This has been a turbulent week in US politics. On Tuesday Kevin McCarthy, the Republican Speaker of the House of Representatives, was ousted from that job on a 216-210 vote, with eight members from his own party joining Democrats to remove him.
It was the first time in US history that Speaker had been voted out of office: a sign of the volatile state of US politics, when energy policy is at a critical moment. With the next general elections for the presidency and Congress a little over a year away, McCarthy’s dismissal has been a reminder that there is considerable political risk around the outlook for energy in the US.
The 2022 Inflation Reduction Act (IRA) created and extended incentives for investment in wind and solar, battery storage, hydrogen, nuclear, and other low-carbon technologies. But to achieve the hoped-for payoffs in growth in low-carbon energy, those incentives will have to remain in place for the next ten years and beyond. Some Republicans in Congress have been pushing to repeal many of the act’s key provisions.
Meanwhile, President Joe Biden’s administration has been acting to restrict future offshore oil and gas development. The Department of the Interior last week published its Proposed Final Program for offshore lease sales over 2024-29, including a maximum of just three, all in the Gulf of Mexico. Deb Haaland, the secretary of the interior, said the plan “represents the smallest number of oil and gas lease sales in history.”
As a comparison, the Trump administration had planned 47 offshore lease sales over a similar five-year period.
It was a position that seemed at odds with the president’s statement a year ago that “we need to responsibly increase American oil production”. The time horizons are different, of course: the restrictions on leasing will affect oil and gas output into the 2030s, while last year President Biden wanted the industry to increase production quickly. But long-term restrictions on activity can increase the risk of a short-term crisis in the future.
The results of next year’s elections still look finely balanced. Polls show President Biden and former President Donald Trump running roughly neck-and-neck in a straight match-up, with Trump enjoying a slight advantage in the RealClearPolitics average. The Republican party has a solid lead in polling on which party will do a better job of keeping the country prosperous, and the rise in US long-term interest rates to 16-year highs this week will add to the pressure on consumers, potentially further eroding support for the Democrats on economic issues.
Republicans currently control the House, and Democrats the Senate. If Republicans take control of both chambers after the election, there are likely to be more moves to repeal parts of the IRA. If the Republicans retake the White House, they could use administrative powers to limit the law’s impact.
Former President Trump has been increasingly vocal recently in his opposition to electric vehicles, and a roll-back of regulations and tax incentives that encourage the shift to EVs seems likely to be a priority if he is elected.
Support for the IRA, despite its limitations
Among the energy executives gathered this week at ADIPEC, the vast energy conference in Abu Dhabi, there was a clear consensus in favour of the IRA. Wael Sawan, chief executive of Shell, described it as a model that other economies could follow. “I think the Inflation Reduction Act is an example of a triumph… [in] what is a polarised political landscape,” he said. “And I think we need more of those opportunities to be able to create the right incentives.”
Vicki Hollub, chief executive of Occidental Petroleum, agreed, contrasting the IRA favourably against proposals for carbon taxes.
“What IRA does is it promotes the development of new technologies,” she said. “And I think that that’s what we need: we need the technology, and carbon taxes are not going to get us there. They are not proven to work, anywhere round the world, to generate what the world really needs in terms of the climate transition.”
After a peak in excitement over the IRA after it was signed into law last year, realism has been setting in. As Michelle Davis, Wood Mackenzie’s global head of solar, put it recently, the full benefits of the IRA “have yet to materialise”.
Developers, investors and others seeking to take advantage of the IRA’s incentives have faced challenges with securing permits and grid connections, and tight markets and cost inflation in parts of the supply chain.
In solar power, for example, the IRA has so far failed to drive more solar projects through final stages of development. In the year leading up to the IRA’s passage, an average of 5.8 gigawatts of utility-scale solar was procured each quarter. In the year since then, that average has fallen to 3.8 GW per quarter.
In some areas, the industry is still waiting for critical regulations and guidance on eligibility for the IRA credits. For the 45V credit for low-carbon hydrogen, for example, the Treasury has said that payments will be linked to carbon intensity, but has not yet specified how that metric will be calculated. There had been expectations in the industry that the regulations would come this month, but the indications now are that they have been pushed back to the end of the year.
The uncertainty has contributed to the fact that there were more new low-carbon hydrogen projects announced in the US in the year leading up to the IRA passing than there were in the year after it.
There is still more detail needed on the incentives for solar power, too. Wood Mackenzie analysts this week published an overview of the impact of the IRA, noting that “there are still many unanswered questions that the industry must sort through before developers and financiers can finalize plans and contracts for new solar projects.”
But even so, the act is still expected to drive long-term growth in low-carbon energy. Despite the near-term challenges, we still expect 15% growth every year across the US solar industry on average. Over the next five years, the operational solar fleet is expected to roughly triple in size.
The big question is whether changes in the White House and Congress could derail that growth. Martin Houston, chairman of the Global Energy Group at the investment bank Moelis, and vice chairman at the LNG company Tellurian, this week raised the question of whether changes to the IRA could be possible.
“If you have all three branches [of government] controlled by a Trump administration in the future, does that allow an evisceration of energy that has got a Biden stamp on it?” he asked in a conference session at ADIPEC. “The first line of attack [in] the first Trump administration was Obamacare. Is the IRA the first obvious target?”
However, he added: “I don’t think necessarily that it’s possible or even advisable. Even for somebody that’s looking for rebound decision-making”.
Plenty of Republican politicians represent areas that are benefiting from investments supported by the IRA, and thus have an incentive not to scrap it. Politico calculated recently that of 210 new clean energy project announcements, 123 were in districts that returned a Republican to the House of Representatives, compared to 76 that returned a Democrat.
And certainly, many energy executives will be arguing the case for stability in US policy.
“I do not in any way belittle the challenges that politicians see today… And I suspect their job is much much tougher than mine,” said Shell’s Wael Sawan at ADIPEC. “But I would hope that there are certain areas that are almost fact-based… and if you can actually create long-term stable policies, then you could potentially attract the capital that is required to be able to underpin that transition to a lower-carbon energy system.”
In brief
Crude oil prices have plunged since last week, with benchmark Brent dropping from a peak over US$97 a barrel ten days ago to about US$84 a barrel on Friday morning. Traders blamed the fall on concerns about weakening demand. A month ago, Wood Mackenzie analysts noted that “strong non-OPEC supply growth coupled with fears of weakening economic growth in China and the risk of persistent inflation have put increasing reliance on OPEC+ to support the market this year.”
Earlier in the week, India’s petroleum minister Hardeep Singh Puri warned about the dangers of OPEC+ production cuts and too-high oil prices at a time when central banks around the world were raising interest rates to counter inflation. He quoted commentators suggesting that US$75-US$80 a barrel would be “a reasonable level” for crude, and others arguing that if prices did hit US$100 a barrel, they would quickly fall back.
Sultan Al-Jaber, chief executive of the Abu Dhabi National Oil Company and president-designate of the COP28 climate talks that begin next month, has urged oil and gas companies to play a central role in the rapid transition to low-carbon energy. In a speech at the ADIPEC energy conference, he identified three specific priorities: curbing emissions from the production of energy; scaling up investments in renewables and battery storage; and developing low-carbon solutions such as hydrogen for “hard to abate” sectors.
Eni has announced a “significant” gas discovery in offshore Indonesia, known as Geng North. Preliminary estimates indicate a total structure discovered volume of 5 trillion cubic feet of gas in place, the company said. It also estimates that a further 5 Tcf or more of gas is present in undeveloped discoveries within the area of interest around Geng North.
Source: Wood Mackenzie
Source : Hellenic Shipping News
