Green-energy flops revive bets on natural gas

Shell and BP had high expectations of biofuels such as renewable diesel and sustainable aviation fuel, pouring billions of dollars into the market. But things have hit a rough patch.

Last week, Shell took a $780 million impairment after pausing construction on a Dutch plant that was meant to become one of Europe’s biggest biofuel facilities. BP abandoned plans for two out of five potential biofuel refineries, although it also bought out its joint-venture partner in Brazil-based BP Bunge Bioenergia in June.

A glut of biofuels, particularly cheap Chinese imports, is squeezing profit margins. Finland and Sweden have also watered down rules about the minimum amounts of renewable fuels that must be blended into petroleum-based transport fuel or heating oil as they try to bring down energy costs. Producers rely on these government mandates to generate demand.

Biofuels will still be crucial to reducing carbon emissions in the transport sector. The International Energy Agency thinks the energy source will eventually have a bigger share of the global mix than wind power, if net-zero targets are reached. But it will be tough to make money in the short term as the market is likely to be oversupplied until around 2027, Bernstein’s energy analyst Irene Himona estimates.

It isn’t the only clean-energy setback for Shell and BP. The latter company took a $540 million impairment on its New York offshore wind farms in October. Shell closed its hydrogen filling stations in California in February and sold its European home-energy business last year.

Shell Chief Executive Officer Wael Sawan said on the company’s latest earnings call that liquefied natural gas is currently “the only credible solution that gives you both energy security and decarbonizes the energy system." Arguably, solar power and onshore wind also meet these criteria, but not at the scale or level of returns that oil and gas bosses would like.

Sawan plans to grow Shell’s LNG volumes by up to 30% this decade, either through acquisitions such as the recent purchase of Pavilion Energy, or getting its hands on third-party volumes. The company recently invested in ADNOC’s Ruwais LNG project in Abu Dhabi. BP is also signing offtake agreements as it tries to build an LNG portfolio of 30 million tons by 2030.

The hope is that more countries will switch from using coal to natural gas for power generation, especially in Asia. Gas is cleaner than coal, producing half the carbon emissions when burned. Switching has helped the U.S. to reduce emissions from electricity generation by almost 40% over the last two decades, data from the Energy Information Administration shows. Natural gas can also be used when intermittent renewable power generated by wind and solar isn’t available.

But the idea that LNG can play a big role in the shift to lower-carbon energy is controversial. Natural gas producers have a big problem with methane leaks and flaring. After monitoring major U.S. oil and gas basins using sensors fixed to airplanes, the Environmental Defense Fund recently found that methane emissions may be four times higher than previously thought. Methane doesn’t hang around in the atmosphere as long as carbon dioxide, but it is almost 80 times more potent in warming the planet, according to the EDF.

Also, the current biofuels glut might look quaint in comparison to what could be in store for LNG. Hundreds of billions of dollars have been pumped into new LNG infrastructure in recent years. Supply is expected to rise by 10% a year between now and the end of the decade, roughly double the historical average, according to Michele Della Vigna, head of natural resources research for Europe, the Middle East and Africa at Goldman Sachs.

If this gush of supply drives down spot prices, it will make LNG appealing to price-sensitive emerging economies and grow the overall size of the market. Cheaper gas would also make Europe more competitive for industrial production, following a tough few years of sky-high energy costs. But a glut wouldn’t be good for the returns of major producers such as Shell.

For now, LNG is the obvious way to keep profits flowing to shareholders while also making progress on emissions. But piling in may store up pain for the future.

Write to Carol Ryan at carol.ryan@wsj.com