We are seeing a flood of CCUS announcements in the US in 2022, but they look like “gathering” exercises at this stage rather than projects that are ready for FID. Companies are chasing potential pore space and, like Talos, leasing onshore and offshore (mainly offshore) acreage, where they believe opportunities exist to sequester CO2. These announcements sometimes include firm commitments from companies that have CO2 surpluses and sometimes are more speculative. At this stage, it seems like a “land grab” and “customer grab”. There is wide agreement that the incentive structure in the US – centered around the 45Q tax credit scheme – is not enough to drive much real investment, unless it can be stacked with other credits like the LCFS structure, which only applies to fuels in California today. We see the land grab as relatively low-cost and low-risk positioning in the hope that incentives or economics change. There are some instances where investments will go ahead, and these will focus on processes that have a reasonably low cost of carbon capture – fermentation, urea, natural gas clean-up for LNG, and a handful of other processes. The LSB Industries announcement for Arkansas, highlighted this week, is likely an example of where the economics work even if LSB cannot get much of a premium for the low-carbon urea.
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.
The back-end loading of the power projects for the US for 2022, as shown in the chart below leaves us somewhat skeptical concerning how much will come online this year. Supply chain problems and materials costs and availability are causing all sorts of problems with renewable power projects and installed capacity expectations for 2021 were too ambitious. We believe that companies are pushing projected start-ups later in the year to give them more of a chance of completion, but this creates the risk that they slip into 2023 or beyond. The most significant issue here is that as these plans get delayed, natural gas demand goes up, as one of the swing suppliers. This is fine as long as the US natural gas industry and shale oil industry is investing so that gas availability rises. Otherwise, we could see gas prices spike in the US next winter and another year where we use more coal than we expected. For more see this week'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.
We include a couple of headlines and charts in today's daily report that step into the central theme of this week’s ESG and climate report, which will be published tomorrow (see here). The offshore wind ambitions and the EIA solar and battery projections both assume that the materials are available to build the capacity. In the case of the offshore wind leases, the winning bidders do not need to be in the market for all of the projects today and while the opportunities will lead to a step-change in demand for turbines in the US, the timing is less clear today that it will be in a few months and that timing may be adjusted to reflects equipment timing and costs, etc.
The linked Siemens Gamesa news could not have been a more clear example of one of our key research themes of the last year – backlog up, suggesting strong demand for new wind power capacity – deliveries and profits down because of material shortages – price inflation and logistic issues. While the company is getting squeezed because of higher costs on contracts that have limited opportunity to pass through the cost, at the same time slide 8 of the earnings release deck shows that selling prices rose in fiscal 1Q 2022. This breaks a declining trend in pricing and one of the core assumptions behind many energy transition plans – that renewable power prices can keep falling. Onshore wind orders are falling, but offshore orders are rising – and these come with higher costs and the need for more materials as we showed in a chart in yesterday’s daily. The added costs burden of more offshore wind projects may only serve to tighten markets for materials further, leading to further increases in installed costs.
The Green Plains Institute analysis below draws heavily on the EPA emissions data by facility, but correctly, in our view, identifies where CCS makes the most sense in the US. We still struggle with the pipeline distances associated with some of these ideas as CO2 disposal is still a cost for emitters and in any attempt to reduce costs, pipeline distances will be key. We have discussed the opportunity recently for massive blue hydrogen investment (including CCS) to replace industrial heating fuel and this would apply in all of the regions below. Note our conclusions in today’s ESG and Climate report that we expect renewable power installation goals to fall short – requiring more use of natural gas (for power generation or hydrogen production) with accompanying CCS.
There are a handful of “renewable” headlines in today's daily report, and it is probably worthwhile discussing the differences. First; the linked Gevo RNG announcement is likely one of several RNG projects that we will see come online in 2022, as there are a number of farm-based RNG projects underway in the US and other parts of the world. The Gevo facility is based on farm manure and is expected to produce 355,000 MMBtu of RNG per year. As such it is not large, and all of the farm-based projects are small in the larger context of the natural gas markets. However, when focused on decarbonizing a specific product or process this RNG can be very important. Our take on the market is that there will likely be more demand for RNG than supply, as several companies are looking for RNG to make proposed investments make sense from a “green” perspective (Monolith would be a good example). This suggests that it will be better to be a seller than a buyer longer-term.
The linked Canada headline supports one of the themes that we have been highlighting for a while, which is that certainty around carbon pricing is likely to drive investment rather than discourage it. Canada, and specifically Alberta, has seen several new investments announced over the last few months because manufacturers can now add some certainty around carbon values to other advantages offered by the province, including cheap natural gas and what appears to be low-cost CCS opportunities. We are also seeing investments shape up in Europe – also to produce low carbon materials and fuels – and this is also driven by greater certainty around carbon value. The lack of a carbon price in the US is becoming a competitive disadvantage for the country and those opposing it in government are, in our view, very misguided. If China can develop a credible and broad carbon pricing mechanism, it will also likely gain investment dollars, possibly at the expense of the US. Not having a sound climate change and carbon value framework in the US is a major threat to many of the reshoring initiatives that US retailers and manufacturers would like to see.
A couple of things worth noting today that reflects our commodity index in today's daily report but also looks at some of the results below. The linked solar headline is confirmation of one of the topics that we have probably worn out over the last few months, which is that renewable power ambitions have not taken into account real limitations in the rate of equipment supply, especially solar modules. New forecasts suggest that the US expected installations of solar capacity could come in 25% short in 2022, which has implications for energy transition ambition, but also overall power supply as the shortfall will have to be made up elsewhere. It is not just a function of solar module availability but also solar module costs, because of some of the material cost inflation illustrated in exhibit 1 (see today's daily report). These shortfalls will have implications for natural gas demand in the US if it needs to fill the gap, and we have already noted that we think US natural gas prices could spike in 2022, much higher than we saw in 2021.