In the exhibit below, we see another chart that we find unhelpful when looking at the path to net-zero or something close. It is not an either/or game with fossil fuels and renewables. Those promoting this idea are setting impossible goals for the renewable industries, which will keep severe upward pressure on all energy costs. Wood Mackenzie may not mean what is implied in the chart below but taken at face value it suggests that more pressure will be placed on an underfunded materials market to supply an underfunded renewable power market, in which any opportunity to use decarbonized fossil fuels will be frowned upon. It would be good to see an analysis of how much global power could be generated from decarbonized natural gas and how much pressure that would take off the renewable industries.
While longer-term use of oil and gas products is in Enterprise Products' best interest, it is nice to see someone else pushing the point that we have been making for more than a year – that there is not enough material out there, in the right locations, to meet the suggested clean energy goals. It is important that this becomes better understood and accepted by a broader group than just Enterprise and C-MACC, as we will not get the needed tack in strategy, priorities, and incentives if there is a broad reliance on renewable targets that will not be met – we focus on the IPCC report in tomorrow’s ESG and Climate report.
One of the subjects that we will cover at length in the ESG and Climate report tomorrow (to be found here) is the significant need for CCS globally, but especially in the US, as we see more balanced forecasts of energy supply emerging which show more use of fossil fuels for longer – especially, but not limited to natural gas. These forecasts recognize the current energy momentum as well as some of the more practical realities around the rate of construction of renewable capacity relative to energy demand growth. The CCS plans that are appearing all over the place are nothing more than plans right now and if the EPA permit activity is a true barometer – not much has moved beyond planning. This needs to change and we likely need both an increase in CCS incentives – which could take many forms – as well as some streamlining around the permitting process. Simply waiting and hoping for a renewable miracle is not going to work – nor is some sort of CCS cost breakthrough.
The linked Covestro headline from today's ESG & Climate report is a reminder that the chemicals and polymer makers are dealing with more than just recycling and product lifecycle management. Customers are equally focused on the carbon footprint of the products they buy and the green hydrogen move by Covestro (assuming that affordable green hydrogen is possible) would replace hydrogen made from fossil fuels and replace other fuels for heat in some cases. Germany has some considerable issues with decarbonizing, as the blue hydrogen route will be challenging in a country that will likely not allow onshore CCS. Covestro and others may have little choice but to buy green hydrogen and/or green power, even if supplies come up short of plan and costs are higher as a result. This is a good illustration of why we believe that the right policies in the US could drive some additional competitive edge while meeting climate objectives. Cheap hydrocarbons coupled with cheap CCS may only be matched in some parts of the Middle East.
First, it is going to be an uphill struggle to get some common sense around the continued use of fossil fuels during any period of energy transition if the activists take away all resources from the energy industry – banking, PR, etc. While there is plenty of work to be done to minimize greenwashing, there is also plenty of work that needs to be done to explain why fossil fuels are still needed and how we can use them as cleanly as possible. If it becomes a business risk to bank or advise any company in the fossil fuel industry, while there will inevitably be workarounds, the net effect will be continued underinvestment, in production and in cleaning up the fuels and the concerns that we raised for natural gas in our Sunday Thematic will happen.
International natural gas prices are hitting new highs this week, both on an absolute basis and relative to the US - see both charts below. At the same time, we see new contracts being signed for US LNG to move to China and Europe, but mainly China. This is happening despite significant renewable power investments globally in 2021 and it would appear that many have underestimated energy demand growth in projections and policy. The other net effect of the supply/demand imbalance this winter and possibly through 2022 will be increased coal use in Europe and the US, with local governments unable to meet near-term climate goals, especially in Europe, but also in parts of Asia and, at the same time keep the people warm and the lights on. In our ESG and Climate piece tomorrow we will focus on one highly unpopular but likely very practical opportunity for coal as part of a planned energy transition program, and it is likely that, while climate goals may not need to change, some socially unpopular decisions around the use of fossil fuels will be needed to prevent even more socially unpopular inflation or absolute shortages.
The fuel use data in the Exhibit below is very much a function of geology and the good and bad luck associated with it. The large hydrocarbon users' consumption patterns are a function of what they have – if you have a lot of coal, you use a lot of coal. The significant build-out of nuclear in France is partly because of Frances’ exceptional track record with the technology but also because the country does not have anything else to fall back on. Japan’s nuclear component was much higher before Fukashima. It is, however, worth noting the almost insignificant share of wind and solar anywhere, and then to put this into context with the collective ambitions, not just for 2050, but for the much shorter 2030 targets.
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.