Oil companies are full speed ahead in the Middle East

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0:32Good morning from the Financial Times. Today is Thursday, October 8th, and this is your FT News Briefing. Oil companies aren't afraid to keep doing business in the Middle East, but the UK's public finances are definitely hurting because of the Iran war. Plus, China is racing to build AI infrastructure throughout Inner Mongolia. What I saw here was just immense. It was like a Disneyland for data centers, and there were just dozens and dozens of sites. I'm Mark Filippino, and here's the news you need to start your day.

1:13The war in Iran is not deterring oil companies from investing in the Middle East. They are looking past the destruction and setting their sights on the region's vast reserves. The FT's energy editor, Malcolm Moore, has the story. Hi, Malcolm. Hi, Mark. So what do we know about what oil companies are thinking about the situation in the Middle East? So I was at a big conference in London this week, and the heads of all the big oil companies were there. And when they're on stage, each one of them was asked, hey, what's going on in the Middle East? Are you worried about it? Is the Middle East still investable for you?

1:47and all of them said, yes, absolutely. The Middle East still has the deepest reserves of oil and gas in the world. And so, of course, we're interested in going to the Middle East. We're in the Middle East, Malcolm. So right now, people are doing deals in Iraq and Syria, particularly in Iraq where ConocoPhillips has just done a big deal and Chevron is in negotiations for a really huge oil field. But then looking further into the future, you know, the places with the best quality oil and the cheapest to produce oil are Saudi Arabia and the United Arab Emirates. And they have always traditionally held their oil pretty tightly because they have these huge national oil companies.

2:33But companies are now hoping that maybe post the war, there's going to be a little reassessment that helps them maybe access better deals. Yeah, but, you know, things are still pretty dicey in the Middle East. There are still Iran-backed factions in Iraq. There are Houthis attacking oil infrastructure in Saudi Arabia. I mean, is this a little bit of wishful thinking to say that the region is stable enough to actually go and expand safely? Well, look, I mean, there are obviously current problems that you can't get oil out of the region very easily. Right. So, you know, we need to solve the situation we have right in front of us, which is that the Strait of Hormuz, you know, Iran is looking to have some sort of influence over that for a long time.

3:14And so these companies are saying, OK, we're going to have to build maybe oil pipelines. But I would say over the long term, just remember that there are no easy places really to get oil and gas apart from, you know, the US. in a lot of places around the world, you're looking at unstable regimes or difficult operating environments, or you have to go into very deep water in the ocean. You know, this is not an easy business. And so these companies, they're kind of used to dealing with difficult situations. What does this all tell you about the state of, and I guess the future of the oil industry?

3:49Well, I mean, I think one thing is that ultimately oil and gas companies, they went through a period where they were feeling pretty uncertain about what the future demand for oil was going to look like and whether we would transition pretty quickly to electric vehicles and how much oil was going to be necessary. They are now all once again, really focusing on growing their reserve base and showing investors that they have a long pipeline of projects well out into the future. And so in that context, you know, the Middle East makes a lot of sense. Sure, right now there is a war, but if you are going to fast forward and you think you're going to need a lot of oil, you know, 2030, 2040s onwards, you want to try to get into the really high quality regions where there's a lot of resource.

4:37And that's what there is in the Middle East. That's the FT's Malcolm Moore in London. Thanks, Malcolm. Thanks, Mark.

4:48there is a nearly 12 billion pound hole in the uk's public finances according to ft estimates the culprit is the war in iran and the rising inflation and higher borrowing costs that have come with it that puts a ton of pressure on labor chancellor john healy as he gears up to release a budget later this month it cuts the fiscal buffer he has in half which means he'll have to use tax rises and spending cuts to fund government efforts to address the cost of living. The Treasury declined to comment. Investors don't seem too worried, though. Some told the FT that if the fiscal buffer can widen by about£2 billion once the budget is factored in, the government can avoid a sell-off in gilts.

5:33Investors are taking advantage of the ripple effects caused by the wobbly French bond market. We've been talking about France's situation at length lately. So just, you know, a quick reminder, bonds everywhere have been in trouble over the past couple of months because of the Iran war. But France has had it worse than all other G7 countries because of a messy budget process. And its sell-off has spread to neighboring countries as well as corporate debt. Several big asset managers said they bought up those bonds at a discount. They're betting the debt sold off more than it should have. So they're scooping up bargains in the hopes that the bonds will bounce back.

6:07and they're not worried about the region heading for an economic blow-up like the Eurozone debt crisis. Why are they so confident? They say that the European Central Bank has better tools this time around to calm markets. For what it's worth, the head of France's Central Bank said yesterday that the ECB does not need to intervene right now and that it was, quote, not here to deal with countries' budget problems.

6:36China is building AI data centers all over the country, including remote places like Inner Mongolia. Beijing sees the region's abundant electricity and cheap land as an advantage in the global AI race. Eleanor Olcott traveled to Inner Mongolia to learn more about this. She joins me now. Hi, Eleanor. Hi. So what was your impression of the data center development while you were there? The scale of the build out of AI data centers in Inner Mongolia was just extraordinary. I've been to quite a few data center campuses and they are fairly run of the mill. But what I saw here was just immense. It was like a Disneyland for data centers.

7:15There were just dozens and dozens of sites, including one, a company called ZData had taken over an old high school in Inner Mongolia, which had to close its doors because it didn't have enough students to enroll. And basically in the playground, they're pouring concrete for this new data center, which I think is just a nice encapsulation of the Chinese economy at this point. Yeah, it is quite the image. Why exactly are data centers popping up in Inner Mongolia? So Inner Mongolia has a lot of land that isn't being used. So that's very cheap. It also has a huge amount of electricity, which is very, very cheap.

8:01So wind, solar and coal. Inner Mongolia actually accounts for half of China's wind capacity, which is just an immense number. So we see the likes of Huawei, Alibaba, DeepSeek, Zhipu, the good and the great of the Chinese tech world flocking here to build out new facilities. Yeah, you described it earlier as a kind of Disneyland of data centers. Are there any constraints associated with building AI data centers in China and, you know, specifically inner Mongolia? Definitely, there are constraints. there are two major constraints, the first of which is China needs to get hold of the chips. So a lot of these facilities are being thrown up before the companies actually know whether or not they can get their hands on the AI chips that are going to be put into these facilities.

8:51On that point, the US and actually the Chinese side restrict the companies from purchasing the leading US AI chips. And on the Chinese side, China does produce its own AI chips, but it's really struggling to manufacture enough to meet this surging demand. And the second smaller constraint is whether or not Inner Mongolia has enough water resources. It's got abundant electricity, but there's an open question as to whether it has enough water. Big picture, Eleanor, what do you think the vision is for Inner Mongolia long term? Inner Mongolia, I mean, it's, you know, an agricultural community, pastoral land, Like this is the only role that they'll be playing in AI, which is powering up the computing capacity.

9:37But more broadly, I think this speaks to Beijing's strategy around AI. It's obviously very important for China to be winning at this. And they're marshalling their resources where they can to kind of close the gap with the US. I think there's wide recognition that there are gaps there, but that China wants to leverage its advantages, i.e. its immense capacity to build, you know, huge projects and also its cheap electricity, ultimately to get more and more people addicted to its technology. Eleanor Olcott is the China technology correspondent for the FT. Thanks, Eleanor. Thank you.

10:24Investors are getting increasingly worried about SpaceX. A crucial measure of credit risk at Elon Musk's company rose to a record high yesterday, and its bonds dropped. These market moves happened after the FT reported that SpaceX was planning to raise $40 billion in debt to buy NVIDIA chips. The company also issued$25 billion in investment-grade debt in June. That was right after its initial public offering. SpaceX is both an AI and a rocket company. One analyst told the FT that some investors are skeptical about it becoming a major provider of AI models or launching data centers into orbit anytime soon.

11:03SpaceX shares fell 2.5 % yesterday.

11:10You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

11:35The new episode of The Next Five is all about CFOs in an AI world. Patrick Villanova at Blackline joins me. CFOs are inherently risk averse. We have to be very prudent when we implement AI. As does Olya Brasi at Highgate. My rule is no human owner means no go live. And Gina Gutsight at FTI Consulting. There's no excuse. You're the CFO. You're signing the name to the financial statements. Listen to The Next Five wherever you get your podcasts. Enjoy. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio.

12:22Listen at schwapp.com slash Washington Wise.