Big Oil cashes in, while clean fuel startups falter

The Inflation Relief Act of 2022-IRA was supposed to accelerate the transition from petroleum-based fuels to what the law called “cleaner transportation fuels.” The IRA provided billions of dollars in tax credits and direct grants to encourage private industry to move forward with the implementation of the so-called “Cleaner” – (a catchy term that includes: liquid hydrogen, biodiesel, ethanol and renewable natural gas-RNG), new fuels that would help the country reach its climate goals.

It’s been a few years and I thought it would be useful to take the pulse of this still nascent but growing industry. Even with the initiatives in the IRA, the chart below from the BP Energy Outlook-2024 edition shows that if current trends continue, petroleum products will still account for around half of the energy used in road, sea and air transport by 2050. Net Meeting Zero Goals for 2050 would require using much less petroleum products. Up to 70% less, according to the BP chart below.

As a starting point to explore the financial health of the clean fuels industry, it’s worth noting that BP: (NYSE:BP) has spent billions of investor money chasing biofuels with no discernible positive impact on its stock. BP since its full acquisition of BP-Bunge Bioenergia (formerly a JV with Bunge Global SA, (NYSE: BG) is down about 15% since the June 20 announcement date.

As private companies lead this transition and take billions in taxpayer funding to build their infrastructure and distribution networks, it’s fair to wonder if they’re doing it profitably. Is BP’s lack of biofuel growth an isolated example or part of a wider trend?

One of the first things we find is companies that initially proposed ambitious climate goal commitments a few years ago are now backing away from them. A recent article in the Financial Times-FT noted that a number of large corporations are withdrawing or no longer prominently referring to previously stated NetZero 2030 goals –

“This year, corporate leaders across a range of sectors have acknowledged that they cannot meet their greenhouse gas emissions targets set, in some cases, several years ago. Major corporations, including Unilever, Bank of America and Shell, have in the past year dropped or missed targets to cut emissions or tighten ties with the most polluting sectors. Others simply skipped over their promise to improve.”

This is probably a lagging indicator of the overall health of the clean fuels industry, as usually long before they make a public announcement like this, they have cut back on investment.

The story continues

Even governments, normally the most ardent supporters of climate policy goals, have doubts. A Reuters article noted that Scotland has moved away from its 2030 target as unachievable by the target date.

“We accept the recent CCC restatement that this parliament’s interim 2030 target is not being met,” Mairi McAllan, Net Zero secretary for Scotland’s devolved government, told the Scottish Parliament in Edinburgh.

Europe’s largest economy, Germany, appears to be in the same predicament as mentioned in this article.

“The climate expert council, which has the independent authority to judge the country’s climate performance, said Germany is unlikely to meet its target of cutting greenhouse gas emissions by 65% ​​by 2030, compared to 1990, as sectors such as transport and construction struggle to meet their targets.”

That brings us back to individual companies focusing on providing the clean fuels that will bring about the transition. Most are struggling, as this Wall Street Journal article notes. In the article, Plug Power CEO Andy Marsh said, “The excitement in the early days has not lived up to the hype.” Plug Power, (NYSE:PLUG) recently opened a green hydrogen plant in Georgia. PLUG stock is down about 75% over the past year. The chart below shows a broad cross-section of the clean fuel industry and none of them are currently successful in the market.

Among the problems facing the industry is cost control, which is compounded by difficulties in raising capital and results in extended project timelines. The FT noted in a recent article that about $84 billion in a wide range of technologies is being blocked for a number of reasons. In Michigan, the article noted that electrolyser – a technology for extracting hydrogen from water – manufacturer Nel Hydrogen has halted a $400mm project due to lack of clarity over IRA tax credit rules relating to hydrogen. Confusion is a common complaint among businesses looking to take advantage of government loans.

Another headache for these companies is the energy intensity of their production processes. Many of their efforts compete with AI data center developers for green energy. Something that has a particular impact on hydrogen projects that require huge amounts of electricity for the water molecules shed to release the hydrogen. The WSJ article noted the problems a developer had with a metals project

“The only way to fix it is to lower the cost of green electricity,” said Andrew Forrest, one of hydrogen’s most vocal advocates. Forrest, the billionaire founder of Australian iron ore giant Fortescue, said his company’s hydrogen production target for 2030 now looked unrealistic. Fortescue plans to produce its own clean energy to produce hydrogen in Australia and is considering doing the same in Arizona.”

Fortescue, (NYSE:FSUMF), like many companies, has begun to answer analyst questions about the financial viability of these projects as their share price has fallen this year. Fortescue shares have fallen 40% since the start of the year.

Summarizing

It is certainly too early to ring the bell on the clean fuels industry. Climate targets remain in place so far, but investors choosing to vote with their money is a telling indicator of possible future prospects. Where do they get their money?

In some cases, the oil and natural gas industry offers shareholders compelling returns based on growing cash flows. Reuters noted in an article earlier this year that the top five Western energy companies were returning cash to shareholders at record rates, thanks to growing cash flows. ExxonMobil (NYSE: XOM ), for example, returns cash to shareholders with a free cash yield of 7.5% as a combination of its annual dividend and a $20 billion share repurchase authorization.

Extraordinary returns are not limited to Super Majors. Independent E&P, Devon Energy (NYSE:DVN), as a combination of share buybacks and dividends, returns capital to investors with a free cash yield of nearly 15% on a one-year basis, based on recent stock prices. flat from early 2024 in the mid-$40s.

By David Messler for Oilprice.com

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