Thu. Jul 7th, 2022

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Welcome back to Energy Source!

We’re in Houston today for our inaugural Energy Source Live conference. We have a great line-up of speakers and sessions to discuss the upheaval in America’s energy landscape. We hope to see ES readers there in person and watching online.

In today’s newsletter, Mark Brownstein from the Environmental Defense Fund, who will be joining us in Houston, argues that accelerating the transition to cleaner fuels is the only way to tackle the “twin crises of energy and climate”. Myles and Amanda have a breakdown of Big Oil’s big day on Capitol Hill. And in a new documentary film we join energy and climate colleagues around the world to discuss the prospects for carbon capture.

Thanks as always for reading!


Opinion: speeding the transition to cleaner fuels kills two birds with one stone

By Mark Brownstein, Senior Vice President of Energy Transition at Environmental Defense Fund

Today’s energy system has become a liability we can no longer afford. As dependence on oil and gas restrains the response to Russian President Vladimir Putin’s war on Ukraine, scientists on the Intergovernmental Panel on Climate Change this week issued yet another urgent warning that society is running out of time to avoid dangerous climate change caused by fossil fuel emissions.

Politicians and pundits say we must choose which problem to solve – protect the economy or protect the planet. But the twin crises of energy and climate have the same solution: the fastest possible transformation of our global energy system.

Unlike previous shocks, there are simply no big spigots waiting to be opened. Pre-Covid, oil and gas production were near record highs. Recent company announcements offer only marginal bumps in production, not enough to replace Russian oil or change prices at the pump.

And despite their rhetoric, neither producers nor their financiers show any interest in making the massive investments necessary to change these fundamentals.

Industry has not forgotten crashing prices during the pandemic, or the deep plunge in 2014 and 2015. Having seen vast amounts of capital evaporate, investors are clear they want dividends and stock buybacks, not new wells. One need only check the latest earnings call to see that producers are listening.

And despite its ambitious climate plans on other fronts, the administration of Joe Biden has openly encouraged the energy sector to drill. It has even approved new oil and gas permits faster than its predecessor. Still, thousands of these leases sit undeveloped. Government is certainly not the roadblock here.

As oil and gas providers sit on their hands (and cash) in the face of an ever-warming planet, even top companies largely acknowledge that the end of their pre-eminence is nearing. Even the lowest-cost operators in the Middle East and South Asia have started planning for a different future.

Meanwhile, at current prices, analysts at Wood Mackenzie say the five supermajors – ExxonMobil, Chevron, Shell, TotalEnergies and BP – could generate over $ 200bn of free cash flow on upstream production by the end of this calendar year. That’s 50 per cent more than the previous record in 2021 and three times the annual average since 2000. The same report notes these same five companies have collectively committed a total of just $ 25bn for energy transition investments between now and 2030.

No one is asking energy companies to dig their own graves. What we do expect is that they will put the massive windfall they are currently receiving to work deploying the technologies the IPCC says are necessary to avoid a climate crisis and that put our economies on a more stable footing.

Successful transition of the global energy system is no small feat. No one wants governments to leave citizens shivering in the dark or stranded at the fuel pump. But we know that every extra tonne of CO2 or methane released now will have to be reckoned with later. Slowing the inevitable process offers a false sense of near-term security while making our fight to preserve the climate even harder.

Lawmakers and executives pass the gas price hot potato

Big Oil was in the dock on Capitol Hill on Wednesday accused of “gouging” American consumers at the pump in a piece of political theater that will do little to tame soaring gasoline prices.

Democrats, who are feeling the heat from irate motorists, castigated the industry’s most senior executives for the “pain” felt by American drivers.

Republicans said the high prices were the fault of Biden’s “anti-American energy policies” and accused Democrats of engaging in scapegoating.

Meanwhile, the six oil executives – including ExxonMobil’s Darren Woods and Chevron’s Mike Wirth – sat stony-faced, insisting that prices were a function of markets and beyond their control.

At $ 4.16, the national average US petrol price is slightly below the record highs it hit last month but has soared over the course of the past year on the back of surging post-pandemic demand and Russia’s invasion of Ukraine.

As we wrote yesterday, the reality is that neither Biden nor Big Oil can realistically do much to affect near-term fuel prices. But that did not stop politicians on both sides of the aisle from pointing fingers and casting blame.

“These prices are straining our constituents’ budgets and their patience,” said Diana DeGette, a Democratic representative from Colorado, adding that oil companies “are making record profits.”

Republicans retorted that oil companies were just the Democrats’ latest scapegoat as they blasted Biden for his campaign pledge to lead a transition to greener energy.

“Rather than deflect blame, President Biden should consider his own culpability for higher energy prices thanks to his relentless pursuit of policies that discourage domestic energy production,” said Virginia’s Morgan Griffith.

Meanwhile, the oil executives pointed the finger at global supply and demand for prices:

“No single company sets the price of oil or gasoline,” said Woods. “The market establishes the price based on available supply and the demand for that supply.”

And as for their inability to quickly ramp up supply, they blamed a combination of shareholder demands:

“Our shareholders expect us to operate the way that delivers a return on capital invested while providing additional value in the form of cash return,” said Devon’s Rick Muncrief.

Oil execs also called out supply chain issues. Pioneer’s Scott Sheffield cited “shortages of drilling rigs, frac fleets, frac sand and other equipment and materials”.

“Given these constraints, it would take 18 to 24 months to add any meaningful incremental production,” he said.

So where does it all leave us? More or less where we were before the hearing: US oil companies have no intention to increase production in the near term; their focus, they made clear, would continue to be squarely on shareholder returns. And the interparty mudslinging will continue.

As for climate, that appears to have fallen off the agenda almost entirely. Monday’s dire IPCC report and the stalled Build Back Better bill were not mentioned until hours into the hearing.

“Do you believe that we need a historic investment in renewable energy to combat the climate crisis and end our nation’s reliance on fossil fuels? And do you believe that your company should play a key part in this transition? ” asked New York’s Yvette Clarke. “Do not all speak at once.”

(Amanda Chu and Myles McCormick)

Video: carbon capture – the hopes, challenges and controversies

Data Drill

The impact of the EU plans to cut off Russian coal will not be felt evenly across the bloc. An analysis by Rystad Energy estimates that a Russian coal ban could affect up to 70 per cent of European coal imports, but the largest coal consumers – Germany and eastern European countries – stand to be hit the hardest. Last year, Germany relied on coal for nearly a third of its power generation.

“These latest sanctions are a double-edged sword,” said Carlos Torres Diaz, head of power market research at Rystad Energy. “There is no easy like-for-like replacement for Russian coal in Europe’s power mix.” The research firm predicts a Russian coal ban will drive up already high electricity prices for consumers.

Uneven reliance on Russian imports is threatening the EU’s ability to present a solid front when it comes to energy sanctions. Hungary’s prime minister Viktor Orban said on Wednesday the country was willing to pay for Russian gas in rubles, Putin’s proposed retaliation for western sanctions. Hungary is one of the EU countries most reliant on Russian fossil fuel imports, according to data from the International Energy Agency. (Amanda Chu)

Bar chart of Power generation mix by country, 2021 (%) showing Germany and Eastern Europe will be particularly hard hit by the EU Russian coal ban
Bar chart of Russian fossil fuel imports as a percentage of total domestic consumption (2020) showing Lithuania, Slovakia, Netherlands, and Hungary among EU nations most reliant on Russian fossil fuel imports

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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