The swinging pendulum of energy investment is being rocked by the crisis in Ukraine, according to industry experts on a virtual panel.
The panel at the Energy Club WA’s March industry event included Credit Suisse head of energy and resources Saul Kavonic, Carnarvon Energy managing director Adrian Cook and ANZ executive director Jonathan Bloch.
According to Mr Kavonic, the Ukraine crisis and subsequent sanctions against Russia could mean the investment pendulum will begin to swing toward energy security away from decarbonisation imperatives.
“As soon as the conflict broke out, energy security took priority and improved overnight,” Mr Kavonic said.
“Europe is diversifying away from Russian supply as soon as possible, we’re seeing large increases in LNG demand into Europe, and countries are doubling down on renewable and green energy resources.
“If there was ever going to be something that knocked decarbonisation pressures off their pedestal as the number one priority on investors’ minds, it was either going to be national security or a global economic shock.
“We’ve now got the national security prerogative and an economic shock may not be too far behind.”
Mr Kavonic said it had been challenging for new players to obtain capital for new oil projects in Australia over the past two years, especially compared to 10 years ago.
“Now, if a company decides not to fund these types of projects, they’re going to have to deal with some public perception that they’re helping to keep Russia’s stranglehold over the European economy,” he said.
“That could possibly become an overriding ESG factor over the next six months.”
Mr Bloch said he didn’t know if the pendulum had swung too far in favour of ESG. “There’s a lot of nuancing [in investment decisions]. It’s not black and white; it’s messy,” he said.
“For all the banks looking at funding energy, the thing that is of most concern is their license to operate socially, community and stakeholder-wise. “To that end, reputation is sitting fair and square at the top of every house, and it becomes a very challenging situation to navigate.”
Mr Bloch said investors were looking across the entire gamut of energy production technology. “In the context of transition and funding transition, there is a huge amount of capital available for it,” he said.
“Those companies that embraced the reality of the challenge of climate and nature and were acting in a way that was tangible to put plans in place were going to get support and are going to get support.
He said the conflict would have little impact on companies’ investments into renewable energy technologies.“If you look at our major clients, their low carbon teams and technology teams are very separate from their upstream oil and gas teams,” he said. “Those teams are not going to disappear, to suddenly do nothing.
“The cat’s out of the bag. We have a serious problem and climate, and nature are at serious risk.
“The fact that those leaders have made that decision to transition, I don’t see that changing and I don’t see those teams stop working.”
Although Mr Kavonic disagreed about the pendulum, saying it had indeed swung too far, he agreed that a multifaceted approach was needed.
“When you’ve got the US trying to pick its least worst dictator in order to avoid oil supply security concerns and can’t get more oil growth coming from Western nations including itself and producers being unable to get funding even though the pricing was there, that is a sign for me that the pendulum has swung too far,” Mr Kavonic said.
“We need to come back and say there does need to be a level of appetite to invest in a sector based on a rational set of objectives. Energy security and decarbonisation are a part of that.
“We do need to double down on what was already a strong green investment, decarbonisation pathway, but acknowledge that it is still a decades-long journey to get there and we can’t take our eye off the ball on energy security for those decades on the fossil fuel front.”
He said there was an opportunity for Australia to “position itself as the freedom gas supplier to the free world”.
“If you look at Woodside’s share price over the past few weeks, it’s had an incredible rally. It’s outperformed global equities, global energies, it’s outperformed US names.
“If we believe that we’ll see a structural increase of tightening of the LNG supply demand dynamic over the next 10 years, being long LNG as opposed to being long oil I think is particularly attractive.”
Mr Cook said that Carnarvon Energy already had questions from investors around fuel security, with the ESG discussion materially abating.
“If the European situation maintains for any period of time or gets worse, the spotlight will begin to shift away from ESG concerns, particularly into the mid-term, into fuel security,” he said. “Whether we like it or not, the dominant source of energy in the world is oil.
“I suspect we will continue to see strong interest in funding for its economics, regional security coming out and the products we will produce from it.”
He said there was a growing appetite for drop-in fuels such as biodiesel to help with fuel security while substituting imported fossil fuel diesels.
“Australia imports about 90 per cent of its liquid fuels, which is a pretty concerning space,” Mr Cook said.
“The fact that we can produce a direct drop-in fuel is really attractive to miners and farmers as it doesn’t need that substantial investment into alternative power generation equipment which may not even be the dominant technology of the future.”
According to Mr Cook, the increased cash generated from Carnarvon Energy’s oil fields would help build a transition investment portfolio which would enable it to scale up over time and produce renewable diesel from Australian feedstocks.
He said that one renewable diesel plant could produce up to 20 million litres, and that scaling up to 30 to 40 plants around Australia would be a substantial benefit.
Mr Bloch agreed with the drop-in fuel pathway, saying it held substantial benefits for developing countries. “In developing countries, the idea of hydrogen and electric vehicles doesn’t work,” he said. “If you look at all the tuk-tuks driving around Asia using diesel, who’s going to be able to afford to retrofit those?
“Biofuels, waste and reafforestation facilitate longer-term plants including hydrogen.
“Biofuels work because there are poorer countries that need that diesel because you don’t have to change the vehicle.”