Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 11, 2016
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Business Trends
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The US elections were not rigged after all. Defying several polls that showed Hillary Clinton had a distinct lead, Donald Trump won a majority of the electoral college to become the 45th President of the United States. It is a scenario that very few prepared for, and it is now the reality for the next four years. What does this mean for the energy sector?  

In his first 100 days, Donald Trump promises to:
….lift the restrictions on the production of $50 trillion dollars' worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal.

….lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward

….cancel billions in payments to U.N. climate change programs and use the money to fix America's water and environmental infrastructure

In the immediate aftermath of the news, oil prices fell sharply, part of a broader plunge in financial and commodity prices as markets reacted nervously to the unexpected outcome. But less than a day after the news sunk in, numbers were up again, and crude oil prices were back were they were before November 8 – in the mid US$40s/b. This suggests that the market seems to think that Donald Trump being in the White House is no preclusion to business as usual. However, it is in the longer term that these ramifications will manifest.

First, domestically. If Hillary won, she would have pushed the energy industry down the renewables trend it has been on since Barack Obama took power. Trump has campaigned to reverse it, and most Republicans would be behind that, focusing instead of exploiting the US’s vast amounts of shale, as well as possibly reviving the Keystone XL rejected by Obama in 2015, that will ship oil sands crude from Canada to Nebraska, then onward to the US Gulf. As Sarah Palin once said – the mantra is, drill baby drill – and a Trump presidency would scale back regulation to allow more drilling. Proponents say it will pump money into neglected states and spur job creations, while opponents fear the environmental damage and usage of eminent domain. There’s also another thing – the pipeline and more drilling will pump supply into a market already suffering from a glut. 

Secondly, internationally. Trump’s rhetorical hostility to trade is well documented –slapping taxes on Chinese imports and bringing manufacturing jobs back. The Trans-Pacific Partnership with Asia and the Transatlantic Economic Partnership with the EU is likely to be killed. But putting up barriers to trade is counter-productive and this is one promise Trump may not be able to keep, if he ever had any serious thought of it. But if you can’t keep trade from coming in, you can boost it going out – so LNG export projects along the Gulf will pop up more. Trump has also criticised the Iranian nuclear deal, which removed international sanctions to allow Iran to significantly ramp up its crude exports this year. This could be reversed with unilateral sanction, creating an upside  for Oil prices here but this may overshadowed by increased US production or even OPEC. 

It is in geopolitics that the greatest worry is. The Paris International Climate Accord is going to be stalled, and Trump has threatened to de-fund everything from the United Nations to NATO. An America under Trump – if you believe the rhetoric – is going to become significantly more isolationist and significantly less “international policeman”. There are tremendous ramifications resulting from this. Trump’s pal Putin could move unchecked towards Eastern Europe and into the Middle East and retain hold of Syria. While China will take full advantage of the power vacuum in East Asia, which depends on the US to act as a counterbalance. This could stoke tensions; between Japan and China, between Southeast Asia and China over the South China Sea’s large oil reserves in Spartly Islands. 

Chicken Littles may be running around crying that the world is ending because Trump is President. They are probably overstating it. The world is not and will not be coming to an end. There is too little that we know about what Trump will accomplish in office come this January onwards.  This is a man who has no history in public governance. Will he really “walk the talk”, and grab Congress and the Senate by the b***s! 

For now what is certain is uncertainty itself. And this traditionally makes Oil markets volatile and keeps investments at bay in a market that is already reeling. 

The sun will still shine tomorrow. You can bet on that for now.  

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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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