Who has the power to green the energy sector?

Two things to start:

• Joe Biden is going to Riyadh to ask Saudi Arabia for more oil tomorrow, as the White House pushes its price-cap plan for Russian exports. Analysts are sceptical about both.

• Trafigura sold a stake in a giant Russian oil business to an obscure Hong Kong company registered just days before Moscow ordered tanks into Ukraine in February.

Welcome back to another Energy Source.

We will be watching the US president’s trip to the kingdom with interest over the coming days.

Flying to the Middle East to curry favour with Crown Prince Mohammed bin Salman was not part of Biden’s grand plan when he took office 18 months ago.

But then again, nor was jettisoning climate pledges in a knee-jerk scramble to bring down prices at the pump. Energy crises have a way of upending even the best laid plans.

Back in the US, numbers released yesterday by the Energy Information Administration showed weekly gasoline demand plunging to its lowest level for this time of year since July 1996. A data slip up by the EIA? A July 4th-related anomaly? Or a more ominous indicator that elevated prices are finally forcing motorists off the roads? Watch this space.

Domestic oil and gas production is the focus of today’s newsletter — and specifically whether it will be investors or regulators that force operators to go green. We delve into a trio of new reports.

In Data Drill, Amanda maps out the vulnerability of the clean energy supply chain — an insight, maybe, into where the next energy crisis will stem from.

Thanks for reading.

Myles

Are oil and gas serious about going green?

Cracking down on greenhouse gas emissions from upstream oil and gas — particularly methane — is often dubbed the low-hanging fruit for action on climate change.

It makes sense. Much of the problem is easily remedied: leaks can be plugged, flaring and venting slashed, and power generation greened.

But whether the industry will take the necessary steps itself — or if it needs to be bludgeoned into submission through regulation — is becoming an increasingly pertinent question.

“This industry for decades has had a history of being dragged kicking and screaming to change — rather than understanding where the market is, identifying the opportunity and then being an early adopter and demonstrating leadership,” Ben Dell, managing partner at asset manager Kimmeridge, told ES.

Three reports released this morning shed some light on the extent of the problem and the industry’s capacity to clean up its act of its own accord.

First, a new paper from Ceres — a non-profit that co-ordinates investor action on climate — makes clear that for all the talk of progress in clamping down on methane, there remains a long way to go.

In an in-depth study of over 300 oil and gas producers, Ceres found that those in the highest quartile of emissions intensity have an average more than 13 times higher than those in the lowest quartile.

Put another way: there is a wild variation between the level of action taken by operators to date. While some are moving in the right direction, many — especially smaller private operators — are lagging well behind.

“It is clear there is a disproportionate contribution to emissions from those smaller companies,” Laetitia Pirson, an oil and gas expert at Ceres, told ES. “We really need to address the ‘tragedy of the commons’ here and the way to do that is through regulation — strong regulation, without exceptions.” 

The Environmental Protection Agency is finalising new rules that would force operators to clamp down further on methane emissions. But these have already come under fire for being too lenient on some smaller operators.

Operators can take the lead

But given the long, tedious — and increasingly vulnerable — state of environmental rulemaking in the US, there is an onus on shareholders to drive the process.

Dell at Kimmeridge, which also released a paper this morning, maintains that the industry has shown itself capable of rapid change when it wants it — for example, in its recent pivot from growth at all costs to a focus on funnelling capital back to shareholders.

“I am confident that the industry can get there and it can change on its own,” said Dell.

Kimmeridge argues that the shift of investor capital away from oil and gas is a huge mistake. Instead, environmentally conscious investors should take a position in the industry — which will be around for years to come — and reward operators who take the lead on moving to net zero.

“Being a good company from an ESG standpoint doesn’t mean that you can’t be involved in the hydrocarbon business,” he said.

“They should be out there owning the best oil and gas companies from an ESG standpoint. If they don’t, they’re actually making it harder for the industry to adapt and change. If the ESG community says we’re not going to own anyone [with] hydrocarbons then the question becomes why would you change?”

The bigger picture

Whether investors or regulators take the initiative, though, climate change will not be solved by oil and gas companies greening the way they produce hydrocarbons if their products remain the lifeblood of the global economy.

Mitigating emissions in the upstream is just one small piece of the puzzle — and the wider jigsaw is a long way off from coming together.

The third big report released this morning, from Rhodium, shows the US is miles away from meeting its Paris emissions targets.

Joe Biden committed the country to cutting 2005 emissions levels in half by 2030 — the first step to achieving net zero economy-wide by 2050.

But on their current trajectory America’s emissions will have shrunk just 24-35 per cent from 2005 levels in 2030 — and 26-41 per cent by 2035.

With the exception of investment in new technology and some tinkering with regulations, Biden’s lofty climate aspirations have largely come to nothing thus far.

Still there is some room for optimism. Expect Build Back Better — the president’s climate legislative centrepiece — to emerge from the ashes in the coming weeks for one last attempt to get it over the line (albeit with significant carrots for fossil fuels and West Virginia senator Joe Manchin).

But for now, as Rhodium, notes, “the clock is ticking, and policy ambiguity rules the day”. (Myles McCormick)

Data Drill

A new chart from the International Energy Agency shows which parts of the supply chain pose the greatest risk to energy transition plans.

The biggest problems are in the upstream — in the mines and facilities where metals and other materials needed in batteries and panels are pulled from the ground. Just a few countries dominate this part of the supply chain.

Lithium prices, for example, have increased more than sevenfold from the start of 2021 to May 2022 due to shortages from under-investment in Australia, the largest producer of lithium, according to the IEA. Coronavirus pandemic disruptions and Russia’s war in Ukraine have also added pressure on supply chains, sending material prices up and threatening years of cost declines.

Downstream, China dominates the processing of materials, making 80 per cent of all solar equipment and three-quarters of the world’s battery cells, according to the IEA. The country is also one of the biggest producers of hydrogen electrolysers and fuel cells.

“The biggest challenge to building a domestic supply chain for clean energy technologies is the vast number of components and critical minerals needed,” said Marlene Motyka, the US renewable energy leader at Deloitte. “This makes it nearly impossible for a country to fully develop a domestic supply chain.”

The chart comes from the IEA’s Securing Clean Energy Technology Supply Chains report. The report was prepared ahead of the Sydney Energy Forum where energy ministers from the US, Japan, India and Australia affirmed commitments to bolster clean energy supply chains. (Amanda Chu)

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Power Points

• Brussels wants to propose incentives for households and industries to curb gas use ahead of winter.

• Soaring gasoline prices are causing shortages for chemicals used in essential goods.

• Record fuel prices are hurting demand more than anticipated, says the IEA.

• “It’s expensive to replace the sun.” Inside the growing industry of vertical farming and the challenges of growing food indoors.

• After months of negotiations, Joe Manchin continues to refuse crucial tax credits for electric vehicle adoption in the budget plan. (NYT)