The energy transition will require an incredible amount of capital, creating high-risk, high-reward opportunities for those participating.
“There may be periods when returns are limited, but if you believe this is the right direction, there will be outsize returns. It’s a high-risk period,” Access Corporate Finance’s CEO David Kotler told Energy Voice.
“The assets of tomorrow are not the assets of today. That transition will require enormous amounts of capital,” Kotler went on. “We’re seeing a fundamental change in how economies are run.”
New energy companies may not immediately produce cash, but the energy transition will play out over some years.
He drew a comparison with the technology companies of the 1990s. “Are the times where there are bubbles and some companies collapse? Sure. But there are equally some extraordinary success stories.”
Hydrogen is a particularly hot topic at the moment. “If hydrogen takes off, we’ll see investments in the tens of billions of dollars,” Kotler said. Along the way some of the electrolyser companies may go bust, some may continue soaring.
“We don’t know how quickly hydrogen will become the dominant fuel. There’s still a lot of uncertainties – but the direction of travel is clear.”
Speaking the same day as US President Joe Biden’s climate summit, Kotler agreed government direction and support was important. However, it is not the only part of the puzzle.
“Change in Europe has come from the corporate sector. Companies have had to consider, regardless of governments, whether customers will continue to be there to buy goods,” he said.
The majors have played an important role in this reorientation and are shifting capital towards the energy transition.
This is manifesting in a number of ways, not just renewable energy sources.
Beyond the usual suspects of solar, wind and hydrogen, the majors are also interested in “mobility, batteries, software systems to manage the grid” and how to use legacy infrastructure in new ways.
Refineries are potential sources of blue hydrogen, Kotler said, with CO2 piped into depleted oilfields.
However, there are new tensions that come along with this shift.
“It’s a very different risk to reward business, upstream or integrated oil to a net zero carbon business. I believe we will see at some point a split in terms of ownership,” he said.
The same shareholders do not want to own hydrocarbons that want to own renewables. Majors could either carry out a clear split or gradually sell down their legacy hydrocarbon businesses, Kotler said.
While shareholders may want more distinction in their energy holdings, banks may feel differently. European banks are still willing to lend to traditional oil majors, although they do often require some commitments to green credentials.
A company that has some renewable energy interests “allows bankers to tick the box – to some extent it’s whitewashing”.
With public markets increasingly opposed to carbon, and banks requiring green commitments, private equity sees a clear opportunity in the traditional E&P space.
“There’s still capital going into the sector but there’s a dramatic change in who is investing in the independents. Hydrocarbons are going to be here for several decades,” the Access executive said.
The private equity model is transparent, he said. Investors in a fund will know that their cash is going into the oil and gas business and will be tied up for a certain amount of years.
“Pressure may come from outside,” Kotler said, but it is much harder to bring to bear on a private company than a public one.
Those private companies have taken heart from the recent upturn in prices, he continued, and have been showing interest in new opportunities. “Deals are getting done, there’s more alignment between buyers and sellers.”