Big Oil Cashes In as Clean Fuel Startups Falter
David Messler

The Inflation Reduction Act of 2022-IRA was supposed to accelerate the transition from petroleum-based fuels to what the act termed “Cleaner Transportation Fuels.” The IRA provided billions of dollars in tax credits and direct subsidies to encourage private industry to move forward with the implementation of so-called “Cleaner”-(a catchall term including, liquid hydrogen, biodiesel, ethanol, and renewable natural gas-RNG), new fuels that would help the country meet climate goals.

It’s been a couple of years now, and I thought it would be useful to take the pulse of this still-nascent, but burgeoning industry. Even with the initiatives in the IRA, the graphic below from the BP Energy Outlook-2024 Edition shows that if present trends continue oil products will still make up about half the energy used in road, marine, and aviation transport by 2050. Meeting Net Zero 2050 goals would require that far fewer oil products be employed. As much as 70% less, according to the BP graphic below.

As a starting point to delve into the financial health of the Clean Fuels industry, it’s worth noting that BP: (NYSE:BP) has spent billions of investor’s cash in pursuit of biofuels with no discernable favorable impact on its stock. BP since acquiring all of BP-Bunge Bioenergia (formerly a JV with Bunge Global SA, (NYSE: BG) is down about 15% from the June 20th announcement date. 

As private companies are leading this transition, and taking billions in taxpayer funding to buildout their infrastructure and distribution networks, it’s fair to ask if they are doing so profitably. Is BP’s lack of growth in biofuels an isolated instance, or part of a larger trend?

One of the first things we find are companies that initially put forward ambitious climate goal commitments a few years ago, are now backing away from them. A recent Financial Times-FT article noted a number of large corporations backing away from or no longer prominently referring to previously stated NetZero 2030 goals-

“This year, corporate leaders in a range of sectors have acknowledged they cannot meet their greenhouse gas emissions targets set, in some cases, several years ago. Large corporations, including Unilever, Bank of America and Shell, have in the past year dropped or missed goals to cut emissions or to shrink ties with the most polluting sectors. Others have simply skipped over their promise to improve.”

This is probably a lagging indicator for the overall health of the clean fuels industry, as typically long before making a public announcement of this type, they have scaled back investments.

Even governments, normally the most fervent adherents to climate policy goals are having doubts. A Reuters article noted that Scotland had stepped away from its 2030 goal as being unachievable by the target date.

"We accept the CCC's recent re-articulation that this parliament's interim 2030 target is out of reach," Mairi McAllan, the Net Zero Secretary for Scotland's devolved government, told the Scottish parliament in Edinburgh.”

Europe’s largest economy, Germany, seems to be in the same predicament as noted in this article.

“The Expert Council on Climate Issues, which has independent authority to judge the country's climate performance, said Germany is unlikely to meet its goal to cut 65% of greenhouse gas emissions by 2030 compared to 1990 because sectors such as transport and construction are struggling to meet their targets.”

That brings us back to the individual companies that are focused on providing the clean fuels that will bring the transition about. Most are struggling as this Wall Street Journal article notes. The article quoted Plug Power CEO, Andy Marsh as saying, “The excitement of the early days has not lived up to the hype.” Plug Power, (NYSE:PLUG) has recently opened a green hydrogen plant in Georgia. The stock of PLUG has crashed about 75% over the last year. The graphic below shows a broad cross-section of the clean fuels industry, and none are succeeding in the marketplace presently.

Among the problems the industry is having is cost control which is compounded by difficulties in raising capital, and results in pushing out project timelines. The FT noted in a recent article that some $84 bn across a broad range of technologies are stalled for a variety of reasons. In Michigan, the article noted that electrolyzer-a technology for breaking out hydrogen from water, manufacturer, Nel Hydrogen had paused a $400 mm project due to a lack of clarity on IRA tax credit rules pertaining to hydrogen. Confusion is a common complaint among companies seeking to avail themselves of government credits.

Another headache for these companies lies in the energy intensity of their manufacturing processes. Much of their efforts are competing with AI data center developers for green energy. Something that is particularly impacting hydrogen projects that require huge amounts of electricity to spilled water molecules to free hydrogen. The WSJ article noted the problems one developer had with a metals project

“The only way to fix it is by lowering the cost of green electricity,” said Andrew Forrest, one of the most vocal advocates of hydrogen. Forrest, the billionaire founder of Australian iron-ore giant Fortescue, said his company’s 2030 hydrogen production target now looks unrealistic. Fortescue is planning to produce its own clean power to make hydrogen in Australia and is considering doing the same in Arizona.”

Fortescue, (NYSE:FSUMF), like many companies has started fielding questions from analysts about the financial viability of these projects, as their stock price has declined this year. Fortescue’s stock is down 40% since the start of the year.

Summing up

It is certainly too soon to ring the bell on the Clean Fuels industry. Climate goals remain in place thus far, but investors choosing to vote with their money is a telling indicator of likely future prospects. Where are they taking their money?

In some cases, the oil and gas industry offers compelling shareholder returns based on rising cash flows. Reuters noted in an article earlier this year that the top five Western energy companies were returning cash to shareholders at record rates, thanks to rising cash flows. ExxonMobil (NYSE: XOM), for example, returns cash to shareholders with a 7.5% free cash yield as a combination of its annual dividend and a $20 bn share repurchase authorization.

Outsized returns are not limited to the Super Majors. Independent E&P, Devon Energy (NYSE:DVN), as a combination of stock buybacks and dividends, is returning capital to investors with a free cash yield of nearly 15%, on a one-year, run rate basis, based on recent prices of their stock-flat since the start of 2024, in the middle-$40s.

By David Messler for Oilprice.com

 

Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and office assignments. He currently maintains an independent training and consulting practice, and writes on energy related topics.

 

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