Sheltered from Biggest Risks, Green Fuel to Ride Out Oil Crash

Green power is cheap enough to compete with fossil fuels and will buck the trend of falling investment in oil and gas as it can offer long-term returns sheltered from political risk, investors and industry analysts say.

 

Oil prices have dropped by around 75 percent since mid-2014, leading the International Energy Agency (IEA) to predict a second successive year of falling hydrocarbon investment, marking the most sustained decline since the 1980s.

 

In the last boom-bust cycle of 2008-2009, a crash squeezed all energy capital expenditure as power generators turned to cheap fossil fuel, which rebounded swiftly.

 

The differences this time include the depth of uncertainty over any oil price recovery following the U.S. shale revolution and a rift in the OPEC oil producers' club that makes agreement on output cuts to remove oversupply tougher than usual.

 

Last December's Paris Agreement on climate change, meanwhile, is the first truly global deal, bringing in China and the United States. The accord is vague and has yet to be ratified but its very existence emboldens investors to move away from hydrocarbon fuel.

 

"Fossil fuel technologies no matter how efficient will face greater and significant challenges," Hendrik Bourgeois, vice president European affairs at General Electric, said in Brussels on Monday.

 

David King, Britain's special representative for climate change, said the flurry of renewable deals on the sidelines of the Paris conference, could have created "a self-accelerating process".

 

"We are talking about the world's biggest (new) market, it puts laptops into the shade. This (renewable energy) market is going to be by 2020 between $2ans $3 trillion a year," he said.

 

Pension funds, looking to the very long term, say the smart money is shifting from oil and gas.

 

Representing the public sector, the largest multilateral lender the European Investment Bank, whose loans seek to underpin European Union policy, in January announced it lent record amounts for climate-related projects in 2015 and predicted the trend would continue.

 

Competition with Gas

The gas lobby is pushing for natural gas, which is half as polluting as coal, to have a central role in a transition to the low-carbon economy the Paris Agreement promotes, but analysts say renewables can compete.

 

Improved technology means onshore wind is often the cheapest energy, with costs as low as 4 U.S. cents per kilowatt hour (kWh), although offshore is still expensive at 10-22 cents kWh, the International Renewable Energy Agency (IRENA) said.

 

Natural gas generation can be below 4 cents in nations such as Russia, where gas is very cheap. Elsewhere, it costs up to 8 cents to generate power from pipeline gas and up to 14 cents from liquefied natural gas (LNGLF).

 

While oil and gas expenditure fell 20 percent last year, renewable investment rose, even as upfront capital costs - the only significant expenditure given wind and solar is free - keep falling.

 

New renewable energy investment in 2015 rose to $280 billion, up from $270 billion in 2014, IRENA said, adding the growth would continue.

 

Some energy majors, groaning under increased exploration costs for ageing fields as well as crashing oil prices, also grasp the logic of diversifying.

 

Total has pledged to invest $500 million per year in new forms of energy and has set up a $150 million venture fund to invest in renewable start-ups.

 

Renewables make up only 3 percent of Total's portfolio - a share expected to reach 10 percent by 2030.