NEO kicks off its Five Questions series with a Q&A with Mitchell Jennings, Senior Analyst in Oil and Gas at Sova Capital, who answers questions on green energy and ESG.
1. Do EU, US and other industrial nations’ plans to reduce carbon by moving to electric cars mean investors should sell oil and gas producer shares now?
Despite the focus on transition, demand for hydrocarbons should remain for some time. Energy demand is forecast to grow, and until fuels such as hydrogen are scalable, oil and gas producers will continue to have a place in the energy mix. There could be a pullback in investment in companies that are not implicitly transitioning and decarbonizing, but these companies should be around for some time. And regarding electric vehicles, transportation accounts for around 20% of global energy demand, according to BP, and 28% in the US, according to the EIA.
2. Will alternative methods, such as wind and solar, be capable of manufacturing enough energy to equal that produced by oil and gas? If not, what fills the gap?
This depends on technology, of course, but much of the current focus is on the potential for hydrogen, which can be made from natural gas and with zero emissions, depending on the method. Until hydrogen or batteries are scalable for industry, natural gas is likely one of the main sources of energy to lower emissions. Gazprom is working on hydrogen technology, and even exporting the fuel, but in the near term, renewables are not likely sufficient to cover current fuel demand.
3. Are utilities, hydrogen, or renewables focused companies a slam dunk investment, supported by government attention to ESG? Or is it just talk?
The stocks themselves may become more interesting as funds and investors turn more ESG conscious. We expect some funds will no longer be able to invest in traditional hydrocarbon producers, which would increase flows into renewable stocks. The future for hydrogen looks promising, but we believe considerable innovation is necessary before hydrogen solutions can be implemented. A lot of the technology is still in the early stages of development. Additionally, we perceive a bit of a disconnect between the actual and near-term future energy mix, and what is being planned and getting headlines.
4. Can all hydrogen production, current and future, be converted to “green” energy or will natural gas remain necessary if hydrogen is to scale up?
Initially, commercially scalable hydrogen is likely to derive at least partly from natural gas. Gazprom is working on methane pyrolysis, which could be net zero, and maybe marked as green in the future. Another possibility as bridge fuel is a methane-hydrogen mix, which could lower emissions, according to Gazprom. There are also ongoing conversations around shipping hydrogen via pipeline, and whether gas would be shipped and converted or hydrogen by itself.
5. Energy producers like BP and Total and Eni have rolled out major carbon reduction strategies. How are core global oil producers in Russia or the Middle East responding?
In Russia, ESG is becoming increasingly topical. Lukoil and Tatneft have reported strategies to be net zero in 2050, and other producers are committed to reducing emissions. The word “transition” isn’t applied the same way in Russia as it is in Europe, and we expect further Russian emphasis on and investment in cutting emissions and green projects. Russia also has sizable potential for carbon capture using forests, which is a topic that is gathering momentum.