It is worth a short explanation of what is going on with European CO2, given the mixed signals of shortages in headlines today and then the slight weakness in pricing shown in the image below. These are two very different markets, with the food, beverage, medical and nuclear industries looking for pure streams of CO2 rather than the contaminated streams that make up the bulk of emissions. Historically, the food and beverage industry looked to fermentation – so alcohol production – as its source of a pure CO2 stream, but as demand grew, the next best place became ammonia production, which also has a pure CO2 stream as a by-product. Most ammonia is further converted into urea, which is a consumer of CO2 and there is not enough CO2 produced in a natural gas-based ammonia plant to convert all of the ammonia to urea. You sometimes see urea facilities also selling ammonia, but more frequently they take the carbon monoxide by-product of the syngas reaction and convert that to CO2. The result is enough CO2 to convert all of the ammonia to Urea and surplus CO2 to sell. Because of this more dominant supply of food and beverage grade CO2, and shutdowns caused in this case by runaway natural gas prices, have an immediate impact on the industries that rely on the CO2.
The charts below both support our view that we will see continued inflation in renewable energy costs, rather than the deflation that is baked into all of the forward models. It is easy to forget that some of the early solar installations are coming to the end of their useful lives and are retiring – these are gaps that new solar will need to fill. Wind power has the same issue, as many of the original wind farms need equipment replaced and the introduction of recyclable wind turbine blades has been in recent manufacturers' announcements. When we see analysis of who is going to use which tranche of new renewable power for which new hydrogen project we see major gaps in the power demand analysis, in part related to power demand growth at the domestic consumer – because the more rapid introduction of EVs – and in part because or retirement of facilities and the need to replace them.
News that ExxonMobil has support for its large CCS hub in Houston should not be a surprise. According to the EPA data, for 2019, Harris and Galveston counties combined have more than 50 million tons of CO2 emissions and there are another 20 million tons in Brazoria county, which is close enough to be included. The devil will be in the details as the cost of building a high-pressure pipe network will be high, as will drilling wells with sufficient capacity offshore. We believe that this hub, or cluster (as they are called in Europe), approach will help drive CCS costs down, but we are concerned by the competitive disadvantage that this might cause for those without access to a hub or cluster – see our ESG report - Cluster F***ed: The Dangerous Scale Component of CCS – for more.
We focused on several aspects of carbon in our ESG and Climate report yesterday and we see several headlines today that focus on carbon and storage, whether it is the blue hydrogen project in France or the Chevron interest in CCS. Chevron has some experience with CCS with the Gorgon natural gas project in Australia and while the company has been criticized recently for falling short of its capture goals for the facility – we believe that all learning experiences are valuable, and what happened in Australia likely leaves Chevron better equipped than many to pursue successful projects going forward. The likely disappointment for Chevron will be the lack of investor appreciation that it may get for the initiatives, as the focus will remain on the scale of fossil fuel exposure – see our Sunday Piece from this week. The barrage of announcements from Chevron is likely in response to the investor pressure that the company (and the industry) is under, but as we discussed on Sunday, it may not make a difference – it did not for Shell in the eyes of the Dutch court.
The tax credits suggested for 45Q in the budget reconciliation plan – see Exhibit below – would pay for roughly 18 million tons of CO2 sequestered or used in EOR over the life of the budget, assuming a credit value of $50 per ton of carbon. While this may seem huge in the context of the current levels of CCS in the US, the country had around 2.5 billion tons of emissions in 2019 that could be addressed with CCS (power and industrials), and if we assume 10% of that needs to be dealt with through CCS, the 45Q provisions in the budget reconciliation would cover less than 8% of the volume for one year and the percentage will be even lower if the “CATCH” act is successful in driving the 45Q value to $85 per ton of CO2. So the numbers are either inadequate, or the government is assuming that the levels of CCS in the US will be much lower than the potential – note that the ExxonMobil proposal for a hub in and around Texas talked about the maximum size for the one project being as much as 100 million tons per annum which should equate to $5 billion of tax credits – per annum. See our ESG & Climate report for much more on carbon markets today.
The Engine No1 headline and the Chevron headline are not necessarily the right way to think about the challenges for Chevron and whether or not the challenges are just really beginning for ExxonMobil. The Engine No 1 approach to ExxonMobil was not ESG focused and hit on a larger issue of very poor shareholder returns, with ESG/Climate only one-line item on a list. What Engine No 1 is doing now, is focusing more specifically on climate, and ExxonMobil is likely as large a target as Chevron on this basis. Last week in our Sunday report, we commented on how good the Chevron Gevo deal was for Gevo, but that it did not move the needle for Chevron. Chevron, ExxonMobil, and others are aggressively pursuing renewable fuels, mostly from waste and vegetable oils until the Gevo agreement, and there is another headline today about Chevron pursuing CCS opportunities with Enterprise and the chart below discusses a green hydrogen plan for Chevron. All of these initiatives do not sum to something that investors will take note of for any of these companies yet, and while they might be important building blocks towards a net-zero future, larger tangible investments are probably needed to get any investor buy-in. In the meantime, the activists have a lot of room to work.
The most notable news from the Iceland CO2 direct air capture (DAC) project, illustrated in the Exhibit below, is not that it is working and how energy efficient it is, but that the CO2 capture costs are extremely high and yet all of the offsets are sold. One report talks about the costs per credit approximating $1000 per ton of CO2, which is likely accurate given that the facility is relatively small scale, at 4 thousand metric tons per year. The same report also states that the credits are almost sold out for the 12 years that they are being offered. We believe that this is indicative of the marginal demand for uncontestable carbon offsets, and this is a topic we have covered at length in our ESG and climate work. Shell, bp, and others are selling what they claim to be carbon neutral hydrocarbons around the world and are buying offsets to do so, but they are coming under quite a lot of “greenwashing” fire because of the less tangible/auditable nature of the credits they are buying – often related to agricultural or specific tree conservation/planting initiatives that are questioned because of the validity of the capture claim or the vulnerability of the credit to weather, fires, and forest maintenance years in the future.
The CO2 emissions chart from the EIA should not be a surprise as the step-up in 2021 and 2022 is a recovery from the economic contraction and habit changes associated with COVID, and the projected increases in 2021 and 2022 are combined lower than the step down in 2020, suggesting that the trend is still negative. The problem is that the trend is not negative enough and as we have written about at length, it will not trend lower fast enough without all corrective opportunities at play – more renewable power, more conservation, and a lot of CCS. See our ESG and Climate work for more.
Europe is likely to be a test case of how much inflation a country or region is willing to bear on its path to clean energy. Costs are rising in Europe, as LNG markets tighten and as carbon prices rise. The net result is increased power prices, with reports of unhappiness in many countries – this is a topic we have discussed at length in our dedicated ESG and climate work and was a focus of last week's report – linked here.
Last week, and in our dedicated ESG and climate report this week, we talked about the challenges of shipping hydrogen, and the linked bp project for Western Australia will have the same problem to solve – choosing ammonia according to the announcement over the very inefficient toluene/cyclohexane option we discussed last week. The appeal of Western Australia is the unpopulated available land that has little alternative use and sees abundant sunshine. The bp project assumes that the facility can buy attractively priced renewable power from third parties, but the company must have a specific power project in mind for the bulk of the electricity needed. The stumbling block here will likely be when the power project(s) bid out the solar module contract, find out that the suppliers are sold out and are asking higher prices to cover reinvestment and higher material prices, and then have to go back to bp with a much higher than expected cost of power. The advantage of solar and wind projects is that inflation only impacts upfront capital costs, which can be amortized over the life of the project – feedstocks are free! That said, most of the announced projects have declining capital costs per megawatt in their planning assumptions today.