Large institutions and asset managers are diversifying away from traditional oil and gas projects, sometimes driven by climate concerns, but their investments haven’t fallen far afield.
Those organizations think in terms of billions of dollars when evaluating a potential investment sector. And so far, they haven’t hesitated to invest in energy. What has changed, and what keeps changing, is where they put those investment dollars.
It’s an energy-investment transition that parallels today’s ongoing energy transition.
Enervus Intelligence Research recently forecast Brent crude prices to reach $108 a barrel in the fourth quarter of the year – a positive sign for oil and gas despite ongoing geopolitical headwinds, tighter monetary policies and the possibility of recession. EIR is a subsidiary of energy software and analytics firm Enervus.
“Tight supply should underpin stronger oil prices in 2023, giving upstream investors confidence in the outlook for production. While cost inflation is likely to remain sticky over the year, the solid returns carved out by public operators will be attractive for investors, even if the supply growth seen previously in high oil price situations has diminished in recent years,” said Bill Farren-Price, EIR director.
Oil Still Dominates
BlackRock Inc., the world’s largest asset manager, faced down criticism about its continued energy investing last year. Climate activists had complained that the company allocates too much money into fossil fuel-related investments.
At the same time, conservative lawmakers criticized BlackRock for observing some environmental, social and governance (ESG) guidelines, especially those based on climate standards. In October, Louisiana announced it would pull almost $800 million in state investment funds from the firm as a protest.
In a published response, BlackRock stated, “We have not made commitments or pledges to meet environmental standards that constrain our ability to invest our clients’ money on their behalf consistent with their objectives.”
“BlackRock has been accused of ‘boycotting’ energy companies. Quite the opposite: BlackRock’s clients are some of the largest investors in the energy industry. In the U.S. alone, we have invested $170 billion on behalf of our clients in American energy companies, including pipelines and power generation facilities,” the statement read.
The NAPE Energy Business Conference at this year’s NAPE Expo, February 1-3 in Houston, kicked off with two business-track sessions on global energy policy and energy investment.
“Energy Policy Around the Globe: The Consequences for Oil and Gas,” the first session, examined efforts by governments to intercede in energy markets and exert greater control over industry operations and outcomes.
The second, “How Texas’ Largest Public Pension Fund Invests in Energy,” featured speaker Carolyn Hansard, senior director for the energy, natural resources and infrastructure portfolio at the Teacher Retirement System of Texas, who has primary responsibility for the organization’s $16 billion investment in the natural resources and infrastructure sectors.
With hundreds of billions of dollars committed to energy, institutions and asset advisers are diversifying into green energy, LNG facilities, solar farms, battery resources and technology and other alternatives to more traditional energy-investment positions.
According to research and intelligence company Rystad Energy, global investment in renewables and other low-carbon energy sectors jumped by 21 percent last year and surpassed related oil and gas spending for the first time.
Rystad forecast that total investment in carbon capture, utilization and storage, hydrogen, hydropower, offshore and onshore wind, geothermal, nuclear and solar will reach $620 billion this year, up from about $560 billion in 2022.
Solar and onshore wind will draw the largest share of those funds, Rystad predicted, with investment in solar totaling $250 billion this year. That’s a relatively modest year-to-year increase of 6 percent, but due to the falling cost of photovoltaic cells, installed capacity could grow around 25 percent, it noted.
Onshore wind investments will climb by 12 percent to about $230 billion, Rystad projected, while offshore wind spending should increase 20 percent, to $48 billion.
Oil Price Projections
OPEC+ has once again pivoted toward supply management and production limits, EIR observed. Continued sanctions on Russian oil exports likely will dampen supply while OPEC production capacity remains at historically low levels, and “these three factors alone should ensure that oil prices gravitate toward the higher end of the post-COVID-19 range,” it predicted.
Current reductions in Russian oil exports are at the level of about 500,000 barrels per day, according to industry sources. Enervus expects U.S. oil supply growth to establish a lower trend around 500,000 barrels per day, per year, with the NOCAR – non-OPEC, Canada, America and Russia – supply wedge staying flat until mid-decade.
“It is hard to see how supply will meet some agencies’ more bullish estimates for demand growth in 2023 and the years beyond without oil prices higher than the current strip,” EIR reported, adding that geopolitical risk in the Arabian Gulf and Central Asia compounds that view.
“Looking forward to 2023, we see more reasons to be bullish (on) oil prices than bearish, with global oil-supply constraints set to keep balances tight,” despite the possibility of a global economic downturn, Farren-Price said.
In a cautionary note, he warned that if prices rise too high amid an economic slump it might engender longer-term risks for oil, since counter-cyclical high energy prices could deepen and prolong a global economic recession.
Rystad reported that some energy categories with smaller investment shares are likely to see the most significant annual increases this year, in percentage terms. Investments in hydrogen and CCUS are expected to grow 149 percent and 136 percent, respectively, with total hydrogen spending nearing $7.8 billion in 2023 and CCUS investment about $7.4 billion, it forecast.
Expenditure in geothermal should also jump significantly, about 45 percent, from a relatively low starting level, while the hydropower market is expected to shrink and nuclear investments are forecast to stay relatively flat, Rystad noted.
Skittish, but Hopeful
Bottom line: large institutions continue to devote significant investment dollars to energy, and not all that money is flowing into green energy. The rapid development of the U.S. liquefied natural gas industry to become the world’s largest in LNG export capacity underscores just how much investment money has been available to energy projects of all types.
Post-pandemic inflation and the threat of a global recession have made many low-carbon investors skittish this year, accounting for the lower rate of investment growth, but somewhat weaker than expected growth “is not a reason to panic for those in the low-carbon sector,” observed Audun Martinsen, Rystad Energy’s head of supply chain research.
“Rampant inflation typically triggers fiscal restraint across industries, and spending will likely bounce back in the coming years. The outlook for hydrogen and CCUS is especially rosy as technology advances and the large-scale feasibility of these solutions improves,” Martinsen said.