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Chevron REG closing biodiesel facilities

The oil major’s biodiesel wing was recently purchased for $3.15bn and is now indefinitely shuttering two facilities in the US Midwest.

Chevron Renewable Energy Group, the oil giant’s biodiesel production subsidiary based in Ames, Iowa, is closing two of its production facilities in Iowa and Wisconsin, with more shutdowns potentially coming, according to local news reports in those states.

The company will shutter plants in DeForest, Wisconsin and Ralston, Iowa. The closures are apparently not permanent and the plants could re-open if market conditions change.

Chevron spent $3.15bn to buy REG last year, which included 10 operational plants in the US and Europe, and one renewable diesel project in Louisiana. The DeForest plant was purchased from Sanimax in 2016.

Chevron REG did not respond to requests for comment.

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Centrica and Equinor exploring development of UK hydrogen hub

Centrica is also advancing plans to convert its Rough offshore gas storage facility off England’s coat for hydrogen storage.

Centrica and Equinor have signed a cooperation agreement to explore developing a low-carbon hydrogen production hub at Easington in East Yorkshire, according to a press release.

The Centrica-operated area at Easington could transition to a low carbon hydrogen production hub over the coming decade. Currently up to one third of the UK’s total gas supply enters via Easington, much of it from Equinor’s Norwegian facilities. Easington is also situated close to large offshore wind farms.

The area is also earmarked as a landing point for the East Coast Cluster’s carbon capture pipeline, which would transport CO2 for storage deep under the seabed. It is a key location within the Zero Carbon Humber partnership which is planned to provide regional hydrogen and CO2 pipelines between the area’s major energy producers and carbon intensive industries.

Centrica is also advancing plans to convert its Rough offshore gas storage facility for hydrogen storage as part of its transition to a net zero future.

The UK government recently doubled its 2030 hydrogen production ambition to 10GW capacity, with at least half coming from electrolytic ‘green’ hydrogen. Equinor has ambitions to deliver nearly one fifth of this national target by generating 1.8 GW of hydrogen production within the Humber region by 2028, beginning with its flagship H2H Saltend project.

Centrica and Equinor expect that the conversion of the Easington Terminal could produce an additional 1GW of low carbon hydrogen production coupled with the around 200MW off-taker demand.

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Electrolyzer company to go public in SPAC deal

Spain-based H2B2 Electrolysis Technologies is set to go public via a business combination with RMG Acquisition Corporation III, a publicly-traded special purpose acquisition company with shares trading on NASDAQ.

Spain-based H2B2 Electrolysis Technologies, a developer and operator of green hydrogen production systems for clean energy generation, and RMG Acquisition Corporation III, a publicly-traded special purpose acquisition company, announced today that they have entered into a letter of intent for a potential business combination.

Under the terms of the LOI, H2B2’s shareholders would continue holding substantially all of their equity in the combined public company. RMG III and H2B2 expect to announce additional details regarding the business combination when a definitive agreement is executed, which is expected before the end of the first quarter 2023.

Since its founding in 2016, H2B2 has become a key player in the green hydrogen energy sector. The company is expanding rapidly in Europe, the United States, Latin America, Asia and the Middle East and has secured a role in strategic projects. In particular, H2B2 has been selected as a participant in the IPCEI Hy2Tech (Important Projects of Common European Interest) program, through which it has been approved by the European Commission to receive up to €25m in public grants out of the €5.4bn that will be invested.

In 2019, the California Energy Commission awarded H2B2 a grant for the development of a green hydrogen production facility, Sohycal plant, in Fresno, California. This 3MW plant is scheduled to begin production in Q1 2023 and will become the first green hydrogen plant, powered by H2B2, vertically integrated from the photovoltaic production of electricity to the transportation and dispensing of green hydrogen at the charging station.

In 2021 Colombia’s Ecopetrol, one of the world’s leading oil companies, began working with H2B2 and recently incorporated the Company into its group of strategic partners as part of its plan to decarbonize and develop green hydrogen energy. H2B2 has also recently entered the Indian market through a joint venture with GR Promoter Group and the creation of GreenH.in Electrolysis.

The company has reinforced its commitment to good corporate governance by increasing the number of independent directors on its board, including newly appointed chairman Antonio Vázquez, who has four decades of experience in international business development. Vázquez most recently was chairman of IAG, the holding company for Iberia, British Airways, Vueling and Aer Lingus, and president of Iberia. The company also recently appointed as CEO Anselmo Andrade Fernández de Mesa, who has been part of the management team since the Company was founded in 2016, including as its CFO until 2021 and head of the business development division for the last two years.

As part of the company’s transition to public ownership, Andrade takes the reins from Felipe Benjumea Llorente, founder of H2B2, who will assume the role of strategic advisor so that he can continue to contribute to the development of the business globally.

“The steps we are taking to finalize our business combination with RMG III will represent a new era for our company and a great step forward in accelerating the decarbonization of the energy sector globally,” said Vázquez.

Anselmo Andrade added: “The company will continue to distinguish itself by bringing together a team with decades of experience in the hydrogen energy sector and deploying its proprietary technology as it continues its expansion.”

RMG III’s Jim Carpenter said “RMG III is excited to be partnering with a company that we believe has the potential to become a global green hydrogen leader.”

RMG III’s securities are listed on NASDAQ, with $483m cash in trust raised through its IPO.

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Air Products expands California SAF project by $500m

The Pennsylvania-based company has modified the design of the project to include more sustainable aviation fuel thanks to incentives in the Inflation Reduction Act.

Air Products will commit an additional $500m to a sustainable aviation fuel (SAF) project in California thanks to the Inflation Reduction Act, bringing the company’s investment in the facility to $2.5bn.

Pennsylvania-based Air Products teamed with World Energy earlier this year to build an expansion project at World Energy’s SAF production and distribution hub in Paramount, California.

The change in the design of the SAF facility results from the passage of the Inflation Reduction Act in the US, Air Products executives said on its fiscal 4Q22 earnings call today. The IRA includes a new $1.25 per gallon SAF credit where the fuel reduces greenhouse gas emissions by at least 50% compared to petroleum-based jet fuel.

While the total capacity at the plant remains the same at 340 million gallons per year, the portion of the output dedicated to SAF will increase, adding additional costs, company CEO Seifi Ghasemi said.

The long-term, take-or-pay agreement with World Energy includes Air Products’ construction and ownership of a new hydrogen plant to be operated by Air Products and renewable fuels manufacturing facilities to be operated by World Energy, the company said in an April news release. The project is scheduled to be onstream in 2025.

Air Products is also building a $4.5bn blue hydrogen complex in Louisiana, where plans to capture 5 million tons per year of CO2 will result in an annual benefit of roughly $425m after tax from incentives in the IRA, Ghasemi said on the call. The legislation provides a tax credit of $85 per metric ton of captured CO2.

“The numbers are very clear with regard to CO2sequestration,” Ghasemi said.

The company is conducting further evaluations of the expected impact of the IRA’s tax benefits for the Louisiana facility that could result in an expansion of the project’s scope, he added.

Also during the quarter, Air Products announced a long-term supply agreement for Imperial Oil’s proposed Strathcona renewable diesel complex, with Air Products supplying about half the low-carbon hydrogen output from its net-zero hydrogen energy complex in Edmonton, Alberta, Canada.

In addition, the company said it would invest approximately $500m to build, own and operate a 35 metric-ton-per-day facility to produce green liquid hydrogen at a greenfield site in Massena, New York, as well as liquid hydrogen distribution and dispensing operations for industrial decarbonization and mobility.

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Hydrogen liquefaction provider looking for growth equity

An emerging liquid hydrogen and liquefaction management company is seeking equity to support manufacturing expansion in Europe and the US.

Absolut Hydrogen, a French liquid hydrogen and liquefaction company based in Grenoble, is looking for equity to scale up production following operations of their demonstration project in France, CEO Jerome Lacapere said in an interview.

Absolut has a partnership with SAF firm ZeroAvia to develop refueling infrastructure for aircraft, and is primarily focused on serving the mobility sector.

A subsidiary of Groupe Absolut, the company offers a full LH2 product range with an entry small-scale hydrogen liquefaction system (< 50 kg/day), a 100 kg/day Turbo-Brayton based H2 liquefier and a 1T/day liquefier based on the same technology. The company's liquefaction demonstration plant in France should produce 100 kg per day, Lacapere said. After that Absolut will need new investment to scale production. Longer term the company has its sites on the US transport market, Lacapere said. “We need to grow in the United States,” Lacapere said. The company will need US-based advisory services and offices in the country to do that, he said.

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exclusive

Interview: Vinson & Elkins’ Alan Alexander on the emerging hydrogen project development landscape

Vinson & Elkins Partner Alan Alexander, whose clients include OCI and Lotus Infrastructure, has watched the hydrogen project development space evolve from a fledgling idea to one that is ready for actionable projects.

Vinson & Elkins Partner Alan Alexander, whose clients include OCI and Lotus Infrastructure, has watched the hydrogen project development space evolve from a fledgling idea to one that is ready for actionable projects.

In the meantime, a number of novel legal and commercial issues facing hydrogen project developers have come to the forefront, as outlined in a paper from the law firm this week, which serves as a guide for thinking through major development questions that can snag projects.

In an interview, Alexander, a Houston-based project development and finance lawyer, says that, although some of the issues are unique – like the potential for a clean fuels pricing premium, ownership of environmental attributes, or carbon leaking from a sequestration site – addressing them is built on decades of practice.

“The way I like to put it is, yes, there are new issues being addressed using traditional tools, but there’s not yet a consensus around what constitutes ‘market terms’ for a number of them, so we are having to figure that out as we go,” he says.

Green hydrogen projects, for example, are “quite possibly” the most complex project type he has seen, given that they sit at the nexus between renewable electricity and downstream fuels applications, subjecting them to the commercial and permitting issues inherent in both verticals.

But even given the challenges, Alexander believes the market has reached commercial take-off for certain types of projects.

“When the hydrogen rush started, first it was renewables developers who knew a lot about how to develop renewables but nothing about how to market and sell hydrogen,” he says. “Then you got the people who were very enthusiastic about developing hydrogen projects but didn’t know exactly what to do with it. And now we’re beginning to see end-use cases develop and actionable projects that are very exciting, in some cases where renewables developers and hydrogen developers have teamed up to focus on their core competencies.”

A pricing premium?

In the article, Vinson & Elkins lawyers note that commodities pricing indices are not yet distinguishing between low-carbon and traditional fuels, even though a clean fuel has more value due to its low-carbon attributes. The observation echoes the conclusion of a group of offtakers who viewed the prospect of paying a premium for clean fuels as unrealistic, as they would need to pass on the higher costs to customers.

Eventually, Alexander says, the offtake market should price in a premium for clean products, but that might depend in the near term on incentives for clean fuels demand, such as carbon offsets and levies, like the EU’s Carbon Border Adjustment Mechanism.

“Ultimately what we need is for the market to say, ‘I will pay more for low-carbon products,’” he says. “The mindset of being willing to pay more for low-carbon products is going to need to begin to permeate into other sectors. 30 or 40 years ago the notion of paying a premium for an organic food didn’t exist. But today there are whole grocery store chains built around the idea. When the consumer is willing to pay a premium for low-carbon food, that will incentivize a farmer to pay a premium for low carbon fertilizer and ammonia, which will ultimately incentivize the payment of a premium for low-carbon hydrogen. The same needs to repeat itself across other sectors, such as fuels and anything made from steel.”

The law firm writes that US projects seeking to export to Europe or Asia need to take into account the greenhouse gas emissions and other requirements of the destination market when designing projects.

In the agreements that V&E is working on, for example, clients were first focused on structuring to make sure they met requirements for IRA tax credits and other domestic incentives, Alexander says. Meanwhile, as those clean fuels made their way to export markets, customers were coming back with a long list of requirements, “so what we’re seeing is this very interesting influx” of sustainability considerations into the hydrogen space, many of which are driven by requirements of the end-use market, such as the EU or Japan.

The more stringent requirements have existed for products like biofuels for some time, he adds, “but we’re beginning to see it in hydrogen and non-biogenic fuels.”

Sharing risk

Hydrogen projects are encountering other novel commercial and legal issues for which a “market” has not yet been developed, the law firm says, especially given the entry of a raft of new players and the recent passage of the Inflation Reduction Act.

In the case of a blue hydrogen or ammonia project where carbon is captured and sequestered but eventually leaks from a geological formation, for example, no one knows what the risk truly is, and the market is waiting for an insurance product to provide protection, Alexander says. But until it does, project parties can implement a risk-sharing mechanism in the form of a cap on liabilities – a traditional project development tool.

“If you’re a sequestration party you say, ‘Yeah, I get it, there is a risk of recapture and you’re relying on me to make sure that it doesn’t happen. But if something catastrophic does happen and the government were to reclaim your tax credits, it would bankrupt me if I were to fully indemnify you. So I simply can’t take the full amount of that risk.’”

What ends up getting negotiated is a cap on the liability, Alexander says, or the limit up to which the sequestration party is willing to absorb the liability through an indemnity.

The market is also evolving to take into account project-on-project risk for hydrogen, where an electrolyzer facility depends on the availability of, for example, clean electricity from a newly built wind farm.

“For most of my career, having a project up and reaching commercial operations by a certain date is addressed through no-fault termination rights,” he says. “But given the number of players in the hydrogen space and the amount of dollars involved, you’re beginning to see delay liquidated damages – which are typically an EPC concept – creep into supply and offtake agreements.”

If a developer is building an electrolyzer facility, and the renewables partner doesn’t have the wind farm up and running on time, it’s not in the hydrogen developer’s interest to terminate through a no-fault clause, given that they would then have a stranded asset and need to start over with another renewable power provider. Instead, Alexander says, the renewables partner can offset the losses by paying liquidated damages.

Commercial watch list

In terms of interesting commercial models for hydrogen, Alexander says he is watching the onsite modular hydrogen development space as well as power-to-fuels (natural gas, diesel, SAF), ammonia and methanol, given the challenges of transporting hydrogen.

“If you’re going to produce hydrogen, you need to produce it close to the place where it’s going to be consumed, because transporting it is hard. Or you need to turn it into something else that we already know how to transport – natural gas, renewable diesel, naphtha, ammonia.”

Alexander believes power-to-fuels projects and developers that are focused on smaller, on-site modular low-carbon hydrogen production are some of the most interesting to watch right now. Emitters are starting to realize they can lower their overall carbon footprint, he says, with a relatively small amount of low-carbon fuels and inputs.

“The argument there is to not completely replace an industrial gas supplier but to displace a little bit of it.”

At the same time, the mobility market may take off with help from US government incentives for hydrogen production and the growing realization that EVs might not provide a silver-bullet solution for decarbonizing transport, Alexander adds. However, hydrogen project developers targeting the mobility market are still competing with the cost of diesel, the current “bogey” for the hydrogen heavy mobility space, Alexander says.

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Exclusive: Riverstone Credit spinout preparing $500m fundraise

Breakwall Capital, a new fund put together by former Riverstone Credit fund managers, is preparing to raise $500m to make project loans in decarbonization as well as the traditional energy sector. We spoke to founders Christopher Abbate and Daniel Flannery.

Breakwall Capital is preparing to launch a $500m fundraising effort for a new fund – called Breakwall Energy Credit I – that will focus on investments in decarbonization as well as the traditional energy sector.

The founders of the new fund, Christopher Abbate, Daniel Flannery, and Jamie Brodsky, have spent the last 10 years making oil and gas credit investments at Riverstone Credit, while pivoting in recent years to investments in sustainability and decarbonization.

In addition to bringing in fresh capital, Breakwall will manage funds raised from Dutch trading firm Vitol, for a fund called Valor Upstream Credit Partners; and the partners will help wind down the remaining roughly $1bn of investments held in two Riverstone funds.

Drawing on their experience at Riverstone, Breakwall will continue to make investments through sustainability-linked loans across the energy value chain, but will also invest in the upstream oil and gas sector through Valor and the new Breakwall fund.

“We’re not abandoning the conventional hydrocarbon economy,” Flannery said in an interview. “We’re embracing the energy transition economy and we’re doing it all with the same sort of mindset that everything we do is encouraging our borrowers to be more sustainable.”

In splitting from Riverstone Credit, where they made nearly $6bn of investments, the founders of Breakwall said they have maintained cordial relations, such that Breakwall will seek to tap some of the same LPs that invested in Riverstone. The partners have also lined up a revenue sharing arrangement with Riverstone so that interests are aligned on fund management.

The primary reason for the spinout, according to Abbate, “was really to give both sides more resources to work with: on their side, less headcount relative to AUM, and on our side, more equity capital to reward people with and incent people with and recruit people with, because Riverstone was not a firm that broadly distributed equity to the team.”

Investment thesis

A typical Breakwall loan deal will involve a small or mid-sized energy company that either can’t get a bank loan or can’t get enough of a bank loan to finance a capital-intensive project. Usually, a considerable amount of equity has already been invested to get the project to a certain maturity level, and it needs a bridge to completion.

“We designed our entire investment philosophy around being a transitional credit capital provider to these companies who only needed our cost of capital for a very specific period of time,” Flannery said.

Breakwall provides repayable short-duration bridge-like solutions to these growing energy companies that will eventually take out the loan with a lower cost of capital or an asset sale, or in the case of an upstream business, pay them off with cash flow.

“We’re solving a need that exists because there’s been a flock of capital away from the upstream universe,” he added.

Often, Breakwall loan deals, which come at pricing in the SOFR+ 850bps range, will be taken out by the leveraged loan or high yield market at lower pricing in the SOFR+ 350bps range, once a project comes online, Abbate said. 

Breakwall’s underwriting strategy, as such, evaluates a project’s chances of success and the obstacles to getting built. 

The partners point to a recent loan to publicly listed renewable natural gas producer Clean Energy – a four-year $150m sustainability-linked senior secured term loan – as one of their most successful, where most of the proceeds were used to build RNG facilities. Sustainability-linked loans tie loan economics to key performance indicators (KPIs) aimed at incentivizing cleaner practices.

In fact, in clean fuels, their investment thesis centers on the potential of RNG as a viable solution for sectors like long-haul trucking, where electrification may present challenges. 

“We are big believers in RNG,” Flannery said. “We believe that the combination of the demand and the credit regimes in certain jurisdictions make that a very compelling investment thesis.”

EPIC loan

In another loan deal, the Breakwall partners previously financed the construction of EPIC Midstream’s propane pipeline from Corpus Christi east to Sweeny, Texas.

Originally a $150m project, Riverstone provided $75m of debt, while EPIC committed the remaining capital, with COVID-induced cost overruns leading to a total of $95m of equity provided by the midstream company. 

The only contract the propane project had was a minimum volume commitment with EPIC’s Y-Grade pipeline, because the Y-Grade pipeline, which ran to the Robstown fractionator near Corpus Christi, needed an outlet to the Houston petrochemical market, as there wasn’t enough export demand out of Corpus Christi.

“So critical infrastructure: perfect example of what we do, because if your only credit is Y-Grade, you’re just a derivative to the Y-Grade cost of capital,” Abbate said.

Asked if Breakwall would look at financing the construction of a 500-mile hydrogen pipeline that EPIC is evaluating, Abbate answered affirmatively.

“If those guys called me and said, ‘Hey, we want to build this 500-mile pipeline,’ I’d look at it,” he said. “I have to see what the contracts look like, but that’s exactly what type of project we would like to look at.”

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