In this week’s energy industry roundup, we examine headwinds for the solar industry, the Willow oil project in Alaska and liquefied natural gas facilities along the U.S. Gulf Coast.
Headwinds for the solar energy industry
As investment in alternative energy is on the rise, the importance of the solar industry’s role is growing as well. Demand for solar power grew 40% in 2022 and is expected to increase another 20-30% in 2023, according to Bloomberg, making the availability of solar power instrumental in meeting net-zero emission goals.
While recent investment and policy (namely the Inflation Reduction Act) has supported the industry, solar energy still faces serious headwinds. The number of utility-scale solar installations fell by 23% in 2022 due to various issues including volatile prices and supply chain issues, according to Reuters. With demand on the rise, it will be extremely important for manufacturers to keep up in 2023. The Energy Information Administration expects to see many of the delayed 2022 projects taking place in 2023, potentially installing triple the capacity installed in 2022. However, success will not come without its obstacles. Key among those:
- Polysilicon price volatility: Polysilicon, a key raw material in the solar photovoltaic supply chain, has experienced an extremely volatile couple of months, with prices plummeting 40% in December and then rebounding more than 50% less than a month later, according to Bloomberg. While solar manufacturers react to volatile prices and try to protect margins, demand is not slowing down. It is likely that we will continue to see pricing strategy shifts in the short term, with prices stabilizing in the long term. In fact, according to Bloomberg, top wafer manufacturers raised prices by nearly 20% in response to the rising cost of polysilicon. With solar as a permanent fixture in the renewable energy space, it will be important to watch polysilicon prices as a key industry indicator.
- Supply chain stress: The majority of U.S. solar panel imports come from Southeast Asia, but most contain materials produced in China (specifically the Xinjiang Province), according to Reuters. The Uyghur Forced Labor Protection Act (UFLPA) prohibits the import of goods produced using forced labor in China’s Xinjiang Province. Since much of the polysilicon used in solar panel construction comes from this province, the import of this material is prohibited. While it sounds straightforward, there are some complicating factors such as the ability to accurately trace goods through the supply chain and the burden of proof of origin required for imports. According to Reuters, U.S. Customs and Border Protection (CBP) had detained 1,000 panel shipments by early November 2022 and pricing platform LevelTen Energy estimates this figure is now closer to 1,400.
In order to support rising solar demand and abide by the important sanction protecting laborers, it will be important to increase production capacity of polysilicon in the United States. Domestic production is set to increase and will ultimately stabilize the market and create more predictable supply chains.
All eyes on the Willow oil project in Alaska
The $6 billion Willow oil project has been a hot topic in the energy world lately; if approved, the project would be a deviation from drilling policy under the Biden administration thus far. The project is located inside Alaska’s National Petroleum Reserve, the largest track of undisturbed public land in the United States, according to Reuters. Although not yet approved, the Biden administration has indicated it is leaning toward approving a modified version of the proposal, with a decision expected as soon as this week, according to CNN.
The proposed project is the largest pending oil and gas project in the United States, with expected production of 180,000 bpd (about 15% of total U.S. oil production) and up to 600 million barrels over the next 30 years. While there are some concerns around the project in terms of its environmental impact and impact on net-zero emissions goals, the state of Alaska is largely supportive of the project, which is estimated to bring in up to $17 billion in revenue for the federal and state government of Alaska and its communities, and generate up to 2,500 jobs, according to the proposal.
In the current energy landscape where supply is struggling to keep up with rising demand, investment in domestic production is and should be encouraged. This project would be a huge step forward in the journey to re-building energy security in the United States.
Gulf Coast LNG
A significant increase in investment and construction of liquefied natural gas terminals along the U.S. Gulf Coast has enabled the rise of U.S. LNG exports, and that trend is expected to continue as additional pipeline capacity comes online.
LNG exports from the United States are projected to rise to 11.78 billion cubic feet per day this year from 10.63 bcf/day in 2022, according to the U.S. Energy Information Administration, and then climb to 12.59 bcf/day in 2024.
The map below shows existing LNG facilities, facilities that have been approved by the Federal Energy Regulatory Commission but not yet built, and facilities proposed but not yet approved. (This map reflects Freeport LNG at full capacity following its recent restart.)
If daily production is over 119 bcf/d (December 2022, EIA), absent domestic demand, the United States could theoretically fill existing LNG capacity more than twice daily. But with midstream infrastructure challenges (or existing infrastructure at capacity), supply in the producing basins builds up while a shortage at the destination locations creates pricing differentials and export delays. While there are clearly several LNG facilities in the works to meet worldwide demand and forecasted exports, critical transportation infrastructure will be essential for the success of such projects.
Current pipeline capacity to Gulf Coast LNG facilities is about 12.1 bcf/d, illustrating the need for the additional 24 bcf/d from proposed and under construction pipeline projects to continue to meet anticipated global demand. The timing of these pipeline projects is critical to the balancing of supply and demand as the LNG facilities begin to come online. Management teams and investors should closely watch events that can affect supply and demand, including weather, geopolitical unrest, LNG and other refining facility outages and commissioning issues, pipeline capacity changes and long-term volume commitments between producers and buyers.
The aforementioned LNG facility and requisite midstream buildout will require billions in investment in order to come to fruition. Projected capital expenditures will approach $15 billion in 2025 up from $5 billion in 2022, according to Rystad Energy. The construction projects associated with the new LNG facilities and pipeline construction/expansion are growing at a faster pace than previous LNG waves, and will require significant human capital to accomplish. The labor market will struggle to keep up, and we anticipate a degree of wage inflation to support the projects in a time when workers are leaving the industry, often for good.
