Earnings season for midstream energy infrastructure has been wonderfully devoid of excitement for many quarters. These companies just keep churning out more cash, typically within a few percent of expectations.

The exception is Cheniere (CEI), where earnings often come in substantially ahead of sell-side estimates. 1Q reported EBITDA beat by 12.5%. The company spent $1.2BN repurchasing stock and continued at about the same rate in April. They are moving towards self-financing their LNG terminal expansions and prioritizing debt paydown.

Cheniere’s stock has been a surprising laggard this year. It remains one of our highest conviction names. The most effective way the US can reduce global emissions is to export more natural gas to emerging economies, displacing coal the way it has in this country.

Cheniere is best positioned to profit from this opportunity.

Last week on my mid-west trip several investors asked me what risks the sector faces. The pandemic caused the worst sell-off any of us could have conceived, albeit a brief one.  A recession would inevitably depress prices along with the rest of the equity market. And yet, reduced leverage and capex along with greatly improved dividend coverage mean we’d enter any downturn in much better financial shape than in the past.

There’s always downside risk, but more robust balance sheets should offer greater resilience.

EBITDA at Plains came in 3.5% ahead of estimates, helped by higher tariffs on crude pipelines. Their stock has returned 50% over the past year.

TC Energy (TRP) beat expectations by 3.5% with all segments doing well led by natural gas pipelines. Their Coastal Gas Link (CGL) pipeline will soon be sending deliveries to LNG Canada in Kitimat, British Columbia for export to Asia. Like CEI, TRP has lagged the market although for different reasons – the size of their capex program continues to weigh on the stock.

However, the company did place $1BN of projects into service during 1Q24, most of which was CGL. They’re guiding to $8-8.5BN in capex this year. Along with Enbridge, the Canadians are bucking the trend towards lower spending on new projects. TRP is -2% YTD.

Williams Companies beat estimates by 8%. The stock has returned 14% YTD.

In their weekly research note Wells Fargo highlighted the growing value of natural gas storage assets. Increased consumption of natgas isn’t being matched with commensurate additions of storage capacity, which is pushing rates up.

Wells Fargo estimates monthly storage rates have doubled over the past three years, to around $0.19 per thousand cubic feet. Williams Companies, Kinder Morgan and Energy Transfer are among those best positioned to benefit.

Renewables growth is contributing to storage demand, because increased reliance on intermittent energy means more natural gas must be held available for power plants when it’s not sunny and windy. And climate extremists are opposed to any new infrastructure that supports reliable energy.

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It’s fair to say the energy transition has been better for investors in traditional energy than renewables. Since the end of 2019, just prior to the pandemic, the American Energy Independence index (AEITR) has returned 15.5% pa versus only 5.4% pa for the S&P Global Clean Energy Index.

Investors in BP expect the company to scale back its climate targets. It makes little sense for them to produce less of what people want to buy until demand drops, which it is not. We noted this the other day (see Former BP Geologist On Energy). One investor said of investing in renewables, “returns are not there.”

It’s because proponents have wrongly claimed that renewables produce cheap energy, whereas electricity prices are rising wherever solar and wind gain share, including in the US.

The WSJ referred to “energy transition fatigue” in Households Wince at the Rising Price of Going Green. The article provides a lengthy list of costly surprises. Most notable is the Parisian who found that new energy efficiency rules forced him to spend €50K ($54K) on remediation before he could sell his apartment.

That’s what progressive policies will bring to the US if we don’t pay attention.

A couple of months ago we noted how environmentalists oppose any infrastructure, even when it’s new power lines to bring solar and windpower to customers (see Renewables Confront NIMBYs and watch America’s Looming Power Problem). A Federal judge had issued an injunction to invalidate a permit, preventing the last mile of a 102-mile project from being completed.

Last week a three-judge US appeals court overturned this injunction, allowing the project to be completed. It just shows that permitting for infrastructure projects needs an overhaul. If a developer can’t rely on previously issued permits from a government agency, nothing will ever get done. Climate extremists should especially want this because increasing our use of renewables will require substantial new infrastructure.

The energy transition is going pretty well.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

I traveled through Indiana last week. A day and a half of meetings in and around Indianapolis were followed by a drive south for an afternoon at Churchill Downs in Kentucky. If you’re lucky enough to be invited to a Jockey Club hospitality suite, a good time is guaranteed. Tye Uppinghouse, our Catalyst Mutual Funds regional partner, was once again a gracious host. I concluded my trip in Miamisburg, OH.

I always enjoy meeting our clients and prospects. America’s heartland is conservative and welcoming. The Hoosier state has yet to legalize medical marijuana, and one advisor I met predicted recreational use was at least a decade away.

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Recent earnings news from pipeline companies has been positive. Enterprise Products Partners raised their distribution by 5.1%, now 1.7X covered by distributable cash flow. Oneok raised 2024 guidance due to strong volumes in natural gas and synergies from last year’s acquisition of Magellan. Earlier this year they announced a 3% dividend increase.

A week ago, Targa Resources raised their dividend by 50%.

These three companies provided current evidence of the industry’s steady return of cash to shareholders. Payouts that yield around 6% are growing at 3-5%, providing a 9-11% total return. Share buybacks add another 1-2%. It’s a story that resonated strongly with many of the investors I met last week. Energy has been an overlooked sector for a long time despite strong performance. Morgan Stanley just reintroduced a 2% allocation to midstream for client portfolios.

The connection with the AI boom came up in most of my discussions. A WSJ story last week said, “in Virginia’s data-center alley, rising power demand means more fossil fuels.” This means more natural gas, increasing the use of America’s abundant, reliable resource that generates half the emissions of coal.

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The article went on to add, “Wind and solar can’t serve data-center demand around the clock, so growth will need to be supplemented by natural-gas-fired power generation, said Arshad Mansoor, chief executive of the nonprofit Electric Power Research Institute.”

Last year, output from wind turbines fell 2.1% even though capacity was up 4.4%. The weather is a fickle mistress. Renewables’ potential output has a tenuous relationship with power actually delivered.

Indiana has a realistic view of EVs – their 4.5% market share is less than half the US average. This is because virtue signaling is refreshingly absent in this solidly red state. Ford has delayed a second EV battery plant in Kentucky after finding tepid demand for electric light trucks. I suspect many of the people living in southern Indiana’s wide open farm country could have predicted as much.

I didn’t find anyone excited about the inconvenience of having to recharge their car for 30 minutes or more at a time, and plenty commenting on the declining value of used EVs. In Indiana they just want to get where they’re going without designing their journey around charging stations.

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Some people have amazing stories to tell. I had the opportunity to finally meet one of our long-time investors Fred Farhoumand, whose family fled Iran when he was a young boy prior to the 1979 revolution. He and his brother Ali have built One Resource Financial Consultants into a successful investment business in Fort Wayne, IN.

Fred’s clients have benefited from his well-timed investments in the midstream sector. We enjoyed a steak dinner together in Muncie where the waitress was honest enough to say she hadn’t tasted several of the entrees because she couldn’t afford them.

Hopefully after our visit she could.

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Perhaps as an immigrant myself I love to hear the success stories of others. Francis Almeida of Moneyline Wealth Management grew up in an Indian orphanage, won a scholarship to study hotel management in Switzerland and worked in the cruise industry before joining Moneyline 28 years ago. He began life with very little and has achieved so much. Francis would probably have been successful anywhere, but that he chose America shows why this great country is so richly endowed with driven entrepreneurs.

It’s also why Clare Lombardelli, the OECD’s chief economist, recently said the US economy was looking “remarkably strong”, with increasing evidence of it pulling away from European economies.

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I was overdue to finally meet in person with Jamie Schade, along with his colleagues Caroline Pratt and Matt Watson. Jamie runs a team with Mark Henestofel at UBS in Miamisburg, OH that correctly identified the opportunity in midstream energy infrastructure back in 2020.

Unsurprisingly, we agreed on much. The energy transition will play out over generations, boosting demand for all forms of energy. Balance sheets are strong and dividend coverage high. Climate extremists still impede new pipeline construction which is boosting free cash flow.

Hug a protester and drive them to their next event.

EV demand remains weak – there are certainly few on the roads in this part of the country.

Hybrids seem like a pragmatic solution – an EV without range anxiety.

Growing power demand from data centers is good for natural gas.

Our dire and worsening fiscal outlook makes a return to 2% inflation unlikely.

In our opinion this sector checks all the boxes.

I found many investors who are underweight energy are concluding it’s worth a closer look. Those with exposure are happy with the results.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

Last week my partner Henry Hoffman and I had the opportunity to chat with Peter Hill. Peter holds board seats or is on the advisory committee of several companies where he provides energy advice, including Edge Natural Resources, Jaguar Exploration and Citizen Energy LLC. His long career includes 22 years spent at BP in various executive positions including Chief Geologist. He still retains contact with a number of people there. We were interested in Peter’s outlook for energy. His views are summarized below.

Peter thinks many commentators underestimate the scale of change that the energy transition entails. It will be a very slow process, as it has been so far. He expects that we’ll still be using oil and gas in 2100, and says the most effective way to reduce emissions is coal to gas switching. The Energy Information Administration regularly reminds us that this is the biggest source of US emissions reduction – far more impactful than solar and wind.

Peter thinks OPEC’s production at around 28.5 Million Barrels per Day (MMB/D) is at or close to its peak. He doesn’t think they have much undiscovered oil remaining. The Ghawar field, which was discovered in 1948, has produced around 65 billion barrels, far more than expected.

The US is becoming the swing producer, a consequence of the shale revolution. Peter noted that shale formations exist in Saudi Arabia, but there’s no appetite to exploit that resource at $60+ per barrel since they currently produce at under $5. They would also struggle to find enough water for fracking, and the oil services business is dominated by American firms who would have to invest significant sums in Saudi Arabia.

Saudi Arabia’s Jafurah Gas Field has 200 Trillion Cubic Feet (TCF) of recoverable natural gas, according to Crown Prince Mohammed bin Salman. This is enough to swamp world markets if produced, but Peter thinks the Saudis will never be willing to invest the $BNs necessary.

For reference, US daily consumption of natural gas averaged 90 Billion Cubic Feet per Day last year.

Peter thinks Russian production will tail off within 12-18 months. Having lived there, he feels Russia’s oil industry has no culture of maintenance. Given a new truck or any piece of equipment, they’ll use it until it breaks down and then discard it.

The Bezhenov Formation shale that sits at the base of the Siberian Basins in Russia is the biggest source rock system in the world according to International Energy Agency. Reserves are estimated at 2,000 TCF gas in place and 1,200 billion barrels of oil. The sanctions that followed Russia’s invasion of Ukraine have cut off any western expertise in extracting these resources. Peter dryly notes that Putin has inadvertently settled who will own these stranded assets once the energy transition takes hold.

For all of these reasons, Peter thinks crude oil is going higher.

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BP made a big mistake with their focus on renewables, which has so far consumed $40BN of capex. As a result, they neglected their core oil and gas business, something Peter called “a huge mistake”. This strategic error was ultimately responsible for CEO Bernard Looney’s firing. He was an unapologetic champion of renewable energy. Looney’s admitted affair with a subordinate, in violation of company policy, may have provided a convenient opportunity to shift BP’s strategy back towards more profitable fossil fuels.

We’ve seen this regularly – big energy companies feel pressured to invest in the energy transition but find that the returns are poor. American investors are more inclined to reward more disciplined capital allocation, which is why NY-listed energy companies trade at higher multiples.

Both TotalEnergies and Shell have publicly ruminated on shifting their stock listing to NY. In recent years pressure from left wing politicians created disingenuous enthusiasm for intermittent energy, for a while displacing astute financial judgment. Remorse is now common among those who drank too heavily of the progressives’ Kool-aid.

Peter has great admiration for Exxon Mobil. They are resilient, and seem to produce an endless succession of talented executives. He described the company’s culture of career specialization, aimed at putting the world’s best in each key role and paying them enough that they rarely want to leave. He contrasted this with BP’s approach of regular rotations, to develop more rounded executives.

On the Deepwater Horizon disaster in the Gulf of Mexico, Hill attributes it partly to a failure to follow the company’s own operating manual, a document on which he spent much time and describes as BP’s “bible”.

Peter feels the Eagle Ford basin in south Texas is a misunderstood shale formation with untapped potential. Current activity focuses on the “hard bands” of rock which are more easily exploited than the soft bands in between. He thinks improvements in technology and technique will eventually allow these soft bands to be more readily drilled.

In terms of emerging technologies, he puts hydrogen in the “too hard” basket, noting the significant technical challenges in handling it. We commented on this recently (see Discussing The Energy Transition With An Expert). Hydrogen has to be super-cooled to reach a liquid state so that it contains enough energy to be worth transporting, a process that is itself very energy-intensive and costly.

AI on the other hand offers huge opportunities. Peter said, “Seismic is made for AI.” He expects it to provide a “significant improvement in 3D.”

With data centers driving power demand higher, the energy sector is well positioned to be a winner from artificial intelligence.

Peter Hill offered many fascinating insights. We hope to check in with him regularly for an update.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

Last week the WSJ published an interesting chart, reproduced below. It was in an article ominously titled America’s Economy Is No. 1. That Means Trouble. The chart shows that US share of global GDP has been increasing for over a decade. We’ve gone from 21% in 2011 to 26% this year.

It’s an amazing performance. A consistent theme since World War II has been the US gradually shrinking its share of the global economy. This was inevitable as emerging economies such as China and India opened up to trade and deregulated their economies.

Military strength goes with economic size.

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This trend implied that the US would need to confront a rising challenge from China as their defense budget grew with their economy. It’s a cycle explained by Paul Kennedy in his 1989 book The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. He chronicles the arc of previous empires such as the French and Spanish. He coined the term “imperial overstretch”, when maintaining an empire imposes unsustainable costs, ushering in the decline of one and the rise of another.

Kennedy marks World War II as the approximate end of the British empire and the rise of the American one, although it’s more accurate to refer to America’s cultural and economic leadership rather than dominion over foreign countries. Back in 1989 Japan was the new rising power. That forecast soon turned out to be wrong, as China took their place. But maybe that’s also going to be wrong.

The WSJ article naturally found reasons to worry about America’s strong economy. It’s not only journalists at the NYTimes that are trained to find the negative in any story. Fiscal stimulus is partly driving growth. Trump tax cuts, the pandemic, the Inflation Reduction Act, the CHIPS Act and student debt forgiveness ($138BN so far) are all boosting consumption. The massive entitlement bill is coming due as baby boomers retire.

For the first decade of the new millennium, the US and EU roughly tracked each other in declining GDP share. They parted company long before the fiscal largesse noted above.

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US oil and gas production began their long ascent around fifteen years ago, roughly the same time our share of GDP began increasing. Has attaining American Energy Independence heralded a newfound resurgence in American economic leadership?

A cynic might suggest that a blog on energy will link anything positive to the shale revolution. It’s a simplification to think one caused the other. But there’s also plenty of evidence that low domestic energy prices have boosted growth.

Germany’s disastrous energy policies (see Germany Pays Dearly For Failed Energy Policy) have so effectively constrained their own manufacturers that some are moving production to the US. Their emissions are coming down because they’re de-industrializing, to America’s benefit.

Japan’s population is shrinking, creating a GDP headwind. China’s population has also peaked, and they’re confronting too much infrastructure spending that hasn’t boosted productivity enough.

The latest example of the role American energy plays is the growing need for natural gas to power new data centers. Tudor Pickering is the latest firm to publish a report on the topic. They estimate as much as 8.5 billion cubic feet per day in new production will be required.

I have yet to read a story predicting more solar panels and windfarms due to AI.

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America’s gains in GDP aren’t easily attributed to either party, since they’ve continued with both Democrat and GOP presidents. Republicans will be tempted to claim success as the party of deregulation. But investors in pipelines as defined by the American Energy Independence Index (AEITR) have done much better under Biden than Trump.

The White House isn’t drawing attention to this, because Democrat progressives would prefer it wasn’t true. It shows that the institutional advantages of our economy have made this possible. These include private ownership of mineral rights, easy access to capital and a culture of entrepreneurialism.

There’s another reason why the US is gaining GDP share. Americans just work harder than Europeans. Nicolai Tangen heads Norway’s $1.6TN sovereign wealth fund that invests the profits from Norway’s oil and gas output. He said that American companies outpace Europeans on innovation and technology. He cited a difference in, “the general level of ambition.” He suggested that Europeans strive for a better work-life balance, meaning they work less.

I left the UK for New York 42 years ago. I agree with Tangen. That’s why I moved here. Americans are more ambitious and less afraid of failure. My generation cared little for work-life balance 20, 30 or 40 years ago. We get it now. I’m not sure the younger generation is made the same way but that’s another story.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

Progressives will maintain that the planet is on track to burn up, but realists will see an unfolding positive story. Transitioning our energy systems is incredibly expensive, slow and inflationary.

JPMorgan just published research (The Energy Transition: Reality check needed) acknowledging this and calling for a reset.

No big company says anything about energy without approval from its senior executives. It’s hard to think of a more highly charged topic. Forecasts that don’t assume “Zero by 50” are immediately seized upon by climate extremists as absence of fealty to the UN’s goal. BP handed off their Statistical Review of World Energy, probably after concluding it offered climate critics a soft target.

Wall Street banks like JPMorgan are voluminous publishers of investment and economic research. Jamie Dimon can obviously peruse only a tiny fraction of this output. But you can be sure he read this one given the sensitivity of the topic. Moreover, you can assume he broadly agrees with its conclusions. He has recently been critical of the Administration’s pause on new LNG permits, and has said it’s impractical to think we can suddenly stop using fossil fuels, which currently provide 82% of the world’s primary energy.

Combined with other moves, such as withdrawing from Climate Action 100+, it shows that the bank is taking a pragmatic, realistic approach. In his annual letter Dimon said, “One of the best ways to reduce CO2 for the next few decades is to use gas to replace coal.”

JPMorgan’s Reality Check research estimated that coal to gas switching could reduce emissions by as much as 17%.

We think this is not just another piece of Wall Street research but reflects JPMorgan’s pragmatic assessment of the energy transition and their role in it. Jamie Dimon has called the Department of Energy’s pause on new LNG permits “enormously naive.”

Jamie Dimon is the adult in a room full of juvenile climate extremists.

Russia’s invasion of Ukraine pushed energy security up the policy agenda for western Europe. The pandemic boosted government spending, leaving less fiscal room to fund the transition, and the inflation that followed pushed up interest rates. These three factors have rendered objectives that were already barely reachable now implausible.

Reality Check has many other useful insights. Just the planned solar and wind buildout to 2030 will take 0.5% of global annual GDP. The energy required would emit 207 million tonnes pa of CO2, equivalent of Argentina, assuming today’s energy mix of 82% fossil fuels.

This type of analysis heralds a more practical approach built around what’s possible versus the fantasies of climate extremists. It means more demand for natural gas, to the benefit of US producers and the associated infrastructure that supports them.

Wells Fargo’s Midstream Energy Weekender suggested that the sector is due to reprice higher. Their favored metric of Enterprise Value/EBITDA (EV/EBITDA) is at 8.2X. Five years ago it was around 11X, and performance since then has been good. To put these figures in context, if EV/EBITDA improved by one turn (ie 8.2X to 9.2X) that would equate to a roughly 20% price appreciation since pipeline companies are typically financed with 50% debt.

Wells Fargo also noted, “a growing realization that a confluence of factors could drive significant growth in US natural gas demand over the next 5+ years.” LNG exports, increased domestic manufacturing and demand from AI centers were the reasons cited. As regular readers know, we have long argued that natural gas infrastructure assets are cheap.

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There are signs that investors are beginning to act on this opportunity. Over the past year the American Energy Independence Index (AEITR) has kept pace with the S&P500’s AI-fueled run and last week moved ahead. YTD the AEITR is +10% vs the market’s +5%.

Tesla’s stock price continues to adjust to the new reality of declining EV demand. A couple of weeks ago an Uber driver in a Kia EV with 14% battery charge remaining said he loves his car. Charging only took about 30 minutes and he could usually find a charging station within 30 miles. After dropping me at the airport he was planning to do just that.

Robert Bryce reminds us that Stanford University’s futurist Tony Seba forecast in 2014 that “By 2025, gasoline engine cars will be unable to compete with electric vehicles.” Seba predicted that Internal Combustion Engines (ICEs) would be obsolete by 2030. Tony Seba is a soft target.

Your blogger will shortly be buying a new car. I’m not opposed to an EV – they work well as golf carts for example. But the inconvenience of charging, the waiting time involved and range anxiety demand a price discount to an equivalent ICE in my opinion. Around 25% would be enough to induce me to buy one. The market’s not there yet although it’s heading in that direction. So I’ll be buying a conventional car.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

As we sat down to lunch in London’s west end earlier this month, Richard told me his family had been good friends with Patrick Moore, presenter of BBC’s The Sky At Night from 1957 until his death in 2012. He was a passionate amateur astronomer who taught viewers what they were looking at in the night sky and contributed to early mapping of the Moon. He spoke quickly and seemed rather eccentric. I remember watching his TV show as a young boy.

The Horsehead Nebula (pictured) draws its red color from ionized hydrogen gas sitting behind the dark nebula. It’s the type of shot Patrick Moore would have used on his TV show.

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Moore believed the Sun’s impact on climate was under-appreciated and dismissed human activity as the driving force behind recent climate change. Perhaps he’d have a more nuanced view today. He was old enough to have met Orville Wright and later Neil Armstrong, connecting the two most defining moments in aviation history.

Richard is a business development manager for a leading international energy major. He’s responsible for developing the case for hydrogen imports to Europe and investigates investment opportunities for clean energy projects, part of supporting their developing energy transition portfolio. Richard has spent his career in energy, including with several European majors. In university he studied climatology, and investigated some of the ways in which volcanic ash and solar radiation can impact the climate.

He reached out to me because of our blog. I always enjoy meeting our readers – Richard multitasks by listening to our blogcasts on his commute rather than reading them. He was able to leave the office for lunch during my recent trip.

Every big energy company has an energy transition strategy. As shareholder-owned commercial enterprises, they don’t have the luxury of accepting inferior returns to achieve politically correct targets. Renewables investments must compete with traditional energy for capital and other resources. Skeptics might argue that solar and wind projects provide political cover to focus on oil and gas, where the real profits are.

Richard is well versed in the challenges of the energy transition. Like most people who have given serious thought to the topic, he believes we need to use much more nuclear. This blog often asserts that nuclear opponents haven’t thought very hard about practical ways to reduce CO2.

Richard noted that small cars lend themselves to electrification. We think they’ll need to be cheaper than equivalent conventional cars to attain mass appeal, because of the inconvenience of recharging. He believes hydrogen is a more practical solution for large trucks and long-distance transport because storing enough power in batteries adds too much weight to be economically practical. Daimler and Hyzon are actively working on liquid hydrogen trucks.

The EU is targeting 10 Million Tonnes Per Annum (MTPA) of domestic hydrogen production along with 10 MTPA of imports to jump start region-wide consumption of hydrogen by 2030. The European Hydrogen Bank is providing up to €100BN in support of these ambitions. De-carbonizing steel and cement production, perhaps with hydrogen, are priorities although the technical challenges are significant.

Europe has always seemed a better prospect for hydrogen than the US, where cheap natural gas renders the economics of hydrogen unworkable without substantial government subsidies. European politics is also to the left of the US, meaning there’s greater tolerance for high energy prices in exchange for reduced emissions.

Liquifying hydrogen prior to transportation makes it denser, allowing for more energy to be moved per unit of volume. However, chilling it to a liquid state is very energy intensive. Boil-off is a common problem for LNG tankers. Some of the LNG must be released in transit as it warms up and becomes gaseous. Boil-off losses are typically around 1% per day for LNG tankers and shipping liquid hydrogen faces the same problem but to a much greater extent due to the larger temperature differential. Hydrogen needs to be cooled to below -250C so many companies are looking at alternative means of transport such as combining it with nitrogen to form ammonia, which is liquid at a much more manageable -33C.

In the US Carbon Capture and Sequestration (CCS) received a boost in the 2022 Inflation Reduction Act which offers tax credits of up to $180 per metric tonne for permanently sequestered CO2. Occidental is a leader in this (see How Occidental Invests In Lower Taxes).

Rock formations that previously held natural gas (methane) can be good places to permanently store CO2. There’s a wonderful symmetry in extracting carbon atoms as methane molecules (CH4) and returning them to their source after use as CO2. The Netherlands has identified storage capacity for up to 3.2 Gigatonnes, more than the EU emitted last year.

The Dutch Senate has now passed a law to end natural gas production at Groningen, one of Europe’s largest, from October 1st this year to limit seismic risks from hydraulic fracturing. Groningen is not currently contemplated as a repository for CO2. Its closure leaves untapped reserves, and some politicians argue it could jeopardize the country’s security of supply. Possible re-use as a carbon dioxide store is yet to be seen but would certainly pose new challenges.

The steel and concrete well casings, through which natural gas was originally extracted, can become corroded from prolonged contact with CO2, requiring the replacement of the installed materials. Hydrogen produces its own challenges when coming into contact with steel. It’s a very small molecule so can penetrate the metal and cause embrittlement.

Safely ensuring the integrity of former gas wells and pipelines if repurposed for CO2 or hydrogen use might prove too expensive, resulting in the need to drill or build new, specialized, infrastructure.

There are likely better options. As is often the case, the biggest challenges in reducing CO2 are economic.

Richard is well-versed in these and other technical challenges facing the energy transition. I spent an absorbing lunch listening to him. We are fortunate to have people with his knowledge and ambition working on the problem.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

The Wall Street Journal called it “Biden’s Green-Energy Price Shock”, noting that electricity prices have increased by 21% since January 2021. That this has coincided with increased solar and wind output ought to surprise no-one. Thoughtful progressives should hail this as a positive development and argue that higher energy prices are an inevitable and worthwhile step in reducing CO2 emissions. But for the most part climate extremists have disingenuously argued that renewables are cheaper than reliable power – therefore they must feign surprise at rising electricity prices.

I spent last week in London. Like the rest of Europe, Britain endured a sharp rise in power prices following Russia’s invasion of Ukraine two years ago. Things have stabilized, but UK electricity is roughly 2X the cost of the US. Offshore windpower has been a success – the North Sea is a reliably blustery place. Last year wind generated 29% of the country’s electricity and 31% over the past twelve months. Natural gas still has a slight edge at 32%.

The US enjoys ample supplies of natural gas priced at around a quarter of what the UK pays. Expensive windpower isn’t the only reason for higher UK electricity prices.

Brexit either (1) inevitably harmed UK GDP growth by raising trade barriers to their neighbors, or (2) provided opportunities so far unexploited by the Conservative government, depending on whether you were against or for. Economic growth is anemic, and with voters going to the polls later this year PM Rishi Sunak has watered down earlier commitments to net zero, recognizing their economic and political cost going into an election he’s widely expected to lose.

Elsewhere in Europe Germany has embraced self-harm as national energy policy. Ruinously high energy prices (electricity is 4X or more vs the US) have led to reduced emissions via de-industrialization. German businesses are relocating and cutting domestic investment. German voters have been steadfast in their commitment to lead on climate change, a hugely expensive and ineffective effort swamped by China’s relentless coal-based growth.

Rising electricity prices are an easy target, as the WSJ op-ed showed. European energy policies have no place in America, and because of this our energy transition is going much better than theirs. Prices remain low and are attracting foreign direct investment. The US economy is growing strongly, easily the best among OECD countries. The benefits of cheap natural gas will grow as the only reliable way to meet increased power demands from data centers.

Americans impatiently expect persistent improvement from many things. This is curbing the efforts of climate extremists to foist expensive, intermittent energy on us without considering cost and reliability. We are less tolerant than Europeans of being told by liberal politicians what’s good for us.

Natural gas infrastructure is benefiting. In A Safe, Profitable Bet on the Green Transition, the WSJ noted how midstream companies such as Williams and Kinder Morgan are raising prices because of scarce capacity. Climate extremists have impeded new investments, thereby boosting free cash flow and helping traditional energy far outperform companies focused on renewables. Pipelines are beating the S&P500 this year.

Hug a climate protester and drive them to their next protest.

Visiting London, where I lived until 1982, triggers warm feelings of nostalgia along with sympathy for a great country that has endured poor leadership for too long. I delayed my arrival to avoid a widespread one-day rail strike. Such disruptions have been going on sporadically for eighteen months. Why do voters put up with that? Why are climate protesters still allowed to block traffic by standing in the road?

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I reconnected with my old boss who, to my great fortune 42 years ago, persuaded his New York office to take on a young man beginning his career in finance. It was nice to thank him.

I saw Arsenal play Bayern Munich in the Champions League. It is possible to buy a ticket if you’re willing to pay a price too embarrassing to disclose. I saw Hamilton, with an enthusiastic UK audience that loved every minute. The lyrics of “You’ll Be Back” sung by George III, cleverly reflect imperial Britain’s slipping dominion over a people ready and able to reject it while retaining an eternal bond of shared values and culture.

Most importantly I saw old friends – I’m drawn back annually and now in my 60s have determined to visit more frequently. There are many great places in the world. You can enjoy them without owning a home there.

America is the world’s greatest country. I’m proud of my English heritage although Britain’s too liberal for me. Visits remind me why I emigrated. But I’m going to keep coming back.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

Vaclav Smil is often described as a polymath. His website says he does interdisciplinary research in the fields of energy, environmental and population change, food production, history of technical innovation, risk assessment, and public policy. He is Distinguished Professor Emeritus at the University of Manitoba.

I first came across his books when Bill Gates described Smil as his favorite author. His 2022 How the World Really Works: The Science Behind How We Got Here and Where We’re Going is one of his best.

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Mike Cembalest is JPMorgan’s Chairman of Market and Investment Strategy for Asset Management. He’s a highly skilled investment writer via his Eye on the Market series and annual energy papers and engaged Smil as technical advisor on energy topics for years. Smil is now 80 and has a less formal role. Cembalest says, “the opportunity to learn from him is one of the highlights of my 36 years at JP Morgan.”

For my part, both continue to be a vital source of information and insight via their writing.

We spend a lot of time thinking and reading about climate change. In a recent essay, Smil provided a dispassionate assessment of the energy transition grounded in facts.

Simply put, the world has no chance of reaching the UN’s goal of eliminating CO2 emissions over the next quarter century.

In 2018 when “zero by 50” was first articulated as a goal, UN scientists concluded that emissions needed to decline by around 45% from 2010 levels by 2030. Today that means eliminating nearly 16 billion tons of CO2 over the next six years, close to what China and the US generate today. Zero by 50 requires cutting almost half of India’s emissions every year, assuming no net growth anywhere else.

Global energy demand is generally forecast to rise by 10-15% by 2050.

Emissions haven’t even peaked yet.

Zero by 50 means replacing all thermal power generation capacity (currently 4 terawatts); converting 1.5 billion combustion engines including 50 million tractors; upgrading half a billion natural gas furnaces, 120,000 merchant ships and nearly 25,000 airplanes.

Smil often reminds how long previous energy transitions have taken. Coal surpassed wood in 1900 and didn’t peak until the 1960s. Then there’s the growth in developing world economies. Wood, charcoal, straw and dried dung provide around 5% of the world’s primary energy for 3 billion people, mostly for cooking. These people aspire to use natural gas.

Over the past quarter century combusted fossil fuels have increased by over half.

Many processes can’t be easily electrified. These include cement manufacture which requires high heat; fertilizer production which is a chemical conversion of methane (natural gas) into ammonia; and aviation because battery-powered planes defy aerodynamics. Smil also points out that a transition to solar and wind power means accepting less efficiency because renewables are low density (need large amounts of space) and intermittent (it’s not always sunny and windy).

The additional materials needed for EVs, solar and windpower and the rest of the energy transition are inconceivable. Smil estimates between now and 2050 we’ll need an extra 150 millions tons of copper (seven years of current production) just for EVs and 600 million tons in total; 40X as much lithium as is currently mined and 25X as much graphite and cobalt; 5 billion tons of steel (2.5X annual output).

All these minerals and inputs will have to be mined and produced without generating any new CO2.

Smil calculates that rich countries like the US would need to dedicate 20-25% of GDP to the energy transition through 2050, a level of commitment to a cause we achieved only once before, for less than five years during World War II.

When you look carefully at history, consider politics and add the desire of most of the world’s population to improve their living standards, only one conclusion is possible.

There’s no realistic likelihood of this goal being achieved.

Scientists, politicians and climate extremists have raised awareness but failed to inspire popular support for the policies they prescribe. This is democratic. It involves a substantial economic sacrifice by people today to benefit future generations. Democracies aren’t good at that. We can’t even embrace measures to curb our looming fiscal catastrophe even though America’s soaring debt is plain to see and not subject to any scientific uncertainty. Climate change and the deficit share this common challenge – getting today’s voters to care about generations not yet born is not a winning political message.

Vaclav Smil explains why we should stop worrying about climate change and plan on dealing with the consequences.

To turn it back to investing: the desire of so many to raise living standards has to be good for US natural gas, especially once the pause on LNG exports is lifted. And as it becomes clear that the solar/wind obsession is not making much impact, more pragmatic solutions are likely. A serious effort that is success-oriented instead of aspirational includes fast-tracking nuclear power and a worldwide coal-to-gas switch, emulating America’s biggest success in reducing emissions.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

JPMorgan’s 14^th Annual Energy Paper (subtitled “Electravision”) is as always packed with data and insights. Mike Cembalest has few peers among investment writers. Two themes, the slow electrification of western economies and the challenges of Electric Vehicles (EVs) stood out.

As Cembalest has noted before, renewables are gaining market share of power generation faster than electricity is growing its share of primary energy use. Around a fifth of US electricity generation comes from solar and wind. Texas is about a quarter of US windpower (see Windpower Stumbles On Unique American Mineral Rights) and Iowa relies on wind for over half of its electricity (See Offshore Wind vs Onshore). Wind’s market share doesn’t appear to correlate with electricity prices in states, but solar does.

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The growth in renewables is exposing more grids to intermittency, since it’s not always sunny and windy. Battery storage is expected to be the major solution, but so far it’s made few inroads. Pumped storage relies on using electricity when it’s cheap (ie midday solar) to move water uphill, releasing it to generate power when demand exceeds renewables supply (breakfast and dinner time). It’s low tech, and yet this still represents 70% of utility scale storage.

Therefore, existing dispatchable power (usually natural gas, sometimes coal) is being retained. Because renewables operate at much less capacity than natural gas plants (typically 25-35% vs >90%), adding 1MW of solar capacity does little to reduce the need for the traditional energy it’s supposed to replace.

The result is adding renewables means carrying ever more redundant dispatchable capacity. Regional grid operators report that new renewables lead to only 10-20% of equivalent capacity reduction of coal or gas. It’s why solar and wind aren’t as cheap as their proponents like to think (see Renewables Are Pushing US Electricity Prices Up).

It also means capacity buffers are falling. New England expects peak summer generation capacity to drop below 10% within a decade, from over 25% currently. The recent surge in data centers to support AI is putting further pressure on power supply.

We tolerate power outages which rarely last more than a few hours. We haven’t had any natural gas outages, which would occur if, for example, very cold weather interrupted production. We’ve had some near misses, including in New York on Christmas Eve morning in 2022. If gas supply was cut, technicians would need to visit every building to ensure no residual gas had leaked while the pilot light was out. Frozen water pipes would presumably be common.

Engineers estimated that restoring service to 130,000 customers could take five to seven weeks. Let’s hope none of us ever lives through that.

On Electric Vehicles (EVs), estimates of their carbon impact usually rely on a grid’s average emissions intensity based on its mix of power. But Cembalest argues that it’s the marginal source that is more important. For example, if most drivers charge their cars overnight, a grid’s heavy reliance on solar power won’t help. The grid may be relying on fossil fuels or even have to invest more in storage. Bad news for EVs is that marginal emission rates are 1.5X average ones, reducing the carbon benefits of EVs.

Cembalest recounts the sorry tale of the new owner of a Ford F-150 Lightning EV who encountered many non-working EV chargers on a trip north from the Bay area. Tesla owners still report very good experience with charging.

Hydraulic fracturing produces over half of America’s primary energy. This technique remains almost exclusively American although Argentina’s Vaca Muerta shale play is a rare foreign example. It’s hard to conceive how the US economy would look without fracking. We’d face higher energy prices, slower growth and continued reliance on foreign imports. The shale revolution has been an enormous benefit to Americans and our trade partners.

JPMorgan’s Annual Energy Paper is full of interesting facts. Europe is colder than the US, because it’s farther north. How much farther? The 44^th parallel north runs through upstate New York and across the Atlantic, passing just north of San Marino. 92% of Americans live below this line, while 82% of Europeans live above it. This is why 10% of European households have air conditioning vs 90% in the US. The increasing use of heat pumps in new European dwellings is making a/c available, since all that’s required is to run the heat pump in reverse on warm days. This will offset some of the efficiency benefits that come with heat pumps.

Mike Cembalest is in that rare category of writers whose output informs, surprises and is always worth reading.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Inflation Fund

By Henry Hoffman, Partner, SL Advisors

In the realm of global energy, 2024 was heralded as a landmark year for the expansion of liquefied natural gas (LNG) projects, particularly for America. Optimism was buoyed by the prior year’s achievements, wherein American enterprises reached Final Investment Decision (FID) on the equivalent of 5 Billion Cubic Feet per Day (BCF/D). That’s one third of the amount of gas Europe was importing from Russia before the invasion of Ukraine! 

However, a regulatory interlude, specifically the temporary suspension of non-Free Trade Agreement (FTA) export licenses coupled with more stringent criteria for extending project in-service dates, has precipitated a recalibration of expectations. This pause has advantaged international competitors, notably with Qatar announcing a 16-MMt/y expansion. Consequently, the landscape for 2024’s FIDs is now markedly altered, favoring projects beyond American shores. 

According to the leading LNG experts at Poten & Partners, only a few domestic endeavors are still poised for progress. These include NextDecade’s (Symbol: NEXT) Rio Grande LNG Train 4, a notable candidate for a 2024 FID. Poten notes they have their DOE approvals in hand and Middle East buyers (Reuters has previously reported this is ADNOC) are in advanced discussions for offtake of 2-3 Million Tonnes per Annum (MTPA), enough to commercialize the project with TotalEnergies exercising its option for 1.5MTPA. NextDecade is targeting FID on T4 by the end of 3Q 2024.  

Nonetheless, the overarching sentiment within the industry is one of restraint, as projects that once seemed imminent now grapple with uncertain timelines. This unforeseen stasis extends beyond the U.S., affecting Mexican projects reliant on American natural gas, thereby creating a ripple effect that benefits international ventures in the UAE, Mozambique, and Papua New Guinea. 

In the intricate tapestry of global energy dynamics, the recent recalibration of the United States’ regulatory stance on non-FTA LNG export licenses has precipitated a notable shift. Asian buyers, initially on the cusp of cementing long-term procurement deals with U.S. LNG developers in the first quarter of 2024, find themselves at a crossroads, compelled to reconsider their supply strategies in light of these regulatory adjustments.  

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This pivot is not merely a transient phase but a reflection of a deeper reevaluation of supply chains amidst evolving policy landscapes. Poten highlights that Energy Transfer’s (Symbol: ET) Lake Charles LNG project epitomizes the challenges and resilience within this sector. The project has faced renegotiation barriers with potential buyers due to the uncertainty surrounding its non-FTA permit extension, essential for meeting its proposed in-service deadline of December 2025.  

This situation is further exacerbated by the U.S. Department of Energy’s stringent criteria for permit extensions, adding layers of complexity to an already intricate negotiation landscape. As a result, Energy Transfer’s attempts to amend pricing structures with buyers have encountered significant headwinds, underscoring the delicate balance between regulatory compliance and market competitiveness.  

Poten notes that Japan’s Kyushu Electric has delayed converting its Heads Of Agreement (HOA) with Energy Transfer into a binding Sales and Purchase Agreement (SPA) as one example of the effects of this disastrous policy. Conversely, Tellurian’s (Symbol: TELL) plagued Driftwood project may have received a lifeline, enabling it to capitalize on the current regulatory pause that has beleaguered competitors like Energy Transfer. 

The implications of this regulatory hiatus extend beyond mere project delays. It underscores a burgeoning competition for market share in the LNG sector, with other nations benefiting from America’s masochist behavior. This political maneuver disadvantages our allies in Europe and Japan while aiding rivals in the Middle East and Russia, manifesting significant and concrete impacts.  

Fortunately, in contrast to the partisan DOE, the American spirit lives on in domestic LNG developers, who, despite the current impasse, continue to forge ahead with negotiations and project planning.