Today’s Key Takeaways: Public E & P companies on track to shatter record profits in 2022 due to high oil & gas prices and surging demand. Total Energies books $4B impairment because of Arctic LNG II project. Biden team will spend $3B to support domestic manufacturing of advanced batteries. Any new energy deal should make the National Environmental Policy Act (NEPA) a” less lethal regulatory weapon.”
NEWS OF THE DAY:
French flip-flop on American LNG draws cry of ‘hypocrisy’
Carlos Anchondo, Energywire, May 3, 2022
In a reversal condemned by environmentalists, a French energy company has agreed to purchase liquefied natural gas from a planned export project in South Texas.
NextDecade Corp. announced yesterday that Engie SA will buy 1.75 million metric tons of LNG per year from the Rio Grande LNG terminal under a 15-year sale and purchase agreement. Commercial operations at the new Texas LNG facility could begin as soon as 2026.
The agreement came about a year and a half after Engie stepped away from a $7 billion deal to buy LNG from the same project, reportedly over concerns about the methane emissions footprint of U.S.-produced natural gas (Energywire, Nov. 4, 2020).
NextDecade’s announcement also came over a month after President Joe Biden pledged to send more LNG to Europe, a decision that environmentalists fear could lead to the build-out of additional gas infrastructure.
Yesterday also saw pipeline giant Energy Transfer LP announce that it signed a 20-year agreement with Gunvor Group Ltd. to supply 2 million metric tons of LNG per year to Gunvor from the Lake Charles LNG export project in Louisiana. Under the agreement, first deliveries are expected to start as early as 2026, according to an Energy Transfer release.
After Engie decided to walk away from its Rio Grande LNG deal in late 2020 — a move that drew cheers from environmental groups at the time — more natural gas producers and exporters began turning to third-party companies to certify their operations as having lower emissions (Energywire, May 10, 2021).
Yesterday, environmental groups took aim at Engie’s latest move.
“This deal perfectly exemplifies the French government’s hypocrisy and insincere promises regarding the climate and energy crisis,” Lorette Philippot, private finance campaign director for Friends of the Earth France, said in a statement.
“Engie’s board decided against signing onto a contract like this because of environmental concerns, just to walk back their decision today by actively or implicitly greenlighting the project,” Philippot continued. The French government owned more than 23 percent of Engie’s capital as of last year.
Still, NextDecade noted steps it’s taking to bolster its environmental record.
NextDecade said it plans to reduce carbon dioxide emissions from the Rio Grande LNG facility by more than 90 percent using carbon capture and storage technology.
NextDecade also plans to produce a “lower carbon-intensive LNG” using “responsibly sourced gas” and net-zero electricity, according to yesterday’s news release.
“The signing of this [sale and purchase agreement] is an important step in showing our commitment in the areas of environmental stewardship, social responsibility, and governance best practices, while upholding the LNG industry’s highest standards,” Matt Schatzman, NextDecade’s chairman and CEO, said in a statement.
“It also shows how we can help meet our buyers’ climate change initiatives, while providing them access to secure energy supply,” Schatzman said.
Yet Rebekah Hinojosa, Gulf Coast campaign representative for the Sierra Club, called NextDecade’s carbon capture and sequestration plans “a scam that won’t reduce Rio Grande LNG’s harmful pollution, and does nothing to reduce greenhouse gas emissions when the gas is fracked, produced, exported overseas, and burned.”
In its release, NextDecade said it expects to make a positive final investment decision on a minimum of two trains of the Rio Grande LNG project in the second half of 2022, “assuming the achievement of further LNG contracting and financing,” according to its announcement.
Neither Engie nor NextDecade responded to requests for comment from E&E News yesterday.
Andrew Logan, senior director of oil and gas at the sustainable investment group Ceres, said it’s “impossible to imagine” the Rio Grande export facility moving ahead without the war in Ukraine.
Russia, under President Vladimir Putin, invaded Ukraine on Feb. 24. The war has displaced millions of people and caused upheaval in global energy markets. A number of European countries also have sought to reduce their dependence on Russian energy.
“The lower-carbon footprint was necessary cover for Engie to change its position on the project, but it was the war in Ukraine that drove this deal,” Logan said in an email yesterday.
He also noted that Engie’s deal with NextDecade is only for 15 years, instead of a typical LNG contract that he said can last for 20 years.
“This indicates desperation on both sides — NextDecade really needs the deal, and Engie doesn’t have many options for securing supply,” Logan said.
“The contract length will make it somewhat harder for NextDecade to secure financing, but also puts Engie on the hook for a large supply of natural gas out to at least 2041 — long past the time at which Europe is supposed to have decarbonized its grid,” Logan added.
Ben Cahill, a senior fellow at the Center for Strategic and International Studies, said a commitment to cleaner gas is important for U.S. LNG exporters that want to sell to Europe.
“Buyers and investors are scrutinizing the emissions intensity of gas,” Cahill said in an email.
“This could be a real competitive advantage for U.S. LNG exporters—but only if the industry makes real strides in cutting methane emissions,” Cahill said, arguing that demand for low-emissions intensity gas will only grow as time goes on.
Separately, a subsidiary of Cheniere Energy Inc. and Engie agreed to a sale and purchase agreement in 2021. It was expanded earlier this year, according to a release from Cheniere.
OIL:
Upstream Oil Industry To See Highest Profits Ever In 2022
Rystad Energy, OilPrice.Com, May 3, 2022
- Total free-cash-flow from E&Ps soared from $126 billion in 2020 to almost $500 billion in 2021.
- Rystad: the current financial health of public upstream operators is at an all-time high.
- Rystad: total free-cash-flow could total as much as $834 billion in 2022.
Public exploration and production (E&P) companies are on track to shatter previous record profits this year as high oil and gas prices and surging demand drive financial success. Rystad Energy research shows that total free cash flow (FCF)*, a company’s cash from operations after accounting for outflows and asset maintenance, will balloon to $834 billion, a 70% increase from the $493 billion profits in 2021. Total FCF from public E&Ps fell to around $126 billion in 2020 as a result of the Covid-19 pandemic and the ensuing oil price collapse, halving the prior year’s total. As the global economy rebounded and fuel demand increased, last year’s FCF levels surged to nearly $500 billion, the highest profits ever for the upstream industry.
“The current financial health of public upstream operators is at an all-time high. Still, the good times are set to get even better this year, thanks to a perfect storm of factors pushing profits and cash flow to another record high in 2022,” says Espen Erlingsen, Rystad Energy’s head of upstream research.
The main contributing factor to these glowing financials is sustained high oil and gas prices. With average Brent oil prices estimated at $111 per barrel in 2022, a Henry Hub gas price at $4.2 per thousand cubic feet (Mcf) and a European gas price of $25 per Mcf, total FCF for public upstream companies will reach $834 billion this year.
However, it is not just record high FCF on the table for public upstream operators. Cash from operations** is also expected to rocket this year, breaking the $1 trillion threshold for the first time. The $1.1 trillion projected annual total is a 56% jump from 2021 levels of $719 billion, which was the highest yearly total since 2014.
Cash from operations is typically used to fund new investments and financial costs, such as debt payments and dividends. In 2020, cash from operations dropped by almost $200 billion, or around 35%, implying that companies had less money to finance new activity and issue payouts to their owners. As a result, investments also dropped in 2020, falling by almost $100 billion or around 30%.
Despite the robust growth in cash from operations, investments are not expected to grow significantly this year, inching up to $286 billion from $258 billion in 2021. The investment ratio*** shows the disparity between record cash flow and profits, and the portion of those windfalls that are reinvested. This ratio has fluctuated during the past decade, averaging around 72%. This year, however, the projected investment ratio is expected to plunge to 26%, the lowest since the early 1980s.
The meager investment ratio and soaring FCF indicate that public E&P companies will have significant cash available to pay down debt or fork out dividends to shareholders. Much of last year’s profit was spent on reducing debt, which has left upstream operators in a very healthy financial position. The upshot of this is that a significant portion of the vast profits anticipated this year will likely be paid out to shareholders.
Almost all the large public E&P companies will have an investment ratio between 20% and 30% in 2022. US independent Occidental Petroleum has the lowest ratio of about 20%, while US major ExxonMobil is expected to see the most significant increase in FCF in 2022, growing by about $18 billion. Compatriot independent Hess is an outlier among these companies with an investment ratio of around 45%, due to the company’s plans to ramp up investments in Guyana and the core US shale patch of the Bakken.
GAS:
TotalEnergies takes earnings hit of over $4 billion because of stake in Russian Arctic LNG
LNG Unlimited, May 3, 2022
TotalEnergies, the French major with global LNG stakes, booked an impairment of over $4 billion in its earnings because of the negative impacts of involvement in Russian LNG and particularly the Arctic LNG II project on the Gydan Peninsula.
“Given the uncertainty created by the technological and financial sanctions on the ability to carry out the Arctic LNG II project currently under construction and their probable tightening with the worsening conflict, TotalEnergies has decided to no longer book proved reserves for the Arctic LNG II project,” explained the French company listed on the Euronext Exchange.
New sanctions
The Paris-based major noted that during April new sanctions have effectively been adopted by the European Union, notably prohibiting exports from EU countries of goods and technology for use in the liquefaction of natural gas benefitting a Russian company.
“It appears that these new prohibitions constitute additional risks on the execution of the Arctic LNG II project,” stated TotalEnergies.
“As a result, TotalEnergies has decided to record in its accounts, as of March 31, 2022, an impairment of $4.1Bln, concerning notably Arctic LNG II,” it added.
Because of the Russian impairment TotalEnergies recorded first-quarter net income of $4.9Bln.
This was 15 percent less than the $5.8Bln posted in the final quarter of 2021, though 48 percent higher than the $3.3Bln reported in the prior-year quarter.
Chairman and CEO Patrick Pouyanné said the company’s Integrated Gas, Renewables & Power division posted adjusted net operating income of $3.1Bln, up 11 percent over the previous quarter, and first-quarter cash flow of $2.6Bln.
“TotalEnergies leveraged its integrated midstream LNG to saturate its European regasification capacity thanks to record spot LNG purchases (4.7 million tonnes) and posted a very good performance in gas, LNG, and electricity trading activities,” explained the CEO.
“TotalEnergies also launched with its partners the Cameron LNG expansion project and that will contribute to Europe’s security of supply,” added CEO Pouyanné.
In other LNG project developments, the French company highlighted the expansion of its strategic alliance with US company Sempra Infrastructure to develop the Vista Pacifico LNG project in Mexico and to co-develop several onshore and offshore renewable projects in North America.
This was in addition to the signature of a heads of agreement with Sempra, Japan’s Mitsui and Co., Mitsubishi Corp., and shipping company NYK Line for the launch of the Cameron LNG expansion project with a maximum production capacity of 6.75 million tonnes per annum.
The Arctic LNG II joint venture is being developed by Russian natural gas company Novatek and partners from China and Japan as well as TotalEnergies, which is also a direct shareholder in Novatek.
The project envisages the construction of three processing Trains each with capacity of 6.6 MTPA. The first Train is schedule to start up in 2023, the second in 2024 and the third in 2026.
The Novatek company, which already operates the Yamal LNG plant, holds a 60 percent shareholding in the Arctic LNG II project and four other 10 percent stakes are shared between the various shareholders.
MINING:
Biden’s team puts up over $3 billion to boost US battery output
Ari Natter, Jenny Leonard, Bloomberg News, Mining.Com, May 2, 2022
The Biden administration will spend more than $3 billion to support the domestic manufacturing of advanced batteries used in electric vehicles and energy storage, officials said Monday.
About $3.16 billion in grants will be made available to produce key battery metals such as lithium, cobalt, and nickel, said Dave Howell, principal deputy director in the Energy Department’s Office of Manufacturing and Energy Supply Chains.
Encouraging the domestic production of battery minerals has been a priority for the Biden administration as it seeks to electrify half of all new U.S. cars by 2030. But surging commodity prices and supply chain snarls remain a challenge. Earlier this Spring the White House invoked the Defense Production Act to spur output of lithium, nickel, graphite, cobalt and manganese.
“Positioning the United States front and center in meeting the growing demand for advanced batteries is how we boost our competitiveness and electrify our transportation system,” Energy Secretary Jennifer Granholm said in a statement.
The grants will fund new, retrofitted, or expanded processing facilities, as well as manufacturing demonstrations and battery recycling, the Energy Department said. A separate $60 million program for battery recycling is also being made available, the agency said.
The money comes from the $550 billion infrastructure bill signed into law last year, which earmarked $7 billion for batteries and the creation of a U.S. supply chain to produce them.
“This will help to underwrite that private investment we need in the United States to build a reliable industrial capacity and, for the first time, have a domestic end-to-end supply chain in electric vehicles and electric vehicle battery production,” National Economic Council Director Brian Deese told
POLITICS:
A Bipartisan Energy Deal?
The Editorial Board, The Wall Street Journal, May 2, 202
Overriding Biden’s NEPA rules blockade is essential for fossil fuels and solar and wind power.
West Virginia Democrat Joe Manchin wants to cut a bipartisan compromise on energy. It’s not a crazy idea, but the risk is that Democrats will lure Republicans into accepting superficial permitting reforms in return for a gusher of green energy spending.
Any worthwhile deal, at a minimum, should make the National Environmental Policy Act (NEPA) a less lethal regulatory weapon. While a large pipeline can be built in a year or two, federal permitting can take two to three times as long. If there are lawsuits—and there always are—you’re looking at a decade or more. Add that to the cost in present value of any energy or other project.
The bipartisan infrastructure deal included modest NEPA reforms, such as a two-year shot clock for federal agencies to complete environmental impact statements. The law also requires federal agencies to work on a review at the same time rather than wait in turn.
Alas, the Administration’s new NEPA regulations, announced last month, will create more red tape that increases costs and expands litigation risk. Federal agencies going forward will have to consider the “cumulative” and “indirect” project impact.
While the rules don’t specify every potential tangential impact, they put an emphasis on climate and “environmental justice.” Project developers will have to mitigate these effects—say, by installing electric-vehicle chargers in minority communities. This is a way to get businesses to pay for the Administration’s Build Back Better plan that can’t pass Congress.
The Administration’s inflated “social cost” of carbon—a speculative estimate of the global harm that could result from climate change, including foreign conflict and migration—will jack up costs even more. The White House pegs the social cost of CO2 at $51 per ton—about 50 times higher than the Trump Administration’s estimate—and is planning to increase it.
A higher cost of carbon means that companies could have to spend more to compensate for their emissions—and regulators are sure to deem some projects too costly to permit. Any energy deal should override the Administration’s NEPA anti-reforms and explicitly prohibit federal agencies from considering climate and social factors.
It should also limit executive discretion to wall off federal land from development under the Antiquities Act and Endangered Species Act. And it should limit states’ power under the Clean Water Act to veto pipelines and high-voltage transmission lines. This would help green energy too.
How about setting a shot clock on approving drilling permits? Texas requires regulators to process permits in three days. The Biden Administration on average takes six months. Pipelines planned in existing rights-of-way of other pipelines should be approved automatically.
Another idea reportedly under consideration is to deem liquefied natural gas exports to a NATO country to be in the “public interest,” thereby short-circuiting Department of Energy review. Even better: Eliminate DOE’s reviews. They’re redundant since the Federal Energy Regulatory Commission must permit export terminals.
The model for a deal would be the 2015 compromise between Barack Obama and Paul Ryan that lifted the ban on oil exports while extending green energy tax credits. The model should not be the infrastructure deal that Republican Senators agreed to last summer that included mostly liberal priorities—e.g., a public transit blowout—with small permitting reforms sprinkled in.
Republicans will likely gain leverage after the midterms to negotiate reforms, so there’s no urgency to strike a deal now. No deal is better than a bad one.