“Green” Hydrogen

In my life, in business and as an investor, I have always been a sucker for a good story. I am a believer in the magic bullet, a card player prone to “Shoot the Moon”, a backyard quarterback telling his receivers – “Go Deep”. Perhaps a career at Enron or in cryptocurrency might have better suited my fantasies.

Back in the day, the first years of the new century, my company invested an embarrassingly large amount of money in “green energy”, the unicorn bred by government, worshipped by the acolytes of the High Priestess Greta Thunberg and milked by the unscrupulous. Back in that simpler time, before faith supplanted folly, “green energy” was limited to the madness of Red State agribusiness – fuel ethanol. Back in that more innocent time, my company developed a new corn to ethanol process.

Despite my straight laced puritanical disgust at the bonfire of vanities known as the Ethanol Mandates, there was a good story behind our effort. The Good Ship Lollipop, otherwise known as the George W. Bush Presidency, was going to double the Ethanol Mandate, using the force of federal regulatory authority to require an enormous increase in fuel ethanol consumption by 2012.

Our head of Business Development, wise to my weakness for good stories, searched out and developed a connection with a fabricator of orange juice making equipment down in Florida. This individual’s equipment had forty years of proven reliability in the industrial processing of orange juice.

While the relationship of orange juice to ethanol had been heretofore restricted to Harvey Wallbanger’s, Screwdrivers and Mimosas, our process for turning corn into motor fuel was very similar to making orange juice. Once in operation, our process would radically reduce energy consumption. We would be as green as that Jolly Green Giant once selling canned vegetables to us.

“The story” that seduced me was the upcoming doubling of the Ethanol Mandate. When the Bush Administration directed the Deep State to replace the “invisible hand” with “bumbledom”, ethanol use would explode. We would be offering a process into that market providing the lowest cost means of production. We would be golden. And so – we followed, as had so many before us, the glowing green firefly into the dark swamp.

Though supposedly a disciple of the philosophy espoused in Kenny Roger’s The Gambler, I seldom actually act in accordance with its dictates. Instead, I most often “hold ‘em when I should fold ‘em”. It’s all part of that “Go Deep” philosophy.

The problem with a good story is that facts are often lost in the telling. As we advanced into the swamp a troubling awareness stole upon us. It turned out Florida’s orange juice business was actually a twin, the wallflower sister of her more glamorous sibling, Las Vegas. Shadowy figures from New Jersey with Sicilian backgrounds controlled both. While our partner’s father had started the “magic” equipment manufacturing operation, our partner was a true son of his father, a bona fide product of his environment.

Well, a few years accompanied by an embarrassingly large amount of money passed and we continued to “hold ‘em when we shoulda folded ‘em”. Actually, it wasn’t “we”, it was “me”. Virtually everyone in the company warned of a bad end coming. That our partner was very plainly a scum bag was apparent to all who worked with him, but I believed the “story”.

In due time, Bush the Younger, having learned nothing at the knee of Bush the Elder, mandated ethanol, ethanol and even more ethanol to be used in the nation’s gasoline. But even as the market demand for corn ethanol soared, our experience continued to prove Warren Buffet’s old dictum, “you can’t make a good deal with a bad person”.

As our first ethanol plant went into construction, our partner somehow lost his knife. Surprisingly it was found in our back and the project owner was forced to terminate our involvement in the project. Our intellectual property protections and contractual understandings vanished as dew in the noonday sun. We found that the business ethics of the oil and gas business were somewhat at odds with that practiced in New Jersey.

But the wheel continued to turn in its implacable way. As the wise King Solomon wrote in the Book of Ecclesiastes:

“The race is not to the swift,

Nor the battle to the strong,

Nor bread to the wise,

Nor riches to the men of understanding,

Nor favor to men of skill;

But time and chance happen to them all”

Freed from the fever swamp of ethanol madness, we survived our losses, to our balance sheet as well as our dignity, catching the wave of the “Fracking Boom” and prospering mightily. Much to the dismay of our ex-partner, even as he was busily engaged in a dauntingly complex corporate makeover designed to shield his expected wealth from the IRS, his “magic” equipment failed to work as advertised in ethanol production.

Based on its forty years of experience in orange juice production, he had guaranteed the “magic” equipment’s waste water discharge to meet all necessary EPA standards. It turned out that ethanol plant waste water actually had to meet EPA standards. Evidently orange juice production plants understood EPA water discharge standards to be the equivalent of freeway speed limits. Perhaps those Italian gentleman from New Jersey had exercised their influence in the regulatory swamp.

Our ex-partner was forced to slink back from which he came – into the Florida swamps. Unfortunately the ethanol plant itself was forced into bankruptcy, its owner the unfortunate victim of a good story. However, in Washington DC as in Las Vegas, “the house always wins”. The plant we designed, easily obtained new financing and emerged from bankruptcy on the federally mandated ethanol requirements. The “magic” equipment was replaced with real equipment and the plant, built using our engineering process, now produces its design capacity of 55 million gallons per year of corn ethanol in Lima, Ohio.

“The house always wins”, the truth of the Universe, the bane of good stories. Expressed as the 1^st & 2^nd Law of Thermodynamics, that truth is the foundation of engineering, the bedrock of modern civilization. Thermodynamics, whether expressed as water running downhill or as the mathematical certainties of the statistics used by Las Vegas is the “house”.

But what if there is a 2^nd house? Who wins then? Which way do you bet? From the standpoint of the thermodynamic house, that ethanol plant we began in Lima, Ohio was a really bad bet, a bit like drawing three cards to an inside straight. But to the regulatory house it was a safe bet, a full house – aces over kings, witness the ease with which a bankrupt and functionally flawed ethanol plant was refinanced.

Those of us prone to the exploration of chance in the universe fall into two camps. There are those like myself with a weakness for the adrenal rush of believing a story. We imagine ourselves on the North Shore of Oahu, with Jan & Dean’s “Ride the Wild Surf” playing in our heads. And then there is the other group, the “smart money”. Traditionally, the “smart money” avoids people with stories and the chaos of surf on the North Shore, preferring the certainties of gravity and water in more staid environments.

The past two decades have proven the regulatory house to be the more certain of the two houses, with thermodynamics becoming known as the “sucker bet”. The regulatory diktat has become the home of the “smart money”. One has only to see shuttered coal fired power plants amid fields of windmills to realize this truth.

Spending a few weeks in Southern California, I always appreciate the opportunity such a visit provides to renew my appreciation for how the game is played, its niceties and nuances. A brief comeback of thermodynamic realities in Europe occasioned by the War in Ukraine has raised media awareness of the importance of natural gas, actually any fossil fuel, to that public’s well being. And so the machinations of California’s utilities in regards to natural gas have gained some visibility in the responsible media, perhaps being given the same amount of column inches as a Kardashian 2^nd cousin’s birthday party.

And so one find’s stories in the California newspapers about natural gas utilities, exploring their ability to provide heat, light and Tesla charging to their ratepayers. As planets are slave to the Sun’s gravity, so utilities are in the iron grip of their regulatory masters. In California that great center of gravity governing utilities is the California Public Utility Commission (CPUC). And the CPUC, an Adorable citadel, is very clear – fossil fuels, including natural gas – must go.

Southern California Gas Co. (SoCalGas) is the natural gas utility for most of California’s southern half. And in keeping with the CPUC, SoCalGas is busily planning for the end of natural gas, target date 2045, with very substantial reductions required by 2030, only 8 years away.

Mike Florio, an attorney activist as well as former Commissioner and current advisor to that august body, was quoted on how business is done at the CPUC – “It’s the California way – set the goal then figure out how to get there. Policy is forcing the technology.”

While anyone who counts in a modern utility is a lawyer or activist, engineers are a necessary evil to their business. Lawyers and activists, preferably activists with law degrees, set goals and formulate policies in a revolving door between utility executive suites, regulatory bodies and “non-profit” advocacy. The President of SoCalGas is one Maryam Brown, a lawyer whose resume highlights corporate law, Policy Advisor to the Speaker of the House in Washington DC and VP of Government Affairs for Sempra (SoCalGas’s parent).

Ms. Brown is the face of SoCalGas in the media, the photogenic empowered woman. Ms. Brown’s boss, CEO Scott Drury, is a shadowy figure, handicapped by the lack of that all important JD degree as well as unfortunate membership in the reviled white cis-male classification. However in Mr. Drury’s defense, his resume is strong in the business of energy, sporting a degree in Public Administration and the experience gained in his last job before promotion to CEO,  VP Human Resources, Diversity and Inclusion.

But then after all the hard intellectual work is done by the important people, someone must actually, you know, “figure out how to get there”. And so utilities are forced to have the necessary evil of an engineering staff. The gnomes in the dark cubicles, the diligent engineers of SoCalGas, have been busy at work at their assigned task of, “figuring out how to get there”.

Thus we have a serious proposal from SoCalGas in the process of being approved by the CPUC called Angeles Link. Angeles Link would build a “green hydrogen” production facility and transportation network in the Greater Los Angeles Basin able to:

• Replace 3 million gallons of diesel fuel per day
• Convert 4 natural gas power plants to hydrogen

There was no budget cost associated with Angeles Link, a common failing of engineers engaged in “figuring out how to get there”.

***** Nerd Alert ***** The next two paragraphs discuss the differences between hydrogen and “green hydrogen”.

Hydrogen is currently used primarily in petroleum refining, a vital necessity for modern fuels such as the low sulfur diesel powering all of those Amazon deliveries. It is produced by steam methane reforming, basically splitting methane and water molecules into their component atoms, CH⁴ & H²O into hydrogen, oxygen and carbon. The carbon and oxygen atoms combine forming that evil pollutant molecule – carbon dioxide, while the hydrogen is left to be used as a pure stream.

“Green hydrogen” is formed by using “green electricity” to split water, H²O, into hydrogen and oxygen. The gases are separated, the oxygen then released into the atmosphere as a waste product (pollutant) leaving the hydrogen to be used as a “green” replacement for fossil fuels. Without very large quantities of “unusable electricity” created by “renewable & sustainable” sources, i.e. windmills and solar panels producing electricity into a grid with no demand for them, “green hydrogen” is ruinously expensive as well as thermodynamically fatuous.

Some two thousand miles east of Angeles Link, there is another infrastructure project under consideration. Though this project must be approved by investors, rather than regulators.

In the interests of full disclosure, I admit to investing in this project as it has a “story”. I will also say that my investment amounts to a purely nominal amount. My erstwhile partner now residing in the Florida swamps did much to cure my youthful extravagant exuberance for “stories”.

Tellurian is an NYSE listed stock with a “story” and as I have said earlier, while chastened, I remain a sucker. Like SoCalGas with Angeles Link, Tellurian is trying to raise the money to build a project – Driftwood. Driftwood is a natural gas liquification (LNG) facility near Lake Charles, Louisiana, a major industrial port on the Gulf of Mexico.

The LNG plant will be fed by a pipeline system in the Haynesville Shale, perhaps the most prolific natural gas field in the US, gathering 4 billion cubic feet (BCF) per day of natural gas and delivering it to the LNG facility for liquification. As LNG Driftwood’s output can be sold to Europe and Asian markets, as well as other US markets such as New York isolated by the Adorable moratorium on pipelines.

Admittedly, the Tellurian executive team is clearly inferior to that of SoCal Gas. Tellurian has neither lawyer nor activist nor former policy advisor to the House Speaker heading the enterprise. There are no photogenic members of the oppressed classes as the face of the company, though its co-founder is an Lebanese immigrant. It is unclear whether his Middle Eastern descent qualifies as BIPOC, the gold standard for “responsible and sustainable” corporate executives.

Tellurian doesn’t even have a former VP of Human Resources with responsibility for Diversity and Inclusion. All Tellurian’s executive team has going for it is their past success in building LNG infrastructure, including founding Cheniere Energy – the leading LNG producer in America.

So one asks – where is the “smart money” invested? With the strains of “Ride the Wild Surf” in my ears, I put my money on Tellurian. But where is the “smart money” going? The house will win, but which house? While Driftwood may be built, Angeles Link is a near certainty. The utility rate payers of California will most assuredly have their pockets picked by the CPUC.

But given the probable costs of Angeles Link, even the supine rate payers of California might rebel if asked to bear the full burden required by the construction of such esoteric unicorn habitat. But have no fear, California’s ratepayers will not have to go it alone.  “We’re from the government and we’re here to help.” The federal government’s official website describes the risibly named “Inflation Reduction Act of 2022” made into law this past August as:

“making the single largest investment in climate and energy in american history, enabling america to tackle the climate crisis, advancing environmental justice, securing america’s position as a world leader in domestic clean energy manufacturing . . .”

(Note  – the website does not capitalize the word – America”)

With such stalwarts as Maryam Brown and Scott Drury captaining SoCalGas, buttressed by approval from the commissars of the CPUC, how could Angeles Link not be funded, floating on a sea of money taken from the pockets of powerless rate payers and taxpayers? It’s looking good for the regulatory house!!

What about Tellurian, trying to raise money from investors? While SoCalGas (Sempra) easily sold $ 600 M in “Green Bonds” recently, Tellurian’s bond offering of similar size was rejected by the market at the same time. Tellurian’s stock price is down 60%. It’s not looking good for the thermodynamic house. While the good citizens of the United States can voluntarily invest in Driftwood, their participation in Angeles Link is unfortunately an involuntary contribution.

While the rarified reaches of energy company executive suites are foreign territory to me, I do have many years of experience on the ground in the various fields of energy. Going back to the days of PURPA, cogeneration and independent power, I worked with and developed power projects supported by government fiat, the “green energy” of their times. Earlier, I recounted my experience with the “green energy” of ethanol.

I also have many years of experience doing mundane projects, building “ungreen” facilities for utilities as well as oil & gas companies. It has been my experience that the world of the “ungreen” is a place of honest people doing honest work striving to make the world a better place. I am humbled and enriched by the fine folks it was my honor to work for and with.

On the other hand, while I did meet good people in the fields of “green energy”, in my experience it did resemble the word I use so often to describe it – a swamp. One could not take honesty or integrity for granted, or even expect it. Whether an independent rascal like my ex-partner or the suits of Enron’s executive suite, “green energy” was and is a swamp, filled with swamp creatures.