Green Energy Failures Revive Natural Gas Bets

Shell and BP had high hopes for biofuels like renewable diesel and sustainable jet fuel, pouring billions of dollars into the market. But things went badly.

Last week, Shell took a $780 million hit after halting construction on a Dutch plant that was set to become one of Europe’s largest biofuels plants. BP has abandoned plans for two of five potential biofuels refineries, although it also bought out its joint venture partner, Brazil’s BP Bunge Bioenergia, in June.

A glut of biofuels, especially cheap Chinese imports, is squeezing profit margins. Finland and Sweden have also relaxed rules on the minimum amounts of renewable fuels that must be blended with oil-based transportation fuel or heating oil in an attempt to lower energy costs. Producers rely on these government mandates to generate demand.

Biofuels will continue to be key to reducing carbon emissions in the transport sector. The International Energy Agency believes the energy source will eventually account for a larger share of the global mix than wind if net-zero emissions targets are met. But it will be hard to make money in the short term, with the market likely to be oversupplied until around 2027, estimates Irene Himona, an energy analyst at Bernstein.

This isn’t the only clean energy blow to Shell and BP. The latter reported a $540 million impairment on its New York offshore wind farms in October. Shell closed its hydrogen filling stations in California in February and sold its European home energy business last year.

Shell CEO Wael Sawan said during the company’s latest earnings conference call that liquefied natural gas is currently “the only credible solution that delivers both energy security and decarbonization of the energy system.” It could be argued that solar and onshore wind also meet those criteria, but not at the scale or profit levels that oil and gas executives would expect.

Sawan plans to increase Shell’s LNG volumes by as much as 30% this decade, either through acquisitions like the recent purchase of Pavilion Energy or by acquiring volumes from third parties. The company recently invested in ADNOC’s Ruwais LNG project in Abu Dhabi. BP is also signing offtake agreements as it tries to build a 30 million tonne LNG portfolio by 2030.

The hope is that more countries will switch from coal to natural gas for power generation, especially in Asia. Gas is cleaner than coal, producing half the carbon dioxide emissions when burned. The switch has helped the United States reduce emissions from electricity generation by nearly 40% over the past two decades, data from the Energy Information Administration shows. Natural gas can also be used when intermittent renewable energy from wind and solar is not available.

But the idea that LNG could play a big role in the transition to low-carbon energy is controversial. Natural gas producers have a big problem with methane leaks and flaring. After monitoring major U.S. oil and gas basins with sensors mounted on airplanes, the Environmental Defense Fund recently found that methane emissions could be four times higher than previously thought. Methane doesn’t stay in the atmosphere as long as carbon dioxide, but it’s nearly 80 times more effective at warming the planet, according to EDF.

Moreover, the current biofuel glut may seem outlandish compared to what may lie ahead for LNG. Hundreds of billions of dollars have been pumped into new LNG infrastructure in recent years. Supply is expected to grow by 10% annually between now and the end of the decade, about twice the historical average, according to Michele Della Vigna, head of natural resources research for Europe, the Middle East and Africa at Goldman Sachs.

If this influx of supply pushes down spot prices, LNG will become attractive to price-sensitive emerging economies and expand the overall size of the market. Cheaper gas will also make Europe more competitive in industrial production after a difficult few years of very high energy costs. But a glut would not be good for the profits of major producers such as Shell.

For now, LNG is the obvious way to keep profits flowing to shareholders while making progress on emissions. But stockpiling could store pain for the future.

Write to Carol Ryan at [email protected]