America’s chief cleantech lender has a ‘ridiculously good rate of return’

Hello and welcome to Energy Source.

Oil sold off again yesterday, the same day the OPEC+ group’s latest production cuts took effect. It underscores how the group has been unable to counter oil market concerns about a sluggish global economy and a Chinese recovery that has yet to propel a surge in demand for crude, although it could still happen.

For more, see Myles’ article on low diesel demand signaling potential problems for the US economy. Meanwhile, listed in the UK BP beat market forecasts this morning with first-quarter earnings of $5 billion, but its stock slipped another 5% due to a drop in the pace of planned share buybacks.

In today’s newsletter, Amanda has an interview with Jigar Shah, the federal government’s chief cleantech lender. Big Oil has yet to follow through on its big promises on hydrogen and carbon capture, he said. And in Data Drill, I look at the valuation gap between major US and European oil companies.

Thanks for reading. — justin

PS Hillary Rodham Clinton is the latest speaker to join the lineup for the US edition of the FT Weekend Festival on May 20 in Washington, DC, and online. Join now and save $20 off using promotional code NewslettersxFestival. Prices increase on Friday.

US energy official says Big Oil didn’t come to the table on decarbonization

Jigar Shah, arguably the largest cleantech lender in the United States, describes his career as an effort to “bring to market a technology that everyone considers unbankable.”

Shah, who heads the U.S. Department of Energy’s Office of Lending Programs and has more than $400 billion in lending authority, is one of the most powerful figures in determining which emerging technologies — and companies — will dominate. America’s energy transition.

“The United States is probably one of the most attractive markets in the world today for building manufacturing facilities or deploying decarbonization technologies,” Shah told Energy Source at a BloombergNEF conference. “The goal is to make sure all of these technologies are profitable without subsidies.”

More than 130 applicants are applying for loans worth $120 billion from the LPO, a 50% increase from when the US Inflation Reduction Act took effect, Shah said. The IRA has expanded the LPO’s lending authority by more than $300 billion, putting Shah at the forefront of President Joe Biden’s climate campaign.

One player that has been conspicuously absent from financing these technologies is Big Oil. While U.S. oil majors including ExxonMobil, Chevron and ConocoPhillips have pledged to green their portfolios with clean hydrogen and carbon capture and storage, those announcements have not been backed by cash, said Shah.

“We haven’t seen them come to the table in a big way yet, but we welcome them because it would be great to have their expertise, especially for their strong track record in successfully developing large, complex energy infrastructure projects in on time and on budget,” Shah said, adding in a later BloombergNEF event that less than 20% of capital in carbon management came from the oil and gas sector.

Exxon has announced plans to spend $17 billion on a new low-carbon venture through 2027, much of it for carbon capture and storage (CCS) and hydrogen. Chevron also announced its intention to spend several billion dollars to create similar companies. But companies have been slow to follow.

“Everyone has the impression that the oil and gas sector somehow dominates hydrogen and CCS, and we don’t see that in our dataset,” Shah said.

The LPO released its annual portfolio report last week, offering an overview of the state of the office’s balance sheet since the IRA was passed. The LPO issued $31.6 billion in loans in fiscal 2022, with losses estimated at around $1 billion, well below the $5 billion set aside for losses and at a rate comparable to that commercial institutions.

The “ridiculously good rate of return” argues that the office didn’t take enough risk, Shah suggests. Right now, he’s not afraid to invest in another bad egg, referring to the $535 million Solyndra solar project that went bankrupt under the Obama administration and cast a shadow over the office for years. .

“Solyndra would not go through the current version of the Office of Lending Programs,” Shah said, “The projects that go through the Office of Lending Programs are all real projects that are set up.”

When it comes to deciding which applications receive loans, Shah said the office has no particular preference for technologies or companies — or even country of origin.

“Whether a company is Chinese, Korean, Japanese or European, we actively encourage companies to invest in the United States,” Shah said. “That being said, we of course ensure that there are no unusual relationships with state actors, and that we identify risks and mitigate them where possible. We ensure that there is respect for intellectual property.

But the office’s lasting legacy, Shah said, will be its work on commercializing small modular reactors for global deployment.

“What excites me the most are the products that we market here and then export all over the world. Solar, wind, geothermal, low-impact hydro, we need to scale it all. (Amanda Chu)

Data mining

TotalEnergies chief executive Patrick Pouyanné was the latest European oil boss to complain about his company’s market valuation discount to its US rivals, my colleagues reported yesterday.

While the company’s move to the United States seems extremely unlikely given Total’s close ties to the French government, Pouyanné’s comment reflects growing frustration among European oil bosses over their prospects on the continent. The Financial Times previously reported that Shell executives had explored a move to the United States for similar reasons.

The valuation gap is not a new phenomenon. US companies have enjoyed consistently higher valuations than their European-listed rivals for many years. Notably, this predates serious talk of the energy transition, so it’s probably not true that European companies are suddenly being punished for going green. Instead, corporate America enjoys a much larger stock market and a larger pool of investors — and have been more stable dividend payers.

As the chart below shows, the 10-year average price to expected cash flow ratio – a jargon-heavy metric that gives a good idea of ​​investor sentiment towards a company – shows a persistent premium for US oil groups. The valuation gap has also not widened significantly over the past two years – it is currently more or less in line with the 10-year average.

On the contrary, European bosses seem to be reacting to the worsening ~vibes~ for oil and gas producers on the continent, where policy and investor sentiment are clearly moving faster against fossil fuels, threatening to exacerbate their valuation problem. (Justin Jacobs)

power points

Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. contact us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Find previous editions of the newsletter here.