Oil and Gas Analysis - December 2023
Paul Young
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Green Hydrogen
Oil transition / Net Zero
1. Watch for a potential new wave of low-carbon action within some segments of the financial sector following noteworthy moves by études économiques Groupe Crédit Agricole and ING , which announced plans just after COP28 to slash oil and gas loans and quickly triple annual financing of renewable energy. Divisions still exist between the strategies of US and European institutions, but there are signs of strengthened low-carbon actions among Asian financial players. Generally speaking, however, the COP28 deal brought clarity. “What finance was looking for is a signal that we're still going in the same direction,†says Linda-Eling Lee of financial services provider MSCI, adding that the overall direction — decarbonization — and destination — 1.5°C — were clearly confirmed by the agreement forged in Dubai.
Timing is also very important, says Lee. While midcentury is too much of a “difficult timeline†for most in the financial industry, the many references to 2030 in the summit’s final declaration “will have much greater repercussions in many ways.†Another “really positive†outcome of the COP is the announced tripling of renewable capacity by 2030, according to Maria Lettini of the US Sustainable Investment Forum. This will cause governments to “provide incentives for markets to respond to that kind of magnitude,†which in turn will accelerate the phasing down of fossil fuels, as a key component in the transition is “having energy to replace the need for fossil fuels,†she believes.
2. After the landmark deal reached at COP28, the focus shifts to countries to roll up their sleeves and implement the agreement's goals. To this end, watch to see whether more countries enact (or strengthen) policies such as carbon prices, combustion engine vehicle bans or clean energy incentives. Without national action, the “UAE [United Arab Emirates] Consensus†— as the deal’s been named — would be mere words on paper. Countries will also be under pressure to prepare more ambitious nationally determined contribution plans under the Paris Agreement between now and 2025, which would generally include emissions goals — including for 2030 — along with domestic action plans to get there. Climate finance is also expected to dominate the climate diplomacy agenda in the year ahead, with COP28 having delivered little real progress, despite an early win with the establishment of the Loss and Damage Fund. Developing countries will be looking for progress on a new global goal on finance at COP29 in Azerbaijan.
3. One of the most tumultuous tests will occur in the world's largest economy and top oil-consuming nation, where President Joe Biden will square off with former President Donald Trump or another Republican rival. On a global scale, the outcome holds implications for the strength of climate diplomacy given the US' status as a key diplomat and huge greenhouse gas emitter. Under a Republican win, a potential risk is an unraveling of the Inflation Reduction Act's (IRA) clean energy incentives (perhaps administratively) or a decision to pull the US out of the Paris Agreement (as Trump did during his previous term).
If Trump or another Republican captures the White House, incentives for many types of clean energy projects could become harder for developers to access, whereas a second Biden term could see more projects reach final investment decisions (FID). Also expect a heightened spotlight on Biden’s backing of electric vehicles (EVs) — which Trump has heavily criticized.
4. Low-carbon hydrogen is crossing some milestones in terms of financing and policy backing, and the coming year will test how far this support goes and at what pace. Plenty of hydrogen hype has been built up alongside a glut of potential production projects, but very few are advancing — with 2024 a test of whether deeper progress is unlocked. Clarity is needed on policy, infrastructure and demand.
Nonetheless, we are already starting to see sizable multi-billion dollar subsidy packages announced by consumer countries, including Japan, France and Germany, which should spur supply and demand. On top of that, electrolyzer manufacturers are increasing capacity as their balance sheets improve and order books enlarge. Bringing projects to FID is still a problem, as just 4% of announced EU hydrogen projects have reached this stage, but the outlook is brighter in the US, with 15% reaching FID and 30% of schemes in China hitting that landmark. The global average is 7%. In the US, regulators seem to be placing tight guardrails around which projects qualify for lucrative tax credits, but the industry now has greater clarity and insiders expect an overall trend of increasing FIDs this year.
In particular, hydrogen's potential will be tested in Gulf oil-producing nations, which have placed the technology at the forefront of their decarbonization strategies. They see hydrogen as a way to gain some economic leadership in the transition due to their access to cheap and abundant renewables. The most notable milestone so far is construction at Saudi Arabia’s landmark Neom green hydrogen project, which reached an $8.5 billion FID last year and seems on track to produce 600 tons per day by 2026. Meanwhile, Oman is pursuing an ambitious goal of 1 million tons/yr of green hydrogen by 2030 by opening up bid rounds for green hydrogen blocks. The UAE is also eyeing a leadership role via a national hydrogen strategy announced last year.
The Hydrogen Council says the number of large-scale hydrogen projects has doubled to 1,400 since May 2022, with these projects having a collective $750 billion projected investment capex spend out to 2030. The International Energy Agency (IEA) forecasts low-carbon hydrogen production volumes will grow from 0.7 million tons in 2022 to 2 million tons in 2026 if all "mature stage" projects are built, or a sizable 12 million tons/yr if all projects in the pipeline are built.
5. Watch to see whether oil and gas companies like bp and Shell Energy continue to roll back their low-carbon plans, especially at BP as a new CEO takes the helm. Companies have been increasingly touting "balanced" low-carbon strategies that weigh decarbonization against other factors — such as demand and energy security — but they also face pressure to act quicker to decarbonize. Notably, companies are now tasked with putting substance behind COP28 pledges to tackle methane. Monitoring and mitigation capabilities take time to develop, but we will watch for concrete collaboration, goal setting, funding and, from advanced firms, tangible emission reductions.
Low-carbon project announcements from oil and gas companies will likely hold a moderated pace, per Energy Intelligence’s Low-Carbon Investment Tracker, as companies emphasize returns and still-record oil and gas demand. Areas on our radar include: (1) renewable electricity project types and jurisdictions that successfully overcome cost and regulatory challenges; (2) further FIDs and dealmaking in carbon capture, and evolution of ambitions from in-house emissions to multi-source hubs; (3) whether industry leads hydrogen project advancement as regulatory clarity is provided, or cedes to start-ups; and (4) the potential for ventures like lithium, geothermal and e-fuels to become substantive transition businesses.
6. Renewable electricity is resuming the long-term path of cost cuts, after supply chain snags threw off the trend in the last two years, with the COP28 tripling renewable pledge likely lending momentum. Early data from Energy Intelligence’s upcoming levelized cost of electricity report suggests that investment costs for onshore wind and solar photovoltaic have decreased by around 5% in the past six months. Offshore wind, which is a smaller market and involves more equipment than other renewable technologies, has reached a cost plateau, according to the data.
Looking forward, renewable costs seem to be back to the consistent downward trend initiated a decade ago. This could even accelerate following the COP28 pledge to triple global renewable capacity between now and 2030. Provided that finance, equipment, labor, and perhaps more importantly, speedy permitting are available, it would translate into an average of some 900 gigawatts of new capacity annually. That would be up from 165 GW per year over 2010-20, 290 GW in 2021, 335 GW in 2022 and, according to IEA estimates, over 400 GW in 2023 and around 500 GW in 2024.
7. The offshore wind market has just seen a disappointing year, which saw some project cancellations in places like the US. This year will determine whether the sector can dry itself off from that storm — and whether or not the cancellations were merely isolated examples of big projects hit hard by inflation. To play its part in the global aim to triple renewable capacity by 2030, the pace of growth in the offshore wind sector would have to get faster almost every year out to 2030. The supply chain is likely to be decent in 2024 but isn’t yet robust enough to achieve the installation rates needed during the second half of the decade, due to stop-start policy implementation, permitting delays, a race to the bottom on prices and a race to the top on turbine sizes. This has taken a level of certainty out of the offshore wind sector — resulting in an underdeveloped supply chain and loss of confidence in new project development.
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The Global Wind Energy Council (GWEC) foresees some potential supply chain bottlenecks this year, but most regional shortfalls can likely be covered by imports of gearboxes, generators, blades and power converters. Imports from countries such as China will increase perceived energy security risks, nonetheless. In many markets due for rapid expansion, or in relatively underdeveloped markets, there is an urgent need to expand the availability of construction vessels and upgrade regional ports to accommodate larger vessels. This is especially urgent for the US market. Despite these potential setbacks, the Global Wind Energy Council expects compound average annual growth rates of 31% out to 2027, and 2024 could well surpass the approximate 18 GW added last year.
8. China, the world's largest greenhouse gas emitter by volume, is rapidly expanding clean energy deployments in a range of sectors — from wind and solar to batteries and electrolyzers — but its growing clean energy export businesses will run up against geopolitical headwinds. In 2023, China’s total installed renewable energy capacity reached 1,450 GW, accounting for more than 50% of the country’s total installed power generation capacity, exceeding thermal power generation capacity (mostly coal) for the first time. Yet the US and Europe have issued a series of policies to support the development of local clean energy industries, putting China's export businesses to the test. Watch this year to see how strongly Europe and the US implement such policies, and whether other nations, such as those in Southeast Asia, compensate by happily accepting Chinese products.
In any case, China is keenly aware of the mounting resistance. During the recently held 2024 National Energy Work Conference, the country stated that it will strengthen the research and development of clean energy technology, address the issue of import dependence on critical materials and build up its markets beyond Europe and the US, including by promoting the Belt and Road Initiative and South-South Cooperation.
9. EV uptake is maintaining steady growth, albeit at different speeds depending on the region, but faces policy litmus tests — and many observers are awaiting further technological evolution to propel deeper EV sales penetration. Regional disparities are still noteworthy, with China seeing clear sales momentum but other regions, like Europe and the US, seeing patchier or slower progress. The share of new-energy vehicle sales in the light-duty passenger market could cross the 40% mark in China this year, as competition heats up and technology continues to improve, but a key test will be the looming expiration of consumer purchase tax incentives. Energy Intelligence modeling sees plug-in EV sales potentially rising to a quarter of new auto sales in key markets in 2024.
For the US market, Kevin Riddell of consultancy LMC Automotive notes that inflation is easing up, federal EV tax incentives will now be available immediately upon purchase, and more electric pick-up trucks will be rolling out from companies like General Motors, Chevrolet and Tesla. Yet fewer vehicles qualify for federal credits under tighter sourcing requirements and some manufacturers are dialing back growth plans. "We have cautious optimism and currently expect light battery EV sales to rise above the 1.5 million sales mark in 2024, making up around 10% of total sales," Riddell tells Energy Intelligence.
10. Battery technology, like renewables, is another area to watch for future cost declines and technological advancements, both for EVs and stationary applications. The evolution of lithium-ion battery cathodes has driven recent advances in key performance areas, delivering improvements in energy density, and reducing reliance on critical minerals like cobalt, finds a new analysis from Energy Intelligence Research & Advisory. After rising briefly in 2022, battery costs are falling again, and "set for ongoing, modest declines out to 2030," which is "a key factor supporting wider adoption," the report says.
Whether the cost declines in recent months are sustained is a key trend to watch in 2024. "Further refinements to existing cathode chemistries and production processes will drive added gains, but newer options like sodium-ion and solid-state batteries could revolutionize performance and costs." Watch for progress this year in commercializing these newer chemistries, including by Chinese battery makers like CATL å®å¾·æ—¶ä»£æ–°èƒ½æºç§‘技股份有é™å…¬å¸ and 比亚迪 , among others.
I can add a bit more color:
- Global oil production - https://boereport.com/2024/01/05/oil-to-remain-volatile-in-2024-says-bofa/
- LNG - https://www.energyintel.com/0000018c-cafc-dd84-a3fd-dbffce6f0000
- Green Hydrogen https://eepower.com/market-insights/the-challenges-of-transitioning-to-hydrogen-power-plants/#
- EV supply chain - https://www.business-humanrights.org/en/from-us/media-centre/manufacturing-of-electric-vehicle-batteries-riddled-by-human-rights-violations/ or https://www.just-auto.com/comment/ev-makers-must-secure-mission-critical-suppliers-to-scale-successfully/ JUST AUTO MEDIA
- Pivoting on the all-in EV policy - https://www.businessinsider.com/electric-car-ev-sales-prices-problem-transportation-2024-1
- Partnering on circular economy / plastics - https://renewable-carbon.eu/news/paving-the-way-to-a-circular-economy-of-plastics/
- Addressing challenges with carbon capturing - https://www.reuters.com/sustainability/climate-energy/comment-carbon-capture-storage-is-dangerous-distraction-its-time-imagine-world-2023-12-11/
- Balancing energy decisions with the right technology and at the right cost - https://www.newstatesman.com/spotlight/sustainability/energy/2024/01/renewable-energy-transition-fossil-fuels
- ESG /https://sustainabilitymag.com/esg/esg-policy-and-regulation-what-to-prepare-for-in-2024
- OPEC and the green transition - https://oilprice.com/Energy/Energy-General/OPEC-Refuses-to-Kill-Itself-to-Please-Transition-Fans.html
Blog – LNG Policy Review – Canada vs United States and Australia - https://www.dhirubhai.net/pulse/us-overtakes-qatar-become-worlds-top-lng-exporter-paul-young-jqbsc/
Blog – ESG – VPP – Texas - https://www.dhirubhai.net/posts/paul-young-055632b_texas-regulators-look-to-expand-successful-activity-7142945266344599552-SMo_?utm_source=share&utm_medium=member_desktop
Policy Review - California CARB Act - Emissions and ESG - https://www.dhirubhai.net/pulse/emissions-california-paul-young-aifzc/
Blog – ESG – Regenerative Farming – UNFI - https://www.dhirubhai.net/posts/paul-young-055632b_unfi-going-bigger-with-solar-plans-activity-7148393786211991552-UzJL?utm_source=share&utm_medium=member_desktop
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Blog – Power Generation (Electricity Grid) Analysis and Commentary – September 2023 - https://www.dhirubhai.net/pulse/power-generation-electricity-grid-analysis-commentary-paul-young-e5qic/
Blog - Hawaii, 3 other states earn B microgrid grades. Most get Ds, per scorecard report - https://www.dhirubhai.net/pulse/hawaii-3-other-states-earn-b-microgrid-grades-most-get-paul-young-hoy7e/
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Blog – Green Transition - https://www.greenjournal.co.uk/2023/12/how-the-utilities-industry-is-working-towards-net-zero/
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Paul Young CPA CGA
Paul Young is a former IBM Customer Success Manager that has deployed over 300 data and AI solutions across industries and geographies for the past 8 years. Paul is also ESG SME that focuses on aligning ESG policies with ESG data as part of the integrated planning and reporting cycle.
#EV #CARBact #NetZero #trucking #EnergyManagement #CarbonAccounting #Emissions #Biodiversity #WaterManagement #WasteManagement #circular #CorporateGovernance #HR #socialgovernance #
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