Catching Up: Russia, Oil, Natural Gas, Policy and Clean Tech Promises
This week Peter and Jackie catch up on the latest news and topics of interest including:
- Russia to cut oil production by 500,000 B/d in March
- BP scales back their target to reduce their oil production by 2030
- The collapse in North American and International natural gas prices
- Waiting for the Canadian Federal Government’s spring budget to learn about clean energy incentives policy
- The concern with articles that overpromise when it comes to clean energy technologies, including commentary on the article “Scientists Successfully Split Seawater to Produce Green Hydrogen” (OilPrice.com)
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Episode 189 transcript
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only, and are subject to the disclaimer link in the show notes.
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forest.
And I’m Peter Tertzakian and welcome back. Well, Jackie, we can’t welcome you back because you’ve been on the road traveling around in Europe, visiting institutional investors and others.
Yeah, it’s been quite a trip. Still on the road right now, but yeah, it was interesting. I went to Europe thinking I would have to be wearing a lot of sweaters, but really there was no conservation of energy that I could see. We even spent quite a bit of time in Germany.
The fact that the price of gas has come down so much, I don’t know if you’ve noticed, but it’s down under about the equivalent of $20 US per MMBTU, versus $40 or even $60 at times over the past year.
So I guess the cheap gas prices, and the fact that storage levels remain high. In fact, Germany, they still have about 75% full storage tanks for gas. So that has meant that people aren’t conserving so much. I mean, some places actually I felt like the buildings were too hot. So the pressure’s off, I guess for the short term.
Yeah, I don’t know if it’s a price thing. I mean, I was over there last late in the fall, late October. It was getting pretty cold. But again, given that there’s a war in Eastern Europe, and the fact that at that time the price of natural cost was very high, I didn’t see any hints of conservation.
Which I think speaks to the whole issue that supply and demand has to participate in the energy transition. And that if we’re ever going to reach sort of these net-zero type targets, that the consumer has to participate as well.
But really I think it’s an interesting dynamic, because so much of the emphasis on energy transition is on the supply side. And it’s as if the consumer just sort of sits on the sidelines and continues to do whatever they do, even if there is a war on high prices.
Well, and it’s interesting too because they’ve been shielded_the consumers_through a lot of subsidies. So it has had a huge cost.
I read a Reuters article in December that said that Germany had already spent a half a trillion dollars on the energy crisis in 2022. And of course, they need to spend more in 2023. So it is costing the government, it’s affecting the balance sheets of these countries. And I think that’s not going to go away. I mean, I imagine that gas prices will come up at some point when they need to refill those storage tanks.
So anyway, so the weather has been a blessing really for people in that they haven’t had as much hardship this winter, and it hasn’t cost as much. But I also think that shielding of the consumer is playing a role here in terms of how much people are conserving.
Well, we’re going to talk about a whole bunch of things today. I guess it’s just you and me talking, no guest, which is always a pleasure. We’ve got a number of topics, there’s certainly no shortage of things going on in the world of energy.
And why don’t we come back to that natural gas topic? Because I think it’s important to talk about the price and how far down it’s come, particularly in North America. But actually I think the headline that is most pressing is that Russia voluntarily cut back its oil supply by 500,000 barrels a day.
Yeah, February 10th. Russia talks about, in fact, their deputy minister, Alexander Novak makes the announcement that this is in response to the destructive energy policy of the countries of the collective west. And he says they will not adhere to the price cap as well. This is kind of a, I think it’s big news. The market didn’t react much to it, though.
It is big news from the Russian perspective, there’s no question. And the price of oil didn’t really rally that much. It’s hung around $80, for West Texas Intermediate. I personally think it was already baked into the market’s expectations, that the 500,000 barrel a day shortfall from Russia was already part of their natural declines. That’s already starting to kick in, number one.
And number two, 500,000 barrels a day is only 0.5% on a hundred million barrels a day of global consumption. And a year on, following the Russian invasion of Ukraine, the world’s supply chains have rebalanced, and the trade routes have altered. I just think it’s not that big news, but certainly one that will continue to keep markets a higher floor, shall we say, on the price of oil.
Well, and it is kind of interesting, because in December, we had the restrictions on shipping and importing Russian oil, unless it was sold under a price cap of $60 a barrel. And the latest data from S&P global shows that as of January, the amount of exports has not been impacted.
However, where it’s going to has shifted. You see less going to Europe and more going to India, and China, and other parts of Asia. But in early February, those new rules that restricted refined products came in to play. And a lot of people view that this one is going to cause some contraction in the supply from Russia.
So in some ways it’s a little bit like, are they getting in front of this? They know they’re going to probably be impacted, so instead of looking like they’re victims here, they’re coming out and saying, well, no, we chose not to do it, so that way they look like they’re in control.
But I think most people sort of had already baked in some supply loss, and I think that’s part of maybe why we didn’t see much of a reaction in the markets.
Well all of this speaks to, at the moment anyway, some sense of a new balance around $80 a barrel.
Well, Peter, I think you’re right. But I do think, everyone thinks this isn’t a big deal.
Now, this sort of tactic has been used before. Remember back in 1974, when the Arab countries curtailed exports to countries that supported Israel during the Yom Kippur War. They did something very similar, like much bigger numbers. They cut about 25% of their exports to these non-friendly countries, and of course, that caused a price spike.
So at this point, at this magnitude, I totally agree. It’s not having much of an impact. But if they start to cut more than people were already expecting, I think that could have a real impact to the market. So it’s something to watch.
Yeah, it is something to watch. Because that strategy and tactic of cutting at the margin, say they cut yet another 500,000 barrels a day, then that will have attendance, which is a half a percent on global demand. But the price of oil likely would go up much more than half a percent, which would mean that their already discounted price of oil would probably go up much more so by artificially restricting supply in an already tight market.
I mean, certainly here in North America, our Strategic Petroleum Reserve has been drawn down dramatically. And so it wouldn’t take much more of a cut to actually drive the price higher. And indeed, some analysts are forecasting a return to a hundred dollars a barrel by the end of the year.
Well, especially as we get into the second half of the year, it’s widely believed that China demand will be back, maybe even higher than it’s ever been. And at that point, the market could be quite tight. If you start making bigger cuts, or additional cuts or ones that were beyond what the market was expecting, I think you would have more of a price impact for
Sure. Yeah. What are we seeing with the Chinese market and the aviation? Are they starting to fly again?
Yeah, I mean the latest data from S&P Global is showing that it’s still below where it was pre Covid. So it hasn’t totally recovered yet, but there is an expectation as we get into the second half of this year that we’re going to see demand levels in China that could be similar to what they were before Covid. That’s going to tighten up the oil market for sure.
Yeah, the demand is back to pre-covid levels in many countries, and even globally. And in part, that is why BP is back into petroleum, isn’t it?
Yeah. So that’s an interesting thing. Made a lot of news in the last few weeks. BP is backtracking on their commitment to reduce their oil production.
So in 2020, BP had pledged that they would reduce their oil production by 40% by 2030, and they would boost their spending on clean energy. But in February of this year, they announced that they are changing that target, and now they will decline by 25% by 2030. So not quite halfing but close to half of the decline that they said before. And the reason for this is they said that there’s concerns about energy security have prompted the change.
And just for background, I think most people would remember this, but this is a second time BP has backtracked. They, in 2003, the company unveiled the slogan that they were going to be beyond petroleum, and they put a bunch of money in that clean tech 1.0 era that didn’t go well for BP or any investors at that time.
And in 2012, they exited most of their investments like their BP solar investment that was associated with that era. So here they are again, backtracking on a plan to get off oil.
Well, certainly the market liked it at the time of the announcement. BP share price rose about 8% on the news. I think the investment community is sort of realizing that oil and gas is not dead, and that it’s going to deliver some pretty healthy returns because of the supply-demand imbalance that is out there. Or certainly the sensitivity of the market to the very tight situation.
Yeah, I mean, CEO Bernard Looney said in the announcement, “You need to invest in today’s systems to have a smooth transition to the low carbon future.” And I think he’s totally right. If you look, the IEA puts out their annual World Energy Outlook each year. And if you spend some time looking, they have actually a fairly detailed section on the investment needed in oil and gas.
And in every scenario, even the net-zero scenario, you actually need ongoing new investment in oil and gas. Because although demand is declining in some of these scenarios, the net zero and the announced pledges ones, if you didn’t invest at all in oil and gas, those wells would decline at a faster rate than demand. So you need investment in all of them.
And the reality is, today, the world is investing on the supply side, we’re going to net zero. In fact, that data is showed clearly in the IEA report that $300 billion or so that we’re spending on oil alone this year would put us on track for a net-zero scenario. But demand doesn’t look anywhere close to a net-zero.
So I think BP is doing a good thing here, in that the world is going to need oil. And being in an energy shortage is not a good thing for the energy transition as we’ve just lived through the last year. It can do a lot of things that are negative to transition.
Yeah, I mean, I think that the belief out there in the sort of green transition community, is that actually instability in oil and gas and high oil and gas prices act like a carbon tax equivalent. And that such instability will necessarily accelerate the green transition.
But in actual fact, what we’ve been witnessing is that instability in oil and gas actually forces a regressive transition back to cheap fuels like coal. And I think that this is also what the CEO of BP was talking about, is that if you want a stable transition to the future, you have to make sure that you don’t go backwards by creating instability in our incumbent oil and gas systems. Because actually, the next best alternative in the near term, if oil and gas prices go high, is coal and wood.
Right. Well, and there’s other issues too. These affordability issues could change governments to ones that do not make climate a priority. We haven’t seen that yet, but I wouldn’t be surprised in the next few years, we see some countries in Europe maybe go to governments that are less friendly to the climate agenda because people are just more concerned about their utility bills.
We see oil being used as a weapon. We see more competition instead of cooperation when there’s shortages, people tend to hoard. So I think there’s a lot of negative things here that won’t necessarily accelerate the energy transition. And being in an energy shortage position to me is not helpful to achieving net zero, 2050.
No, I think that there is a heightened emphasis now on ensuring a less volatile transition. As I said, I don’t expect any transition like the aggressive agenda that’s being proposed for net zero by 2050 to be smooth. But we can try and at least make it less volatile.
And I think this is what the BP announcement says. And I think that coming back to our natural gas price, where we’ve seen the price of natural gas fall quite dramatically. So let’s talk about that again. Because in many ways, that is a good thing. Because natural gas prices globally were so high, particularly in the developing country markets, that they couldn’t afford the natural gas and so they went back to coal.
Right? Yeah. So natural gas prices have really fallen drastically since the beginning of the year. As a reminder, last summer, at times, they were as high in North America as $9 per MMBTU at Henry Hub. And now that’s fallen to as low as around $2.50 per MMBTU.
And that is really kind of the average price probably seen over the last decade, when we had that glut of supply. And in Europe, of course, we mentioned that at the beginning of the podcast, the prices are way down there as well because of the warm winter. So in May we did have that podcast, but we said North American Gas is going global, and we put forward a theory that natural gas prices were going to be structurally higher over the next decade. Does this change in price change our theory here?
I don’t necessarily think so. I think that the globalization of North American natural gas with more LNG exports is going to create a higher base line of prices.
We have had surprisingly warm winter in Europe. Which, from an energy security perspective has been very positive. Because it has muted the impact of high prices. Although, as you said earlier, substantially subsidized already in Europe. But it could have been a lot worse.
And so I don’t think the natural gas story is over in terms of higher prices. It’s still highly weather dependent. And of course, we shouldn’t wish for higher natural gas prices, say $20, $30, $40 an MMBTU. Particularly as you pointed out, it creates instability in places like Southeast Asia and others, where affordability is even more of an issue than it is over here.
Yeah. I mean, our two things is not only the LEG exports, but we also said because producers aren’t spending as much on capital programs in North America, and also oilfield service constraints mean that it’s harder to bring on additional supply. And then of course it’s hard to build pipelines. So these are all things that contributed.
But I think in the short term, gas prices will always have volatility. This warm weather has meant that we have very high inventory levels compared to other years. And once you have those high inventory levels, you always have lower prices.
Eventually though, those inventory levels come back to normal. Either supply doesn’t grow as much so, or demand goes up because it’s so cheap. So we do think that eventually that will get solved, and will get back to those kind of more structurally higher prices.
But I think the thing to keep in mind with natural gas markets is that they always are going to be so dependent on weather. And over the next 10 years, while on average prices may be higher, there’s going to be a number of years within that where prices are low.
Because when you have warm winter weather … Just to put it in perspective, the difference between a typical day and a warm day in winter can be something like eight Billion Cubic Feet per-day difference in demand. So if you get that day, after day, after day, it just loses a big glut of gas if you’re not demanding that much gas. And then it takes a long time to get the markets in balance again.
Right. Okay. Well, we’ve talked about volatility in oil and gas prices and how if it’s too volatile, it tends to lead to a regressive transition, which is not a good thing.
Let’s talk about the progressive side of the transition. We’ve seen the IRA, the Inflation Reduction Act in the United States, which is a huge catalyst for green clean energy spending. We’ve seen some similar action in Europe recently. What about here in Canada, what are we expecting?
Well, yeah, so we’re still awaiting this spring budget in Canada to learn about clean energy incentives here. I know a lot of people involved in policy have been very busy over the last few weeks because there was a deadline of February 10th to get in all of your feedback around the budget.
And, I’m sure every year there’s lots of feedback, but this year, with the Fall Economic Update promising and setting expectations that this budget would include incentives that were like the US Inflation Reduction Act, I’m sure they got lots of submissions in with people arguing why the incentives should be certain ways, or what they should look like.
But just as a reminder, the kinds of things we’re expecting the budget are things like investment tax credits on green electricity of all types, maybe in the range of 30%. Clean hydrogen, some people are saying 30%, but many people are advocating that it actually needs to be much higher if we’re going to compete against the US. And some people also advocating that we need production tax credits like the US, not just investment tax credits.
Yeah, let’s explore that a little bit because it’s such an important point. A production credit, for example say a solar manufacturer, actually gets the credit when they produce a solar panel and they get effectively a bonus for producing.
Right, yeah. In the case of manufacturing, you’d get a certain price for each unit you would manufacture. In the case of producing electricity, a production tax credit would maybe get you an extra penny or two on each unit of energy that you produce.
And for clean hydrogen, it would be price is associated with each kilogram of hydrogen that you may produce in a production tax credit. But an investment tax credit is when you, let’s say you spend a billion dollars on the project, if it was a 30% investment tax credit, you would get a tax credit that’s equivalent to 30% of your capital cost.
So in many cases, not always, but in many cases, the production tax credit gives you a better return on your investment, especially for manufacturing and for hydrogen, than getting in a tax credit just on your initial capital cost.
But I think it’s just a magnitude of it. Especially for ones like green hydrogen, where you’re getting a tax credit associated with the greenhouse gas intensity of your product today. But you know over the next 10 years, for example, if you’re green hydrogen and you’re using electricity from the grid, that that intensity is going to improve over the next 10 years. So your credit might be growing over time as the electricity gets better.
So it gets very complicated, and each situation is unique. But in many cases, the production tax credit can be more lucrative, and manufacturing’s an especially important one. For instance, getting 30% off the initial cost of building your manufacturing plant is a small number compared to getting a certain amount of money for each widget you produce over the next 10 years. So the Americans have that.
Yeah. Well, it is very complicated. And what is even more complicated is trying to compare the US policy regime with the Canadian one or European one. Investors have the ability to invest anywhere, and so trying to analyze which has the most favorable regime to invest in is a complicated thing. And we shall see after the policies come out from Canada how the market views it. And whether after doing that analysis, they deem it more favorable to invest in Canadian green energy manufacturing facilities and infrastructure versus somewhere else.
Yeah. One thing I did want to point out, that maybe isn’t thought about in Canada too much, is that I think we already had a whole bunch of policies, I’ll call them the stick type policies. Whether it be the $170 carbon price, or the Clean Fuel Standard, or the yet-to-be-seen Clean Electricity Standard, which I think is going to have some penalties associated with it, be more of a stick-type policy. We’ll see when that comes out, what it looks like.
But now we’re going to be layering on top of that carrot policies, incentive policies. And so I think in some ways we might be advantaged from a perspective in that we have multiple layers of policies that are supporting these investments, and that creates some resiliency. If one thing changes, there’s multiple layers there that are supporting your investment.
So maybe wait and see, but I’m optimistic that Canada will have maybe some advantages. Because we’re going to have the combination of sticks and carrots that will drive these investments.
Right. Well, so we await the budget.
That’s right. Everyone will be watching carefully. We’ll be talking about it when it comes out, for sure.
Okay. Well, as speaking of clean green energy, why don’t we move on to this interesting article that was posted recently about how some scientists have successfully split seawater, saltwater, to produce green hydrogen in what is claimed to be a far more efficient manner.
So it’s an interesting article. I mean, I think one of the issues with green hydrogen not only has been its cost, but its sustainability. In that it uses a lot of fresh water, and it has to be very freshwater. And that means that some regions of the world, it just doesn’t maybe make a lot of sense because there isn’t going to be a sustainable source of freshwater that can support that. And even when you think about climate change, how does it look 10 years from now in terms of the use of freshwater for making hydrogen?
So I think this is an interesting development. In that, if you could just use seawater, well there’s no shortage of that. In some area of the Middle East, they were talking about using seawater, and having to clean it up. I mean, that takes a lot of energy, and then use it to make green hydrogen. So this would be a major improvement, and it should increase the economics of it and the viability of it in many regions of the world.
Yeah, I mean, this is a lab-scale thing from what I interpret the article to say. So it’s far from commercialization. But I want to pick up on your point about the lack of fresh water in many places.
In actual fact, in places where it’s sunny, where you would use solar power and clean electricity to generate green hydrogen, in places where it’s sunny, there usually is no freshwater. Like the deserts.
So actually, the ability to not have to use intense desalinization mechanisms is a positive. But I have to say, I have a big issue with this article because of the way it’s written. And the quote by one of the inventors is, “We have split natural sea water into oxygen and hydrogen with nearly a hundred percent efficiency and so on.”
Look, the process, as I interpret, is channeling most of the electricity into splitting H2O, hydrogen and oxygen. But the way it’s written makes the reader believe that, hey, this is a magical process that is going to give us infinite amounts of clean hydrogen from the seawater. It’s not true.
Splitting off hydrogen from water is a very energy-intense process. A lot of energy has to be used to do that. And so this is one of the issues that I see in a lot of the reporting about clean green energies. Is it makes the reader, especially readers that are uninformed about energy and the physics of energy, believe that, hey, we’ve got these magical processes. Don’t worry, it’s going to be this future of unlimited energy. And it just doesn’t work that way.
Yeah, I mean, you can’t do an energy conversion without some losses. I don’t know if there’s any example of that. Even storing energy in a battery and then taking it out.
You lose something like 10%, right? Any time you convert energy from one form to another, there are losses.
Yeah. So it’s just that the idea that these technologies are utopian and they offer unlimited amount of energy. It doesn’t do the clean green energy, I’ll call it movement, any good to do misrepresentations of how these things work. Because it gets people excited, get some investors excited. They pile in and they find out, oh, it wasn’t as advertised. They lose money, and then they won’t come back.
I think that I’ve seen that movie many times over the last two, three decades. And it does not serve the energy transition well to be creating basically hype around this kind of thing.
Well, and I think that’s important that investors hopefully are starting to get a little bit more sophisticated. But efficiency is a really important thing to consider when you’re looking at some of these pathways to get to clean energy. They’re not all equal.
So for example, I just talked losing about 10% of your energy when you store electricity in a battery. A hundred percent goes in, 90% comes out. You lose some to heat. You can even see that when you charge your cell phone, when it’s really low and you plug it in, it gets quite hot, you’re losing energy to heat.
But another example is some of these long-term schemes for storing energy. So we know batteries work well, but they’re very expensive. So we can’t afford to store a day’s worth of energy in them. They’re more to cover us for maybe three or four hours than a big-grid scale utility system.
So there’s some new schemes to store energy through compressed air, through pumping water. There’s somewhere they have blocks where they’re going to lift the block when the electricity is cheap and drop it when they need it later. But many of these lose something like half of their energy in storage.
Oh, they do. Yeah.
So therefore you need to get the electricity for half-price so that you can lose half of it and still sell it at a price that would make sense. Right?
So some of these are going to be challenged by the amount of losses they have, and some are quite high. Hydrogen’s another one. If you’re using hydrogen as a way to store electricity, you’re going to be losing a big chunk of it. And that’s going to make the economics a little bit tougher. Because the price for electricity that you get after the fact better be pretty high to offset that.
The more conversions you have going from end to end, from your primary source of energy, whatever it is, wind, sun, oil, gas, geothermal, nuclear, whatever to the intended end use of work, light, heat, mobility, so on, the more conversions you have in between. The more energy gymnastics you have to do, the more you lose.
And so simplicity is really important. So on one hand, this announcement speaks to potentially greater simplicity, but there’s nothing out there that is a hundred percent efficient. And saying things like that makes people believe that there are no losses. In fact, there are a lot of losses, and nothing in the world of energy comes for free.
One thing that’s pretty close to efficient, though, is an electric motor. I think the electricity goes in, and something like 98 or 97% of that energy is converted into useful work. And there’s pretty small losses. That might be one of the examples of something that’s close, but still not a hundred percent.
Right. But you have to get the energy into the motor, and where does the energy come from?
Right, and even to get it down the transmission line, there’s losses.
8% losses, typically, in a big high tension line. So yeah, I think that this is a subject that we’re going to talk about some more, the end-to-end efficiency. Because that translates directly into operating costs of the entire system.
And if we’re talking about creating new energy systems that are off the main fossil fuel energy systems, you have to have systems that can compete from end-to-end. Not just, say, an electric motor in isolation, or a fuel cell for converts hydrogen into electricity and isolation. You have to consider the whole thing.
So anyway, we will have more to talk about that. In the meantime, thanks for listening.
Yeah, thank you.
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