Oil and gas investors are endangered but not doomed
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Over the past decade costs for renewable energy generation have fallen substantially, particularly for wind and solar. Government subsidies for alternative energy suppliers have also fallen.
As Fatih Birol, executive director of the International Energy Agency, has stated, renewable energy is no longer a niche market. For all the discussion about the desire for sustainable energy, another question needs asking. Are investors in fossil fuels doomed?
In recent years the IEA, an organisation representing energy consumers born out of the first Opec oil shock of the early 1970s, has spent almost as much time discussing carbon emissions and renewable energy as on its respected outlook for oil markets.
The agency perhaps understands what many fossil fuel investors have not completely grasped: their holdings in oil and gas companies could be endangered.
If a cost advantage — or even just an equality — develops in favour renewable energy, why would capital not shift away from dirtier energy? If so, the worth of any stranded oil and gas assets owned by energy producers could fall.
“The challenge to the energy industry is a well-known story for financial markets,” believes Kingsmill Bond, new energy strategist at think-tank Carbon Tracker. “A disruptive new technology with falling costs and exponential growth causes investors in the incumbent to suffer major losses.”
Yet, until very recently, fossil fuels have held the key advantages over renewable electricity generation. Solar needs sunshine and wind turbines a steady and strong breeze. Both need large amounts of space. “Fossil fuels will only be doomed if something reliable, affordable and scalable can replace it,” says Philip Lambert, chief executive of oil industry M&A advisers Lambert Energy.
Until that time, investment in oil and gas will remain vital even if renewables take up a larger portion of world energy consumption. This is particularly true for crude oil for which supply just keeps up with an annual depletion from producing fields at 5-7 per cent, plus world demand growth averaging 2 per cent.
Indeed, non-fossil fuel energy sources may simply expand the use of all fuels, rather than replace oil and gas, according to Dr John Constable. Even after decades of financial support, renewables (including biofuels, waste and hydro) are responsible for almost the same share of energy today (14 per cent) as supplied in 1971 according to IEA data.
On that basis, fossil fuel generation will not go away soon. Even Carbon Tracker admits that a low energy demand scenario (including for transport fuels) requires as much as $1.6tn of oil and gas investment by 2025. But the think-tank also argues that brand new projects (greenfield) are not needed before that time. Capital spending for such development is at risk of being made redundant by renewables.
A major reason for this risk is falling cost, which when measured per megawatt for both solar and wind power generation, has dropped precipitously. According to the US Energy Information Agency, in America solar power can already compete with a combined cycle gas-fired generator on a comparable cost basis. By 2022, that will be true for onshore wind farms as well. That is true even without any subsidies.
Investors have taken note. Carly Magee, partner at infrastructure and private equity specialists Foresight Group, says: “Renewable energy projects were originally supported by reasonably high government subsidies, which gave scale and supported cost reductions. We are now seeing a shift towards unsubsidised renewable energy projects.” Foresight has invested in unsubsidised solar farms in Spain and Portugal.
But the cost which needs to fall much more is that for storage, to offset the intermittent nature of solar and wind power.
While lithium-ion batteries have fallen in price by 80 per cent between 2010-17, according to Bloomberg New Energy, scale is lacking. Insufficient energy can be packed into a small storage space. In California, the utility Pacific Gas and Electric hopes to build four of the largest lithium-ion storage sites in the world. Together they would supply just 2,700 homes with electricity for one month. As such, these batteries will only be able to supply power at times of peak demand.
Regardless of the arguments in favour of maintaining fossil-fuel generation, renewable energy does appear to be winning the public relations battle. According to a regular UK government survey — the Public Attitudes Tracker — support for renewable energy has climbed to 85 per cent.
Academics at the University of New Hampshire published a paper last year revealing that, even in politically conservative regions of America, respondents believe the use of renewables more of a priority than oil and gas drilling by at least three to one.
That would explain why major oil companies, such as Royal Dutch Shell, Exxon and Total, have begun to not only tout their green credentials but also to invest in ancillary areas such as battery technology.
A transition to renewable sources of electricity generation, particularly from solar and wind, seems well entrenched. While these may not fully replace fossil-fuel sources in the near term, they should at least remain a major part of the energy mix for decades to come.
Fossil fuel investors, then, may not be doomed. But will have to look over their shoulders to stay ahead of renewable energy.
Alan Livsey is the FT Lex research editor