The ‘diminishing returns’ of the energy transition

Hello and welcome back to Energy Source.

Chevron said yesterday 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 shale patches is slowing, major drilling prospects are becoming increasingly scarce and companies have cash — and in this case rich stock prices — to throw around.

Chevron has spent months fending off questions about the quality of its shale holdings after production from trading disappointed last year, and this deal seeks to answer some of those questions. It also deepens Chevron’s investments in the US, suddenly putting Colorado’s little-known oil patch among the global oil powerhouse’s top five assets.

Meanwhile, PDC’s decision to sell shows how disaffected smaller oil producers are on Wall Street. It’s a sharp contrast from the early days of the shale revolution, when upstarts ruled the oil patch and giants like Chevron struggled to keep up. PDC, like other undersized drillers, 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 today’s newsletter – Miles explores a new survey of energy executives who say low returns on clean energy projects are holding back investment. And Amanda reports that efforts by the US and other Western nations to extricate themselves from China’s clean energy supply chains will take a decade or more.

Thank you for reading – Justin

show me the return

For some the energy transition is not yet proving profitable enough.

This is one of the central takeaways from Consultancy Bain’s Annual energy transition surveyA closely watched measure of the industry’s approach to decarbonisation, which was released this morning.

ES took an upfront look at the study, which surveyed more than 600 senior energy and natural resources executives globally. These are our main takeaways.

1. Insufficient returns are preventing capital from transition. , ,

More than three-quarters of executives surveyed pointed to a limited return on investment — and a lack of consumer willingness to pay — as a major obstacle to pumping money into clean energy.

“We don’t lack capital, we lack returns,” Joe Scalise, head of Bain’s global energy and natural resources practice, told ES. “To make these world-changing investments — to have the capital to make them — requires a substantial return.”

“The issue we’ve got here isn’t that there isn’t a will to change,” Scalise said. “Every executive I interact with. , , Cares about the future of the planet. But they also have fiduciary responsibilities to look after the assets they are in charge of.

A lot of cash is being pumped into clean energy – hundreds of billions each year – but it’s still nowhere close to the trillions needed to meet climate goals. Getting to that next level has one big hurdle: Being green doesn’t always pay off.

Supermajors Shell and BP have recently downplayed their plans to pivot into renewable energy as profits in their fossil fuel businesses soar. Despite steep drops in wind and solar costs in recent years, fossil fuel energy — especially in last year’s sky-high price environment — is where the money is.

If markets are not delivering sufficient returns to trigger a transition of the required scale and speed, then steering capital in the direction of transition falls on governments.

2 . , , But government intervention is making a difference

Where governments are handing out carrots to encourage 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 inflow of capital, leaving other nations scrambling to keep up.

The impact of this is clear from the survey’s findings: Executives in North America expect to allocate 22 percent of capital spending to “new growth areas” this year, up from 19 percent a year ago. In Europe, where governments are racing to stem the flow of investment westward across the Atlantic, the trend is the opposite.

“Nothing repels investment like uncertainty,” Scalise said. “If there is ambiguity you hold people back. I think there is a perception that it is more so in Europe at this point after the IRA.

If the IRA pits governments against each other in a new clean energy subsidy arms race, it could juice returns and unlock a new wave of spending.

3. People problem

But as capital flows into decarbonisation, there is another problem: labour.

From turbine technicians to panel installers, the energy transition requires a significant amount of manpower. Officials 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 pointed to a “hostile environment” for finding or keeping employees in these areas.

“The energy and natural resources industries . . . have never been at the forefront of exciting places for new computer science graduates to go to work,” Scalise said. “It hasn’t been quite a backwater. But it hasn’t been an exciting place for a while.”

That attitude is changing today — and quickly. But it’s not just tech jobs where the problem exists. Filling needed construction positions is also proving tricky.

“We need more and more frontline workers, more and more people able to deploy Power Grid capital,” Scalise said. “[Many]of those businesses have declined over the years. But that’s where the money is going to flow in and that’s where the skillset is going to be needed.

(Miles McCormick)

data drill

President Joe Biden’s efforts to build clean energy manufacturing bases in the US and other friendly countries won’t soon break America’s dependence on China’s vital minerals. new report From Lazard Geopolitical Advisory.

Securing enough critical minerals, such as lithium and nickel, which are needed to power the clean energy transition, has moved to the top of the agenda in Western capitals as tensions mount with China, which controls vast areas of the supply chain. dominates.

The US has made many commitments with trading partners to secure important minerals, and buyers’ and sellers’ clubs are emerging to gain greater leverage over the market.

The US Inflation Reduction Act uses subsidies to entice companies to source increasing amounts of the critical mineral used in electric vehicle batteries from the US or free trade partners. Car makers will be hurt by continuing to rely on China-based supply chains, or so the thinking goes. The European Union has also proposed its own domestic limits for important minerals.

However, the policies will not quickly reduce China’s ever-deepening 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 that countries will need Chinese supplies for at least the next decade.

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“The dependencies and interdependencies that exist between countries are very stark, and something that will remain in place for at least the next 10 years,” said Carlos Petersen, a geopolitical consultant at Lazard. “Dependencies abroad will not end with a policy like the IRA.”

This long transition leaves Western countries in a vulnerable position. China has too much leverage to retaliate against Western countries and starve them for inputs, risking higher prices and slowing the transition, says Lazard. Beijing controls most of the mining and refining of rare earths, graphite and silicon, as well as the processing of lithium and cobalt.

“If we were to enter into another crisis between the United States and China or the West and China. , , It will be one of the top tools that China can use,” said Theodore Bunzel, co-head of Lazard Geopolitical Advisory.

Yet the situation also carries risks for Beijing. Coercive retaliatory action from China could backfire, prompting buyers to look elsewhere or invest more heavily in their domestic supplies and technologies. China’s temporary ban on exports of rare earths to Japan in 2010 resulted in a significant reduction of the country’s dependence on China, which continues more than a decade later. (Amanda Chu)

power points

Energy Sources was written and edited by Derek Brown, Miles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. reach us energy.source@ft.com and follow us on twitter @FTEnergy, Keep track of past editions of the newsletter Here,