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Welcome back to The Source of Energy – your second installment in as many days as the US holidays this week.
The world is on track to burn record volumes of oil this year as the energy-hungry Chinese economy returns from a long Covid-19 slumber. That was the main thing from the International Energy Agency’s first monthly report for 2023, published yesterday.
Meanwhile, at the World Economic Forum in Davos, America’s chief climate diplomat, John Kerry, responded to European complaints that America’s green subsidies were anti-competitive, telling America’s allies that they could always spend more yourself. That might not go down well in Brussels.
And in Chesapeake Energy’s shale bed sold piece of oil assets as it focuses on its first love: natural gas.
To today’s newsletter: Is offloading dirty assets the best way for an oil company to reduce its emissions? Or is it just a waste of money? Derek delves into the emissions debate and looks at a report on how dealers should approach the conundrum.
And Amanda breaks down what landmark US climate legislation, the Inflation Reduction Act, means for various renewable energy sources. Some green energy providers will do better than others.
While I’m on my soapbox, I’ll repeat my plea from yesterday: next week I’ll be in the Permian Basin (between Hobbs, New Mexico and Midland, Texas) reporting on the oil jobs boom. If any readers have thoughts, anecdotes or tips – or want to meet up while I’m there – please get in touch: email@example.com.
Until next week, thanks for reading. — You think
How to make divestment work for the climate – not just for companies
In an effort to force oil and gas producers to reduce emissions, vexing problem stands in the way. The easiest, fastest and most profitable way for a manufacturer to do less damage is to sell polluting assets. Job done — for the selling company, anyway. But what if the buyer is worse?
For example, when BP, considered a climate leader among oil companies, sold its Alaska assets to private operator Hilcorp in 2019, it reduced BP’s emissions—but not an asset‘s where fossil fuel production continues to grow. Actually, between 2017 and 2021298 deals saw assets move from companies with increasing liabilities to those without, while only 119 deals went the other way. According to the Environmental Defense Fund, by 2021, about 30 percent of businesses have actually weakened environmental liabilities related to assets.
EDF and another climate group, Ceres, proposed a solution based on six roundtables with private equity groups, oil companies, banks, NGOs and other stakeholders. Their framework, released todayhas four “Climate Principles for Oil and Gas M&A”:
Seller due diligence should filter out buyers who lack adequate climate commitments or the financial resources to comply.
Sellers should disclose the asset’s pollution even after the sale and be honest about how much of their own emission reductions come from the transfer.
Sellers should help buyers reduce asset emissions and commit to continuing standards.
Buyers should establish their decommissioning plan.
It won’t be easy for traders. “M&A in the oil and gas industry is simply like how gravity works,” said Andrew Baxter, head of energy strategy at EDF. Investment bankers are motivated to get deals done quickly and efficiently, and any hint of friction is unwelcome. “There was a lot of resistance.
But the companies themselves, including some buyers, are increasingly seeing the point, said Laetitia Pirson, a Ceres oil and gas expert.
“The paradigm is already changing a bit. By structuring it a bit and publishing these principles, we hope to level the playing field.”
Asset managers are increasingly active, including private equity groups, Baxter said in part because of their need to continually raise capital from pension funds, university endowments and other limited partners with deepening climate commitments.
EDF and Ceres hope that at least one transaction this year will incorporate the framework, and stakeholders are advocating for it.
The biggest motivator for the operator – and its investors – will remain the feedback from closing deals without proper consideration of the consequences.
“We’re still talking about BP-Hilcorp in Alaska,” he said. “The reputational risk kind of proved itself.
And if the seller cannot find a buyer with adequate climate commitments?
“If you can’t find someone who is going to be able to responsibly operate that asset and manage the phasing out of that asset and the decommissioning of that asset, you should decommission that asset,” Baxter said. (Derek Brower)
The uneven impact of IRAs across the renewables sector
The massive U.S. climate package signed by President Joe Biden will greatly boost investment in renewables, but opportunities vary by source.
Overall, annual investment in renewables will reach $114 billion by 2031, up from $64 billion in 2022, according to a report released today by Wood Mackenzie. The IRA included $369 billion in green subsidies to accelerate clean energy deployment and shift supply chains away from China.
Two incentives in the IRA will be particularly important to renewable producers and developers. The first is a new manufacturing tax credit for US-made parts. The second is a subsidy for developers who meet certain domestic content limits in renewable projects.
Wood Mackenzie estimates that IRA incentives could reduce the cost of renewables anywhere from 20 percent to 60 percent.
Here’s a breakdown of the report’s remaining findings by source:
Clear view of the wind
The IRA tax breaks will provide a much-needed boost to U.S. onshore wind power producers after years of shrinking profit margins and shifting production to Mexico.
The U.S. will have enough capacity to meet demand for turbine equipment through 2031, despite facing a near-term shortage, Wood Mackenzie says. The manufacturing tax credit will allow components such as nacelles, blades and steel towers to achieve relative cost parity with imports.
Despite the nascent market, Wood Mackenzie expects the US to be one of the most attractive markets for offshore wind production, mainly due to its difficult-to-transport components and high shipping costs. Wood Mackenzie estimates that the US will install 7.53 GW of offshore wind by 2031, with annual spending reaching $22 billion.
Cloudier outlook for sunshine
Wood Mackenzie issued a less positive outlook for solar power. While 45 GW of module projects are in the pipeline, the consultancy warns that this is not enough to cover the enormous growth in demand and the US lacks upstream manufacturing capacity.
American manufacturers also face stiff competition from Southeast Asia, where panel costs are 32 percent cheaper. Tariffs and restrictions on imports from China’s Xinjiang region are also driving up parts costs and causing delivery delays. Trade barriers and supply chain hurdles have stalled the sector in 2022, with solar capacity growth down 23 percent from the previous year, according to Wood Mackenzie and the Solar Industry Association.
“The wind energy manufacturing community is better positioned to take advantage of the tax incentives,” said Daniel Liu, lead author of the report.
Upcoming IRS leadership
Despite these forecasts, the extent to which these incentives will boost US renewable generation remains uncertain. The Treasury has yet to issue guidance on how the incentives will be implemented, and overseas manufacturers are keen to protect their cost advantages.
The gradual reduction of incentives after 2032 also means that the country has a short period of opportunity to build production capacity, often from scratch, and achieve cost competitiveness without subsidies.
“Many countries had a head start due to cheaper labor costs. . . so it’s a bit of a race to catch up,” Liu said. (Amanda Chu)
It has nuclear “new dawn” arrived in the UK?
Nord Stream 2 investor Wintershall Dea will leave Russia following a response to its ongoing oil and gas operations in the country.
Harbor Energy, one of the UK’s largest oil and gas producers, will do just that cut jobs this year in response to a higher windfall tax.
There are nearly two dozen Republican attorneys general focus on proxy advisors over their recommendations linked to climate and social goals.