This year, energy markets experienced significant volatility due to global catalysts and shifting investment trends. However, newly introduced legislation has also acted as a boon to incentivizing greater investment in the renewables sector, thus furthering the energy transition. In this Energy Market Insight, BTU Analytics takes a look at these events and others that we have covered in 2022 to provide a comprehensive picture of our analysis across the energy transition, power, and oil and gas markets this year.
Oil & Gas
Beginning in February, Russia’s invasion of Ukraine, coupled with European gas pipeline outages, ushered in a period of higher demand for LNG cargoes and near-$10 Henry Hub, which was also exacerbated by slow US supply growth. Driven by a combination of massive reductions of Russian natural gas exports to Europe, the resulting high competition for LNG cargoes, infrastructure constraints (chief among them being the ongoing Freeport outage and the sabotage of Nord Stream 1 & 2), and abnormally high summer temperatures, Henry Hub pricing was sustained far above $6/MMBtu for most of the summer.
In oil markets, guidance from OPEC and the West’s shunning of Russian barrels increased uncertainly around global supply and launched WTI over $120 per barrel in June. Supply chain constraints on labor, steel, frac sand, and other materials limited rapid investment in supply. Instead, U.S. producers continued to focus on investor returns and as a result US oil production growth lagged.
And lastly, earnings reports through the first two quarters of the year saw producers continuously prioritize shareholder returns over investment in production growth, and though 3Q earnings saw this trend continue, guidance for inflation grew sizably as well. As BTU Analytics detailed in a March Energy Market Insight, costs in the well completions market had already been on the rise. With supply chain constraints and the near-full utilization of frac crews, many E&Ps guided in 3Q22 earnings that costs would rise even further in 2023 due to inflation, this time by 10–20%.
Power
In 2022, U.S. power markets saw electric grids come to the precipice of failure but avoid falling off. Long-term trends of the continuing energy transition and a warming climate met the short-term challenges of pressured supply chains. Early and sustained heat brought about record demand in ERCOT in May, while California narrowly avoided rolling blackouts later in the summer. Load from summer heat was narrowly met by a capacity buildout that was strained from supply chain issues that are largely attributable to a Department of Commerce investigation and recently enacted legislation.
Beyond renewable project delays that forced utilities to delay coal-fired retirements, utilities and regulators continued to reckon with the inherent weaknesses of intermittent resources. While energy storage saw new high operational watermarks, a shift in support of nuclear power plants illustrated the value of reliable, dispatchable resources and signaled an increasing likelihood of future nuclear subsidies and the fuel’s continuing contribution to the country’s generation mix.
Finally, and most impactful to the U.S.’ evolving energy mix, the Inflation Reduction Act (IRA) was signed into law, providing a myriad of benefits to both renewable developers and other clean tech companies. For renewable and energy storage developers, the annual fear of expiring or declining tax credits that typically leads to fourth quarter scrambles to bring projects online was alleviated by a ten-year time horizon on credits. Old infrastructure found new value as well with the introduction of energy communities, incentivizing new renewable development around retired and retiring coal units. Lacking in the bill is any material policy changes to address the U.S.’ dearth of transmission development, leading to increases in curtailed generation. However, expect the IRA to accelerate the pace of renewable development for years to come.
Energy Transition
Outside of continued growth in renewable power generation capacity, energy transition themes continued to grow though have not yet had significant impacts on energy markets on a large scale. With the passage of the IRA, 45Q credits (the tax incentive for capturing and either utilizing or sequestering carbon) were dramatically increased, going from a maximum of $35/t for utilization and $50/t for storage to a maximum now of $60/t for utilization and $85/t for storage. Direct Air Capture (DAC) projects saw an even larger increase in tax incentives, reaching $130/t and $180/t for utilization and storage, respectively. This increase in tax credits makes many new Carbon Capture and Storage (CCS) projects economically viable, particularly when considering using CO2 for Enhanced Oil Recovery (EOR) given the strength of oil pricing in 2022.
BTU Analytics also tracked several new project announcements this year, with more than 75% of CCS project announcements coming from 2021 and 2022. In addition to increasing interest in CCS, green hydrogen (hydrogen produced in a way where measured lifecycle emissions are low or near zero, aka hydrogen made from renewable energy) has also seen a whirlwind of announcements. Last year, the passage of the Infrastructure Bill earmarked $8B to fund clean hydrogen hub demonstration projects across the U.S., which is done through the Department of Energy (DOE). By the time the deadline for project submissions arrived in November of this year, BTU Analytics noted 18 different hydrogen hub projects, spanning nearly every state in the country, had been announced and filed an application. As not all of these projects will be selected, BTU Analytics expects areas with existing hydrogen economies to be some of the first in line given the ability to reduce emissions by simply replacing grey hydrogen (hydrogen produced with natural gas) with green hydrogen, as well as utilizing existing midstream infrastructure to help support new demand sources.
Conclusion
In summary, 2022 saw several significant events for energy markets. BTU Analytics devoted numerous Insights and Outlooks to navigating the volatility surrounding oil and gas pricing, the shifting of energy mixes within the U.S.’ ISOs, and the multitude of ways renewables developers can capitalize on the newly enacted IRA. To see these Insights, please see BTU Analytics’ other Energy Market Insights; for samples of these reports, please email info@btuanalytics.com with “Oil,” “Natural Gas,” “Power,” or “Energy Transition” in the subject line. Lastly, be sure to check back in on January 5th as we release a special Energy Market Insight that details BTU Analytics’ 2023 Preview!