Mainstream’s Eddie O’Connor on low oil prices


January 21, 2015

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This Wind Watch has been written by Eddie O’Connor, founder and CEO of Mainstream Renewable Power.

The world’s pension funds need to invest. The International Energy Agency (IEA) has reported that $40trn will be invested in energy over the period to 2035. As the price of oil falls below $50 a barrel, will these investments continue to support global oil and gas industries? Or will they seek out value and growth in the world’s renewable energy and clean technology sectors?

Our view is that they will do the latter, for the reasons set out below.

There are 12,000 gigatonnes of carbon locked up in the earth’s crust. The cheap stuff, like the oil from the Ghawar field in Saudi Arabia has been found, and most of these fields have passed the peak of their production. Outside the Gulf, further oil extraction is from areas that are inherently more expensive. There are the well-reported tar sands in Alberta, shale deposits in the US, and seabed extraction from increasingly deep waters.

The fall in oil prices over the past few months has brought a huge measure of reality to energy investors. If production costs are higher than $70 a barrel then their investment is wasted. The Financial Times reported at the end of 2014 that, of the $2trn invested last year across the sector, almost half ($930bn) may never see a return. It is no wonder that international regulators, including the Governor of the Bank of England, have commissioned reviews of the implications of this investment bubble in fossil fuels.

The simple fact is that much of world’s fossil inventories cannot be used if the world is to meet its 2oC policy goal. So, whether at $40 a barrel or $120 a barrel, the essential proposition is this: the reserves must remain in the ground. Investors must now add to their due diligence this question: ‘what price will be put on carbon in any and every country in future?’

An agreement at COP20 in Lima in December may not of itself have nudged a review of energy investments by pension fund managers. However, coupled with the decision by the EU in 2014 to continue targets for carbon reduction to 2030, and the commitment by President Obama and President Xi Jinping to meaningful carbon reduction targets, it should. There will be a price on carbon.

And so, to revert to the original statement by the IEA, there will be $40trn trillion spent on energy investments by 2035. If fossil fuels are too risky, how are the pension funds going to deploy their investments, and where will they find value?

Wind energy is one of the major success stories of the past 15 years. The generation technology is now immensely reliable, with modern turbines available for 98% of their operational lifetime. The price of generation has fallen by 30% in the last seven years.

Almost all the cost of wind is accounted for in the capital cost. The fuel is free. It is always local. It will always be there. It makes electricity without pollution; it makes electricity without water. These facts are rather obvious.

The same fundamentals apply to solar power, which enjoys the added benefit of scale – allowing for rooftop deployment as well as utility scale plant.

A wind or solar farm with a power offtake agreement is the lowest risk investment that a pension fund could make. It doesn’t matter how oil, coal, and gas prices fluctuate. The price of renewable power remains constant, delivering consistent cashflows to investors over the lifetime of their investment. A perfect vehicle to deliver the returns sought by the world’s pensioners.

Today, alternative energy is no longer alternative, but mainstream. It is oil that is the outlier, and our investments must recognise that.

This is an abridged version of a longer blog post that can be found here.

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