Weekly Climate Recap: Exxon, EVs, Hydrogen Hubs

Exxon is the winner of this week’s biggest story with their massive acquisition of Pioneer Natural Resources. Also this week, some data on the growth of electric vehicles and the exciting progress we are seeing in decarbonizing personal vehicles. Finally, for better or worse, hydrogen hubs were announced in the US and will receive billions in funding.

☀️ Exxon’s Big Acquisition of Pioneer Natural Resources

Exxon will buy Pioneer Natural Resources in a US$65B deal that is Exxon’s largest since merging with Mobil in 1999. Exxon said that this transaction would more than double their production to 1.3m barrels per day once the transaction closes, which is expected in the first half of 2024. This is an interesting acquisition to analyze through the lens of the energy transition as it represents Exxon’s confidence in the U.S. domestic fossil fuel market remaining strong despite initiatives to move away from fossil fuels. The CEO of Exxon, Darren Woods, also highlighted that,

“As importantly, as we look to combine our companies, we bring together environmental best-practices that will lower our environmental footprint and plan to accelerate Pioneer’s net-zero plan from 2050 to 2035,”

BloombergNEF

This transaction will catapult Exxon to the top producer in the US, beating out rival ConocoPhilips and Occidental Petroleum. Further, this will ultimately result in Exxon having majority control of the Permian Basin with Pioneer’s net acres within the Midland Basin being a good strategic move given the oil productivity in horizontal wells in the Midland Basin.

BloombergNEF identified 5 key takeaways from Exxon’s call discussing this US$60B acquisition.

1. Exxon has no plans of cutting rigs or people as the company looks to its growth target of 2 million barrels a day by 2027
2. 2/3 of an expected US$2B in annual cost savings can be derived from improved oil recoveries
3. Pioneer will add US$5B in free cash flow to Exxon, but decisions on increasing dividend or buyback program are in flux
4. Exxon is moving employees to West Texas to pursue a well in the Permian
5. This acquisition will bring overall production to 5 million barrels a day by 2027

Interestingly, the activity fund, Engine №1, who in 2021 secured three board seats at Exxon Mobil, voted in favour of the transaction. The view of Engine №1 is that we need oil and gas in the short-term and the Permian Basin is the best and most affordable short-term asset. The fund stresses that since oil and gas is needed, sourcing from the most responsible producers is the right thing to do for the environment.

Takeaway: This is an extremely interesting corporate event to analyze through the lens of the energy transition. While Exxon is seemingly betting on the permanence of fossil fuels, the estimated production figures stand in extreme comparison to what the International Energy Agency estimates production will be. In the IEAs NZE 2050 estimate, they predict 24 million barrels per day of consumption per day, down from 97 million as of 2022. Exxons production by 2050 is estimated to be 103 million alone. While this acquisition has some sustainability tints to it, it scares me to think that oil supermajors are this confident in continued production of fossil fuels.

🔌 Electric Vehicles Reach Disruption Level of Sales

Electric vehicles continue to surge in popularity as their capabilities and acceptance grow more mainstream. As reported in CleanTechnica, global plugin vehicle registrations grew 45% in August 2023 vs August 2022. This means that plugins represented 18% of the overall share of the auto market. The list of the top selling plugin vehicles are dominated by Tesla and BYD as shown below.

CleanTechnica

This data on electric car brands comes on the back of news out of the US that states that Tesla’s are now cheaper than the average new gas-powered car. The combination of Tesla’s strategy shift to bring down the price of their cars and rely on volume in conjuction with an existing federal rebate have sunk the price of a Tesla to below the price of an ICE vehicle. Further, EV sales are reported to have accounted for more than 7% of new cars sold in the US in 1H23 which represents a huge milestone for the EV industry in the USA.

Takeaway: This announcement on the success of EV growth and the report from Ember that I touched on last week have been two success stories in the transition so far. While both events represent progress and a huge milestone, it is too soon to take our foot off the… battery? Continued cost declines, competition, and technology advancement will drive EVs to further growth and offset carbon emissions.

🥼 Hydrogen Hubs Announcement

The Department of Energy in the United States has selected 7 clean hydrogen hubs to receive federal funding to develop low-carbon hydrogen production and usage projects across the country. These hubs involve state governments, private companies, and research organizations and may receive up to a cumulative $7 billion over the coming years. The goal is to reduce carbon emissions in various industries, including chemicals, fertilizer production, shipping, trucking, and power generation. The combined production capacity of the hubs is estimated to be 3 million metric tons of hydrogen per year.The list of hubs announced are as follows:

1. The Appalachian Regional Clean Hydrogen Hub will focus on using natural gas for hydrogen production in the West Virginia, Ohio, and Pennsylvania region, or blue hydrogen. This project will receive US$925m.
2. California’s Alliance for Renewable Clean Hydrogen Energy Systems will work on hydrogen projects in Southern and Northern California, including fueling ships and trucks at major ports. This hub will be receiving US$1.2B.
3. The HyVelocity Gulf Coast Hydrogen Hub in Texas will be the largest hub, producing both blue and green hydrogen, and will tap into existing hydrogen infrastructure. This hub will be receiving US$1.2B.
4. The Heartland Hydrogen Hub in Minnesota and North Dakota plans to use wind energy and nuclear power for hydrogen production, primarily for fertilizer and power generation. This hub will be receiving US$925m.
5. The Mid-Atlantic Clean Hydrogen Hub (MACH2) will focus on supplying industrial areas in southeastern Pennsylvania, Delaware, and New Jersey with clean hydrogen.
6. The Midwest Hydrogen Hub, spanning Illinois, Indiana, Michigan, and Wisconsin, aims to use hydrogen in steel and glass production, power generation, transportation, and aviation fuel. This hub is receiving US$1B.
7. The Pacific Northwest Hydrogen Hub (PNWH2) plans to exclusively produce hydrogen using renewable energy in eastern Washington, Oregon, Idaho, and Montana for transportation and fertilizer production. This hub is receiving US$1B.

The announcement comes in addition to information on tax credits for hydrogen production that were included in the Inflation Reduction Act. The 45V tax credit offers US$0.75 per kg of Hydrogen produced with no more than 2 kg of CO2E emitted per kg of Hydrogen at the lower end. At the upper end, this credit gets up to US$3 per kg of hydrogen produced with less than 0.45 kg of CO2E.

Takeaway: Hydrogen, in my opinion, is not a technology that should be receiving billions of dollars. Despite my personal views, this is a big announcement for the hydrogen industry at large. The funding going into these hubs will vastly scale up production, for better or worse. Perhaps this funding will catalyze investment and result in some big offtake agreements being signed but we will have to wait and see where things go from here.

What Else is in the News

• California Governor Gavin Newsom signed two key pieces of legislation that will result in more climate-related transparency from large companies in the state. SB 253 and SB 261 were signed last Saturday and both require various sizes of companies to publish emissions and other climate-related business factors. SB 253 will requires companies operating in California with revenues above US$1B to report GHG emissions each year. SB 261 will require companies with revenues greater than US$500m to disclose climate-related financial risks and countermeasures.
• Not to get too Red Hot Chili Peppers and obsessed with California, but another key piece of legislation was signed in California, SB 410. This bill is intended to speed up interconnections to the grid from the customer side to help the state further electrify. With piece of legislation comes after FERC 2023 that is aiming to interconnect generators faster. I see this piece of legislation passed by California as hugely important to get more EVs and other electrification initiatives to the masses but I cannot help but think about how this will impact electricity demand and how further capacity will be needed on the grid.
• Who would have thought a FERC order to remove barriers for assortments of distributed energy resources to integrate into the grid would be difficult? That is what that various ISOs of the US have had to contend with in the wake of FERC 2222. They face challenges as the grid evolves and customers can now become the generator, something that complicates things immensely for grid operations used to developing implementation strategies differently.