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.
In last week's ESG & Climate report titled The Evolution Of the Plastic Industry Could Stall in 2022, we introduced our “new materials” stock index, and we have included our hydrogen index in this week's report titled, Hydrogen – Hype, Hope, and Headlines. We have created these for several sectors and each week we will add the chart below showing one-week and one-year performance for each index. Note that these are simple averages for each group and are not market cap-weighted. If we did a market cap weighting, we would have a couple of sectors where one stock dominated all - EVs for example. The steep decline in the EV index in 2021 was largely due to the negative performance of the Chinese EV companies that trade in the US and are included in the index. Note that all sectors have had a bad start to this year. We have chosen to include a water category as we have noted since we began this service that water is an area that we believe will be in greater focus going forward and will be considered an ESG topic.
In yesterday's ESG and Climate report, we looked at an extreme example of how the right support for clean fossil fuel use through a long period of energy transition, could create economic growth, support job growth, and not require subsidies – coal gasification to produce low-cost hydrogen. With the opposition to the “Build Back Better” bill, there is a clear opportunity for the fossil fuel industry to step up and suggest compromises, and we are seeing increasing interest in large scale CCS, despite its cost, in part because it is a path that will allow natural gas and other fossil fuels to meet increasing demand in a way that has a much lower carbon footprint, and in part, because it will still be cheaper than some of the heavily subsidized ideas to try and accelerate investments in renewable power that will inevitably fall foul of equipment and material shortages – something we have written about at length in past research – linked here. The EIA has already noted that coal use in 2021 has risen globally and it is likely that it will rise again, given the increasing demand for electric power and the lack of supply elasticity in the renewable power and natural gas-based systems – coal is a large part of the swing capacity these days. Many of the CCS projects proposed for the US are not much more than proposals today, but we are seeing some initial investment to prove that subsurface storage opportunities are feasible.
Much of the core focus of both our chemical industry and ESG and Climate research recently has been on inflation and materials shortages; we would point you to: Inaction, Caused By Inflation Fears, Is Driving More Inflation! and Coming Up Short: Materials Availability To Limit Climate Progress. This linked article suggests that, as we have predicted, cost and availability pressures are taking a toll on solar installation plans for 2022 in the US. While the inflation piece is real and the product shortages highlight some of the capacity constraints for materials and panels, the broader conclusions that can be drawn from the headline are more concerning. These shortages (and higher prices) are coming well before we see any step change in attempts to increase renewable power installations associated with all of the green hydrogen projects that have been announced over the last 6-9 months. All of these investments are relying on the deflationary trends continuing, especially for onshore wind and solar.
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.
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.
It is interesting to watch the pivot between recycled versus virgin polymer to the carbon footprint of the various options as outlined in the chart below. We are assuming that the numbers in the chart are averages as there is a sizeable range for everything. As we note in today's daily report, ethylene feedstock will impact the carbon footprint of ethylene and consequently, the footprint of polyethylene – HDPE made from ethane based ethylene in the US where the ethylene producer is recycling hydrogen back into the furnaces, will have a much lower carbon footprint than HDPE made from naphtha based ethylene in Europe, for example. On the recycling side, there will also be a range based on transportation costs for collection and sorting and then distribution to a customer.
ExxonMobil is seriously upping its lower-carbon game with the CCS announcements over the last few weeks and the release this week that states the company will spend $15 billion over the next 6 years on lower carbon initiatives. In this linked headline ExxonMobil states that it will meet its 2025 emission goals this year – we are assuming that this must be correct as the company would not want to risk the accusation of greenwashing. Either way, the critics will weigh in, either claiming “greenwashing” or suggesting that the targets were not high enough, to begin with. The ExxonMobil focus is very much on CCS, which makes sense for an oil and gas-centric company whose only real play right now is to lower the carbon footprint of its fuel portfolio. In the release linked above, ExxonMobil also talks about biofuel and hydrogen initiatives, but again calls for supportive policies from governments and we suspect that the underlying push here is towards the US government. ExxonMobil and others have indicated that $100 per ton is the right incentive to drive CCS and other carbon abatement strategies and we would agree with this estimate as it backs up much of the work that we have done over the last year. See - Carbon: Trading, Offsets, and CCS as a Service – It’s All Coming! and - Carbon Games – Appetite, But Not Enough Hunger Yet. The other reason why ExxonMobil and others would like to see the US act is because other jurisdictions in which they operate will likely take a lead from the US.