💥Energy Flux💥 Monday, 29th March 2021

RELAUNCH SPECIAL: Hydrogen spares LNG latecomers’ blushes 😳, EU throws lifeline to gas investment 🆘 + much more 🚀

Mar 29, 2021

Rather a lot has happened in the energy world since Energy Flux went into hibernation in January. This special relaunch edition catches up on some of the most pertinent developments, so is a bit longer than weekday editions will usually be. Here goes!

In today’s issue:

Hydrogen spares blushes of LNG latecomers
Chinese LNG spree highlights scale of net zero challenge
US LNG project fails on economics, not environmental impacts
EU taxonomy rejig throws lifeline to gas-fired power investments
EU carbon border tax heralds stronger CO2 price – bad news for coal
Under the radar (transition stories you might have missed)

Hydrogen spares LNG latecomers’ blushes😳

First up, Saudi state oil company Saudi Aramco is apparently skipping long-held hopes of exporting liquefied natural gas (LNG) in favour of hydrogen. Jumping on the hydrogen bandwagon allows Aramco to spin a growth narrative around its underutilised natural gas reserves. Most conventional Saudi gas is reinjected to boost oil production, while the kingdom *still* burns a lot of oil for power generation — so exporting gas as LNG wouldn’t make much sense until that was rectified.

Aramco is arriving late to the natural gas party, hitting new production records just as established and emerging gas markets in Europe and Asia seek to tilt towards ever-cleaner fuels. The H2 push diverts attention from Aramco’s failure to seize the LNG opportunity a decade ago — an opportunity that saw Riyadh’s arch rival Qatar become the world’s biggest and most fiercely competitive exporter, boosting Doha’s regional geopolitical clout (more on Qatar below).

Big Oil companies don’t talk much about the inefficiencies inherent in the steam methane reformation process to turn CH4 into H2, nor who will ultimately bear the cost of switching to a less efficient fuel source. So long as hydrogen convinces investors that fossil reserves have an enduring route to market, Aramco and its peers will continue to promote H2 as ‘the fuel of the future’.

The rules of thermodynamics are not *yet* causing pause for thought in the frenzied rush to ship liquefied hydrogen around the world. Japan and Australia have started producing H2 from unabated brown coal to demonstrate the feasibility of the process. They promise to capture CO2 emissions for storage offshore Victoria in a later phase, once hydrogen exports to Japan are underway, although Australia’s record on carbon capture is rather patchy (which puts Oz in good company — Energy Flux dissected lack of progress on CCUS and its shortcomings not so long ago).

Separately, Canada and Germany signed a cooperation agreement that envisages transatlantic trade of H2 — probably the ‘blue’ variety derived from gas, which Canada has in abundance. This chimes with Aramco’s hydrogen push: Canada also failed to capitalise on the LNG boom and is playing catch-up. While one major liquefaction facility is under construction in British Columbia (Shell’s LNG Canada project), Chevron recently stopped funding the Kitimat LNG scheme in BC after failing to find a buyer for its 50% stake in the development. It is hard to say with conviction that any other will be built this decade.

Chinese LNG spree highlights scale of net zero challenge

Underscoring Qatar’s global pre-eminence in LNG production, Qatar Petroleum signed a long-term deal with Sinopec to ship two million tonnes per annum (mtpa) of the fuel into China. Separately, French IOC Total (which is confident LNG will be the fuel of today and tomorrow) signed a binding deal with Chinese energy player Shenergy Group to sell 1.4 mtpa of LNG into Shanghai and neighbouring regions, and market the fuel there via a new joint venture.

China’s latest buying spree illustrates how the world’s biggest natural gas importer and second largest LNG buyer still needs a lot more gas to meet booming demand, let alone dent its gargantuan coal consumption profile. China’s coal burn accounted for 51.7% of global consumption in 2019 (source: BP stats), and shows no real signs of abating. Beijing will have to do more than incremental coal-to-gas switching if its net zero by 2060 pledge is to be taken seriously.

US LNG project survives FERC environmental review but fails on economics

Are the wheels finally starting to come off the once-vaunted ‘second wave’ of gas liquefaction projects planned along the US Gulf coast? Exelon Corporation and partners have scrapped the proposed Annova LNG project in Brownsville, Texas, citing unspecified “changes in the global LNG market”. (I could write a book on the pandemic’s impact on LNG markets, but I’ll spare you. Suffice to say it’s been pretty cruel for unbuilt liquefaction projects looking for elusive buyers to leverage debt finance).

This goes to show that the brief LNG winter spot price surge, which saw JKM futures breach $32/MMBtu in January, didn’t convince gas buyers to look again at less competitive liquefaction projects — which typically market their long-term offtake deals as a means of insulating buyers against such spikes.

Annova’s cancellation also illustrates how Republican commissioners at FERC can overlook the evident impacts of building three huge liquefaction projects in close proximity to one another that threaten endangered species and marginalised communities, but it won’t make much difference if weak market conditions render them uneconomic and impossible to finance.

But don’t sound the death-knell for greenfield US LNG just yet: project developer NextDecade enjoyed a rare 34% stock bounce after hiring Oxy Low Carbon Ventures to get rid of CO2 captured from its proposed Rio Grande LNG project — one of the three (now two) planned in Brownsville, near the border with Mexico. Not everyone is buying it...

Tad @TadAllagash

$NEXT might be the biggest ESG scam going right now. 1. Sign a non-binding term sheet to pay $OXY for CO2 offtake for an LNG project that doesn’t exist yet 2. Call it your “Carbon Solutions” business 3. ???? 4. Profit!!

🆘 EU taxonomy rejig throws lifeline to gas-fired power investments 🆘

The European Commission is reportedly considering reclassifying natural gas as ‘partially sustainable’ in its landmark new taxonomy for green finance (source: $FT). Green groups and scientists are up in arms after a key criterion was tweaked in the draft legal text (which is now in the final stages prior to adoption by the Commission).

A previous hard emissions limit of 100g of CO2 per kWh of generation for fossil fuel-generated electricity — which would have ruled out unabated gas-fired power generation — is reportedly to be replaced with a relative 50% reduction on the baseline emissions performance. The devil is always in the detail: does this include full lifecycle emissions along the entire gas value chain, from well to burner tip, including both carbon and methane?

The draft text that went out for consultation late last year implied the 100gCO2/kWh cap did not, which would be a major omission considering how much gas is flared, vented and consumed just getting an LNG cargo to European shores.

This didn’t matter so much with a hard cap, as even the most efficient combined cycle gas turbines can’t achieve <100gCO2/kWh from direct emissions anyway, let alone on a full value chain basis. But moving the taxonomy onto a relative emissions reductions threshold while excluding the gas production and shipping footprint would throw many CCGTs back into the ‘sustainable investment’ bracket in coal-heavy EU markets.

In light of the EU’s net zero commitment and the wealth of evidence about the CO2 and CH4 emissions profile of most major gas/LNG producers, this seems short-sighted.

What’s at stake depends on how much influence the EU taxonomy will exert on voluntary capital allocations; financial institutions will soon have to disclose which of their investments qualify as sustainable according to EU rules, so this could be a big deal.

EU carbon border tax spells bad news for coal

The European parliament has voted to introduce a carbon border tax, aka the Carbon Border Adjustment Mechanism, which would impose a tariff on imports of carbon-intensive products from jurisdictions without a carbon price. It might also offer a rebate to EU manufacturers when they export domestically produced items, which would put the CBAM in the political realm of trade protectionism — although the EU Commission and MEPs are adamant that free emissions trading system allowances (EUAs) will end for industries that currently receive them, once the CBAM comes into force (to avoid a double subsidy).

Alongside further reform of the ETS, this likely means increased future demand for EUAs, a much stronger EU carbon price and greater economic pressure on coal-fired power generation in EU power markets. And if CO2 prices go ballistic, which frankly they have to if the EU is going to get on a net zero pathway, then older less efficient gas-fired generators will be pushed out of the money too — to the benefit of cleaner generators.

Under the radar

Canadian fossil producer ditches oil and gas acreage in favour of lithium permits. Highwood Oil Company sees greater value in mining minerals to power the coming electric vehicle revolution than pulling hydrocarbons out of the ground
Crown Estate primed to cash in on bidding war for Scottish offshore wind acreage. UK seabed landlord hikes fee limit ten-fold in anticipation of cut-throat ScotWind leasing round later this year, although experts expect wind turbine efficiency gains will result in targeted bidding on smaller parcel sizes. Last month’s Round 4 lease awards in waters around England and Wales yielded almost 8 GW of potential new offshore wind projects
Futurist think-tank blames mainstream energy analysts for inflating carbon bubble around coal, gas and nuclear assets. RethinkX says the levelised cost of energy from conventional power plants will be *much* higher than big-name consultancies have been telling investors, with negative implications for asset valuations
New investments in Italian gas-fired power stations “risk $11 billion in stranded assets”, according to Carbon Tracker. Italy should leapfrog gas and “embrace coal-to-clean” by ditching plans to build 14 GW of CCGTs to replace coal retirements, NGO says
National Grid bets on electric future by acquiring Western Power Distribution for £7.8 billion and offloading its gas arm. UK’s push to electrify heating and transport prompts “transformational” portfolio rejig. This will also rid NG of its problematic US gas distribution business, which has clashed repeatedly with New York state officials and regulators over retail rates and a controversial 2019 moratorium on new gas hookups
Fallout from the Texas big freeze continues as Griddy Energy LLC files for Chapter 11 bankruptcy protection. The February cold snap, ensuing demand surge and extreme price spike ($9,000 per MWh!) left Griddy — which passes wholesale prices through to retail customers apparently without markup — unable to balance the books
BP might be ‘reimagining energy’, but is not willing to reimagine its carbon emissions. British oil major rejects activist shareholder motion to set concrete short term CO2 reduction targets, says it needs flexibility to emit more this decade and delay deepest cuts for post-2030. (For chapter and verse on the challenges facing BP, check out this gem from the Energy Flux archive)
SEC forces US oil companies to hold shareholder votes on climate emissions targets. Wall Street regulator gets tough with ConocoPhillips and Occidental Petroleum after beefing up its approach to ESG investing
The humbling of ExxonMobil continues, with a fresh Moody’s downgrade — its second in a year. The agency cut XOM’s credit rating to Aa2 from Aa1, citing its penchant for borrowing eye-watering sums to stubbornly keep paying its oversized dividend even as revenues collapsed. Energy Flux covered Exxon’s spectacular downfall in late 2020 — see here.