 1.3 million barrels per day.
Conclusion: Under the above supply and demand assumptions, we expect the balance of supply and demand for the whole year of 2022, specifically by 2022H2, there will be a slight accumulation of 200,000 barrels/day. Since the beginning of the year crude oil inventories have been running at a low level, it is expected that the inventory in the second half of the year will be difficult to accumulate effectively, and the oil price in the second half of the year is expected to remain relatively high, and we predict that the oil price in the second half of the year will run in the range of 100-120 US dollars / barrel.
Risk points of the above judgment: 1) the risk that OPEC countries are not willing to implement production increases; The risk that Russian crude oil production will not recover in Q4 – factors that could put oil prices above our forecast range; 3) Risk of a demand recession – the above factors could cause oil prices to fall below our forecast range.
4.2. China's natural gas: supply constraints in 2022
The logic of the supply-demand balance forecast for the natural gas market in 2022 has changed.
Previously, it was "demand - national output - imported pipeline gas = imported LNG". That is, we default to the international LNG market is a relatively loose market, and the demand gap can be easily compensated by the price.
2022 may be "national output + imported pipeline gas + imported LNG = demand". That is, this year's international LNG market is a rather tight market (the reasons include the mismatch between supply and demand of natural gas, superimposed Russian and European energy decoupling, as elaborated above), resulting in China's imported LNG resources being re-exported to the international market, resulting in a decline in the amount of imported LNG landings. Generally speaking, it is a market environment of "supply restricting demand".
Key assumptions: 1) Domestic gas, benefiting from the high overall gas price this year, and the policy of natural gas pricing marketization, domestic gas production momentum is sufficient, the output growth rate of 15%; 2) In terms of imported pipeline gas, pulled by the climbing of the Eastern Route of Russian Gas, the same increase of 10%; 3) Imported LNG was affected by entrepot, -20% year-on-year.
The growth rate of China's natural gas consumption will drop to about 4% in 2022, which is the lowest level since 2015 and even lower than the growth rate during the epidemic in 2020.
Therefore, the natural gas market environment in 2022 is good for the upstream and negative for the downstream.
4.3. Domestic petrochemical products: the end of production capacity is about to pass, and the boom cycle is worth looking forward to
2022 is the last year of the expansion cycle of major petrochemical production capacity, and 2023-2024 will enter a low-speed period, and the industry boom is expected to show an inflection point upwards.
In terms of ethylene, if the NDRC gradually liberalizes the approval of ethylene in the second half of 2022, there may be a new round of ethylene production capacity in 2025 and beyond. If ethylene approvals remain slow, we may face a relatively long period of low-speed capacity rollover and a boom cycle.
In terms of aromatic PX, since there is no short-process aromatics plant planning, it means that as long as there is no new batch of refining projects, there will be no incremental PX projects put into production. Therefore, 2023-2025 is expected to be almost a gap period for PX launches.
5. Investment point of view: new and old energy is not contradictory, and the upstream and downstream are not contradictory
We may need to dispel a little obsession with the logic of investing in energy products:
First of all, there is no contradiction between new and old energy sources at present. Although the energy transition is a long-term trend, we are currently facing a shortage of overall energy supply. The shortage of fossil energy capital expenditure has been continuous for many years, and the increase in new energy capital expenditure has not effectively compensated for the decline in old energy capital expenditure. The global energy Gini coefficient (energy expenditure/GDP) has climbed sharply, reaching 9.1% and 4.4% in Europe and the United States, respectively, and Europe is even very close to the level of the 1980 oil crisis (figure 16 above).
Second, the upstream and downstream are not contradictory. Although usually we tacitly accept that when crude oil prices rise sharply, refining profits must be damaged. However, the current market environment we are facing is very special, the energy transition and ESG on the upstream crude oil and downstream refining also brought about the impact of insufficient capital expenditure, the Russian-Ukrainian war on the refined oil link is more than the impact of crude oil. Judging from the recent performance of oil prices and cracking spreads, it is a synchronous rise (Figure 25 above).
5.1. Upstream: CNOOC and Guanghui still have good valuation and value for money
The core focus of upstream companies is the continuity of dividends under high prosperity. Since dividends and growth are a trade-off relationship, several companies put the dividend yield (2021) and growth rate (2022 guidance in the 2021 annual report) on a single chart. It can be seen that CNOOC and Guanghui Energy have the best comprehensive cost performance.
5.2. Downstream refining: the opening of the second growth curve is worth paying attention to
Since the 2021 double carbon policy, the growth of large-scale refining has been constrained. Since 2022, there have been two changes: First, the dual-carbon policy has been corrected, and the energy consumption of raw materials is not included in the energy consumption assessment; The second is the company's bottom-up layout of new material projects.
5.3. Tracking of profitability and valuation of key listed companies
Key recommendations: 1. Optimistic about the profit repair of the large refining and chemical, as well as the opening of the second growth curve, recommend Rongsheng Petrochemical, Hengli Petrochemical, Oriental Shenghong, Hengyi Petrochemical, Tongkun Shares. 2. Upstream companies continue to benefit from the high price of energy products, and are optimistic about CNOOC, China Shenhua, Guanghui Energy and Zhongman Petroleum.
6. Risk Warning
1) The risk of a strong negative feedback on demand, or the end of the Russian-Ukrainian war, the end of relevant sanctions, or the rapid release of surplus production capacity by OPEC, resulting in a rapid decline in oil prices and international LNG prices;
2) The further escalation of the intensity of Russian sanctions has led to a further rise in international crude oil, refined oil and natural gas prices, affecting the risk of terminal demand;
3) The risk that the downturn in the petrochemical industry will be longer than expected;
4) The risk that the new material project of the big refining and chemical company will be slower than expected;
5) The calculation has a certain degree of subjectivity and is for reference only.
This article originated from the financial world