How the Willow Project Came to Be
Plus the EU's three new energy policies, growth of U.S. LNG exports, a NATO-EU task force to protect infrastructure and the early impacts of the Russian oil price cap
(Photo of a 2018 exploration pad and well drilled by ConocoPhillips as a precursor to the Willow Project | Source: KTOO)
This week we have details about two major U.S. fossil fuel projects (one oil, one gas), which signal that the country is not yet done with these resources and that it will continue to be an important energy exporter through at least the rest of the decade. The European Union also made big announcements as it introduced three new energy acts that provide direction for the EU’s energy transition. EU lawmakers seem to be finding competitive advantage over the U.S. clean energy subsidies through quickly improving the clean energy permitting processes (which continues to slow down deployment in the U.S.). We also saw the announcement of a formal partnership between NATO and the EU to protect critical infrastructure, and an IEA report that shows steep reduction in Russian oil revenue following the price cap and bans put in place over the last few months.
Biden Administration Approves 180k b/d Willow Project in Alaska
Figure 1: Location of the Willow Project (Source: Washington Post/Associated Press)
DRIVING THE NEWS: Last week the U.S. Department of the Interior issued its Record of Decision approving the long-anticipated ConocoPhillips Willow Project located in the National Petroleum Reserve in Alaska (NPR-A) (ConocoPhillips news release).
INSIGHT: While in Alaska last week, we had the opportunity to meet with senior U.S. Department of the Interior leaders, who shared some helpful context for understanding the administration’s decision:
The project history goes back to the late-1990s when ConocoPhillips originally leased the land under the Clinton Administration. Since then, the company has spent over $600 million in lease payments, exploration and other costs.
While President Biden had committed on the campaign trail to halt new fossil fuel development and set ambitious targets for U.S. emissions reductions, stopping the Willow project presented a potential breach of contract by the U.S. that would carry strongly negative implications for the country and for taxpayers.
From an Alaskan perspective, while some local native municipalities and village corporations opposed the project, the native regional corporations as well as state governments and trade unions strongly supported the Willow project on an economic development basis.
WHY IT MATTERS: The Willow project will produce an estimated 180,000 barrels per day when fully operational, equivalent to roughly 600 million barrels over its 30 year lifespan. For reference, in 2022 the U.S. produced roughly 11 million barrels per day (428,000 b/d from Alaska, EIA).
The Biden Administration did, however, secure a number of major concessions from ConocoPhillips in the approval process: the project size is significantly reduced from five proposed to three approved drill sites, ConocoPhillips will return roughly 68,000 acres of existing leases to the NPR-A, and the administration is pursuing a new rules to protect an additional 13 million acres of nearby land and 2.8 million acres of Arctic Ocean (DOI Press Release).
THE GEOPOLITICS: The project is still years away from market production, which means it will do little to serve near-term oil demand (including from China’s re-mobilizing economy). Over the medium-term, many say the project will reduce U.S. dependence on foreign oil imports. It is unclear how much impact the single project will have, however, given that in 2021 the U.S. imported roughly 8.47 million barrels per day.
NEXT STEPS: Following the approval, a number of groups came together to sue in an attempt to halt the project. The project had previously been struck down in 2021 by the U.S. District Court for the District of Alaska, but DOI expects that this time the approval will be upheld based on updated environmental studies and reduction of scope. A decision is expected by April 3rd.
DIVE DEEPER: The Washington Post has a good summary of the location and impacts of the Willow Project, and the Carnegie Endowment wrote a commentary that examines the project from a climate impact and oil production gap perspective.
EU Proposes Three Major Energy Reform Acts
DRIVING THE NEWS: The EU last week announced three new energy legislation proposals as part of its Green Deal Industrial Plan: the European Critical Raw Materials Act, the EU Electricity Market Reform, and the Net Zero Industry Act.
WHY IT MATTERS: The three proposals taken together provide a window into how the EU is framing its priorities for the energy transition. Across the three proposals, supply chain resilience and a transition away from highly concentrated third-party technology and material providers stand out as key themes.
The EU also seems to have identified permitting reform as a potential competitive advantage. The U.S. has been struggling with reforming its permitting processes for renewables and transmission, which presents a major problem for deployment going forward. If the EU can find a way to expedite permitting, the faster project implementation could provide a compelling case for clean tech providers to focus on Europe even without the massive subsidies offered across the pond.
SUMMARIES: Each of the three proposals aims to strengthen key parts of the EU energy transition:
European Critical Raw Materials Act: Although demand for raw materials is expected to rise sharply in the coming years, “Europe heavily relies on imports, often from quasi-monopolistic third country suppliers”. This act includes four targets to increase domestic production[1]. It distinguished between ‘strategic raw materials’ (SRMs)–those with particularly high importance to specific industries that may experience demand and supply shocks–and ‘critical raw materials’ (CRMs) that are more generally important for the EU economy at large. The act introduces a ‘strategic project’ designation that will streamline permitting and make financing easier for SRMs. Finally, the act will seek to set up a ‘CRM club’ to bring together and develop diplomatic relations between consuming and producing countries; an approach similar to that taken by the EU for COVID-19 vaccines and natural gas (Wall Street Journal). Notably absent from the act is any sort of subsidies for SRM/CRM projects.
“Excessive dependencies on single suppliers could disrupt entire supply chains, particularly as export restrictions and other trade restrictive measures are increasingly used amid intensifying global competition” stated the Commission (Euractiv).
EU Electricity Market Reform: The second act aims to 1) to accelerate renewables and the phase-out of gas, 2) to protect consumers from short-term energy price spikes and disconnect volatile fossil fuel prices from consumer utility bills, and 3) to make EU industry cleaner and more competitive. To do so, the EU is proposing enhancements to market transparency; measures to incentivize longer contracts with non-fossil power producers and to bring more clean, flexible generation to the systems (including demand response and storage); and giving consumers a wider choice of contracts with both long-term secure pricing or dynamic pricing. For more information, see a summary from Bruegel.
Net Zero Industry Act: The third proposal sets out a goal (not a legal requirement) to produce domestically at least 40% of the technology needed to reach energy and climate targets by 2030. The act aims to speed up permitting and increase access to finance for clean tech, including renewables, CO2 capture, and renewable hydrogen. It includes a Net-Zero Europe Platform which will help with data sharing and coordination across countries and agencies. However, the act is facing the same challenges around domestic manufacturing requirements that the U.S. subsidies package did: namely complaints from the solar industry that exclusion of cheaper Chinese panels will slow installation (Financial Times).
“The net-zero industry act will… create the best conditions for those sectors that are crucial for us to reach net-zero by 2050: technologies like wind turbines, heat pumps, solar panels, renewable hydrogen as well as CO2 storage,” said EC President Ursula von der Leyen (Euractiv).
“We aim to manufacture at least 40% of our deployment needs in Europe. Of course, we will continue to trade with our partners. Not everything will be made in Europe, but more should be made in Europe,” said EU climate chief Frans Timmermans.
NEXT STEPS: The three proposals will now go to discussion and must be agreed upon by the European Parliament and the Council before going into force. The decision dates are not yet set, but it is clear that EU leaders are looking for move forward as quickly as possible.
U.S. LNG Developer Venture Global Secures Financing for Plaquemines Expansion
DRIVING THE NEWS: LNG developer Venture Global announced last week a final investment decision and financial close for Phase 2 of their Plaquemines expansion project. The $7.8 billion for Phase 2 brings the total investment to $21 billion across both phases–which Venture Global claims as the largest project finance ever.
The expansion will bring the facility’s export capacity up to 20 million tonnes of LNG per year, with a capacity to liquify 2.6 billion cubic feet per day or 2.5% of U.S. gas output. Phase 1 is already under construction and is expected to begin production in 2024, followed by Phase 2 in 2025 (Reuters)
Phase 2 customers will include: ExxonMobil, Chevron, EnBW, New Fortress Energy, China Gas, Petronas and Excelerate Energy.
WHY IT MATTERS: The Plaquemines project puts the U.S. on track to surpass 20 billion cfd of LNG export capacity, making it the largest global LNG exporter going forward. As the world continues to demand more gas, this will continue to provide a strategic advantage for the country in the global energy markets.
Figure 2: U.S. on track to become the world’s largest LNG exporter (Source: Financial Times and Wood Mackenzie)
The expansion of export infrastructure seems to be counter to the Biden Administration’s campaign promises to halt the expansion of fossil fuel infrastructure. But the dramatic changes in global energy markets over the last year have required the administration to adapt. Speaking about the Plaquemines expansion, Energy Secretary Granholm stated: “It’s a free market and we’re not going to stand in the way”, adding “What’s good is that we’re expanding our ability to help with energy security”.
THE COMPETITIVE LANDSCAPE: U.S. LNG is controlled by a small number of firms, and that concentration seems to be growing. Beyond Venture Global, ExxonMobil, Cheniere Energy, and Chevron are the leading U.S. exporters.
Two factors seem to be driving this concentration: first, the massive barriers to entry which make it much easier for large firms with existing facilities to expand their operations than for startups to build new projects from scratch. Second, given the extremely high cost and business risk, brand recognition is a major factor for attracting buyers and lenders (Financial Times).
NATO-EU Task Force on Resilience of Critical Infrastructure
DRIVING THE NEWS: On Thursday, senior officials from NATO and the EU launched a new NATO-EU Task Force on Resilience of Critical Infrastructure. The task force will focus on coordinating defense of four key sectors: energy, transport, digital infrastructure, and space. It will provide a forum for the two organizations to share best practices, situation awareness, and develop approaches to improve resilience (EC Press Release).
In January when the need for a task force was first announced, NATO Secretary General Jens Stoltenberg stated: "We want to look together at how to make our critical infrastructure, technology and supply chains more resilient to potential threats, and to take action to mitigate potential vulnerabilities. This will be an important step in making our societies stronger and safer." (NATO Press Release)
To mark the announcement, NATO and European Commission leaders traveled together last week to the Troll gas platform in Norway’s biggest offshore gas field, which provides roughly 10% of Europe’s gas needs. Naval ships from the UK, Germany, Spain, and Portugal gathered for the event (Financial Times).
WHY IT MATTERS: Security of critical infrastructure has become a major concern following the sabotage of three of the four Nord Stream pipelines last year and a slew of other security issues. This official partnership marks the most significant coordination to date between the military alliance and the EU.
While protecting physical infrastructure is important, ministers in Norway have also sounded the alarm about the potential for cyber attacks, which they say is a greater risk that an act of physical sabotage.
Russia’s Oil Revenue Falls Due to Price Cap
DRIVING THE NEWS: According to the IEA’s most recent Oil Market Report, Russia’s oil export revenue fell sharply in February, down $2.7 billion from January to $11.6 billion last month.
By volume, Russian exports fell 500 kb/d to 7.5 mb/d in February. Shipments to the EU have fallen from 4 mb/d at the start of 2022 to just 580 kb/d last month. Russia has also seen shipments to India and China drop, though shipments without destination increased from 600 kb/d to 800 kb/d.
Over the last year, Russia has had to find new buyers for 4.5 mb/d of oil previously being shipped to EU, North America, and OECD Asia Oceania buyers that are no longer purchasing their products
From the IEA report: “Willing buyers in Asia, namely India and, to a lesser extent, China, have snapped up discounted crude oil cargoes, but increasing volumes on the water suggest the share of Russian oil in their import mix may be getting too big for comfort.”
WHY IT MATTERS: The reduction in Russian exports last month demonstrates the cumulative impacts of the $60 per barrel price cap implemented by the G7 on December 5th as well as the subsequent bans on seaborne imports of Russia crude oil and oil products (CNBC).
Russia has found itself with a smaller buying pool globally, and has been forced to make major concessions on price which particularly benefits low- and middle-income countries.
When announcing the price cap back in December, U.S. Treasury Secretary Janet Yellen expressed that even countries that do not abide by the Western sanctions or price cap rule should benefit through increased bargaining power for steeper discounts on Russian oil (Dept. of the Treasury). This plan seems to have largely materialized, as China, India, and other Russia oil buyers are now reaping the benefits of reduced prices.
MEANWHILE: Russia has now overtaken Saudi Arabia as China’s largest supplier of oil (Aljazeera). China has imported roughly 2 mb/d in the first two months of 2023, up 24% from the same period last year.
DIVE DEEPER: See the IEA’s March Oil Market Report summary and full text.
[1] The European Critical Raw Materials Act includes four 2030 targets related to domestic production: 1) domestic production of at least 10% of the EU’s annual consumption for extraction, 2) at least 40% of the EU’s annual consumption for processing, 3) at least 15% of the EU’s annual consumption for recycling, and 4) no more than 65% of the EU’s annual consumption of each SRM from a single third country.