June 11, 2018
As published on Forbes.com
We have entered an era of cheap, abundant energy, spurred by shale oil and gas, innovation in renewables, batteries, long-distance powerlines and electric vehicles. In Part I of the Energy Transition Report Card, I graded those clean energy innovations (my company Chrysalix Venture Capital invests in clean energy innovations for resource intensive industries). I also discussed their significance to the energy transition, the shift from fossil fuels to clean energy that experts love to say, ‘will not happen overnight.’
Traditional energy has been out-innovated and further breakthroughs in clean energy will solidify the transition. In fact, we already see oil companies reacting to this inevitability. In today’s Energy Transition Report Card, we grade the market trends that herald change.
In early 2014, oil still traded at $100 USD per barrel. It dipped as low as $30 before rebounding and now hovers around $70. Rolling out the biggest innovation in traditional oil and gas in the past 50 years (horizontal drilling and fracking) at scale in North America in recent years led to the development of cheaper shale oil and gas. US shale producers became the ‘swing players’ on the world market, supplanting OPEC and challenging Russia for the spot of number one oil producer.
When oil prices rise north of $50, shale producers respond to that price signal, increase supply and de-facto ensure that new, costly projects in the artic or Canadian oil sands will not proceed. No wonder most companies have abandoned artic and oil sands projects that sit too high up the cost curve.
Between 2014 and 2018, North American natural gas bounced back from its low of sub $2 to $3, while liquid natural gas (LNG) in Japan went from $16.50 to as low as $5.50 and is now at $8.80.
The abundance of cheap LNG has transformed the natural gas industry from a bunch of regional markets into a global one. Thus, while some forecasts call for an LNG shortage by 2025, it will be difficult to bring new capacities on line because prices are unlikely to return to the high teens of yesteryear. Energy is a commodity industry where ‘Cost is King!’
Major oil companies and automakers have begun to position themselves for the post-carbon world. Some examples:
The stock market offers a bottom-line verdict for our Energy Transition Report Card. All energy stocks have been lagging in the major indexes and invite pressure from shareholders to match gains they have seen elsewhere.
Between May 9, 2014 and May 9, 2018, the Nasdaq went up 80% and the Dow 48%. Yet, Shell was down 10% and Total by 13%. Canadian oil sand player Cenovus was 62% in the red, while its neighbor Suncor was essentially flat thanks to strong efficiency and consolidation plays. The world’s largest solar player, Sharp, was up 22% and Tesla/SolarCity increased by 68%.
To attract capital for growth, energy players must innovate offerings that consumers will pay for and that provide ‘investment certainty.’ That’s codeword for certainty against crippling regulations and stranded assets. Clean energy has a stronger hand for that given what we’ve discussed in Parts I and II of the Energy Transition Report Card.
If I had to invest in large-scale traditional energy capital projects, I would be very concerned about these assets getting stranded in 15 years. Fossil fuel projects may not have time for 30-to-40-year amortization periods anymore.
No known innovation can save oil and gas players that sit too high up on the energy cost curve. Within four to six years, the sticker-price of a midsize electric vehicle may be cheaper than a similar midsize gasoline car. When that happens, we will have to redefine what we mean by ‘the energy transition will not happen overnight.’
My advice for marginal energy players: move away from the commodity industry. Go for higher-priced, specialty solutions such as petrochemicals, carbon-based nanomaterials or entirely new products. Look at how Calysta from California and Cargill have started to use natural gas to make an animal-free feedstock for fish, livestock and pets.
Cleantech is creating new, well-paying jobs – still in energy but just different, faster and cleaner than their predecessors. The transition period won’t be ‘overnight,’ but it will be shorter and more sudden than you think.