2022 is the year in which the rubber will need to meet the road for many of the chemical and other material and industrial companies who have made 2030 emission pledges. In the Dow release yesterday, the company used the call as an opportunity to remind investors about the Canada investment and tie that into the 2030 emission goals. We note LyondellBasell’s 30% emission reduction goal by 2030 and like others, LyondellBasell will not be able to get there without substantial investment. LyondellBasell and others do not necessarily have to spend in 2022 (neither does Dow), but unless there are some concrete plans by the end of the year stakeholders will likely start to question whether the emission goals are real. We suspect that most companies are trying to work out whether investments in hydrogen (likely blue hydrogen because of the volumes needed) are a better solution than trying to capture CO2 from a natural gas furnace. Any large hydrogen investment with associated CCS will take 5-6 years from concept to production. Like Dow, we would expect others to focus emission-reduction investments in countries/states that have a clear value on CO2. See today's daily report for more.
One piece of big news early this week was ExxonMobil’s announcement that it is developing plans that will drive net-zero emissions by 2050 and the company shared a detailed overview. We have picked some charts from the report, some of which can help us draw conclusions for ExxonMobil, but others are more general. The company is banking on a lot of emission reduction and CCS to get to the 2030 target and a large part of the goal is likely to come from the plans for the Permian and the previously stated net-zero target that the company has for 2030 – detail on how this will be achieved is shown in the Exhibit below, see more in today's ESG report.
The carbon credit schematic below helps understand the mechanics, but the diagram does not sufficiently emphasize the critical importance of the “Verification and Validation” step. This is a great example of a mechanism that should work logically, but if the input is wrong the output will be also. Potential buyers and sellers of carbon credits understand the process well, but they are more concerned about what goes in the front end as the value of the credit will be very dependent on the quality. Today the only “sure thing” carbon offset is direct air capture, as all of the agriculture-based offsets need much tighter definitions. See research - Carbon Prices – Inequitable and Uncertain – Not What We Need
As we have mentioned before, we see a couple of major challenges with the CO2 pipelines proposed for the mid-West, one of which is summarized in the Exhibit below. The first issue is pipeline right-of-ways, as there are already activists determined to oppose the pipelines, and opposition to pipelines has been a core them of the last 10 years. The second issue is cost. Carbon abatement is a cost for all looking for solutions and even where incentives exist, such as the 45Q program or the LCFS fuels program, the challenge will still be creating a path with the lowest. Compression and pumping costs are high for CO2, especially if the pipeline wants a pressure that will allow for direct injection into a series of wells. Lower pressure transportation by pipe is inefficient and raises the capital cost of the pipeline – so it becomes a trade-off – CAPEX vs OPEX. $4.5 billion of investment – as suggested by Summit – is $375 per annual ton of carbon dioxide sequestered - $37per ton assuming 10-year straight-line payback – twice that if you want a 10% return. This is before a dollar of OPEX and pipeline costs could easily exceed another $30+ per ton, with separation and purification of the CO2 stream also not free. Unless the ethanol producers are paying Summit and Navigator to take the CO2, the math becomes very challenging. See today's daily report and our weekly ESG and Climate report for more.
The Monolith announcement is not that surprising, as the auto industry is very focused on its carbon footprint and its suppliers, like Goodyear, are under pressure to look for more sustainable solutions. While Monolith uses natural gas as a feed, it’s carbon black is produced with very limited Scope 1 emissions, unlike the traditional route, used by the incumbents. It is not clear what the production economics are for Monolith because the co-product value of hydrogen could vary greatly depending on local needs, but the emergence of a competitor who sees carbon black potentially as a by-product is not likely to be good news for the traditional makers. A by-product that is more environmentally friendly is even more of a threat. Complicating the picture further could be the arrival of larger volume production from Origin Materials, which has a renewable based carbon black like material, which may also be seen as a by-product.
When China announced its 2060 net-zero goals we dedicated one of our ESG and Climate pieces to the topic - China: A Challenge With 2060 Goal But Also A Possible Edge - concluding that this would likely drive considerable competitive advantage for China assuming that others would bear the costs of new technology learning curves and China would get the solutions more cheaply. In interim China would have lower costs of manufacturing because of the delayed net-zero implementation. With the Biden administration now pushing for a coordinated 2050 commitment for the US, some of the burdens of early costs that China could benefit from also fall on the US. In one of the headlines (from today's report), there is criticism of the European CBAM and questions around whether it could work. The reality is that it, or something like it, has to work, otherwise asymmetric climate policies will create pockets of competitive advantage - potentially very damaging to those spending more.
Most of the focus today is on carbon, in part because the CCS momentum is picking up, with more initiatives being announced daily all around the world, and partly because of the surge in European carbon prices as shown in Exhibit 1 from today's daily report. The IEA CCS projections in the Exhibit below, are likely low in our view, despite the significant investment needed to reach the target shown. In our ESG and climate report today we focus on many of the materials supply limitations that will likely emerge as the world tries to add wind and solar capacity at higher and higher rates. Our analysis of the IEA net-zero projections published earlier this year suggested that the IEA might be too ambitious on renewable power and that the balancing effect would likely be increased natural gas use versus its base case and more than forecast CCS. We have a long way to go to get there given the shortfall in the exhibit below, but at the same time, carbon prices are moving to make it happen. The European price has spiked again this week and is now slightly higher than $100 per ton of CO2, a level reached by the UK price late last week. At this level, we should see investments in Europe to abate carbon without additional local subsidies, or with minimal subsidies. The constraint in Europe will be finding inexpensive CCS locations. A $100 carbon price in the US would, in our opinion, drive a very significant investment in the US, not only in CCS capacity but also in new blue and green hydrogen capacity.
We note the IEA work on CCUS in several charts below and this is good timing relative to our ESG and climate report this week – which focused on carbon pricing, something we believe is necessary to promote more real activity in CCUS. In the Exhibit below, it is important to note how many projects are in “development” rather than operational or under construction. It is also worth noting that the number of projects under construction has not grown since 2019. One of the reasons for this is that increased activity at the planning stage is then followed by a delay associated with permitting, which depending on the region can take 2 plus years. The other constraint is uncertainty, with many of the projects under consideration waiting for something to change, either local values of CO2 or mandates or direct government support. For example, the large project planned for Houston and championed by several oil, power, and chemical companies is unlikely to move forward without a higher tax credit for CO2 sequestration or without some other incentive. The mid-West projects targeting the ethanol industry will also need permits, not just for the wells but also for the many hundreds of miles of proposed pipelines.
In our ESG and Climate report tomorrow we are focusing on the very wide range of carbon prices and the structures of the various emission reduction incentive schemes, with a focus on what it does to the competitive landscape within the impacted markets. For example, with the government subsidy being offered to BASF and Air Liquide for the CCS project in Antwerp, some level of competitive edge will be granted to the companies, because similar subsidies might not be available to others. Last week we discussed the very wide range of potential carbon abatement costs for companies in the same business, driven by technology and geography. If we add to that the potential for some projects to attract subsidies, while others do not, we change the landscape of the competitive playing field. Could we, for example, see BASF shutter production in Germany, where abatement costs are high, and move more manufacturing to Antwerp – something likely to be very unpopular with the German government and trade unions. This is more problematic in Europe because of the open trade policy. For Germany to give the same benefit that BASF has at Antwerp to chemical manufacturers in Germany could be prohibitively expensive given the much higher inland costs of CCS in Europe, assuming any permits would be issued. Alternatives to CCS, such as the electrification of industrial heating processes or the use of hydrogen as fuel might be equally expensive. We see some of the select European subsidies possibly causing discord between the member states.
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.