In the previous article, I discussed the growing importance of Environmental, Social, and Corporate Governance (ESG) for companies. Perhaps no industry has a higher visibility on ESG metrics than the energy sector. After all, a substantial fraction of global carbon emissions arise from the production, transportation, and consumption of fossil fuels.
Energy companies have tackled this issue in several ways. Today, I want to discuss the role of hydrogen as a way of improving ESG metrics.
The Role of Hydrogen
Hydrogen is increasingly being viewed as an important tool for reducing carbon emissions, because the use of hydrogen for energy generates no direct carbon dioxide emissions. In May 2021, the International Energy Agency (IEA) released a new report detailing the “Seven Pillars” that would be required to get the world to net‐zero carbon emissions (NZE) by 2050. The report is Net Zero by 2050: A Roadmap for the Global Energy Sector. One of those pillars is “Hydrogen and hydrogen‐based fuels.”
The IEA report forecasts that “Global hydrogen use expands from less than 90 million metric tons (Mt) in 2020 to more than 200 Mt in 2030, as the proportion of low‐carbon hydrogen rises from 10% in 2020 to 70% in 2030.”
The IEA projects that about half of low‐carbon hydrogen produced globally in 2030 will come from coal and natural gas with carbon sequestration. Demand will come from industry, refineries, power plants, and the transportation sector. Hydrogen will be increasingly blended into natural gas for distribution to homes and industry.
Bank of America
recently released its own hydrogen forecast, in which they estimated annual hydrogen revenues of $2.5 trillion by 2050 made possible by hydrogen infrastructure investments of $11 trillion. The authors project that hydrogen volumes will increase by 6x by 2050, supplying 22% of global energy production.
Not All Hydrogen is Created Equally
But the key to having hydrogen help transition the world to net zero emissions is to ensure that the carbon is produced with a low carbon intensity. According to the U.S. Department of Energy (DOE), more than 99% of hydrogen today is produced from fossil fuels. Around 95% is produced via the steam methane reforming (SMR) process, and another 4% comes from partial oxidation (POX). While fossil fuels currently provide feedstock for hydrogen production, most production is done without regard to the carbon dioxide released, negating the net zero contribution of the resulting hydrogen fuel.
Hydrogen production “pathways” can be evaluated according to their carbon intensity (CI). This measures the amount of greenhouse gas (GHG) emissions released into the atmosphere per unit of fuel energy over the fuel’s lifecycle. Carbon index analysis considers the entire production process from site location, to facility construction, to energy requirements for production, to CO2 capture, to transportation and delivery. The California Air Resources Board (CARB) has estimated that hydrogen production via SMR has a relatively high CI of around 150 grams of carbon dioxide equivalents per megajoule (gCO2e/MJ). A low-carbon economy will require hydrogen production with a lower CI.
Hydrogen production can also be classified using a color scheme. Grey hydrogen denotes hydrogen produced from fossil fuels – with the subsequent carbon byproduct being emitted to the atmosphere. Most of today’s hydrogen production is grey.
The long-term ideal is green hydrogen, which is hydrogen produced from renewable sources at a low CI, compared to SMR. However, the DOE estimates that the cost of producing hydrogen from renewable sources is presently $6 to $12 per Kg, versus less than $2/Kg when it is produced from fossil fuels.
Source: Hydrogen Strategy: Enabling A Low Carbon Economy; Department of Energy; July 2020. Link.
At a price that is 3-6 times higher than hydrogen produced from fossil fuels, the green hydrogen ideal is still at a significant economic disadvantage.
It is possible to capture and store (CCS in the previous graphic) or otherwise utilize the carbon dioxide when hydrogen is produced from fossil fuels. This hydrogen has a low carbon footprint and is classified as “blue hydrogen”.
Thus, production or use of blue hydrogen offers the fossil fuel industry a significant opportunity to improve their ESG scores. The DOE estimates that blue hydrogen can be produced via the SMR process for $2.27 per kilogram – an overwhelming cost advantage over hydrogen produced from renewable sources.
Blue hydrogen has a substantially lower CI score than grey hydrogen, and is significantly cheaper than green hydrogen. It can serve as an ideal transitional step in the decarbonization of the economy.
The Cornell and Stanford Study
I would be remiss to ignore that a recent report from researchers at Cornell and Stanford Universities claims that the use of blue hydrogen is actually worse than simply burning natural gas.
However, as Ted Nordhaus, Founder and Executive Director of The Breakthrough Institute recently pointed out in a Twitter thread, the study’s findings were based on worst-case scenarios throughout the analysis.
Nordhaus writes “If gas production is crazy leaky, you value methane reductions MUCH more than carbon reductions, and you assume that carbon capture tech doesn’t capture over a third of the carbon, blue hydrogen is worse than gas!” He adds that by using a less extreme set of assumptions — by the admission of one of the study’s authors —the global warming potential (GWP) would be 10 times lower than the study concluded.
However, it is fair to point out that the CI of blue hydrogen will depend very much on the entire production process. If methane is obtained from a process with a high leakage rate, and the carbon isn’t captured and stored, then the CI is going to be much higher.
In the next article, I will provide specific examples of how some companies are using hydrogen to improve ESG metrics.
Slow pace of vaccinations is largest drag on the economy in survey of business leaders – NBC News
Corporate leaders are far less bullish about the economic recovery than they were back in the spring — and they fear that vaccination holdouts could stall or even reverse the progress that has been made.
A new survey by the National Association for Business Economics, or NABE, found a marked pullback in expectations for economic growth and output, especially in the near term. Survey respondents expect real growth in gross domestic product for this year to come in at 5.6 percent at the median — a significant drop from the median 6.7 percent growth expected in May, when the survey was last conducted.
“The erosion of forecasts and confidence has really mirrored what our economists have been saying, because we brought down our Q3 GDP forecast from 7.0 to 5.6 percent,” said Sam Stovall, chief investment strategist at CFRA Research. “We just feel that things don’t look as rosy as they did before.”
Nearly 2 in 5 NABE survey respondents said downside economic risk outweighs upside risk for the year, and just 16 percent said conditions are weighted toward the upside. The figures were reversed in May, when 56 percent ranked upside risk as a higher probability and just 15 percent said saw greater downside risk to the outlook.
The key difference, and the factor that is weighing on hopes for the recovery, is the resurgence of Covid-19 fueled by the highly contagious delta variant of the coronavirus. Everybody who was banking on the pandemic’s receding over the summer has had to modify their expectations in the face of a public health crisis that shows no sign of abating.
“We all believed we were through the pandemic five months ago, and I believe that the variant has caught many people by surprise,” said Joseph Heider, president of Cirrus Wealth Management. “As this lingers on, executives are becoming more concerned and asking, ‘Are we going to have this under control?'”
NABE survey chair Holly Wade, executive director of the NFIB Research Center, said in the survey outlook report, “Panelists point to a variant of the coronavirus, against which the vaccines may be ineffective as the main downside risk.” Nearly two-thirds of respondents identified that as the greatest downside risk to the economy, and 9 percent more cited slowing vaccine uptake as the most worrisome hurdle. A plurality of 44 percent said a faster vaccine rollout is the best chance for higher-than-expected economic gain.
Heider said: “Vaccine resistance is, I think, larger than many people anticipated. I think it’s creating real concerns as to our ability to reach herd immunity. And when we don’t have herd immunity, the unvaccinated are human petri dishes for the virus to mutate.”
Although the virus represents the biggest threat to near-term business recovery, analysts said it is far from the only headwind corporations face. “There’s just many more variables and unknowns than there were six months ago,” said Dick Pfister, CEO of AlphaCore Wealth Advisory.
In addition to the threat of Covid and potential variants, Pfister said, companies and investors are monitoring other unfolding circumstances. The Federal Reserve is edging closer to ending its bond buying, and more policymakers have expressed openness to raising interest rates sooner. The financial peril faced by the heavily indebted Chinese real estate giant Evergrande is making investors nervous, he said, as they try to gauge whether the company’s teetering on the brink of collapse was an isolated incident.
“There’s probably more than just one, and there are some fears from economists that this could be more systematic inside of China,” he said.
A globally connected economy poses other sorts of risks, as well: A cascading series of bottlenecks in the global supply chain affecting semiconductors to energy has triggered much of the growing worry about rapidly increasing prices. The NABE survey found that 17 percent of respondents said supply chain disruptions were having a “significant impact” on business, while 27 percent more cited mild or moderate impacts.
“Inflation expectations have moved up significantly from those in the May 2021 survey,” Wade said. On average, NABE respondents expect inflation to rise by 5.1 percent in the fourth quarter year over year, a jump from an expected 2.8 percent increase in the May survey.
David Wagner, portfolio manager at Aptus Capital Advisors, said the duration and the breadth of global supply disruption have triggered a re-evaluation in corner offices in the U.S. and around the world. In the spring, “it seemed like the supply chain problem was transitory,” but the assumptions were dashed as the summer went on, he said, adding: “Supply chain problems are persisting for much longer than originally expected.
“Now that you’re starting to see some kind of tangible supply chain backlog, I think that’s got more people pessimistic. It caught people by surprise,” Wagner said.
Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said, “Supply concerns are weighing on the mind of the market and economists because it has limited the amount of output we can get from certain industries.”
Along with the supply shortages that are hindering production and driving up costs, the unbalanced labor market continues to constrain growth, as well — but there also are glimpses within those distortions of potential normalization. Although about one-third of survey respondents said they were facing a surfeit of workers, a larger proportion, 44 percent, said they were not experiencing a labor shortage. Respondents predict wage growth of 4 percent for the year, followed by a 3.5 percent increase next year — rates broadly in line with what many economists consider to be indicative of a well-functioning labor market.
“The labor market is not fully recovered — we’re seeing that across other surveys, as well, and even the Fed’s own Beige Book indicates that hiring has been challenging,” Haworth said. “There’s a lot of room for improvement, but it’s really slow going.”
Toronto market rises as energy shares reach 3-month high
Canada‘s main stock index rose on Monday as a rally in oil prices lifted the energy sector to the highest level in nearly three months, while financials gained ground as bond yields rose.
The Toronto Stock Exchange‘s S&P/TSX composite index ended up 60.76 points, or 0.3%, at 20,463.42.
“Energy has rallied pretty nicely” on the jump in oil prices, said Kevin Headland, senior investment strategist at Manulife Investment Management.
The energy sector rose 3.1% to notch its highest closing level since July 5, while crude oil futures settled nearly 2% higher at $75.45 a barrel as investors fretted about tighter supplies.
The heavily weighted financial services sector ended 0.5% higher but information technology lost 1.2%.
The move lower in technology was “a carryover from the U.S., given the jump in 10-year yields today,” Headland said.
The U.S. 10-year yield rose above 1.5% for the first time since June 29 before easing, bolstered by solid economic data and signals the Federal Reserve is shifting toward a more hawkish policy.
Higher yields tend to hurt the shares of companies with high growth prospects because they reduce the value of future cash flows.
The S&P 500, which has a higher technology weighting than the Toronto market, ended lower.
“In the Canadian stock market… we’re playing a little bit of catch-up to U.S. stocks as they outperformed Canadian stocks in the last five sessions,” said Michael White, portfolio manager at Picton Mahoney Asset Management.
The healthcare sector, which includes cannabis producers, ended 2.4% higher. The materials group gained 0.5%.
(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Dan Grebler)
Fund Managers See Stocks Outperforming Bonds Despite Economy – Bloomberg
Gently, but steadily, economic expectations are coming down. It may be an overreaction to the wave of Covid-19 caused by the delta variant, or it may be a response to incoming data, or it could reflect dampening hopes for an expansive new fiscal policy in the U.S. as the standing of President Biden also dampens. But for whatever reason, hopes for a big new “reflation” or even a post-Covid “reopening” have dwindled.
One thing remains unchanged by this, however. The great majority of investors are still convinced that there is no alternative to stocks. Even with drabber economic growth in prospect, which should help fixed-income more than equities, the overwhelming consensus still calls for stocks to outperform bonds.
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