There are investment opportunities within the energy sector that will benefit from the energy transition — and they are not just in the renewables sector.
Tyson Birchall, managing director of Longbow Capital, a Calgary based private equity manager, points out that even if the world is able to achieve the objectives of the Paris agreement, the oil and gas industry will still require investment of approximately $425 billion per year to meet demand as supply declines faster than demand does (he cites IEA reports).
Longbow manages approximately $500 million and is investing in opportunities inside and outside of the oil and gas sector that will benefit from the disruption created by the energy transition — which can include energy infrastructure, services, products and technology — what Birchall called, “Energy with a capital E.”
Birchall presented, virtually, at the Silicon Valley Band of Angels’ investment group dedicated to energy.
“There’s going to need to be a tremendous amount of investment in oil and gas” even if the energy transition moves oil and gas down to 25% of our global energy needs, said the investor.
He said that the size and scale of the challenge — and the motivation accelerating the energy transition has created an enormous number of opportunities. He added that there were also “a lot of snake oil salespeople riding the coat tails” of the trend.
Cleaner oil and gas?
Birchall singled out a few firms from his firm’s portfolio.
Certarus looks to displace diesel or propane consumption with its lower-carbon distributed compressed natural gas technology. Certarus compresses, transports and integrates CNG for the energy, mining, forestry, utility and industrial sectors — enabling an “electric frack” powered 100% by natural gas turbines or a 20-MW peak-shaving project in Long Island, New York. Certarus revenue grew from $16 million in 2014 to $175 million in 2019, in what Birchall described as a very profitable business.
“Fracking is a hydrocarbon-intense spectacle of horsepower and engineering,” with $75 million or more of mobile equipment that is required to be set up and then moved to the next well for every frack. Fracking didn’t require penny-pinching when oil was expensive and capital for the industry was cheap, but it does today. And saving money is not the only driver.
“The oil and gas industry is responding to shareholder pressure,” said Birchall, adding that it reducing emissions and the environmental impact of resource development has become a primary driver for companies as they seek acceptance by investors. He observed that there were more oil and gas ESG compliance-related conferences than general oil and gas conferences as it has become a dominant theme.
Another portfolio firm, North West Refining is 50% partner in the building of the Sturgeon Refinery, a greenfield refinery “designed to capture CO2 process emissions from the outset,” according to the company. 70% of emissions are captured and transported via pipeline for an enhanced oil recovery application.
In order to achieve Paris agreement goals, the O&G industry has to reduce its emissions intensity by 45%. If you’ll believe it, it’s cleaner oil and gas.
“Oil and gas has a problem — people hate it”
The investor also spoke about the ways in which the oil and gas industry is responding to environmental pressure from investors and other stakeholders.
The oil and gas industry has been “demonized” and has some real headwinds it must to face, said Birchall, adding,”Oil and gas has a problem — people hate it”
“But what do business owners do?” Quoting famed investor Paul Tudor Jones, Birchall said they “adapt, evolve, compete or die. The oil and gas industry is going to keep going. It’s not simply going to roll over and it will invest in technology to be able to compete in a low-carbon world.”
This was a trend that was evident pre-Covid. Birchall noted that, “Covid hasn’t changed anything — it’s accelerated everything.”
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