Hello and welcome back to Energy Source.
Oil sold off again yesterday, the same day the Opec+ group’s latest output cuts came into force. It underscores the extent to which the group has not been able to counter the oil market’s jitters about a sluggish global economy and a Chinese recovery that has not yet propelled a big surge in crude demand, although that could still be coming.
For more on that, check out Myles’ piece on weak diesel demand signalling potential problems for the US economy. Meanwhile, UK-listed BP beat market forecasts this morning with first quarter profits of $5bn but its stock still slid 5 per cent on a drop in the pace of planned share buybacks.
In today’s newsletter, Amanda has an interview with Jigar Shah, the federal government’s cleantech lender-in-chief. Big Oil hasn’t followed through yet on its big promises on hydrogen and carbon capture, he said. And in Data Drill I look at the valuation gap between US and European Big Oil.
Thanks for reading. — Justin
PS Hillary Rodham Clinton is the latest speaker to join the line-up at the US edition of the FT Weekend Festival on May 20 in Washington, DC, and online. Register now and save $20 off using promo code NewslettersxFestival. Prices increase on Friday.
US energy official says Big Oil hasn’t come to the table on decarbonisation
Jigar Shah, arguably America’s most important cleantech lender, describes his career as an effort to “commercialise technology that everyone says is unbankable”.
Shah, who heads the US Department of Energy Loans Programs Office and has more than $400bn in loan authority, is one of the most powerful figures in shaping which emerging technologies — and companies — will dominate the US energy transition.
“The US is probably one of the most attractive markets in the world today for building manufacturing facilities or deploying decarbonisation technology,” Shah told Energy Source at a BloombergNEF conference. “The goal is to make sure that all of these technologies are cost effective without subsidies.”
More than 130 applicants are applying for loans worth $120bn from the LPO, a 50 per cent increase from before the US Inflation Reduction Act came into effect, Shah said. The IRA expanded the LPO’s loan authority by more than $300bn, putting Shah on the front lines of President Joe Biden’s climate push.
One player that has been noticeably absent in funding these technologies is Big Oil. While US oil majors, including ExxonMobil, Chevron and ConocoPhillips, have made commitments to green their portfolios with clean hydrogen and carbon capture and storage, these announcements haven’t been backed up with cash, said Shah.
“We haven’t seen them come to the table in a big way yet, but we welcome them because it would be great to get their expertise, especially for their strong record of successfully developing large, complex energy infrastructure projects on time and on budget,” Shah said, adding in a later BloombergNEF event that less than 20 per cent of capital in carbon management has come from the oil and gas sector.
Exxon has said it plans to spend $17bn on a new low-carbon business through 2027, much of which is earmarked for carbon capture and storage (CCS) and hydrogen. Chevron has also said it plans to spend several billion dollars building out similar businesses. But the companies have been slow to follow through.
“Everybody feels like the oil and gas sector is somehow dominating hydrogen and CCS, and we’re not seeing that in our data set,” said Shah.
The LPO released its annual portfolio report last week, offering a glimpse into the state of the office’s balance sheet since the IRA’s passage. The LPO issued $31.6bn in loans in fiscal year 2022, with estimated losses of about $1bn, well below the $5bn set aside for losses and a rate on par with commercial institutions.
The “ridiculously good rate of return” argues the office didn’t take enough risk, suggests Shah. Right now, he isn’t worried about investing in another bad egg, referring to the $535mn Solyndra solar project that went bankrupt under the Obama administration and cast a shadow over the office for years.
“Solyndra wouldn’t make it through the current version of the Loan Programs Office,” Shah said, “The projects that go through the Loan Programs Office are all real projects that are put in the ground.”
When it comes to deciding which applications receive loans, Shah said the office does not have a particular preference for technologies or companies — or even country of origin.
“Whether a company is from China or whether it’s from Korea or Japan or Europe, we are actively encouraging companies to invest in the United States,” Shah said. “That being said, we of course make sure that there’s no unusual relationships with state actors, and that we’re identifying risks and mitigating them when possible. We make sure that there’s a respect for intellectual property.”
But the lasting legacy of the office, Shah said, will be its work on commercialising small modular reactors for global deployment.
“The thing that I’m super excited about is the stuff that we commercialise here, and then export around the world. Solar, wind, geothermal, low- impact hydro, we need to scale it all.” (Amanda Chu)
TotalEnergies’ chief executive Patrick Pouyanné was the latest European oil boss to complain about his company’s valuation discount in the market compared to its American rivals, my colleagues reported yesterday.
While moving the company to the US looks extremely unlikely considering Total’s close ties to the French government, Pouyanné’s comment reflects a growing frustration among European oil bosses about their prospects on the continent. The Financial Times reported previously that Shell executives had explored a move stateside for similar reasons.
The valuation gap is not a new phenomenon. US companies have enjoyed consistently higher valuations than their European-listed rivals for many years. Notably, this predates serious discussions about the energy transition, so it’s probably not the case that European companies are suddenly being punished for leaning into green energy. Instead, the US companies benefit from a much larger equity market and deeper pool of investors — and have been steadier dividend payers.
As the chart below shows, the 10-year-average price-to-expected-cash flow — a jargon-rich metric that gives a good idea about investors’ mood on a company — shows a persistent premium for US oil groups. Nor has the valuation gap widened significantly in the past couple years — it’s currently more or less in line with the 10-year-average.
Rather, European bosses seem to be responding to the worsening ~vibes~ for oil and gas producers on the continent, where policy and investors’ sentiment are clearly moving more quickly against fossil fuels, threatening to exacerbate their valuation problem. (Justin Jacobs)
Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.