Braskem’s green polyethylene is an interesting niche opportunity, but we question how big the market might be for a product where you need the buyer to agree to prices that cover your costs – i.e. how many buyers will potentially pay up. In a $100 per barrel crude oil environment, polyethylene from sugar cane likely looks quite attractive, but probably less so in a $50 crude environment. Sugar cane-based ethanol has a cost advantage over corn-based ethanol, and one of the key questions for Braskem is how do you grow the business outside Brazil, where the barriers to entry for others are not much different. We do not doubt the demand potential for green polyethylene and other ethylene derivatives, but our concerns would be how to profitably grow the business, especially if there is a lower crude oil price backdrop. Today it is easy to make a bull case for oil – we do so above – but note that oil forecasting is not our strength and nor is it anyone else’s – based on hindsight. Paying a 20% premium over fossil fuel-based polymers may make sense for some packagers with meaningful ESG goals, but a 100% premium is likely unstable.
The Denbury release is a great example of something that we discussed in our ESG and Climate piece yesterday. The company is putting stakes in the ground concerning carbon capture and storage but is only really spending on its EOR opportunities, which of course look really interesting today. While the 45Q credit for EOR helps, the main driver is the incremental crude oil volumes that you can pull out of the ground because of the CO2 injection – the higher the price of crude oil the greater the value of EOR. Regardless of the tax credit, the economics of EOR should look very good today and it is not surprising to see several initiatives from Denbury given that it has a lot of existing infrastructure for CO2. The CCS plans are no different than some of the projects we discussed yesterday – they are stakes in the ground – marking territory – but unlikely to move forward without higher incentives. One of the core topics of our report yesterday is whether the conflict in central Europe will turn attention away from energy transition and energy security for tomorrow, because of the acute distraction of both energy and national security today.
We continue to believe that the US has a cost advantage in CCS versus many of the other regions of the world and that when coupled with low natural gas prices the US should be able to take a lead in developing low carbon chemicals. CF is pushing the idea of both blue ammonia in the US as well as green ammonia, and while the company has yet to announce sequestration plans for the CO2 it is working to purify – see Exhibit - once dehydrated and compressed the incremental cost of storage should be low.