The Inflation Reduction Act of 2022-IRA was designed to accelerate the transition from petroleum-based fuels to what the law called “cleaner fuels.” The IRA provided billions of dollars in tax credits and direct subsidies to encourage the private sector to begin implementing so-called “cleaner” (a catch-all term that includes: liquid hydrogen, biodiesel, ethanol and renewable natural gas-RNG), new fuels that would help the country achieve its climate goals.
It’s been a few years now and I thought it would be useful to take the pulse of this young but emerging industry. Even with the initiatives in the IRA, the following graphic from the BP Energy Outlook-2024 Edition shows that if current trends continue, oil products will still account for around half of the energy used in road, maritime and aviation transport by 2050. To achieve the 2050 net zero targets, far less oil products would need to be used. According to the BP graphic below, up to 70% less.
As a starting point for examining the financial health of the clean fuels industry, it is worth noting that BP (NYSE:BP) Billions of investors’ money in search of biofuels, with no discernible positive impact on the stock. BP has fallen about 15% since the announcement date of June 20, following its full acquisition of BP-Bunge Bioenergia (formerly a joint venture with Bunge Global SA, (NYSE: BG)).
As private companies lead this change and pour billions of taxpayer dollars into expanding their infrastructure and distribution networks, the question is whether they are doing so profitably. Is BP’s lack of growth in the biofuels sector an isolated incident or part of a larger trend?
One of the first things we notice is that companies that initially proposed ambitious climate targets a few years ago are now moving away from them. A recent Financial Times-FT article found that a number of large companies are moving away from or no longer prominently referring to previously stated NetZero 2030 targets.
“This year, corporate leaders in a number of sectors have acknowledged that they will not be able to meet greenhouse gas emissions targets they set, in some cases, several years ago. Major companies such as Unilever, Bank of America and Shell dropped or missed their targets to reduce emissions or reduce ties to the most polluting sectors last year. Others simply failed to keep their promises to improve.”
This is likely a lagging indicator of the overall health of the clean fuels industry, as the industry has typically scaled back investments long before a public announcement of this nature.
Even governments, which are normally the most ardent supporters of climate policy, have doubts. Reuters article noted that Scotland had moved away from its 2030 target because it was not achievable by the target date.
“We accept the CCC’s recent restatement that this Parliament’s interim target for 2030 is unachievable,” Mairi McAllan, the Scottish central government’s net zero minister, told the Scottish Parliament in Edinburgh.”
Europe’s largest economy, Germany, appears to be in the same predicament as in this article.
“The German Advisory Council on Climate Change, an independent body that assesses Germany’s climate performance, said Germany was unlikely to meet its target of reducing greenhouse gas emissions by 65 percent by 2030 compared to 1990 levels because sectors such as transport and construction were struggling to meet their targets.”
This brings us back to the individual companies that are focused on providing the clean fuels that will make the transition happen. Most are struggling because this Wall Street Journal Notes on the article. The article quotes Plug Power CEO Andy Marsh as saying: “The excitement of the early days has not lived up to the hype.” Plug Power (NYSE:PLUG) recently announced a green hydrogen plant in Georgia. PLUG stock has plummeted about 75% in the last year. The chart below shows a broad cross-section of the clean fuels industry, and currently none of them are doing well in the market.
Among the problems facing the industry is cost control, which is exacerbated by difficulties in raising capital, leading to a delay in project timelines. FT noted in a recent article that around $84 billion in a wide range of technologies has stalled for various reasons. In Michigan, the article pointed out that electrolyzers – a technology for producing hydrogen from water – manufacturers, Nel Hydrogen had paused a $400 million project due to a lack of clarity about IRA tax credit rules for hydrogen. Confusion is a common complaint from companies seeking to claim government credits.
Another problem for these companies is the energy intensity of their manufacturing processes. Much of their efforts are competing with AI data center developers for green energy. This particularly impacts hydrogen projects, which require large amounts of electricity to release hydrogen from spilled water molecules. WSJ article mentioned the problems a developer had with a metal project
“The only way to solve the problem is to reduce the cost of green electricity,” said Andrew Forrest, one of the Most vocal supporters of hydrogen. Forrest, the billionaire and founder of the Australian iron ore giant Fortescuesaid his company’s goal of producing hydrogen by 2030 now seems unrealistic. Fortescue plans to produce its own clean electricity to make hydrogen in Australia and is considering doing the same in Arizona.”
Fortescue (NYSE:FSUMF), like many other companies, is facing questions from analysts about the financial viability of these projects as the company’s share price has declined this year. Year-to-date, Fortescue’s share price has fallen 40%.
Summarize
It is certainly too early to call an end to the clean fuels industry. Climate targets remain in place for now, but investors’ decision to vote with their money is a powerful indicator of likely future prospects. Where are they going with their money?
In some cases, the oil and gas industry offers attractive shareholder returns due to increasing cash flows. Reuters An article earlier this year pointed out that the West’s five largest energy companies are paying out record numbers to shareholders thanks to rising cash flows. ExxonMobil (NYSE: XOM), for example, is paying out its shareholders a 7.5% free cash yield, which is comprised of its annual dividend and a $20 billion share buyback authorization.
Above-average returns are not limited to the super majors. Independent E&P company Devon Energy (NYSE:DVN) is returning capital to investors through a combination of share buybacks and dividends, with a free cash yield of nearly 15% on a one-year run-rate basis based on recent prices of its shares, which have remained flat at around $40 since the start of 2024.
By David Messler for Oilprice.com
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