Oil and natural gas followers should know that Biden’s new clean energy plan is a major negative, in particular, to US natural gas in the 2020s. We know there is still 97 days to the US elections and a lot can change but, with Biden’s big polling lead nationally and even in some key battleground states, it’s the right time to start to look at what he means to oil and natural gas. Our concern is that Biden states he plans to put the US on an irreversible path to achieve net-zero emissions economy-wide by 2050 and, to do so, he will need to move quickly and strongly on new pro-climate change policies. This not an item that doesn’t impact for 30 years and shows up in 2050, rather, the impacts will be in 2020s. Biden’s new clean energy plan has multiple game changers to oil and natural gas. This blog focuses on one that will have a major impact on US natural gas in the 2020s – he plans to only have “carbon-pollution free” electricity by 2035. Not zero net emissions, “carbon pollution-free” ie. no fossil fuels. We don’t think this is attainable as fossil fuels provide 60% of US electricity. But if he puts the US on an irreversible path to this goal, even if he is only 25% or 50% successful, it would be a massive hit to future US natural gas consumption. Electricity currently represents ~40% or ~33.5 bcf/d of total US natural gas consumption. If Biden is 50% successful, it will knock of 16.8 bcf/d or 20% of total US natural gas consumption. If he is 25% successful, it will knock of 8.4 bcf/d or 10% of total US natural gas consumption. If markets see Biden is serious about making this happen, it will very quickly impact the long term value of US natural gas and that some investors will soon look to avoid US natural gas ie. not consider it investible for the mid/long term.. Its why we believe Biden’s carbon-pollution free electricity plan will be a major negative to US natural gas in the 2020s
Biden’s plan to put the US on “an irreversible path to achieve net-zero emissions, economy-wide, by no later than 2050”, but the impacts on oil and gas will be hitting right away. We know a lot can happen in the 97 days to the election but, given Biden’s current wide lead, the time is right to get energy investors on how he plans to turn the US energy mix upside down. The reason why this is part 1 of our blogs on Biden is that his clean energy plan (and his other potential policies) has multiple potential game changers to today’s energy mix. And there is too much in it to include in one blog. Two weeks ago, Biden released “The Biden Plan to Build a Modern, Sustainable Infrastructure and an Equitable Clean Energy Future”. [LINK] We believe the most important takeaway for energy markets to understand is that Biden wants to put the US on “an irreversible path to achieve net-zero emissions, economy-wide, by no later than 2050”. Our worry is that, to put the US on an “irreversible path”, he will have to move fast and big in his first four years. Biden’s plan, if implemented, will dramatically change the US energy mix to hugely reduce fossil fuels.
There will be an immediate impact on oil and natural gas as climate change will be a Day 1 priority and much more than recommitting to Paris. We have highlighted in the title Biden’s target for 2050, but his clean energy plan has many mid term targets that provide clear indicators for materially reduced oil and natural gas demand. Climate change is a Day 1 priority for Biden. Biden’s platform has made it clear that climate change is a priority and, not just for his first 100 days, rather his first day. Biden’s plan says the US “Re-enter the Paris Agreement on day one of the Biden Administration and lead a major diplomatic push to raise the ambitions of countries’ climate targets”. And it says “He will not only recommit the United States to the Paris Agreement on climate change – he will go much further than that. He will lead an effort to get every major country to ramp up the ambition of their domestic climate targets. He will make sure those commitments are transparent and enforceable, and stop countries from cheating by using America’s economic leverage and power of example. He will fully integrate climate change into our foreign policy and national security strategies, as well as our approach to trade. Biden will rejoin the Paris Agreement, but simply rejoining is not enough. Biden will use every tool of American foreign policy to push the rest of the world to raise their ambitions alongside the United States”. Biden has clearly listened to the Sanders/Warren side and has stepped up his ambitions on climate change. He wants to go beyond the Paris Agreement.
United Nations’ COP26 gives the perfect global forum for the world to join Biden’s push for the world to raise their climate change ambitions. We continue to believe one of the major global energy themes for 2021 will be the world is behind its targets to meet its climate change targets/ambitions. The IEA has just completed a series of reports that provide data on being behind target, which we included in our June 11, 2020 blog “Will The Demise Of Oil Take Longer, Just Like Coal? IEA and Shell Highlight Delays/Gaps To A Smooth Clean Energy Transition.” [LINK] There will be a global spotlight on climate change in 2021 with COP26 (the UN Climate Change Conference UNFCCC CO26) being held Nov 1-12 in Glasgow, Scotland. The Paris Agreement on climate change was signed on April 22, 2016 in the last year of the Obama administration. Given Trump pulled the US out of the Paris Agreement, it provides Biden a global stage for the US to re-engage with the world and step back into a global leadership role on climate change. On June 1, 2017, Trump announced the US would cease all participation in the Paris Agreement and gave formal notice to withdraw on Nov 4, 2019. The withdraw takes 12 months to take effect ie. on Nov 4, 2020, which is one day after the Nov 3 presidential election. We don’t expect Trump to change the US position whether he loses or wins the election. But as we have seen in all other UN climate change forums, there will be a focus on climate change in the months leading up to Glasgow as countries try to find a consensus position. Biden says he wants to push the rest of the world to raise their ambitions. Biden doesn’t say it specifically, but his plan to push the world is consistent with the fact that the world is behind in meeting their climate goals. On July 11, we tweeted [LINK] “Key 2021 energy theme: #CleanEnergy transition is not on track. UN Guterres 22:10 min “nations must commit to net zero emissions by 2050 and submit more ambitious national climate plans before COP26 next year”. Can’t make up for lost COVID19 time”. UN Secretary General Guterres spoke at this week’s IEA Clean Energy transitions summit and he reminded of why markets should see a great global focus on the clean energy transition and that is not on track to meet its timing. At the 22:10 min mark [LINK] Guterres said “nations must commit to net zero emissions by 2050 and submit more ambitious national climate plans before COP26 next year”. The world being behind its clean energy transition targets, Biden’s climate change priority and COP26 provide the perfect scenario for Biden’s return to US global leadership.
Biden’s clean energy plan will dramatically change the future US energy mix away from fossil fuels. Our first blog in this Biden series is focused on Biden’s target to “achieve carbon-pollution free energy in electricity generation by 2035” because we see this as an item that will impact US natural gas right away. This is a huge target and it means that Biden plans to turn the US energy mix upside down. The other big headline is to push EVs by doing things like federal fleets, mandating all transit and other buses must be EV by 2030, etc. One item that seems to be mostly overlooked so far is one that can have a material impact on oil and natural gas – his focus on improving energy efficiency. Biden says he will “Reform and extend the tax incentives we know generate energy efficiency and clean energy jobs”. We have always viewed efficiency standards as low hanging fruit that can have a material impact. Its not just car fuel efficiency, but also commercial and residential buildings. Our concern is that efficiency gains end up taking away demand from coal, oil and natural gas as opposed to solar, wind, etc. We expect one of our likely follow on Biden blogs will be on efficiency. There are many other items in the Biden plan. One noticeable omission is no discussion on carbon tax or carbon price.
Biden looks like he is trying to skip over natural gas as the transition fuel to the clean energy world. Natural gas has been universally viewed as the key transition fuel to a world of clean energy. Biden doesn’t specifically say so, but it seems like Biden’s plan is trying to skip over, or dramatically lower, natural gas role as a transition fuel to a world of clean energy (in this case electricity) and in being the primary fuel source for a new hydrogen world. We will more on hydrogen in the future, but Bide also wants to skip over natural gas as the primary hydrogen source by “using renewables to produce carbon-free hydrogen at a lower cost than hydrogen from shale gas through innovation in technologies like next generation electrolyzers”. Today’s blog focuses on the impact of Biden’s “carbon pollution-free” electricity target by 2035, but he is trying to eliminate or ensure there are carbon offsets for all fossil fuels in the US energy mix by 2050.
US Energy Mix
Biden plans means he has to replace 60% of today’s fuel for electricity by “carbon pollution-free” electricity by 2035. Biden power sector plan is to “move ambitiously to generate clean, American-made electricity to achieve a carbon pollution-free power sector by 2035. This will enable us to meet the existential threat of climate change while creating millions of jobs with a choice to join a union.” We are a little surprised that we haven’t seen a huge market focus on this point. Biden says “carbon pollution-free” electricity. Biden doesn’t say its “net zero emissions” for electricity but “carbon pollution free”, which means no fossil fuels. We think this is impossible as it means that in less than 15 years, they will replace ~60% of fuel sources for US 2019 electric power and, perhaps even more difficult, have an integrated power system originally set up for fossil fuels to be able to deliver reliable 24/7 electricity. Its not just the fuel but having the integrated electricity grid to support all clean electricity. In 2019, carbon fuels (oil, natural gas, and coal) provided 60% of fuel for US electric power. But whether it is impossible or not isn’t the point. Rather if Biden tends to put the US on an irreversible course, then he will be moving in the first four years to set in place programs, taxes, incentives, etc. And if they start moving to that 2035 target and make any significant progress, it should materially reduce US natural gas consumption over the 2020s.
US Electricity By Fuel Source
If Biden is successful in generating only “carbon pollution-free” electricity, he could eliminate ~40% (33.5 bcf/d) of current US natural gas consumption. We chose this for our first blog because we see it having a material impact on US natural gas consumption in the 2020s. The EIA estimates 37% (31.0 bcf/d) of US natural gas consumption is for the power sector. In addition, the EIA estimates 27% (23.0 bcf/d) is for industrial consumers, wherein the EIA includes natural gas used for generating power in the industrial consumption. The EIA doesn’t split out the % used for electric power, but we have just included 3% to round up natural gas for electric power to 40% or ~33.5 bcf/d of total US natural gas consumption. Note our US natural gas consumption excludes natural gas exports via pipeline or LNG.
US 2019 Natural Gas Consumption by Sector/Grouping
Even if Biden is only 25% successful by 2035, it will materially reduce US natural gas consumption. We just don’t see how Biden can replace all carbon sources for electricity and have an integrated power system based solely on clean energy by 2035. Regardless, if he puts the US irreversibly on this course in the first four years and is only 25% successful, it is a material reduction to US natural gas consumption. We ran two cases with both assuming no change to the natural gas supplied to electricity for 2021 and 2022, and then any new policies start to impact natural gas for electricity in 2023, consistently decrease until 2030 and then decrease faster to 2035. We ran two cases: natural gas consumption for electricity is reduced by 25% and 50% in 2035, which, by 2030 reduce natural gas consumption by 6.3 bcf/d and 8.4 bcf/d, and by 2035 by 8.4 bcf/d and 16.8 bcf/d. Note we have not included any increasing electricity consumption as we assume Biden’s move on efficiency are able to at least offset any estimated small annual growth ie. +0.5% or more.
Natural Gas Lost Consumption If Biden Is 25% or 50% Successful
Once Biden shows he is serious about carbon pollution free electricity, it will inevitably impact the view of long term value of US natural gas. Our concern gets back to the title of our blog that Biden says he wants to put the US on an irreversible path and, to do so, this means he plans to take early actions on climate change. Once it becomes clear that he is taking action to move the US to carbon pollution free electricity by 2035 and that this will happen over the 2020’s, there will be the realization that it will materially reduce US natural gas consumption (even if only 25% successful) and this should reduce the long term value of US natural gas.
Moving to a hydrogen economy will not save US natural gas as Biden wants to produce “carbon-free” hydrogen. One of the big global energy themes for the 2020s is moving to a hydrogen world. Right now, the primary (and cheapest) fuel to generate hydrogen is natural gas. Normally, most would expect to that natural gas would be the big winner in the move to a hydrogen economy. And no question if Biden wants to move to hydrogen quickly, natural gas would be the proven (and cheapest) source. However, Biden’s clean energy plan notes his priority to produce “carbon-free” hydrogen. Biden wants to be “using renewables to produce carbon-free hydrogen at a lower cost than hydrogen from shale gas through innovation in technologies like next generation electrolyzers;” If Biden wants to add hydrogen quickly, we believe producing “carbon-free” hydrogen at a reasonable price will be another area where there will be a gap between the aspiration and reality.
It’s a good thing Canada has LNG Canada and TMX under construction. If Biden moves quickly on the “carbon pollution-free” electricity and US natural gas demand drops, the reality is that it will cause a natural US gas supply correction. There will be less capital provided to a sector that will be viewed to be in decline. But it will also force more US natural gas to look for more export markets. It will also reduce, but not eliminate, US natural gas imports from Canada, which have been on the decline, down to 4.7 bcf/d in 2019 vs 5.4 bcf/d in 2018 and less than half the 10.2 bcf/d in 2007. In a declining US natural gas consumption market, we would not expect to see any capital provided for either new or increasing capacity in US natural gas pipelines to markets to currently served by imports of Cdn natural gas. We expect Cdn natural gas to do better than US natural gas with LNG Canada Phase 1 adding add 1.8 bcf/d of new demand around 2025 and LNG Canada Phase 2, if approved, would add another 1.8 bcf/d of demand. Any potential reduction in US natural gas demand is a reminder of the strategic importance of access to new export markets for Canada’s oil and natural gas via under construction LNG Canada and TMX.
US Net Natural Gas Imports From Canada (bcf/d)
Stay tuned for futures blogs on the impact of a Biden win on oil and natural gas.