CERAWeek 2022: Financiers say energy transition may accelerate renewables drive, but won’t eliminate traditional oil and gas reliance

The momentum for a global energy transition away from fossil fuels that began to pick up as the world emerged from the COVID-19 pandemic won't happen overnight, though it has started to accelerate with the war in Ukraine, financiers observed at the just concluded CERAWeek by S&P Global conference.

During multiple sessions at CERAWeek, which ran 7-11 March in Houston, financiers made it clear that the appetite for investment in oil and gas assets has dried up especially in Europe, which is heavily dependent on Russia for natural gas supplies.

With prices of oil, natural gas, and coal reaching record levels owing to tightness of supply fomented by the ongoing war, renewables seem like a rosier prospect for investment to most.

"It is absolutely clear that the energy transition will accelerate as people fear and people are fed up with being dependent on Russian oil," said Marcel van Poecke, managing director of Carlyle International Energy Partners and head of the Carlyle International Energy Partnership.

However, van Poecke and others on the panel warned that the transition to net-zero by mid century won't happen overnight, and it won't be smooth, and it won't be cheap, citing global consulting firm McKinsey, which raised the estimated price tag at $275 trillion.

'Messy and muddy'

"Energy transition is going to be messy and muddy business as we have seen it play out in Ukraine," Morgan Stanley Vice President and Managing Director Tom Greenberg said.

For starters though, countries cannot completely switch away from investment in fossil fuels, according to Greenberg.

Describing the energy transition as "a paradox" because it's energy intensive and likely needs to be funded by fossil energy profits, Greenberg said the scarcity of alternative energy sources is propelling the transition because people want to compete with the high prices.

But on the other hand, he said, it affects the availability of capital, which is raised through traditional fossil fuel extraction and sales, for technologies that are expensive to construct.

Discussing the impact on oil with the tilt toward electric vehicles in another CERAWeek panel, Michael Cohen, chief US economist for bp, tended to agree with the view that there will be a decline in existing supplies of oil and gas under a climate-constrained scenario or otherwise.

Need for 'resilient' hydrocarbons

But Cohen said "there's still a need for resilient hydrocarbons," which is how he chose to describe relatively lower GHG emitting natural gas.

"Whether you are talking about India or China, there's a need for natural gas," Cohen added.

India's leaders have time and again spoken of the need to use natural gas to transition to a carbon-free future by 2070.

Global energy companies like bp and Equinor say they need to be mindful of being able to produce enough to meet the demand of emerging countries.

Equinor Vice President Annette Frydenburg said lack of sufficient reinvestment in oil and gas production between 2016 and 2020 has resulted in a situation where companies can't keep up with resilient demand.

This is the transition period, Frydenburg noted, "where you are able to feed the world with the energy that's needed, while at the same time as you're being a company that's taking that step leading in that transition phase."

Are EVs truly green?

In the developed world, the transportation sector offers the most opportunity to reduce GHGs, CERAWeek panelists said.

In the US for instance, transportation was responsible for 1,875.73 million mt of GHG emissions in 2019, 29% of the US total, with light vehicles (passenger cars and light trucks including sport-utility vehicles) contributing 59% of that total.

However, EV penetration of total US car and pickup sales remains low at 3-4% of new vehicles. That is due to the fact that EVs are pricey, and US drivers want pickups, and very few pickups are electric, according to S&P Global Research and Analysis Director Mike Fiske.

Even having a Tesla does not guarantee an automatic switch away from fossil fuels, Fiske noted.

"You can have a Tesla, but how green the Tesla is depends on where the energy is coming from that is charging it. Is it coming from renewable sources, or it is coming from a coal-fired power plant?" Fiske asked.

Given where commodity prices for oil and gas currently stand, Stephen Pang, managing director with TortoiseEcofin, a renewables investment firm, said investors are looking not only to capitalize on the near-term opportunities, but also to accelerate the transition to renewables.

Pang said he expects to see a greater appetite among investors to push the market penetration of renewables beyond 50%.

However, EV and renewables penetration into global markets may have been tempered by the recent escalation of the cost of minerals that are key to these clean energy technologies. S&P Global Commodity Insights reporting on the development said the LME suspended trading on 8 March after prices more than doubled to surpass $100,000/mt — reaching a record high of $101,365/mt in early trading, after closing at $48,078/mt on 7 March. Trading resumed on 16 March, only to be temporarily suspended again.

Girding up for grid investment

Aside from fossil fuels financing the transition, investors said the energy transition will require a huge amount of steel and other hard assets, and it has to happen in a short period of time.

Black & Veatch Vice President Deepa Poduval, who leads the firm's global advisory practice, said people often forget that that the next big bucket of investment—after renewables—is around the electric grid itself.

Poduval expects significant investments in fortifying the grid to enable renewable energy to connect from places where there were no prior linkages. "And it's going to be driven toward reliability, towards creating resilience, even as the impact of climate on those assets that have already been aging are now under additional stress," she said.

'High appetite for risk'

Companies like Black & Veatch, a construction and engineering firm, have traditionally had a low appetite for risk, but are now willing to take a chance on clean technologies, especially those that are emerging.

"I think there's a much higher tolerance for risk, just to get your hat in the way and become a player in the ecosystem," said Poduval who leads the firm's global advisory practice. She added the appetite is not so much driven by trying to get a high rate of return, as it is by the demand for these clean energy technologies.

Juliana Garaizar, who heads the Houston climate cleantech incubator Greentown Labs and is its vice president for innovation, agreed.

As the head of a firm that is charged with helping startup companies stand on their own with their cleantech solutions, Garaizar said the appetite is definitely changing, with many venture capitalists that were reluctant to invest in early stages of a company now turning to Greentown-based companies.

"They realize it's a race towards getting the technologies out there," she said. "If we want to get to the net-zero goals that many of the companies have established, then that path has to be a lot shorter [than 10 years], and we need to be willing to invest in earlier stage companies."

As US Special Presidential Envoy for Climate John Kerry noted in his 7 March speech, at least $130 trillion in private capital is waiting on the sidelines to be allocated towards the energy transition.

Morgan Stanley's Greenberg said carbon pricing is necessary to allow allocation of capital—and this is where governments need to participate.

Once a price on carbon has been set, he said, "you will truly see capital start to unlock in a significant scale to build the type of infrastructure that we need to generate for the ongoing transition."

Posted 16 March 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.