Investors must take a “big picture” approach to supporting the green energy transition which, according to Deutsche Bank (DB) Private Bank CIO Markus Mueller, means including big Oil & Gas companies.
Muller argues that shunning fossil fuel producers only cuts off the finance necessary to help them shift from being the biggest emitters of greenhouse gasses today, to major suppliers of clean energy in the future.
In a CIO Special Report, Energy Transition: the quest for emissions-free energy, DB finds that renewables power-generation capacity is growing faster than non-renewables. with capacity increasing by 130 per cent over the last ten year; much faster than non-renewables growth of 24 per cent.
But globally, wind and solar generation still only accounts for 10 per cent of total electricity production. One forecast suggests they will need to grow to around 40 per cent of electricity generation by 2030 and over 75 per cent by 2050, with parallel deployment of other zero-carbon generation, flexibility, storage and networks, to deliver zero-carbon energy systems at scale.
According to Muller this means “huge investments in wind, solar, energy storage and transmission lines amongst others, will be needed to decarbonise the energy supply”.
He says: “Consequently, we expect these industries to experience substantial growth over the next few years, partially at the expense of industries like Oil & Gas as we gradually phase out fossil fuels. We believe the energy sector and certain utilities like those based on gas will undergo several challenges in the future as burning fossil fuels for electricity accounts for most of the world’s carbon dioxide gas emissions and will have to be reduced.”
Muller says many energy firms’ financial performance will be affected over the long term, with substantial downside risks resulting from their reliance on fossil fuels.
Stranded assets
However, he argues that simply divesting from fossil fuel companies will result in stranded assets and preclude these organisations from helping to get renewable energy over the requisite production line.
“Financial markets may be overlooking the potential of these companies to earn competitive returns on their decarbonisation investments, providing opportunities for valuation-focused investors with multi-year investment time horizons. The global energy transition may therefore benefit some companies that financial markets are currently neglecting, based on possibly excessive discounting of specific sectors, perhaps including energy and gas utilities,” Muller says.
The DB report also makes the case that major Oil & Gas companies are preparing to change their business models to become energy companies providing a range of fuels, electricity and other energy services.
This means entering sectors, most notably electricity, where there are already a variety of actors with specialised knowledge, and where the majority of low-carbon investment differ significantly from conventional oil and petrol projects in terms of scale and financial characteristics.
Oil & Gas companies’ expenditure outside traditional fossil fuel resources has reached 5 per cent of total spending in 2022, reflecting their interest in supporting renewable electricity, and Muller says this figure can only “increase further over the upcoming years”.
Finally, Muller notes that existing utilities have multi-decade development track records and established pipelines for future projects, and he says these companies are skilled managers of large and complex energy projects, which means “their expertise should benefit them as the energy transition progresses, for example, with offshore wind projects”.
He concludes: “Energy transition investment will need to be seen within a bigger picture. There will be transition risks in this process: established energy companies will have to work hard to adapt to the changing business environment if they want to avoid becoming stranded assets.
“Within transition industries such as Oil & Gas, those companies that are better at managing the transition may deliver better financial performance than their industry peers over the medium term as well as making a long-term contribution to our future wellbeing.”
