Hello and welcome back to Energy Source.
Chevron yesterday said it would buy PDC Energy, a Colorado-focused shale driller, for $7.6bn in the latest sign that the US oil industry could see a wave of deals. Growth in the shale patch is slowing, prime drilling prospects are becoming increasingly scarce and companies have cash — and rich stock prices in this case — to throw around.
Chevron has spent months fending off questions about the quality of its shale holdings after production from the business disappointed last year, and this deal seeks to answer some of those questions. It also deepens Chevron’s investment in the US, putting Colorado’s little-known oil patch suddenly among the global oil powerhouse’s top-five assets.
PDC’s decision to sell, meanwhile, reflects how unloved smaller oil producers are on Wall Street. It’s a complete reversal from the shale revolution’s early days when upstarts ruled the oil patch and giants such as Chevron struggled to keep up. Like other undersized drillers, PDC had seen its shares trade at a persistent discount to its larger rivals for years, leaving it vulnerable to a takeover. It probably won’t be the last.
On to today’s newsletter — Myles digs into a new survey of energy executives who say that low returns on clean energy projects are holding back investment. And Amanda reports that US and other western nations’ efforts to extract themselves from China’s clean energy supply chains will take a decade or more to pull off.
Thank you for reading — Justin
Show me the returns
The energy transition is not yet proving profitable enough for some.
That is among the central takeaways from consultancy Bain’s annual energy transition survey, a closely watched measure of industry attitudes to decarbonisation, which was released this morning.
ES took an advance look at the study, which polled more than 600 senior energy and natural resources executives globally. These are our main takeaways.
1. Inadequate returns are deterring capital from the transition . . .
Over three-quarters of the executives surveyed pointed to limited return on investment — and a lack of consumer willingness to pay — as a leading barrier to pumping money into clean energy.
“We don’t have a shortage of capital, we have a shortage of returns,” Joe Scalise, Bain’s head of Bain’s Global Energy & Natural Resources practice, told ES. “In order to make these world changing investments — in order to form the capital to make them — there needs to be an adequate return.”
“The issue we’ve got here is not that there’s not a desire to change,” said Scalise. “Every executive I interact with . . . cares about the future of the planet. But they also have fiduciary responsibilities to caretake the assets that they are responsible for.”
There is a lot of cash being ploughed into clean energy — hundreds of billions every year — but it’s still nowhere close to the trillions needed to hit climate targets. Getting to that next level is hitting a major barrier: going green doesn’t always pay.
Supermajors Shell and BP have recently scaled back their plans to pivot into renewables as profits pile up in their fossil fuel businesses. Despite the huge fall in wind and solar costs in recent years, fossil fuel energy — especially in the sky-high price environment of the past year — is where the money is at.
If markets are not driving a sufficient return to trigger a transition of the scale and pace required, steering capital towards the transition falls to governments.
2 . . . but government intervention is making a big difference
Where governments are doling out carrots to coax investment it seems to be working.
The US Inflation Reduction Act — which is injecting $369bn into clean energy in the form of subsidies and loans — has spurred a massive influx of capital, leaving other nations scrambling to keep up.
Its impact is clear from the survey’s findings: executives in North America expect to allocate 22 per cent of capital spending this year to “new growth areas”, up from 19 just a year ago. In Europe, where governments have been racing to stem the flow of investment westward across the Atlantic, the trend is the reverse.
“Nothing repels investment like uncertainty,” said Scalise. “If there’s ambiguity you get people holding back. I think there’s a perception that there’s more of that in Europe at this point post IRA.”
If the IRA pits governments against each other in a new clean energy subsidies arms race it could juice returns and unleash a fresh wave of spending.
3. The people problem
But even as the capital flows into decarbonisation are increased, there is another problem: labour.
From turbine technicians to panel installers, the energy transition needs a significant amount of manpower. Executives say finding people to fill those jobs is becoming a problem.
Digital and IT jobs are a particular bugbear for hiring managers. Roughly a quarter of executives surveyed pointed to an “unfavourable environment” either to find or keep staff in these areas.
“The energy and natural resource industry . . . has not exactly been at the forefront of exciting places for new computer science grads to go work,” said Scalise. “It’s not quite been a backwater. But it hasn’t been an exciting place to be for quite some time.”
That attitude is shifting today — and quickly. But it is not just in tech jobs where the problem exists. Filling essential construction positions is also proving tricky.
“We need more and more frontline workers, more and more people capable of deploying power grid capital,” said Scalise. “[Many of] those trades have been in decline for several years. But that’s where the money is going to be flowing and where the skills are going to be needed.”
President Joe Biden’s efforts to build a clean energy manufacturing base in the US and across friendly nations won’t break America’s dependence on China’s critical minerals anytime soon, warns a new report from Lazard Geopolitical Advisory.
Securing enough critical minerals, such as lithium and nickel, that are needed to power the clean energy transition has moved to the top of the agenda in western capitals as tensions escalate with China, which dominates vast swaths of the supply chain.
The US has made multiple commitments with trade partners to secure critical minerals, and buyers’ and sellers’ clubs are emerging to gain more leverage over the market.
The US Inflation Reduction Act uses subsidies to entice companies to source an increasing amount of critical minerals used in electric vehicle batteries from the US or free trade partners. Continuing to rely on China-based supply chains will put carmakers at a disadvantage, or so goes the thinking. The EU has also proposed its own domestic thresholds for critical minerals.
The policies, however, will not quickly unwind a deeply entrenched dependence on China, warns Lazard in its report titled “Critical Minerals: Geopolitics, Interdependence, and Strategic Competition.” Years of under-investment, long project lead times, and rapid demand growth mean countries will need Chinese supply over the next decade, at least.
“Dependencies and interdependencies that exist between countries are very stark, and something that, at least for the next 10 years, will remain the case,” said Carlos Petersen, geopolitical adviser at Lazard. “The dependencies abroad won’t end with a policy such as IRA.”
This lengthy transition leaves western countries in a vulnerable spot. China has a lot of leverage to retaliate against western nations and starve them of inputs, risking high prices and slowing the transition, says Lazard. Beijing controls most of the mining and refining for rare earths, graphite and silicon, as well as processing for lithium and cobalt.
“If we were to enter another crisis between the United States and China or the west and China . . . this would be one of the top tools that China could use,” said Theodore Bunzel, co-head of Lazard Geopolitical Advisory.
Yet the situation carries risks for Beijing as well. Forceful retaliation from China could backfire, pushing buyers to look elsewhere or invest more heavily in their own domestic supply and technologies. China’s temporary ban on the export of rare earths to Japan in 2010 led to a significant reduction in the country’s reliance on China that continues more than a decade later. (Amanda Chu)
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.