From the Editor: Carbon-neutral nirvana? [Gas in Transition]
Successive COP gatherings dating back as far as the Kyoto Protocol in the late 1990s have brought forward all manner of ideas for industrialised economies to tackle climate change.
In broad terms, virtually all of these ideas require a combination of increased investments in renewable energy, largely solar and wind, dramatically reduced – or in fact – eliminated investments in conventional fossil fuels like coal, or and natural gas, and improved efforts at energy efficiency.
More recently, many in the climate change cabal have latched on to hydrogen as something close to a silver bullet: if only we had unlimited supplies of green hydrogen, produced from renewable electricity, all would be well. We could shutter oil and gas wells, mothball refineries, drive fuel cell vehicles that emit only water.
Renewables and hydrogen, they say, could replace oil and gas in pretty much every setting, from providing power to our cities to fueling our planes, trains and automobiles.
The cost of the energy transition has been estimated by McKinsey at some $275 trillion for net zero to be achieved by 2050. That works out to about $9.2 trillion/year, or about 7% of global household spending.
But beyond this eye-watering financial cost, other barriers are standing in the way of a carbon neutral future, including the Iron Law of Megaprojects, which has bedevilled conventional energy investors for decades.
As outlined recently by economics blog ZeroHedge, the Iron Law of Megaprojects, coined by Oxford professor Bent Flyvbjerg, holds that megaprojects, which cost billions of dollars, are years, if not decades, in the making and while socially transformative, invariably come in over budget and well past their estimated completion date.
Runaway cost inflation
The Iron Law is already playing out off the coast of Long Island, where the government of the state of New York is trying valiantly to replace its oil- and gas-fired power needs with a string of hundreds of wind turbines.
The plan was initially laid out in 2019, and was to have been launched with the construction of a state-funded turbine facility at the Port of Albany, north of New York City. ZeroHedge writes that ground hasn’t even been broken at the project site on the shores of the Hudson River, and already the estimated cost has doubled, to $700mn from $350mn, and could go higher still, to $800mn, if equipment costs are factored in. That’s the Iron Law in action.
The wind turbine facility is only the first investment of New York state’s ambitious Climate Leadership and Community Protection Act, which consists of a number of individual megaprojects that together would cost between $270bn and $290bn.
The benefits of that kind of investment would come primarily from a reduction in greenhouse gas emissions worth up to $415bn as the state moves off oil and gas into renewables. But if the overall cost of the gigaproject rises by 55% – less than the cost overruns of just the wind turbine factory – the costs will exceed the benefits, and state taxpayers will be on the hook for the difference, ZeroHedge says.
And if costs balloon to twice the initial estimates, the state stands to spend more than $100bn more than it gains in benefits. That would be a loss of over $30,000 for every New York household by 2050. The Iron Law in action.
Connecticut is also grappling with the Iron Law. There, the cost of a state-funded pier in New London to support the development of offshore windfarms has also more than doubled, to $250mn from $95mn.
Nothing new here
The oil and gas industry has been dealing with these kinds of cost increases for years.
In Canada, the Keystone XL pipeline project, intended to supply oilsands crude to Gulf Coast refineries, found itself in regulatory and court hell for more than a decade, before its proponent, TC Energy, finally pulled the plug after sinking $1.5bn into the exercise.
Or look to Oregon, where US mid-streamer Veresen, and later Canada’s Pembina Pipeline, spent more than a decade guiding the 7.8mn metric tons/year Jordan Cove LNG project through the state permitting process before finally laying it to rest in 2021.
And what of hydrogen, that magic elixir that some hope will be unicorn dust that will get us to a low-carbon future?
Consider Australia. There 10mn metric tonnes/year of green hydrogen projects are in a pipeline that has yet to see a single final investment decision, not even from the biggest hydrogen cheerleader of them all, billionaire Andrew Forrest and his Fortescu Future Industries, who has pledged to get five of his projects to FID, including the Gibson Island green ammonia project in Brisbane’s industrial district.
The $36bn BP-led Australian Renewable Energy Hub, which would deploy 14 GW of electrolysers powered by 26 GW of wind and solar capacity to produce 1.6mn mt/yr of hydrogen or 9mn mt/yr of ammonia, is also having difficulties, not only attracting customers but also securing enough electrolyser capacity.
The trouble with many of the hydrogen projects under consideration, BloombergNEF told Hydrogen Insight recently, is that investors are nowhere near confident enough that demand for this green hydrogen will materialise anytime soon.
“Australia’s announced project pipeline already exceeds 10mn tonnes of H2 per year by 2030, but we expect many projects to experience delays,” BNEF’s David Hostert said. “Potential reasons for this include a lack of concrete offtake agreements and specific government incentives – which appear to be delaying financial closures for many large projects.”
These are all cautionary tales that the conventional oil and gas industry around the world has heard for decades. With the energy transition in the US alone facing cost estimates ranging anywhere from $4.7 trillion to $60 trillion – three times the GDP of the most powerful economy in the world – they should give cause to pause for those charged with leading us to carbon-neutral nirvana.