Inside the biggest debates at CERAWeek

Welcome back to Energy Source — coming to you again from Houston, with a bumper edition as the CERAWeek energy jamboree enters day four.

Today’s newsletter dives into the big themes dominating conversations in the energy industry here in Houston and beyond — and the faultlines that have emerged.

In Data Drill, Amanda charts fresh numbers showing US solar installations fell last year for the first time in four years — making it clear that despite huge government supports under the Inflation Reduction Act, it is far from plain sailing for the renewables buildout.

It’s been great to catch up with so many readers here in Houston. If anyone else wants to get in touch, drop us a line: [email protected].

Thanks for reading — Myles

Our top takeaways from CERAWeek

The Hilton Americas has been a hive of activity all week.

Big names from the US secretary of energy Jennifer Granholm to BP chief Bernard Looney have flown into town to address the annual industry event. On the sidelines, meetings have been held between everyone from US government officials and their European counterparts, to shale bosses and their Opec counterparts.

Below, we’ve recapped three of the biggest points of conversation:

1. US-Europe energy ties get tense

Europe’s energy crisis has been front and centre as the continent struggles with the fallout from Russia’s full-scale invasion of Ukraine.

While the mild winter meant Europe did not suffer the energy price pain many analysts expected, leading European energy groups warned against complacency.

“The crisis in Europe is far from over,” said Didier Holleaux, executive vice- president of French utility Engie. “We have just fought the first battle . . . But unfortunately, there are more battles to come . . . and we have to prepare.”

Andree Stracke, the head of Germany’s RWE, also cautioned against a false sense of security, saying natural gas prices, while far lower than last summer, remain at levels that are damaging to Europe’s economy and could prompt an exodus of industry.

“The press is talking about cheap energy this month. I do not believe we have achieved cheap energy, especially compared to other regions of the world like the US,” he said.

While there was consensus that the crisis is not going anywhere — there was no unified opinion on a solution.

We need to “create some minimum consensus inside Europe on how much gas we need to replace part of the Russian gap”, said Holleaux.

For US fossil fuel producers, the answer for allies across the Atlantic is clear: Europe needs a lot more American gas. That has bred transatlantic tensions.

US gas producers have prodded Europeans to commit to long-term gas contracts that they can use to lock in demand decades into the future.

But Europeans have largely resisted those calls, opting for short-term supply options with an eye on decarbonising fuel supplies in future years.

“By law, by 2043 there should be no gas any longer in Germany. Therefore signing up for 20 years — it’s just impossible,” Stracke said.

2. Where will oil supply come from?

Another faultline emerged over future oil supply growth — and who would pump more to keep rising prices at bay. No one was keen to take charge — including Opec.

US crude growth will remain shackled by Wall Street, shale bosses told ES. The world, they said, would need to turn to Opec to satisfy demand growth. Otherwise, crude prices could escalate sharply later this year as China’s economy cranks into gear.

From the perspective of the big publicly traded shale companies, the message is the mantra they’ve been repeating ad nauseam over the past 18 months: “capital discipline”.

Investors have told them not to grow production beyond 5 per cent. Period. And they have no intention of moving beyond that — whatever prices might do.

“Maybe some growth through the drill bit is OK, but you’re going to have to be careful — that’s just the mindset of investors right now,” Rick Muncrief, Devon Energy chief executive, told ES.

Even if they wanted to grow, execs said escalating drilling costs still stood in the way. On top of that, inventory issues — that is, how many more drilling locations the companies have in store — were becoming an increasing concern. When the mighty Permian Basin hits its ceiling in the next few years, US supply will flatten out.

In the words of ConocoPhillips boss Ryan Lance:

“[The Permian] has been a great gift to the world over the last 10, 12, 15 years and it’s going to keep giving for a long period of time. But it is starting to recede — and the plateau is on the horizon.”

Keeping a lid on prices then, means careful co-ordination with Opec, execs said. Scott Sheffield of Pioneer Natural Resources said US president Joe Biden should make a point of building relationships with Saudi Arabia, the UAE and Kuwait — the only countries he reckoned had the spare capacity that would allow them to significantly boost output.

But Opec said it would not be filling any supply gaps on its own. Haitham Al Ghais, Opec secretary-general, told delegates:

“It’s a global responsibility that Opec cannot shoulder on his own.”

If no one answers the call, the only outcome will be prices soaring well into the triple digits — and reaching a point where consumption tanks as people are forced off the roads and out of the skies.

Devon Energy’s Muncrief said: “Demand destruction will be the ultimate corrector.”

3. The IRA crashes the party

CERAWeek has historically been an oil and gas focused shindig. But for years clean energy has been carving out a larger role in the event. These days, you can choose your own adventure: turn right at the escalator to hear how natural gas will save the world; turn left to hear the same about green hydrogen.

But the big change this year was the Inflation Reduction Act (referred to as the I-R-A in the US; European Union officials have opted for the phonetic “eera” pronunciation to avoid awkward parallels with Irish paramilitaries). Energy executives of all stripes were full of praise for the climate law.

“I think IRA is the most visionary legislation that any country has ever done in order to promote climate change,” said Seifi Ghasemi, chief executive of Air Products, one of the US’s largest hydrogen producers. It was a fair reflection of enthusiasm among other delegates here in Houston.

In a tub-thumping speech, Granholm spoke of the “generational economic opportunity” for the energy investors in the room. She touted geothermal (“geothermal is hot!”), carbon capture and renewable energy. In contrast to her speech last year imploring her audience to produce more oil, this one was unmistakably about the transition.

“You have the skills and the knowledge to build some of these critical technologies at scale,” she told a crowd of oil and gas executives.

“Your expertise for example, in offshore drilling gives you a leg up on offshore wind, your breakthroughs in fracking gives you a massive advantage in geothermal . . . And of course, you are better positioned to crack open cost-effective carbon management.”

The audience’s enthusiasm was not surprising. Biden’s flagship climate law opens up new supply growth opportunities for energy companies across a host of clean technologies. And what it does not do, which executives have long feared, is try to reduce energy demand or tax consumption.

Oil and gas executives said the law suddenly made carbon capture and storage, which has never been economically viable, a profitable new growth option. Green hydrogen went from a pipe dream to realistic new business, others said.

John Ketchum, chief executive of NextEra Energy, the US’s largest renewable power developer, was the focus of a well-attended session at the conference’s main hall — a sign in and of itself of change at CERAWeek.

He said the IRA had set up a period of “dramatic growth in both wind and solar” power.

But permitting remains the biggest hurdle to supercharging the renewable buildout (more on that below). Granholm agreed. Without a streamlined process, executives said, the effectiveness of the IRA would be blunted. (Justin Jacobs, Myles McCormick and Derek Brower)

Data Drill

US solar installations fell last year for the first time in almost half a decade, new data shows, underlining the host of challenges that dog the sector despite unprecedented government support.

Installations were down 16 per cent in 2022 versus 2021, the first year-over-year decline since 2018, according to a report released today by the Solar Energy Industries Association and Wood Mackenzie.

The disappointing performance points to the hurdles that complicate the Biden administration’s hopes for exponential growth in clean energy stemming from the historic Inflation Reduction Act.

“The solar and storage industry . . . is poised for even more rapid growth than it’s ever had, but there are some pretty significant challenges that threaten its potential,” said Abigail Ross Hopper, president of SEIA, the industry trade group.

Supply chain challenges, trade barriers, and delays connecting to the grid helped contribute to last year’s slowdown. Probes into tariff dodging by Chinese manufacturers and detainments of products linked to forced labour in China severely curtailed the supply of modules, increasing project costs and timelines by more than a year for some developers.

Once projects are built, it can also take years to connect to the grid, a cumbersome process known as interconnection. Lawrence Berkeley National Laboratory, a US research centre, estimates the typical time for interconnection in the US now exceeds four years because of a host of issues including an outdated administrative system and lack of transmission.

“The challenges of the interconnection queue are probably the single largest threat to projects that we have in our pipeline right now,” said Ben Catt, chief executive of Pine Gate Renewables, a utility-scale solar developer. (Amanda Chu)

Power Points

• Volkswagen pauses plans for its European battery plant as it seeks €10bn in US incentives.

• The European Commission urges member states to phase out energy subsidies as it prepares to reimpose budget rules.

• South Africa’s economy shrank more than expected in 2022 as a result of rolling blackouts.

• Pakistan’s disastrous floods offers a test case for how much polluting, rich nations should help their vulnerable counterparts.