Today’s Key Takeaways: NE’s refusal to allow natural gas pipeline infrastructure leads to big prices for consumers. Oil prices are barreling ahead. China and the US are the new superpowers for LNG, but not as predictable as their predecessors. Getting minerals right is the key to crafting the right strategy. BP moves NY offshore wind project forward.
NEWS OF THE DAY:
New England’s ‘Clean Energy Transition’ Seems Heavy on Fuel Oil
David Blackmon, Forbes, January 17, 2022
On Sunday, January 16, the New England states along the northeastern U.S. corridor received 24% of their peak power generation not from renewables, not from natural gas, not from coal or nuclear, but from fuel oil.
Fuel oil. This is a power generation fuel of last resort in many parts of the world, deployed by utilities only when other potential generation sources become overly expensive. Yet in New England in 2022, it’s right up there among the top sources, crowding nuclear for the second most abundant source on the grid.
“Renewables,” meanwhile, came in at 8% on the New England grid on Sunday. I put the word in quotes since, when you break that 8% down into its component parts, only a little more than 1/3rd of what was generated actually came from the renewable energy sources – wind and solar – that have been pushed so fervently by the global climate alarm lobby and international news media in recent years. 32% of that 8% comes from the burning of refuse, or garbage; 28% comes from burning wood, a source that produces more emissions than natural gas or probably even fuel oil. Another 3% comes from the burning of landfill gas. Which is, you know, well, gas.
These are the components that made up the power generation mix for New England, which is, as the banner headline says at the Iso-New England website, in the midst of a much-promoted “Clean Energy Transition,” heavily subsidized by the federal government. At the end of the day, what New England residents received from all of the advertising, virtue signaling, and heavy subsidization was roughly 3% of their electricity generated by wind or solar, and 24% generated by the supposedly-antiquated means of burning fuel oil.
Even better, the customers for New England’s power utilities had the privilege of paying rates far above the national average for getting 24% of their electricity from fuel oil and 3% of it from wind and solar. That’s due in large part to the refusal of officials in New York State over the last decade to allow the building of natural gas pipelines across their state to carry cheap, abundant, clean-burning natural gas from the Marcellus and Utica Shale basins to the New England states. That lack of safe and efficient pipeline infrastructure means that gas utilities in the New England states must import vast quantities of LNG to meet their needs during the winter, often from Russia, and are thus held hostage to international prices for LNG instead of being tied to the much-lower domestic price for U.S. natural gas.
Some will say that I cherry-picked one day of Iso-New England’s power mix to write about here, and they will be right. I did. But my response is to ask, in what world in the year 2022 should this particular power generation mix still exist anywhere in the United States of America, much less in New England? After all the Soviet-style central planning and setting of targets and goals and commitments to carbon trading and price-on-carbon schemes that have taken place in that part of the country in this century? After all of the heavy-handed efforts by government planners and Andrew Cuomo-style politicians to cancel fossil fuel infrastructure projects and artificially raise the cost of those fuels? After all of that, how is it even possible to find a time in the middle of any day in which fuel oil still generates 8 times the electric power that wind and solar were generating?
No one likes to ask hard questions of renewable energy providers. It is not a popular, politically correct, woke thing to do. As I noted in a column last fall, it is almost as if the vast majority of international policymakers and news media outlets have entered into an old-style Omerta pact against doing so. It’s not surprising, really: When everything you’re doing is tied to a specific political narrative – which is what this all is – any admission that that narrative does not necessarily have any real relationship to reality can create a lot more work for you. So, you just don’t say those things and hope the problems solve themselves.
But these problems are not going to solve themselves. While everyone seemingly in charge is silent, renewables are failing to deliver what they have promised all over the world. They’re failing in New England; they’re failing in California; they’re failing in Texas; they’re failing in Europe; they’re failing in Asia. As a result, global coal use is up – way up; global natural gas use is at record levels; and in New England on January 16, 24% of power on the grid was generated by fuel oil, 800% more than was provided by wind and solar.
The world had better start asking the hard questions of wind and solar and the rent-seeking pushers of this energy transition soon. Because none of this is going to get better until those hard questions are asked and properly, honestly answered.
From the Washington Examiner, Daily on Energy:
OIL’S OBSTINACY: Oil prices are barreling ahead today, with Brent crude holding above $86 after closing above the same mark on Friday for the first time since it peaked there in October.
West Texas Intermediate is above $84 per barrel, having risen more than 18.5% from Dec. 14 to Jan 14.
Jacques Rousseau of ClearView Energy Partners pointed to supply outages in Libya and Ecuador, as well as Kazakhstan, as helping to drive the upward trend, but the consensus also appears to be that the omicron variant is not weighing down demand in the way traders feared when it first broke onto the scene around Thanksgiving.
“The demand side is more difficult to read at this point but rising oil prices suggest to us that the Omicron variant could be less disruptive to mobility than the Delta variant,” Rousseau told Jeremy.
In short, the high and rising prices are demonstrating some measure of permanence and by extension are carrying into 2022 a political challenge for President Joe Biden, who has been forced to try to dent fossil fuel costs while simultaneously pursuing green policies to reduce their use.
The high prices seen last fall fueled months of oil and gas politicking from the Biden administration during the fourth quarter, as Biden and officials requested an FTC investigation into the industry for unfair business practices, released Strategic Petroleum Reserve crude oil, and eventually encouraged more output from domestic producers.
Mike Muller, head of Asia for Swiss-based Vitol Group, said over the weekend he expects Biden to release more oil from the SPR.
“The market’s saying: ‘More, please,’” Muller said.
The White House hasn’t made any recent indications, but the administration said following the initial SPR announcement that it may return to the reserve if conditions warrant. That would seem to be a safe political play for Biden, as congressional Democrats have shown in pressing him to open the reserve that they see it as designed for these particular circumstances.
Some analysts have maintained the SPR has little prospect for greatly affecting prices in the way that additional production could but leaning strongly into that strategy beyond Energy Secretary Jennifer Granholm’s urging domestic producers to “get your rig count up” would pose special political challenges, especially as Biden’s energy and climate agenda remains stalled.
Traders Wanted in a Once-Sleepy Gas Market with New Kingpins
Bloomberg News, January 16, 2022
Around the world, analysts and traders are grappling with the biggest shakeup in the 60-year history of liquefied natural gas: The emergence of two new superpowers, the U.S. and China, who are bringing more uncertainty and price fluctuations to a once-staid commodity market.
China became the biggest importer of liquefied natural gas in December, overtaking Japan for the first time since it pioneered the industry in the 1970s. Meanwhile, the U.S. is set to become the world’s top exporter of the fossil fuel on an annual basis later this year, beating out cornerstone suppliers Qatar and Australia.
Neither of the two superpowers are as predictable as their predecessors, and data from China is particularly hard to come by. That’s helped fuel wild swings in LNG spot prices as it’s become a traded commodity, similar to crude oil. To keep up, trading desks have proliferated globally, with Japanese LNG giants like Tokyo Gas Co. and Osaka Gas Co. setting up their own, while banks Macquarie Group and Citigroup Inc. are hiring traders to cash in on the volatility.
Gas markets have never been this volatile. They’re trading up and down on single days in ranges they barely covered over decades. European natural gas prices, often used as a benchmark for LNG, hit a record high of 180 euros per megawatt-hour in mid-December, before collapsing more than 60% in the next 10 days.
The changes have given China enormous weight within the market because it can more easily influence spot rates or long-term pricing norms.
In Moscow, Ronald Smith, a senior analyst at broker BCS Global Markets, which provides research to investors in LNG derivatives, says his clients sometimes spend hours hunting for minutiae out of China, like the number of trucks shifting from diesel to natural gas. But such data, which can help predict Chinese demand, can be hard to come by, he said.
“Gas prices could give big surprises when China demand grows stronger or weaker than the market thought,” said Smith. “Predicting U.S. supply is easier,” he said, though there are sometimes unexpected developments there too, like cargoes meant for Asia suddenly heading to Europe.
For much of its history, LNG — natural gas in liquid form that’s used for everything from transportation to heating — was only bought and sold via rigid multi-decade contracts. That method simply involved ferrying the fuel between two nations, using legacy pricing mechanisms linked to crude oil.
Changes came after hydraulic fracturing unlocked vast U.S. shale gas reserves starting just over a decade ago, transforming the country from a net importer of the fuel to an exporter. The U.S. is now expected to have the world’s largest export capacity by the end of 2022, once a new terminal comes online in Louisiana.
U.S. LNG contracts are among the most flexible in the industry, allowing buyers to take their gas wherever it’s most needed — or to whoever will pay the most. Buyers can even pay a fee to cancel the shipment altogether when it isn’t economical, as was the case in 2020 when spot prices crashed to record low levels. This is perfect for nimble traders seeking to make profits off price arbitrage between regions.
American LNG producers also broke the industry-wide norm of pricing shipments to crude oil, opting instead to sell cargoes linked to the domestic Henry Hub gas marker, the main pricing point for U.S. futures contracts for the fuel and the name of the delivery location in Louisiana where several pipelines intersect.
Robust shale output has helped keep U.S. gas prices lower than overseas rivals.
The U.S. has, meanwhile, gained greater heft within the market. Just in the last month, a surge in American LNG deliveries to Europe helped cool off a record-breaking spot price rally as Russian supplies remained weak.
Still, the greater flexibility brought in by the U.S. comes with a raft of new challenges. Traders must now closely monitor hurricane disruptions in the U.S. Gulf of Mexico, while political action — like stricter emissions guidelines — could boost the price of LNG shipments.
There are also other risks since the U.S. and China are ascending at the same time. Just a few years ago, LNG was swept up into a tit-for-tat trade war between Beijing and Washington. Chinese firms temporarily stopped importing U.S. LNG cargoes or signing longer-term supply contracts after Beijing slapped tariffs on shipments in retaliation for American levies in 2018.
The emergence of U.S. and China is “a big shake-up, especially given their geopolitical rivalry,” Nikos Tsafos, James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies. There is the “possibility that their tensions could disrupt markets.”
The U.S. was the world’s top LNG exporter for the first-time last month
China started up its first LNG terminal in 2006, and its import volume was a measly 20 million tons in 2015 — just a fourth of Japan’s total deliveries. That quickly changed as China accelerated an effort to replace coal with gas to heat houses and fuel industries in a bid to curb emissions.
China’s historic demand — now at about 80 million tons a year — presents an outsized business opportunity for legacy suppliers and a batch of new hopefuls. Still, China is something of an unknown for the industry, especially as many smaller, so-called second-tier LNG importers begin to flood the market seeking to sign deals and buy spot shipments.
“The opportunity is clear in terms of demand but dealing with China is not as predictable as dealing with Japan, so this creates some challenges as well,” said Susan L. Sakmar, a visiting assistant professor at the University of Houston Law Center.
Shipments may have to quickly change directions on a dime if China’s government suddenly decides it needs spot shipments to feed its economy or if a geopolitical flareup results in sanctions.
China is “one country whose decisions can move the spot LNG market,” said Tsafos at CSIS.
Safeguarding Critical Minerals for the Energy Transition
Nikos Tsafos, Center for Strategic and International Studies, January 13, 2022
The transition from fossil fuels to low-carbon energy sources will depend on critical minerals. The consumption of these minerals could increase sixfold by 2050, according to one scenario by the International Energy Agency. In that world, the trade in energy-related resources will consist largely of critical minerals rather than oil and natural gas. By value, this market could top $400 billion, exceeding the value of all the coal extracted in 2020. Helping this system emerge, and safeguarding it, is a major objective for the United States, both to ensure an orderly energy transition and to limit the externalities that often come with extractive industries.
Yet the term “critical minerals” lumps together markets with disparate characteristics, which makes it harder to craft a strategy toward each commodity. The geography of critical minerals is also poorly understood: too often critical minerals is a code word for cobalt in the Democratic Republic of the Congo (DRC) or rare earths in China. The tendency to see critical minerals through the prism of U.S.-China competition is another problem, overlooking the fault lines that will define these minerals, especially the likely tensions between mining companies and the populations and sovereigns to which these resources ultimately belong. The United States needs a broader view of the challenges and opportunities involved with critical minerals—and a comprehensive strategy to deal with both.
Getting Minerals Right
A strategy to safeguard critical minerals should begin with a basic understanding of which minerals really matter and why, where they are mined today and where they could be mined in the future, what applications they might be used for, and whether they can be substituted by other minerals in specific applications.
To begin with, it is important to understand that two applications could drive three-fourths of the demand for critical minerals in 2050: electricity networks and batteries, chiefly for electric vehicles. Half of the total projected demand in 2050 is for copper and a quarter is split between nickel and graphite. Then come lithium, manganese, and cobalt. In terms of value, copper accounts for a third of the total in 2050, lithium and nickel each account for almost a quarter each, graphite 10 percent, and cobalt 7 percent.
Of course, these are just forecasts. But they reveal important trends and realities. Copper is by far the most valuable mineral. Copper, lithium, and nickel will account for over 80 percent of the market value in 2050. The production of each mineral is concentrated, but the major producers differ by commodity. The largest copper producer is Chile (40 percent of the total), Peru is second (11 percent), and China is third (9 percent). Australia produced half of the world’s lithium in 2020, Chile 22 percent, and China 17 percent. The top nickel producer is Indonesia (30 percent), followed by the Philippines (13 percent) and Russia (11 percent). Also on the list are countries such as Cuba (cobalt), Argentina and Brazil (lithium), and New Caledonia (nickel). This map is different than the impression one gets from headlines that overfocus on one or two countries and commodities.
This does not mean that other critical minerals—cobalt, manganese, graphite, or rare earths—are not important, only that context matters. Cobalt often dominates discussions about critical minerals, but in 2050, the value of cobalt could be lower than copper today and trivial relative to commodities like oil and gas today. Even the DRC earns more from copper exports today than from cobalt, despite being the world’s bigger cobalt producer. This is not a reason to ignore cobalt, but to ensure that conversations do not always devolve to cobalt and the DRC.
Even China’s role should be put in perspective. China is a major producer of rare earths and a few other minerals, but its key role comes from the processing part of the value chain. China’s advantage is not geology but industrial strategy—it has developed supply chains to extract the value of these minerals, in part by becoming a market for these products. This is something that the United States and its allies can replicate over time.
Finally, no discussion about critical minerals should be static. Technologies have different mineral requirements, and there are active innovation efforts to reduce the reliance on one mineral or another. And as markets grow, they will become more diversified, stable, and transparent, alleviating some of the concentration challenges the world faces today. This is especially so if there is a policy push to encourage diversification—which the United States can support.
What the United States Should Do
There is a gap between projected supply and projected demand for most critical minerals by the end of this decade (especially in cobalt and lithium). At home, the United States can produce more. A long overdue mapping exercise has received a boost by the Infrastructure Investment and Jobs Act, giving a clearer image of what exists and where. But extraction is still contentious given the lack of trust between mining companies and local communities, especially tribes. The federal government should create space for interlocutors to find common ground. It is hard to believe that the world’s largest oil and gas producer cannot also extract minerals safely and economically. Some balance among viewpoints is essential.
The effort to expand supply does not end at the border. The International Development Finance Corporation in 2020 supported a company that wanted to expand nickel and cobalt production in Brazil. The United States should make more such transactions, leveraging U.S. finance to expand and diversify supplies, all the while adhering to the highest environmental, social, and governance standards.
The quest for higher standards should not end with U.S.-financed projects. A major fault line in the energy transition will be the tension between sovereigns and mining companies. Resource-rich countries naturally want to capture the benefits of the resources they hold. This will lead to conflict, already visible in places like Serbia, Chile, Peru, and Indonesia. If hydrocarbons are any guide, these conflicts will be intense and transcend the narrow issues of how to divvy up the rents. They go to the core of a country’s identity and politics.
The United States can help lessen such conflicts by pushing for clear and high standards for extraction. It can help countries negotiate with foreign companies through capacity building, offsetting some of the information and expertise asymmetry that often characterizes mining transactions. And it can support transparency to reduce corruption and build confidence in markets. This work has been ongoing at the State Department for years, but it can grow and reach more countries and minerals.
Strengthening supply is one side of the equation; demand is another. Innovation can help find alternatives to some critical minerals. The Department of Energy (DOE), for example, has set a 2030 goal to “eliminate cobalt and nickel in lithium-ion batteries.” The timeframe is bold, and possibly unrealistic, but the ambition is right. In wind turbines, DOE has supported research and development efforts to reduce the consumption of critical minerals, including rare earths. More such efforts can produce cumulative results over time.
The United States should also use product specifications to nurture new technologies and nudge sectors to adopt different minerals. China has relied on such measures before, favoring local manufacturers over foreign firms. So far, Congress has looked at using tax credits that favor domestic manufacturers, especially those using union labor, a policy that likely violates trade rules. Connecting credits to specific technologies where the United States has an edge is more a reasonable approach and could apply to multiple end uses as well as recycling.
The United States has lost ground in critical minerals. China has built a commanding position, largely in cobalt and lithium, centered on its processing capabilities and its ability to nurture these industries for local use and exports. But the energy transition is just getting started. There is time for the United States to catch up and lead.
A U.S. strategy on critical minerals should craft approaches depending on each mineral and end use. It should focus on growing production to meet demand, relying on domestic resources and mining overseas backed by U.S. finance. It should be uncompromising on environmental, social and governance standards, encouraging transparency and fighting corruption. On the demand side, it should encourage technologies and processes that lessen reliance on the most problematic minerals, helping to grow out of some of the predicaments faced today.
Only with that holistic approach can the United States safeguard the critical minerals needed for the energy transition. Bold climate action without a sensible critical mineral strategy is bound to produce trouble. But the complexities presented by critical minerals cannot be an excuse to delay or shy away from the energy transition that the climate requires. Instead, the United States needs to step up and help shape this market—one of the most consequential over the next three decades.
Backers of tribal recognition measure submit signatures
Associated Press, January 14, 2022
Supporters of a proposed initiative that seeks to formalize government-to-government relationships between the state and federally recognized tribes in Alaska have submitted signatures aimed at getting the measure on this year’s ballot.
The campaign behind the measure needed to gather 36,140 signatures. This week, it submitted 56,200 signatures to the state Division of Elections, the Anchorage Daily News reported. The division must review and verify the signatures, and the campaign will be notified within 60 days of submitting the signatures if everything is in order to get the measure on this year’s ballot.
Under state law, the timing of when the Legislature adjourns affects which ballot initiatives appear on.
Barbara ’Wáahlaal Gidáak Blake, a cosponsor of the Alaskans for Better Government campaign, called the support for the effort so far “amazing.”
Supporters of the measure say formalizing Alaska’s recognition of tribal sovereignty will allow for more efficient, effective implementation of measures that benefit tribal members at the local level without substantially altering state laws.
“What this does is codify what’s already recognized by the federal government,” said state Rep. Tiffany Zulkosky, a Bethel Democrat.
Zulkosky has legislation with language that is nearly identical language to that of the proposed initiative. The measure passed the House 35-4 last May. It hasn’t been taken up by the Senate yet.
Organizers of the initiative campaign are largely agnostic about whether the legislature acts or the measure goes to a vote of the people.
The Alaska Federation of Natives, Sealaska Corp. and Central Council of the Tlingit and Haida Indian Tribes of Alaska are among the backers of the proposal.
Blake said the ballot group is not aware of any organized opposition so far.
CLIMATE CHANGE :
From the Washington Examiner, Daily on Energy:
OFFSHORE WIND MOVES FORWARD IN NEW YORK: Norwegian energy giant Equinor and BP have finalized purchase and sale agreements with regulators related to their joint offshore wind venture off New York’s coast, stakeholders announced on Friday.
Under the PSAs, Equinor and BP agree to provide 1,260 megawatts of renewable offshore wind power from their Empire Wind 2 project and 1,230 MW of power from their Beacon Wind 1 project.
The agreements follow news last week of a pending offshore wind lease auction at which the Interior Department will make more than 488,000 acres of federal waters available to developers.