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Are natural gas producers’ best days behind them?

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One thing to start: US oil demand is falling again — and Thanksgiving is not going to deliver the usual pick-me-up.

Natural gas has caused a drop in US power sector emissions over the past decade. But now plans to totally decarbonise electricity threaten its role.

Our first note looks at the challenges and opportunities facing natural gas producers under a Biden administration.

Our second is on the UK’s “Green Industrial Revolution” and the modest sums Prime Minister Boris Johnson plans to spend on it.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Myles

The threat facing the US natural gas sector

The US power sector is the biggest market for American natural gas. And gas-fired turbines are the biggest source of US power.

Joe Biden, who takes over the presidency in nine weeks’ time, wants American electricity decarbonised by 2035.

What gives?

“Here we are in 2020 and we have an administration that has pledged to [achieve] a zero-carbon energy sector by 2035 — and we’re using a lot of gas,” said Sarah Ladislaw, senior vice-president at the Center for Strategic and International Studies.

Electricity generation burnt through 31bn cubic feet of natural gas a day in 2019 — a third of the country’s total production. Without carbon capture technology, which is not available yet at sufficient scale, that market could totally dry up.

“There’s a real question about how to square that circle,” said Ms Ladislaw. “You’re either going to have to replace it . . . or have some sort of carbon capture and sequestration.”

Line chart of Billion cubic feet per day showing US natural gas production soared over the past decade

The president-elect’s ability to follow through on this promise is limited, however, by his lack of a majority in the Senate. Much hinges on what happens in the two Georgia run-offs in January.

If he cannot force through a national clean energy standard, Mr Biden may well just kick the task to the states, analysts said. A growing number of them have already set ambitious clean power targets for coming years.

Regional programmes — such as state-level energy standards or carbon pricing — would likely have come under pressure had Donald Trump won another term. Mr Biden, by contrast, may be able to co-ordinate them.

Joe Biden’s climate ambitions are likely to be tempered by his lack of a Senate majority. © AFP via Getty Images

The opportunity

Other analysts think a Biden administration could actually be good for gas, especially if a divided government forces compromises in Washington.

Switching US power from coal to gas — which emits about half as much carbon as coal when burnt — helped the US cut its emissions in recent years. While coal’s share of power generation has dropped from about half in 2005 to 23 per cent last year, gas’s share has doubled to 38 per cent. (Coal is likely to gain some market share at gas’s expense next year, contributing to a rise in emissions.)

Jen Snyder, an analyst at Enverus, said there is a lot more potential for gas to further reduce coal’s market share in the medium term. This would allow for more reductions in emissions (Mr Biden’s aim), without jeopardising the fossil fuel industry (Republicans’ aim).

“There is more running room for gas to effectively take market share from coal and reduce emissions in the mid-term, because renewables aren’t cost effective everywhere,” she said. “There’s more potential for compromise with the Biden administration and a ‘red’ Senate.”

As the reliance on renewables increases, analysts said, there will be more need for so-called “dispatchable” power generation, that can be called on to smooth the intermittency of solar and wind.

“Until battery storage technology evolves to the place where you can [effectively] store that renewable power, I think natural gas seems to be the most prudent lowest emission fuel for us to use going forward,” said Ms Snyder.

Line chart of Share of total generation (%) showing Gas has displaced coal in US power

Gas producers, having survived this year’s chaos much better than their oil-producing counterparts, are betting on the latter scenario.

Toby Rice, chief executive of EQT, the US’s biggest gas producer, said last month: “We anticipate that long-term US demand will increase driven by coal and nuclear retirements.”

For EQT and other industry players, though, much rides on the role gas plays in the energy transition — either as a “bridge fuel” aiding the process, or as another fossil fuel the world must urgently be weaned off. If it is the latter, they will be in trouble.

“We’re dealing with a fairly robust US natural gas industry that is deeply unprepared for a transition that could move faster than they’ve been planning on,” said Ms Ladislaw. 

“The reality is, the longer you don’t plan for that future, the less likely you have a chance of actually succeeding and existing in it,” she added.

(Myles McCormick)

The UK brings out its peashooter

Boris Johnson is not, to put it kindly, famous for his attention to detail. That much is clear from his budget, unveiled this week, to change the UK’s energy economy. Either the £12bn ($16bn) the prime minister pledged to spend over the next decade on a “Green Industrial Revolution” is woefully wrong — or it is woefully inadequate.

The plan brings forward a deadline for banning the sale of gasoline and diesel cars to 2030, and commits to install new electric vehicle charging infrastructure: moves that will help green the transport sector, now by far the UK’s biggest emitter. It proposes development of 40GW of offshore wind power — making the country “the Saudi Arabia of wind”. It scopes out investment in hydrogen, new nuclear reactors, insulation for buildings, and includes the obligatory promise to develop carbon capture and storage.

Winds of change or hot air? Boris Johnson is planning a ‘Green Industrial Revolution’ in the UK © FT Montage/Getty

Environmentalists — sceptical of a man who once derided wind power as unable to “pull the skin off a rice pudding” — have been mostly supportive. And yet, looking more closely, it all seems a bit paltry.

For a start, £5bn of the money for a “Green Industrial Revolution” is actually for flood defences. Only about £3bn of the announced £12bn is new cash.

Mr Johnson thinks the private sector will offer “potentially three times as much”. So call it £48bn. And yet the proposed Sizewell C nuclear plant could soak up £20bn of investment alone.

On an annual basis, the plan envisages spending equivalent to $6.4bn. That’s less than a self-respecting oil major pays in dividends — or writes off in a bad quarter. And it’s a rounding error in the $1.1tn the International Energy Agency says the world will need to spend yearly on renewables by 2030.

By contrast, Joe Biden’s climate plan envisaged $500bn a year for the next four. The EU’s Green Deal also dwarfs Mr Johnson’s modest vision.

Mr Johnson might argue that his government’s investments will have multiplier effects, and include savings on fossil fuels and climate mitigation. Or that these announcements are just the start. And the UK has already been doing a good job at cutting emissions.

But will these new measures get the country to its Paris climate targets or net-zero emissions by 2050?

Not a chance, say climate experts.

Mr Johnson, facing a pandemic- and Brexit-stricken economy, and the long-term threat of climate change, appears to have turned up to the fight wielding not a Biden-sized bazooka, but a pitiful peashooter.

“The funding in the government’s long-awaited 10-point plan doesn’t remotely meet the scale of what’s needed to tackle the unemployment emergency and climate emergency we are facing, and pales in comparison to the tens of billions committed by France and Germany,” said Ed Miliband, an opposition politician who ran the Department of Energy and Climate Change when he was in government.

(Derek Brower and Nathalie Thomas)

Data Drill

More than 100 oil and gas companies in North America have filed for bankruptcy this year, new data show, as the price crash continues to course through the sector.

Bankruptcies last month marked a slowdown from the middle of the summer when filings were at their highest, according to figures from law firm Haynes & Boone, but they climbed again nonetheless.

Column chart of Chapter 11 filings (cumulative) showing Oil and gas bankruptcies in North America have topped 100 in 2020

Power Points

Endnote

Prince Abdulaziz, Saudi Arabia’s energy minister, said yesterday that he saw “a lot of correlation in the Biden administration in terms of climate change and renewables. We see eye-to-eye with their aspirations.”

Do they? Mr Biden’s aspirations include electrifying the US transport sector, a major market for Saudi crude. And he has openly talked of a transition away from the oil industry. These aren’t the kind of ambitions that have much traction in Riyadh.

So Prince Abdulaziz was probably right to focus on renewables. The kingdom might need to get used to a president who suddenly takes a lot less interest in the oil market — one who doesn’t even feel the need to berate Opec on Twitter when the crude price gets too high (or low).

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.





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A carbon registry leaves polluters with nowhere left to hide

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The writer is the founder and executive chair of the Carbon Tracker Initiative, a think-tank

No one yet knows which countries will extract the last barrel of oil, therm of gas or seam of coal. But the jostling has started. Every nation has reasons to believe it has the “right” to continue fossil fuel extraction, leaving others to deal with the climate crisis.

In the Middle East, oil producers can argue that the cost of extraction is low. In Canada, they market their human rights record. Norwegians trumpet the low-carbon intensity of their operations. And in the US under Donald Trump, they touted the virtues of “freedom gas” and called exports of liquefied natural gas “molecules of freedom”.

The dilemma for governments is that if one country stops producing fossil fuels domestically, others will step in to take market share. And so the obligation to contain emissions set out in the Paris Agreement risks being undermined by special pleading.

In the UK, the furore over plans for a new coal mine in Cumbria the year that the country is hosting the UN’s climate summit is indicative of the contrary positions many countries hold. Facing one way the government says it is addressing climate change. But looking the other, it consents not just to continued extraction, but to support and subsidise the expansion of production.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here 

To keep warming under the Paris Agreement limit of 1.5C, countries need to decrease production of oil, gas and coal by 6 per cent a year for the next decade. Worryingly, they are instead planning increases of 2 per cent annually, the UN says. On this course, by 2030 production will be too high to keep temperature rises below 1.5C. The climate maths just doesn’t work.

One of the problems in attempting to track fossil-fuel production is the lack of transparency by both governments and corporations over how much CO2 is embedded in reserves likely to be developed. This makes it difficult to determine how to use the last of the world’s “carbon budget” before temperature thresholds such as 1.5C are exceeded.

Governments need a tool that establishes the extent to which business as usual overshoots their “allowance” of carbon. There needs to be a corrective because the cost competitiveness of renewable energy, and the risk of stranded energy assets, has not stopped governments heavily subsidising fossil fuels. During the pandemic, stimulus dollars have been dumped into the fossil-fuel sector regardless of its steady financial decline, staggering mounds of debt and falling job count. 

This is why my initiative and Global Energy Monitor, a non-profit group, are developing a global registry of fossil fuels, a publicly available database of all reserves in the ground and in production. This will allow governments, investors, researchers and civil society organisations, including the public, to assess the amount of embedded CO2 in coal, oil and gas projects globally. It will be a standalone tool and can provide a model for a potential UN-hosted registry.

With it, producer nations will have nowhere left to hide. It will help counter the absence of mechanisms in the UN’s climate change convention to restrain national beggar-thy-neighbour expansion of fossil-fuel production.

No country, community or company can go it alone. But governments can draw from the lessons of nuclear non-proliferation. First, they must stop adding to the problem; exploration and expansion into new reserves must end. This must be accompanied by “global disarmament” — using up stockpiles and ceasing production. Finally, access to renewable energy and low-carbon solutions must be developed in comprehensive and equitable transition plans.

The choice is between phasing out fossil fuels and fast-tracking low-carbon solutions, or locking-in economic, health and climate catastrophe. A fossil-fuel registry will help governments and international organisations plan for the low-carbon world ahead.

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Energy is the world’s indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here.



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Hasty, imperfect ESG is not the path for business

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The writer is a global economist. Her book ‘How Boards Work’ will be published in May

Good environmental, social and governance practices take a company from financial shareholder maximisation to multiple stakeholder optimisation: society, community, employees. But if done poorly, not only does ESG miss its sustainability goals, it can make things worse and let down the very stakeholders it should help.

To be sure, the ESG agenda should be pursued with determination. But there are a number of reasons why it threatens to create bad outcomes. The agenda is putting companies on the defensive. From boardrooms, I have seen organisations worry about meeting the demands of environmental and social justice activists, leading to risk aversion in allocating capital. Yet innovation is the most important tool to address many of the challenges of climate change, inequality and social discord.

Pursued by $45tn of investments, using the broadest classification, ESG is weighed down by inconsistent, blurry metrics. Investors and lobbyists use different evaluation standards and goals, which focus on varied issues such as CO2 emissions and diversity. Metrics also depend on business models.

Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges (for example, from worker audits, the COP26 summit and the Paris Club lender nations).

ESG is not without cost and the best hope for long-term success lies with business leaders’ ability to stay attuned to its impact and unintended consequences. For example, while the case for diversity is incontrovertible, efforts at inclusion should account for the possible casualties of positive discrimination.

Furthermore, despite ESG advocates setting a strong and singular direction for governance, organisations have to maintain their operations and value while managing assets and people in a world where cultural and ethical values are far from universal. While laudable, a heightened focus on ethics (such as human rights, environmental concerns, gender and racial parity, data privacy and worker advocacy) places additional stress on global companies.

It is often asked if advocates appreciate that ESG is largely viewed from the west’s narrow and wealthy economic perspective. To be truly sustainable, ESG demands global solutions to global problems. Proposals need to be scalable, exportable and palatable to emerging countries like India and China, or no effort will truly move the needle.

Much of the agenda is too rigid, requires aggressive timelines and lacks the spirit of innovation to achieve long-term societal progress. Stakeholders’ interests differ, so ESG solutions must be nuanced, balanced and trade off speed of implementation against the breadth and depth of change.

Business leaders are aware of the need for greater focus and prioritisation of ESG. We also understand that deadlines can provide important levers for senior managers to spur their organisations into action. After all, in the face of pressure for a solution to the global pandemic, vaccines were produced in months instead of the usual 10 years.

I live at the crossroads of these tensions every day. Raised in Africa, I have lived in energy poverty, and seen how it continues to impede living standards globally. As a board member of a global energy company, I have seen much investment in the energy transition. Yet from my role with a university endowment, I have also been under pressure to divest from energy corporations. 

Business leaders must solve ESG concerns in ways that do not set corporations on a path to failure in the long term. They must have the boldness to adopt a flexible, measured and experimental agenda for lasting change. In this sense, they must push back against the politically led narrative that wants imperfect ESG changes at any cost.



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UAE’s Taqa seeks to shine with solar energy push

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From a distance, the 3.4m panels making up the United Arab Emirates’ largest solar power plant look like a massive lake.

But Noor Abu Dhabi, nestled between camel farms and rolling sand dunes, is no mirage. The 1.2 gigawatt facility — the world’s largest single-site plant — produces enough electricity for around 90,000 homes. Owned by Taqa, an Abu Dhabi state-backed utility, with Japan’s Marubeni and China’s JinkoSolar, it will celebrate its second anniversary of operations this month.

Staff constantly scan for repairs so production can be maximised during daylight hours, while every evening more than 1,400 robotic cleaners wipe the dust from the banks of solar panels to boost efficiency.

Noor and another Taqa project — an even larger 2GW solar plant under construction in Al Dhafra, nearer the capital — are emblematic of the company’s ambitions to recast itself as a force in clean energy.

It has outlined a new sustainable strategy with a goal for renewables to form 30 per cent of its energy mix, compared with 5 per cent now, and plans to boost domestic power capacity from 18GW to 30GW by 2030. It will set itself a carbon emissions target later this year.

“We want to transform Taqa into a power and water low-carbon champion in and outside the United Arab Emirates,” said Jasim Husain Thabet, chief executive of the power provider, which is majority owned by government holding company ADQ and listed on the emirate’s bourse.

Renewable sources account for a small part of the UAE’s energy supply

Taqa’s push into renewables is a key element of the UAE’s ambition to have clean energy form half of its energy mix by 2050, with 44 per cent from sources such as wind and solar and 6 per cent from nuclear power.

Last year, the oil-rich emirate had 2.3GW of renewable energy capacity, or seven per cent of the power production mix, mainly from solar power, according to Rystad Energy, a research firm. It forecasts that the UAE is on track to reach its 44 per cent target by 2050.

Although many Gulf governments have targets to boost solar and wind power, the UAE has been out in front.

The Al Dhafra plant is expected to boast the world’s most competitive solar tariff when complete. The facility, a joint venture with UAE renewable pioneer Masdar, EDF and JinkoPower, plans to power 150,000 homes when it comes online next year, reducing the country’s carbon emissions by the equivalent of taking 720,000 cars off the road.

“This is about being a good citizen,” said Thabet. “But it is also attractive for global investors keen on environmental sustainability, it fits in with our main shareholder’s priorities and brings down financing costs.”

Yet Taqa’s sustainability pitch could fall flat with investors scrutinising environmental concerns.

Taqa has committed to capping production at its overseas oil and gas assets, which span fields in Canada, the North Sea and Iraqi Kurdistan. But although it has not ruled out selling the hydrocarbons assets that it bought during a spending spree in the 2000s, divestment is not imminent.

“If the right opportunity comes we will consider it, but right now our focus is on enhancing operations and reducing emissions,” Thabet said.

The UAE, a leading oil exporter and member of Opec, is also committed to increasing its crude oil capacity in the coming years. The country is working towards reducing greenhouse gas emissions, but still has one of the highest per capita carbon footprints in the world.

But Mohammed Atif, area manager for the Middle East and Africa at DNV, a renewables advisory firm, said the UAE, like other major oil and gas producers such as Norway and the UK, are working for a more sustainable future. 

“Yes, the roots and history of the UAE are grounded in hydrocarbons, but they are aware of the challenge of climate change,” he said. “It is a transition, not a revolution, and that takes time.”

US special presidential envoy for climate John Kerry: ‘There’s no reason why oil-producing countries cannot also be a key part of tackling the climate crisis’ © WAM/Handout via Reuters

John Kerry, the US special presidential envoy for climate, visited the Noor plant while attending a regional climate change dialogue in Abu Dhabi earlier this month, saying such “incredible energy projects” would “set us on the right path” to achieving the Paris Agreement goals that aim to limit global warming.

“There’s no reason why oil-producing countries cannot also be a key part of tackling the climate crisis,” he said in a tweet. 

At the same time, Taqa is eyeing opportunities to expand in renewables beyond the UAE. Last year it merged with Abu Dhabi Power Corporation, creating an integrated utility company with ADQ owning 98.6 per cent.

The government is expected to increase the free float via a share offering, Thabet said, declining to provide further details.

With exclusive rights to participate in power projects in Abu Dhabi over the next decade, the company is now mulling how to leverage that guaranteed cash flow abroad.

Thabet said the company would focus on projects and investments that burnish its sustainable credentials. It wants to build 15GW of power capacity outside the UAE. The group currently produces 5GW internationally, including 2GW in Morocco.

“We believe in solar and [photovoltaic] projects, so we will focus on that — but if there is an opportunity outside the UAE, such as onshore or offshore wind, then we will explore that,” he said. Taqa would also consider investing in international renewables platforms to reach its targets, he added.



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