In a media interview earlier this week (more details to follow) we were involved in a discussion about inflation and specifically energy. The discussion covered much more than this, but the chart below is perhaps one of the easier ways of showing where our concern lies, and it ties directly to the behavioral patterns that are emerging concerning climate change and ESG focused investing. As noted in the title of the chart, the likelihood that the linear path from here to net-zero will work is very low, given that we would need global government coordination now, and we are far from it. The other scenarios are much more likely, at least in the early years, and they call for an increase in emissions, which implies growing demand for fossil fuels and other materials that have a high emissions footprint. If you are an oil or gas producer and you look at the chart you could quickly conclude that while your products are in demand today and likely to be in growing demand for several years, the longer-term outlook is very unclear. This might slow down your investment plans, or at least make you think twice about the shorter lead-time projects – such as on-shore and shale-based. However, it could kill any longer-term offshore/deepwater projects that take many years to bring on stream. Today we see energy investment hesitancy everywhere (see our Chemical Blog), but at the same time, we do not see the global coordination to drive a faster energy transition, assuming we had the materials and the investment dollars to move any faster. The risk that we run out of produced fossil fuels from time to time over the next 3-5 years is very high.
We are going to focus our Sunday Thematic this week (will be found here) on a couple of related topics: alternative technologies that only make sense when prices are high, and whether this has changed with ESG and climate pressure, and ESG solution fixation – “methanol is the only solution” – see infographic below – or it’s hydrogen or ammonia or batteries. Sticking with the theme that seems to have hit a chord with COP26 attendees and something that we discussed in a report around carbon capture several months ago – we cannot let a foolhardy quest for “perfect” get in the way of more economic “good enough” solutions. The emission issues are generally site and process specific and different solutions will be more practical and affordable for different processes and in different geographies – there is no “one size fits all” solution.
A couple of things worth highlighting in today's daily report – the first being Chevron’s move to join the net-zero club – focusing all eyes now on ExxonMobil in particular but also the rest of the US E&P crowd. Chevron will have some major challenges getting to net-zero and will likely face much of the same skepticism that bp, Shell, and TotalEnergies attracted in Europe initially and still face today. The Europeans have placed a lot of their bets on moving into renewable power – for the moment, Chevron is focused on moving to net zero in its own operations, which we read as biofuels and a lot of CCS. Given the acute shortage of international natural gas, it would make the most sense for the independent natural gas E&P companies and the LNG sellers to jump on the same boat. By promising low carbon natural gas and LNG, the industry is much more likely to gain support for the expansion that the world needs to counter some of the EIA assumptions around coal and petroleum product use from 2030 to 2050. Of course, it would be a whole lot easier for the US industry to do this if they had a value on carbon to work with! The chart below looks at one of the core clean-up issues, which is methane leakage. This is a subject we cover extensively in our ESG and Climate service linked here.
We expect to see a step up in chemical companies parading their green credentials – or plans for more green credentials, not just because COP26 is ahead but because it has now become a competitive issue. Dow’s view that it may be able to sell low carbon polyethylene in the US at a premium to regular polyethylene reflects a fairly rapidly changing narrative with customers, many of whom are also trying to accelerate their green credentials. For a couple of years, we saw packaging companies, for example, talk in broad terms about ambitions around recycled/renewable content, carbon footprints, etc. Now we are seeing the results of them trying to put their ambitions into practice and they are looking for tangible solutions from their suppliers to help them meet the pledges that they have made to consumers. For many of the packagers, the cost of the packaging is a very small component of the product cost and we would expect the packagers to look at more expensive packaging solutions if it gives them a better label. In the Air Products chart below, the company is using the La Porte start-up to remind us that it is already a huge player in hydrogen and hydrogen infrastructure. See our recent ESG and Climate Report.
We think that Orion Engineered Polymers and its fellow traditional carbon black producers could be in for a rough ride.
The gaps in the exhibit below are not surprising as 2050 is a long way away and we would not expect all of the needed capacity to be announced or pledged yet, especially as many companies are still weighing alternatives. For example, as an ethylene producer, you have 5 paths – hydrogen as a furnace fuel – electric power as a heating medium – stick with what you have and use CCS – find an alternative route to make the polymers – make alternative polymers.
The battery storage investment chart below is interesting in that it shows significant pairing with Solar facilities and less with wind. If we are to meet the green hydrogen goals that many are optimistically predicting over the next 10 years, then the new wind and solar investments need to be paired with hydrogen and hydrogen-based swing power generation capacity. This is the only way that countries will develop effective hydrogen grids. Simply having one or two large hydrogen facilities and/or import facilities will result in very inefficient distribution models either for fuel cell vehicles or for heating and swing power generation. A distributed network for hydrogen makes much more sense and modular electrolyzers coupled with modular hydrogen power generators is a more holistic model, with much more flexibility than adding batteries. Granted, the battery technology is tested and available today, but the broader ambitions for hydrogen will not be met if we do not get out of the blocks soon.
Overnight there has been a very good IEA report on how China could get to net-zero by 2060, and further news of more industries hit by power cuts because of power shortages, some of which are apparently due to tighter emissions standards. These are both important and far-reaching topics and will require some analysis to provide the kind of insight that we believe is necessary, and accordingly, we will push these to next week’s report (all input welcome). In the meantime, we have included a couple of charts that show the way up and the IEA view of the way down. The power outages are interesting as while they may cause some manufacturing cutbacks and we have seen recent news to that effect, China has overbuilt in the last couple of years relative to domestic demand growth, and with port and shipping congestion the country has surpluses of many products sitting around at very low values. The power moves may help correct some of these imbalances and we are already seeing some chemical prices bounce off recent lows because of production cutbacks. We discussed the acetic acid chain in one of our dailies last week – linked here.
Companies are being encouraged/forced to produce climate plans by ever more focused shareholders many of whom only have a passing understanding of how some of the companies operate and how they might best set a course to lower emissions and otherwise be better stewards of the environment. The pretty graphic by Covestro below likely looks much better than the data and ambition behind it really are. This is not necessarily meant as a criticism of Covestro, but the company like many others is being challenged to explain a very complex, process, and engineering-heavy set of options to an audience not really qualified to understand them – pictures with circles are easier.
Our concern with the very encouraging charts below is that it is easy to join the group today, as there is no requirement to have a granular plan as to how you achieve net-zero. Many of the companies on the list may have the best intentions, but to get to their targets many need technology advances that are at best in laboratories today, and many need pricing structures – either incentives or penalties that make the right path forward more obvious. A lot of this does not exist today and the timeline to getting some of it done is being extended by political log-jams and differences of opinions. As time passes, the 100 or so companies that have signed the pledge are going to have to, at a minimum, explain what they are going to do and shortly thereafter, start committing capital.