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PE Live: Funding for the energy transition remains robust

Oil and gas companies are largely maintaining their investment in the energy transition. If they do not, there are plenty of other firms looking for opportunities

While depressed prices for oil and gas mean producers have lower revenues with which to invest, it is far from clear that there will be less capital available for the energy transition, according to the speakers at a PE Live webcast on the energy transition.

“It is limiting the capacity of IOCs to transition—they have got less cash to do so,” says Anne Lapierre, partner, global head of energy at law firm Norton Rose Fulbright. “But they are still very wealthy companies. And it is not a matter anymore of greenwashing, it is a matter of surviving.”

If IOCs decide to scale back their transition ambitions there are plenty of other companies looking at potential opportunities. “It is important to note that even if there is less money from IOCs available at the moment… there are a large number of other players,” adds Lapierre.

The oil price is limiting investment in the transition—but only from those players. Because the transition is accelerating, we see new players (of course renewable companies, but also tech companies and companies investing in the development of the mobility segment) with pretty big amounts of money available, investing in the sector.” 

It means the transition “is probably going to play out pretty differently to how we originally thought it would”, she says.

Reasons to invest

The motivation to invest in the transition goes beyond immediate financial considerations, according to research by professional services company Deloitte. “71pc of all CEOs commented that they see improvement in the environment as being a driving factor,” says Stanley E Porter, vice chairman, US energy, resources, and industrials leader at Deloitte.

“But from a strategy standpoint, oil and gas companies have regulatory policy at the top, followed by consumer support for reduction in emissions and then revenue opportunities.”

In the power sector, new business models and then customer support for reducing carbon emissions were the driving factors. “Power companies are looking at energy-as-a-service, moving more into energy management and supply,” he adds.

“Because the transition is accelerating, we see new players... with pretty big amounts of money available, investing in the sector” Lapierre, Norton Rose Fulbright

IOCs are also increasingly motivated by concern about legal challenges, suggests Lapierre. The challenge faced by ExxonMobil in the Court of New York for not fully accounting for the carbon price is “probably the first of many, many actions”, she says, despite the case being rejected. “It needs to be taken very seriously… from a risk advisory standpoint, it is definitely something they need to address.”

A lot of oil and gas companies have been investing in solar, even before the last decade, says Katherine Hardin, executive director, Research Center for Energy & Industrials, at Deloitte. “There were early moves into renewables, but in the past four or five years we have seen an increase in investments in areas such as biofuels and, increasingly, battery storage and electric vehicles.”

She notes that sustainable investment indices outperformed those based on hydrocarbons, even before the crisis. “And that trend is likely to continue,” she says.

It is important to note that constraints on investment can be ring-fenced to specific “subsectors of the industry, for example even before crisis the US shale industry was facing capital constraints”, says Hardin.

“Another factor to consider when evaluating investments in fossil fuels is the availability of competing investments, from which investors may receive higher or more stable returns.”

Oil and gas projects

The transition away from oil and gas has obvious implications for investments in exploration and production, but perhaps not severe ones in the near term.

“Even in a decline scenario for consumption of oil and gas, there would be a plateau before it falls off over time," says Allan Baker, head of energy advisory & project finance (Emea) at bank Societe Generale. People will focus on replacing the reserves that are being consumed.”

That said, there is “going to be a focus, for sure, on cost”, says Baker. “In times of low oil prices, it is the low-cost production that reaches the market.”

While low prices are not conducive to committing capex, postponing for a long period may mean reserves that are expensive to extract may never again be economic to develop.

“I guess there has got to come a time when people start to try to monetise the reserves they have got while they have value,” he says. Companies may “push products onto the market to get the best price they can, recognising that they may have limited value going forward”.

“There is inevitably going to be a lot more price competition in a declining market—and that could disrupt the market quite significantly,” he adds.

The danger is that many countries and companies could independently decide to increase production at the same time, resulting in significant oversupply. That will happen “if companies are not sensible”, says Baker while noting that coal producers, which were slow to end the life of assets as demand evaporated, significantly over-produced.

“There are alternatives to generating [power from] coal in most cases,” says Baker. “Having a viable alternative makes it a lot easier to withdraw or refocus funding. At the moment, there is still a need for oil—we have not yet found alternatives.”

A recording of  PE Live 6: Is the energy transition accelerating? can be heard here.

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