The Oil Industry’s Bright Green Energy Future

September 01, 2021

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by Mike Newman (Parhelion Underwriting) The Oil industry is under pressure on many fronts in the climate change era and faces an existential threat from alternative, renewable sources of energy – but the industry is also best-positioned to win the Prize in energy’s green future.

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First, the background, from the investors’ perspective. Over the past 15 years, the annual total returns to shareholders (TRS) for the average oil and gas company has lagged the S&P 500 by seven percentage points. Oil stocks, accounting for more than a tenth of the bellwether index barely a decade ago, now account for just 4% of the S&P 500. This suggests the sector’s traditional business model has been under stress for some.

Then, add to that the existential threat posed by the sort of competitor that the industry has never faced in the past – an industry based on renewable sources of energy, an alternative to fossil fuels, that is being heavily supported by governmental carbon emissions reduction mandates around the world.

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A new breed of activist shareholder challenges oil majors on their climate policies and emissions-reduction plans. Earlier this year, climate change hedge fund investors managed to elect three new directors to ExxonMobil’s board in a rebuke to Exxon’s oil-centric investment plans.

Compounding the issues for Oil companies, according to the Winds of Change report from S&P Global Ratings, is the real possibility they may be held legally responsible for their role in climate change.

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To begin with, Oil companies have existing infrastructures, resources, and technologies that give them advantages in a green present and future. While there are competitors from other sectors entering each of these markets, the Oil industry has natural advantages that will allow it to leverage capabilities, adjacencies, and investments to date, which will put them in a leading role.

Here we identify seven areas where the Oil Industry has inherent natural advantages.

Wind. Oil companies and the oilfield service businesses that support them have unique expertise in how to build and operate in an offshore environment, which are key to this type of power. The installation of wind turbines in the sea, especially in deep waters, is pretty similar to installing oil platforms, especially floating platforms.

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Solar. Oxy, EOG Resources, ExxonMobil and Chevron have all added solar energy projects in recent years. Many oilfields, such as the Permian Basin in Texas and New Mexico, are coincidentally well-suited to renewable energy, with lots of cheap, flat land, good irradiance and a regulatory framework favorable to project development, whether oil and gas or renewables.

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Hydrogen. Hydrogen production through the electrolysis process has become both more technically advanced and less expensive than most of the alternatives. ...

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Further, the Oil industry has decades of experience with petrochemicals, the in-house expertise to support the development of hydrogen-related innovations and knows how to build energy production at scale. The industry’s existing pipeline infrastructure is adaptable to transport hydrogen.

Biofuels. The appeal of stacking the $1-per-gallon biodiesel tax credit on top of California’s Low Car-bon Fuel Standard credits, while reducing RIN exposure for those that have it, has encouraged a race for renewable diesel production capacity in the Oil industry that will likely transform America’s bio-mass-based-diesel industry over the next few years.

The federal tax credit is guaranteed only through 2022, but that’s enough for developers to continue transforming half a dozen U.S. oil refineries into renewable diesel plants, even as two existing renewable diesel producers proceed with massive expansions. There are currently four operational renewable diesel plants in the United States: the two expanding facilities, capable of producing 365 million gallons/year (mg/y) prior to upsizing; and two newly-commissioned plants that will produce another 190 mg/y.

That existing 553 mg/y of capacity will soon be eclipsed by six more renewable diesel plants under construction, plus the expansions. This first big wave of construction represents over 2 billion gallons of biobased-diesel capacity. What’s poised to come next could be even more extraordinary. At least five additional proposed renewable diesel facilities—including oil companies Marathon Petroleum and Phillips 66— represent another 3.3 billion gallons of potential capacity. Altogether, this is nearly 5.5 billion gallons of new or potential capacity, which is double the U.S. biodiesel industry’s current size.

Government support has created the low carbon fuel markets that are developing rapidly across the country. Not only are these markets proving to be profitable for oil refineries that have preexisting production infrastructures equipped to deliver qualifying fuels but also the currency of these government markets – LCFS credits and RINs — are increasingly valuable assets and often provide the income stream that enables renewable project finance (albeit with the risk of regulatory change).

Carbon capture, utilization and storage (CCUS). This is a natural fit for the Oil industry and it’s where it can reduce its carbon footprint while at the same time qualifying for decarbonization credits and getting government support.

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Offshore Metals and Minerals. ... Offshore exploration gives the Oil Industry a clear advantage and the seafloor holds great riches.

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Geothermal. Producing geothermal energy involves deep-well drilling, just like oil and gas. READ MORE

Oil Giants Announce Renewables Ventures: Oil Companies to Expand Business Into Renewables, Partnering With Ag (DTN Progressive Farmer)

Chevron makes pact with Bunge to join Chase for renewable diesel (Farm Progress)

ExxonMobil introduces renewable diesel process technology (Biomass Magazine)

Chevron, Bunge partner on renewable fuel feedstocks (Biomass Magazine)

Chevron invests in soybean crushing facilities as production ramped up (Biofuels International)

Oil-ag partnership trend continues as Chevron teams up with Bunge for soybean oil (Biobased Diesel Daily)

Could Oil Pipelines Solve America’s Water Crisis? (OilPrice.com/Yahoo!)

FROM THE STATES: Louisiana Gov. John Bel Edwards (Poltico's Morning Energy)

Big Energy Companies’ New Pitch: ‘Carbon-Neutral’ Oil and Gas: Bundling barrels with promises to capture carbon can make companies’ emissions figures look better, but critics say the practice could undermine the case for burning less fossil fuel (Wall Street Journal) complete article available from Governors' Biofuel Coalition

Despite spills and air pollution, fossil fuel companies award CEOs for environmental records -- Marathon Petroleum’s former CEO got a $272,000 bonus for surpassing environmental goals the same year the company spilled 1,400 barrels of fuel in an Indiana creek (Washington Post)

How the rise of copper reveals clean energy’s dark side (The Guardian)

Hunt for the ‘Blood Diamond of Batteries’ Impedes Green Energy Push (New York Times)

Congo Ousts Mining Leader in a Cloud of Corruption Claims: The country’s president removed Albert Yuma Mulimbi as chairman of the state mining firm. Cobalt in Congo is a crucial resource in the global clean energy revolution. (New York Times)

Former Congo president's ally loses chairmanship of state mining company (Reuters)

How a debate over carbon capture derailed California’s landmark climate bill (Grist)

Excerpt from DTN Progressive Farmer: Two major oil companies this week announced plans to expand renewable fuels production by partnering with agriculture.

Chevron U.S.A. Inc. and Bunge North America, Inc., announced on Thursday a joint venture to develop what the companies say are lower-carbon-intensity feedstocks for renewable fuels.

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Also this week, Maryland-based CleanBay Renewables announced a 15-year agreement with BP to sell renewable natural gas processed from poultry litter to BP for retail sale.

CleanBay said in a news release it produces renewable natural gas by mixing poultry litter with water in an anaerobic digester. One of the end products is biogas, which includes methane. The biogas can be processed into RNG and used to fuel vehicles.

The companies said BP initially will sell the fuel to customers in California, where renewable natural gas fits into the state's low-carbon fuel standard. READ MORE

Excerpt from Politico's Morning Energy: FROM THE STATES: Louisiana Gov. John Bel Edwards, whose state has a heavy concentration of manufacturing, told reporters on Wednesday that he'd like to see the 45Q tax credit for carbon capture projects raised to $85 per metric ton — a figure in line with what has reportedly been backed by top Democrats and the White House in recent days as part of the reconciliation package.

"I engage quite often with CEOs of companies who are really involved in carbon capture and sequestration and the 45Q tax credit is incredibly important in order to make this happen," the governor said. "The $50 a ton is obviously helpful. There is a prevailing sentiment that it needs to be closer to $85 per ton in order for it to be meaningful and generous enough to really make a difference."

Edwards added that he is aware of some efforts in Congress to increase the figure to around the $85 mark, adding that he hoped that they will be successful "so that that the amount of that tax credit won't be an impediment." READ MORE

Tags

rare earth metal/critical minerals cobalt copper lithium nickel Big Oil/Oil Majors oil refineries enhanced oil recovery (EOR) Investing Hydrogen/Renewable Hydrogen pipelines hydrogen pipeline carbon pipeline electrolysis BioChemicals/Renewable Chemicals tax credits biodiesel tax credit renewable diesel tax credit repurpose Just Transition 45Q Carbon Oxide Sequestration Tax Credit tax policy BioRefineries/Renewable Fuel Production carbon capture and storage (CCS) carbon capture and utilization (CCU) carbon/CO2 sequestration Regulations-Federal Regulations-State RINs (Renewable Identification Numbers) Renewable Fuel Standard (RFS and RFS2) LCFS (Low Carbon Fuel Standard) Green Jobs market forces Sustainability Agriculture soybeans Renewable Natural Gas (RNG) Maryland poultry litter/waste California ESG (Environmental Social Governance)

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