Trade Finance TV: Powering a clean tomorrow

Clarissa Dann: We’ve all heard the call to action at COP26. Net zero emissions by 2050 or earlier. But as poorer nations come out of poverty and economies bounce back after COVID 19, there seems to be a very long way to go before renewables can really replace oil and gas.

Jonathan Bell: So thank you very much for inviting me here, and thank you to Deutsche Bank for inviting me to this session. On the commodity financing and trading front we are going through a traumatic period in all aspects, and many financing institutions are drastically reevaluating or changing their portfolios, particularly so with the exclusion of coal and coke and the reduction also in upstream oil and gas financing. As a result, less developed nations begin to suffer economically. Supply chains get impacted adversely and commodity pricing spirals. With tighter supplies producers are reaping the benefits with record profits largely due to the rise in oil and gas prices. Where is the sector going and what can we expect?

Danai Koutra: What is responsible for three quarters of the emissions that have taken place and the 1.1 increase in temperatures? The oil and gas industry, the energy industries have the appropriate skill set to help us go towards the net zero. And this is what we witness a lot with our clients. They see that there is an opportunity for further investment and for employment. And I think this is the key that we have to take into account that net zero is not something bad for the industry but something good.

Clarissa Dann: From the analysis perspective, what do you say?

Edward Gomersall: We’ve seen a handful of major energy companies pivot towards taking advantage of the opportunities that renewables presents itself. Particularly in Europe materialization of so-called green IOCs and as companies with significant upstream exposure and assets divest these and turn their attention to lower carbon fossil fuels, i.e. gas and in more extreme or forward thinking cases outnot renewables exposure. So companies like Orsted are leading the way on this. Denmark’s national oil company formally.

Danai Koutra: Already in developed markets is seeing much quicker development and licenses that are being provided for the development of wind farms. We now having also more offshore wind farms that are being developed, huge ones. We have in the UK one of the biggest ones, the Dogger Bank. Because of the significant demand we see also the government’s retraction in the form of CFD that they are providing to these kind of wind farms. Given the significant demand from all developers to develop those that we see on the tariff for the know, even see if these on the recent licenses that we have been given in the North Sea in Denmark, particularly one of the latest ones, and in Germany as well.

Jonathan Bell: We’re at this point in time today when Russia has gone into Ukraine. For Russia, which is one of the biggest oil producers and oil exporters in the world, which is part of Opec+, and it has this sort of love hate relationship with Saudi Arabia in terms of the supply of global oil. And I think that while we’re looking at net zero and we were making big strides towards that, I think that it’s all turned on its head with what’s actually taking place now, because before we actually had access into some of the big oil and gas developments in Russia itself, like a more circle and places like that. And now we probably won’t have that, particularly with further sanctions taking place. So it’s a difficult situation that we’re in in terms of energy supplies. But one thing’s for sure, the price is going to go up for oil and gas, and that’s going to be very difficult for countries like Germany. With the vaccine of Nord Stream two.

Edward Gomersall: Is providing an opportunity for politicians to reassess how they approach policy thinking around net zero. We’ve seen in recent months before this latest crisis that there was an acute tightness in European gas demand in the European gas market. That is partly due to European policymakers effectively phasing out coal and nuclear without giving enough incentivization to increase renewables capacity and without giving enough appreciation to the demand inflexibility of gas, because that is the most practical transitioning fuel towards net zero. It is the least carbon intensive of fossil fuels, and Europe itself is a gas fed economy. It’s got rigid infrastructure across Europe. Pipeline, infrastructure, LNG and port infrastructure and that industry residential power relies on.

Jonathan Bell: You know, I think that it was Shell came out with the energy report at the end of 21 saying that forecasts are for a huge increase in gas being traded up to 2050. On the taxonomy front, I don’t know what you make of this, but you know, the EU considering labeling LNG green and are also considering labeling nuclear green. But I mean, you know, they really ought to label LNG green because we are going to need it so much.

Edward Gomersall: I think taxonomy is probably one of those areas which is not fully appreciated in the wider industry. It has potentially huge ramifications for directive finance. If the EU bloc decides to label LNG green. That will have a huge impact on the flow of capital. I don’t think LNG is, you know, per se a green. Its clearly a fossil fuel, but it is the least bad option.

Clarissa Dann: The other one that’s coming through is green hydrogen, there’s various colors of hydrogen out there. And so investment into green hydrogen, although there’s a bit of sort of gray lurking around.

Edward Gomersall: So the vast majority of hydrogen produced today is gray hydrogen that is gas fed. You’ve also got brown, which is coal fired, you’ve got blue, which is gaining traction. And this is gas fed with carbon storage. And the holy Grail is green hydrogen where there are no emissions taking place. Policy approach is going to dictate the trajectory of hydrogen. In many ways, there are similarities between hydrogen and LNG. It is incredibly capital intensive. Eight out of ten of the biggest ever project financings are LNG, hugely capital intensive, and that’s where major oil and gas companies can use their experience. And that’s where banks can use their experience to support the energy transition.

Danai Koutra: I think development of the unused clusters and the carbon storage units in England and Scotland shows as well the criticality of the skill set to be able to use those clusters and reject these gas and make it into blue hydrogen and wherever because it’s something in any case they’ve been doing for the better production of their own. It’s not being said to be able to use those clusters and reject these gas and make it as a blue hydrogen or wherever, because it’s something in any case, they’ve been doing for the better production of the oil. Its known technology and something that can be used today. As we all agreed, the oil and gas will be needed in the near and medium term at least. However, we need to finalize the companies that have a clear trajectory, clear targets the oil and gas companies. They understand, and I think they’re making significant steps towards that because they understand without that, they can survive. We have to be frank, not only some KPI is that we see more and more frequently, but also clear targets and how to achieve them, because what we all want to avoid is the greenwashing.

Edward Gomersall: In its worst case, we’re seeing companies marking their own homework. Where they can say we have adopted an internal process where our shipment of whatever. Has met our definition of net zero. So we need to have an assessment that is independent of the companies first and foremost that markets can have confidence in and can try. The companies themselves are starting the process because the consumers are demanding it. Most European markets have bought into net zero by 2050. And consumers dictate, so we will still be using fossil fuels in 2050, but companies will be incentivized to mitigate those fossil fuels as much as possible.

Jonathan Bell: But just as an example of that, I mean, Deutsche Bank financed a very good independent oil producer, London Energy, which is setting a real fine example. Zero carbon by 2025 in all its production, and it already traded last year the first ever net zero transportation of 600,000 barrels of net zero produced oil. Okay, it’s still oil end of the day. But look at what it’s done, you know, in terms of making its production processes net zero, at the end of the day, 9% of emissions come from oil and gas directly, indirectly, something like 42%. So it’s a huge amount. There’s a lot more that we can do. And as we’re looking to 2050 some countries a bit further, India, 2070, this is going to be something that we all need to keep on top of. And I think that we are on the right path, although until 2030, it’s still going to be ramping up in terms of the use of coal and for the next sort of 20 years, some hydrocarbons to add.

Clarissa Dann: Edward, Danai and Jonathan, thank you so much for joining me today.

All: Thank you.

Published on March 29, 2022