Today’s Key Takeaways: Less uncertainty for industry in reconciliation bill but permitting reforming still outstanding. Instability of energy transition leads oil supermajors to hold back on investment. Auto industry worried about mining and manufacturing mandates for EV’s in new bill. Germany’s coal revival continues. $8.5 billion deal for U.S. LNG with Europe.
NEWS OF THE DAY:
MORE BITTER THAN SWEET?
Jeremy Beaman & Breanne Deppisch, Washington Examiner, August 9, 2022
LESS UNCERTAINTY FOR INDUSTRY: Some oil and gas industry groups hope that leasing provisions in Democrats’ reconciliation bill will force the Interior Department’s hand to begin holding lease sales more regularly.
Packed into the green-energy- and climate-change-focused Inflation Reduction Act is language requiring Interior to reinstate leases from Lease Sale 257 and bring back the three other offshore oil and gas lease sales it canceled in May.
It also includes new contingencies linking the issuance of offshore wind leases to the sale of oil and gas leases, and for onshore, the bill would also link rights-of-way for wind and solar on federal lands to the sale of oil and gas leases.
Why it matters: These are hearty concessions for the Democrats, a number of whom introduced legislation this Congress to nix new leasing on federal lands, and for President Joe Biden, who promised on the campaign trail to restrict new leasing and drilling and ordered a new leasing pause shortly after taking office.
The Biden administration, under significant pressure from environmental groups intending to hold Biden to those campaign promises, has been slow to auction off federal acreage. At the same time, though, it has stopped short of ruling out sales, as Republicans and a handful of Democrats — including Sen. Joe Manchin — have demanded that the administration carry on with lease sales to enable more domestic energy production in response to high prices globally.
Industry groups and Republican-led states have litigated against the administration ever since over how it’s carried out its leasing responsibilities, including suits challenging Biden’s pause on new leasing and Interior’s delayed five-year program.
For Erik Milito, president of the National Ocean Industries Association, the reconciliation bill’s leasing language should help redirect a wayward ship and would give his oil and gas members more certainty for expanding production.
“It was huge for NOIA to be able to secure the reinstatement of Lease Sale 257 and getting mandatory lease sales moving forward,” Milito told Jeremy, asserting that the language in the bill is “not discretionary.”
Milito said he expects environmental groups to continue to challenge any reinstatement of the 257, which Interior carried out in November but which a federal judge later threw out on grounds that the agency failed its environmental review obligations, and other provisions requiring sales. But, he said, if the provision is signed into law as is, it will mean that “Congress has spoken.”
“I would hope that this would drive Interior to move forward with [Outer Continental Shelf] oil and gas leasing in a way that really makes any further litigation irrelevant,” he said.
More bitter than sweet: Industry groups, including the American Petroleum Institute and American Exploration and Production Council, have welcomed the leasing provisions but resolved to oppose the bill (NOIA, on the other hand, which represents offshore wind developers and shipping companies in addition to oil and gas firms, has endorsed it).
The reason: The leasing provisions would be accompanied by higher minimum royalties for both onshore and offshore leasing, increase minimum per-acre bid thresholds for onshore lease sales, and raise rental rates.
Anne Bradbury, CEO of AXPC, which represents onshore developers exclusively, said those and other provisions like the methane fee outweigh the positives of new leasing requirements.
Bradbury name-dropped the Mineral Leasing Act, which governs the onshore oil and gas leasing program and provides that Iease sales be held “at least quarterly” where eligible lands are available (How much discretion Interior wields to comply with that timeline is the subject of active litigation).
“So, we appreciate it, but we also feel like it’s current law that they need to [hold lease sales],” Bradbury told Jeremy.
Beyond that, obtaining leases is the “first step” for onshore developers, who then have to wade through litigation and acquire permits, she said.
“You’re not resolving any of the issues that make it difficult to produce on federal lands and in some ways, you’re increasing the costs even more,” Bradbury said of the Democrats’ bill.
The permitting reform that’s been put on the table to succeed the reconciliation legislation is still outstanding, and some Republicans have drawn clear lines in the sand that they won’t accept the terms of the permitting reform as they stand.
OIL:
Oil Supermajors Continue to Hold Back on Investment
Andreas Exarheas, Rigzone, August 9, 2022
Oil supermajors continue to hold back on investment as mid-year guidance remains mostly firm.
Oil supermajors continue to hold back on investment as mid-year guidance remains mostly firm, a new report from Fitch Solutions Country Risk & Industry Research has noted.
Overall, the group will raise annual capital expenditure by 19 percent in 2022 versus earlier guidance growth of 17 percent, the report, which was sent to Rigzone recently, revealed.
“The mild rise in investment is coming from Shell, the sole exception in the group, who have boosted 2022 capital expenditure guidance by 17 percent since our previous report,” analysts at Fitch Solutions stated in the report.
“Brent crude prices have averaged $105 per barrel for the first half of 2022, a gain of 48 percent over 2021’s annual average price. However, the sharp gains in Brent have failed to spur similar increased investment across the supermajors peer group,” the analysts added in the report.
“On the downstream side record refining margins have helped boost the profits significantly as the global contraction in refining capacity during pandemic supercharged fuel prices as post lockdown economies boomed,” the analysts continued.
In the report, the analysts noted that the record earnings should be the catalyst for increased long-term investment but added that the current guidance from the supermajors “leaves little hint of capital expenditure excess”.
“The difficulty in making multi-billion-dollar investments over the long-term term continues to be dogged by uncertainty raised by the energy transition and most majors have chosen to exercise caution and remain balanced in guidance for capital expenditure in 2022,” the analysts added.
The lack of increased investment is another strong indicator for tight supply in the coming years, according to the Fitch Solutions analysts.
“After years of low investment and threats to Russia’s access to global trade, markets remain on edge in fear of supply shortages helping to keep the price outlook elevated,” the analysts stated in the report.
“Although higher interest rates from hawkish central banks have raised near-term concerns for oil demand the outlook for supply remains muted supporting the case for high oil prices,” the analysts added.
Fitch Solutions’ report examined BP, Chevron, ExxonMobil, Shell, and TotalEnergies. In its second quarter results, BP reported an underlying replacement cost profit of $8.5 billion, compared to $2.8 billion during the same period last year, while Chevron reported a net income of $11.6 billion, compared to $3 billion during the same period last year.
Exxon Mobil Corporation announced estimated second-quarter 2022 earnings of $17.9 billion, compared to $4.69 billion in 2Q 2021, Shell posted adjusted earnings of $11.4 billion in 2Q, compared to adjusted earnings of $5.5 billion in 2Q 2021, and TotalEnergies reported adjusted net income of $9.8 billion in 2Q, which was 2.8 times higher than the same period last year.
GAS:
Centrica Agrees to Import £7 Billion US LNG for the UK
Elena Mazneva, Bloomberg BNN, August 9, 2022
Centrica Plc plans to ramp up its supplies of liquefied natural gas, inking a 7 billion-pound ($8.5 billion) deal for US volumes as Europe rushes to wean itself off Russian fuel.
The UK company signed a heads of agreement with Delfin Midstream Inc. to buy LNG from the US’s first floating export facility, off Louisiana. While deliveries aren’t expected to start until 2026, the accord shows European firms are securing extra supply after disruption to Russian gas flows sent prices soaring.
Centrica is focused on boosting its LNG portfolio and “ensuring that we increase our access to a diversified range of reliable gas supplies,” Chief Executive Officer Chris O’Shea said in a statement on Tuesday.
The deal follows a similar agreement between Delfin and Vitol Group last month. Delfin is scouting for customers for production from its LNG project ahead of a final investment decision expected later this year.
Centrica agreed to purchase 1 million tons annually for 15 years. The company earlier this year vowed to exit all accords with Russian exporter Gazprom PJSC and has since clinched an agreement to get more gas from Norway over the coming winters. In the UK, it’s trying to hammer out a deal to restore capacity at the giant Rough storage site before the cold season sets in.
Countries in Europe are hunting for alternative sources of gas after slapping sanctions on Russia in the wake of its invasion of Ukraine. Moscow’s supply cuts have pushed prices to records, driving inflationary pressure that’s stoked a cost-of-living crisis across the continent.
Read also: UK’s Lucky Gas Glut About to Run Out as Winter Approaches
“Today’s deal between Centrica and Delfin is positive news for the UK, helping to ensure our diversity of supply from reliable sources — like our friends in the United States — for many years to come,” British Business Secretary Kwasi Kwarteng said in the statement.
MINING:
From the Washington Examiner, Daily on Energy:
GERMANY’S COAL REVIVAL CONTINUES: German coal importers are expecting a flurry of new shipments beginning next month as the country scrambles to secure alternatives to Russian gas.
Alexander Bethe, the chairman of German coal importers’ group Verein der Kohlenimporteure (VDKi), told Reuters that the group expects “significant volumes increases in the monthly import figures from September onwards.”
It is unclear who will be supplying the coal, though Australia, South Africa, Indonesia, and Colombia were all cited as potential suppliers by German industry officials earlier this year.
Coal imports could rise in September by as much as 50% compared to May, Bethe said, bringing the county’s annual imports of steam coal up to 32 million tons or more—up from 27 million tons the previous year.
Still, coal importers acknowledged weather and logistical concerns ahead, including low water conditions in Germany’s rivers and canals.
The levels have hampered shipments in recent weeks and forced barges to sail with reduced loads—and officials say they are hopeful that the low water conditions on rivers and canals might ease in mid-to-late August to free up more shipping space.
POLITICS:
How Manchin kneecapped the climate bill’s EV tax credit
Jael Holzman, E & E Daily, August 8, 2022
Democrats have been jubilant about their budget reconciliation bill nearing final passage, but the auto industry is starting to worry the climate spending legislation might actually slow the nation’s switch away from gas-powered cars.
During months of negotiations, Senate Energy and Natural Resources Chair Joe Manchin (D-W.Va.) made clear he would only support expanding the consumer electric vehicle tax credit if it included requirements for the cars to be made from supply chains controlled by the United States or its allies and without any products from China, said people familiar with the talks.
Manchin was loud about his concerns. He took several opportunities to express frustration with colleagues wanting to push Americans to buy more electric cars.
“Right now, we’re about ready to put our whole eggs in one basket, thinking EVs are the way to go, and we’re going to be absolutely so taken advantage of, to the point to where we’re going to be held hostage by the foreign supply chain that China has a grip on,” Manchin said in June.
The West Virginia Democrat has repeatedly groused that minerals crucial to electric car batteries — like lithium, cobalt, nickel, and graphite — are currently produced into a global supply line primarily controlled by China.
“I just can’t believe we’re even thinking about going down that path, and I’m going to do everything I can to stop it,” he said. “Because I think it’s stupid.”
Manchin ultimately won.
Starting in 2024, only EVs with at least 40 percent of their minerals from the United States or nations with U.S. free trade agreements, or with materials recycled in North America, would be able to take full advantage of the reconciliation bill’s incentive. Cars would also need components manufactured in North America (Greenwire, July 28).
The legislation would also prohibit tax credits from applying to vehicles made with any minerals from countries labeled a “foreign entity of concern” — a label that could cover Chinese resources.
Agreeing to Manchin’s demands allowed Senate Majority Leader Chuck Schumer (D-N.Y.) to cinch a massive deal on climate, stuffed with stimulus for battery manufacturers and wind and solar developers.
But Manchin’s supply chain language might wind up actually hurting progress on climate. That’s because standing up the domestic and friendly nation supply chains may take longer than the bill’s timetable.
‘May well backfire’
The existing EV tax credit has a cap limiting the benefit to only 200,000 vehicles sold per manufacturer. Some large auto companies like General Motors and Tesla have hit this ceiling, so they can’t use the credit.
The legislation would pave the way for all car companies to enjoy incentives, but they would have to use a supply chain that does not currently exist.
Some of the minerals needed to make EVs — like cobalt and graphite — are not mined in large quantities by any nations with U.S. free trade agreements.
“It’s unclear whether any [EVs] will qualify,” said Jay Turner, an environmental studies professor at Wellesley College and author of “Charged: A History of Batteries and Lessons for a Clean Energy Future.” “This may well backfire.”
U.S. car companies have begun to build EV supply chains that can cut China out of the equation. But those initiatives are in their infancy and may require developing new mines in places where they do not yet exist (Greenwire, April 18).
That all means Manchin’s supply chain demand will impact how helpful the reconciliation bill helps reduce U.S. greenhouse gas emissions, said Ben King, associate director with Rhodium Group’s energy and climate team.
“It’s a question of, ‘Relative to what?’” King said. “Relative to current policy, the bill is still good for the climate. Relative to what the bill could have been, it doesn’t achieve as much.”
The bill would have the Treasury Department — an agency tasked with managing the nation’s fiscal health — create a system for tracking the minerals and components that are going into electric vehicles.
Setting that system up could prove complex, and the bill says almost nothing on how the government should prop it up, other than it taking place.
Ellen Carey, vice president of global policy and public affairs for supply-chain tracking firm Circulor, said “technologically” the request is “doable, it’s feasible and it makes sense.”
But tracing minerals for batteries is trickier than other minerals, such as diamonds, which the U.S. currently tracks to avoid links to financing violent conflicts.
“There is much more complication here,” Carey said.
Manchin’s supply chain gambit sent the automobile industry into a lobbying frenzy ahead of the Senate vote on reconciliation. Companies were urging Democrats to do anything they could to ease their burden.
Sen. Debbie Stabenow (D-Mich.), who represents Motor City, cheered the reconciliation package but also voiced concerns about the EV language.
“This is a serious concern, and if I had written this, I would’ve written it very differently,” Stabenow told reporters last week.
Manchin remained adamant. “I don’t believe that we should be building a transportation mode on the backs of foreign supply chains,” he said Tuesday.
Aides to Manchin and Schumer did not respond to requests for further comment.
Inside the talks
As Schumer and Manchin went back and forth over the climate bill, other Senate Democrats had their own proposal to help create an American battery supply chain that could take on China.
For a long time, according to two people familiar with the talks, Stabenow worked with Sens. Michael Bennet (D-Colo.), Raphael Warnock (D-Ga.) and Catherine Cortez Masto (D-Nev.) to craft a package of supply chain incentives with some of the brightest minds in the battery and critical minerals sectors, including academics and industry representatives.
One of those experts was Nathan Iyer, a senior associate with the Rocky Mountain Institute, a think tank focused on developing climate policy solutions.
The four senators, said Iyer, developed a tax credit package for battery and mineral production that would have helped subsidize a supply chain compatible with a cheaper and more secure U.S. electric vehicle market.
The tax credits for battery production wound up in the bill. But on mining, Manchin had his own demand for binding mineral content requirements, which Iyer said were “required for him to support the EV tax credits” at all.
Iyer said he is grateful the EV and battery manufacturing tax incentives are in the bill. He hopes the battery language can help make the supply chain requirements Manchin called for “more feasible.”
But he acknowledged Manchin’s mandate “definitely kneecaps the credit for several years.”
“[It’s] definitely a concern, but also such a sensitive time that no one wants to be ‘that guy,'” Iyer said.
Iyer said the four senators’ proposal was not floated “as an alternative” to Manchin’s demands. A second person familiar with the proposal said the geographic constraints on the EV tax credit “was not something that any of us had talked about” but was “part of the bilateral negotiation between Schumer and Manchin’s office.”
Another person who was in communication with Manchin’s office said the senator initially wanted the minerals to only be mined or processed in North America, a proposal even more limiting than what is in the current version of the bill.
That person said Manchin’s office had “been asking automakers for a really long time to give them” data on “what a reasonable on-ramp” would be for creating a domestic EV supply chain and that it’s unclear if those car companies understood “the only way to get the EV tax credit within this bill was having something like this.”
“I don’t think the automakers thought they were being serious,” the person said.
E&E News granted people familiar with the negotiations anonymity to speak candidly about the situation.
Mixed bag
After embracing their deal with Manchin as a boon for climate action, congressional Democrats and the Biden administration now find themselves in a bind over manufacturing and minerals mandates.
As the bill heads to the House, lawmakers could placate the automobile sector and give companies more time or money to set up supply chains so they can comply with the tax credit or ditch the sourcing requirements entirely.
But that risks Manchin abandoning his colleagues on the larger reconciliation bill, costing the president and the Democratic Party a valuable legislative win ahead of a difficult midterm election. Politics aside, climate action from Congress is imperative for the planet, advocates say.
At this juncture, the auto sector has concluded many Americans will not be able to use the tax credit for years to come.
“A likely result of this bill (as currently constructed) is that a significant number of consumers will not be able to take advantage of this credit in the early years when it is needed most,” John Bozzella, president, and CEO of the Alliance for Automotive Innovation, said in a statement provided to E&E News.
The Congressional Budget Office appeared to confirm that assertion in a budgetary analysis of the bill, estimating the EV tax credit would cost the government the equivalent of only about 11,000 vehicles on the market qualifying for it.
By 2030, the credit would only draw on the federal budget by enough to total just over 1 percent of the total vehicles sold in the U.S. last year, according to CBO.
Siding with Manchin could have benefits for U.S. climate action in the longer term by accelerating the creation of a domestic supply chain for electric vehicles, said Jordy Lee, program manager at the Payne Institute for Public Policy at the Colorado School of Mines.
Manchin is right, Lee said, when it comes to the risks of relying on China and other nations for minerals and EV parts.
“Overall, I think this isn’t a bad thing,” he said.
Still, there is a world Lee imagines where this language boomerangs on climate action by pulling the rug out from under electric car sales.
In that universe, the bill would pass, but auto companies simply wouldn’t be able to move fast enough. Then another shock to their existing supply chains would put electric vehicles further out of reach for middle-class consumers — as was the case after Russia invaded Ukraine (Greenwire, Feb. 24).
“Maybe the world won’t face shortages. Maybe these supply chains won’t be disrupted. Maybe production will increase to meet demand even if the U.S. doesn’t increase production to meet demand. But the reason these minerals are called ‘critical’ is because they’re vulnerable to supply chain disruptions,” Lee said, concluding: “There’s 100 percent a world where that exists.”