Banks are falling over themselves to announce they are stopping investments in new oil and gas fields as the noise against the sector grows. But there is still plenty of financing noise around the oil and gas sector itself and there is starting to be some realism about the speed of the rollout of the alternatives. Renewable construction costs are leaping and supply chains are showing signs of stress. New project announcements in the offshore wind and hydrogen sectors still greatly outweigh schemes under construction and at some point an energy gap could emerge.
Over to Germany, where the Greens share power as a junior partner in the governing coalition with the Social Democrats. The party was said to be the dynamic, new look partner in the government – until recently. An interesting report on Reuters this week suggested voter fatigue is setting in.
"Their appeal has faded this year, however, as Germans focus more on domestic matters and consider how much the Greens' climate policies will cost and require in lifestyle adjustments," the report said. The Greens faced an interesting dilemma early last year when Russia invaded Ukraine and their government prioritised significant new investment in gas infrastructure. But the Greens were able to counter that by saying new investment in renewables was required over the long term.
Germany is undoubtedly a European economic success story but its energy policy has been under scrutiny since the invasion, which highlighted the wisdom or otherwise of abandoning nuclear power completely in 2011 following Japan's Fukushima nuclear disaster. The government gave 11 years for the reactors to be shut down but even within that timeframe, the Federal Audit Office found in 2021 that the energy transition had proved too costly and underestimated the risks to supply. With Russian gas in shorter supply last year Germany turned to "intensive use" of old coal-fired power stations, leading to additional emissions of 15.8m tonnes of CO2 according to Energy Brainpool. Such are the risks of the energy transition.
Over to Uganda. Much has been made of the success of stopping Western banks financing the US$3.5bn 1,500km East African Crude Oil Pipeline (EACOP) pipeline. The result? It will be financed by the Chinese. This is not to judge the case for EACOP one way or the other. It is simply a fact.
Down to Mozambique. Work is now due to restart on financing the Mozambique LNG scheme, with bank meetings due in July. The project financing is in place but was put on ice in April 2021 due to the local security situation. Now the security situation appears to have calmed, the US$15.4bn project financing can be revived and renewed.
Presumably, all those who signed into the deal will recommit, including US Exim, which is to supply US$5bn, and the UK's UKEF, which is providing US$1bn. A host of commercial banks are involved. Will this deal be judged as financing new a oil and gas field, ie against some bank policies, or will it be judged as midstream, simply transporting gas, ie not necessarily ruled out? Indeed, what is the rule for LNG, a sector that has boomed over the last 12 months with record amounts of project finance raised from commercial banks, mainly in the US?
PFI held its hydrogen project webinar a couple of weeks ago with an expert panel and record numbers, for us, of webinar attendees. Clearly, interest in the sector continues to grow and grow, and there is a real push to get the sector moving. But while the opportunity is vast, the challenges are great.
Trent Vichie, CEO of Canadian developer EverWind, said demand was there from Germany for the first phase of its project but to move up to scale "more work needs to be done on the European side”, he said, “especially on the side of logistics”.
Paddy Padmanathan, previous CEO of ACWA Power, who worked on the Neom Helios hydrogen scheme financing and is now with hydrogen developer ZHero, said demand for hydrogen was not an issue but the supply chain definitively was. However, he added that the average premium gap between grey hydrogen, derived from fossil fuels, and green hydrogen, derived from clean energy, is probably double the price.
Initiatives to get the market going are emerging. The European Union (EU) has its hydrogen bank idea and Australia has just released it hydrogen subsidy scheme. Both rely on topping up that premium gap. But both are limited in scope, with the EU subsidy limited to €800m and the Australian one to A$2bn – enough to support just 1GW of electrolyser capacity by 2030. Interesting, but not game-changing.
Northland Power released its Q1 results last week. Costs at its 1.2GW Baltic Power offshore wind farm have jumped C$1bn from an original estimated C$3bn. Oops. Hopefully supply chain issues will ease. But in the meantime, don't assumed X amount of new green GW is coming online soon just because X amount of new projects have been announced.