The energy transition has triggered “great upheaval” in the financial sector as traditional business models for fossil fuels have been disrupted but there remains abundant capital available for low-carbon and renewable investments, according to a prominent industry consultant.

Michael Liebreich, chief executive of consultancy Liebreich Associates, told the ONS 2020 digital conference that the push by European majors BP, Shell, Total, Equinor and Repsol to achieve net-zero carbon dioxide emissions targets by 2050 has been driven mainly by investor pressure for greener portfolios.

He explained that investors guided by environmental concerns were now calling the shots by dictating which projects gain access to capital, marking a clear shift from a decade ago when it was oil companies that had the initiative in presenting projects for possible financing.

“The financial sector has now taken the lead by pushing companies and consumers to reduce emissions,” he said.

Liebreich said there has been a “competition among majors to make the most dramatic statement on being on track for a net-zero economy by 2050… but none of this would have happened unless investors had questioned whether they should continue to hold these companies in their portfolios”.

However, investments in renewable electricity, low-carbon and transport projects have a completely different risk and return profile to oil and gas projects and need new pools of capital to be created, according to Liebreich.

“There has been a shift from business models that were well understood for coal, oil and gas over the past 100 years to new business models,” he said.

Nonetheless, he claimed there was “plenty of capital available”, despite the erosion of savings from the Covid-19 crisis, to finance renewable and low-carbon projects with global clean energy investments having remained at around $360 billion per year over the past decade, out of around $2 trillion invested annually across the energy sphere.

At the same time, there are myriad climate initiatives that are guiding investment decisions by banks, insurance companies, asset owners and investors in both the financial and corporate sectors.

Last year, nearly $500 billion in debt was issued in sustainable finance in the form of climate bonds and funding for clean energy and transport, according to Liebreich.

“This would have been the year for sustainable finance had it not been for the pandemic,” he said.

'Mood music'

He added the “mood music coming out of Asia is that these trends towards clean finance and pressure on corporates to reduce emissions is accelerating”, though whether US companies follow suit will depend on the presidential election in November.

Equinor chief executive Eldar Saetre, speaking in an interview for the conference, said the company would “adapt its existing asset portfolio and examine how we shape our portfolio going forward”.

The Norwegian state-controlled company has faced criticism for its loss-making investments in US shale, both on financial and environmental grounds, having previously exited its holdings in Canada’s pollutive oil sands industry.

The company, which is targeting a thirtyfold growth in renewables by 2035, is investing heavily in both offshore floating wind and carbon capture, utilisation and storage through the respective Hywind Tampen and Northern Lights projects.

Saetre, who is set to retire from the role later this year, said the company will increasingly focus on value creation from renewables and low-carbon projects, while oil and gas production would shrink over time.

He said though that renewables “have a very different risk profile” from oil and gas that depends on building a “tougher low-margin culture” to make such investments profitable in a “competitive environment that requires different business models, mindset and culture”.

“We need to see opportunities supporting this money and for costs to come down. Both the planet and companies cannot afford not to adapt. We need to adapt to attract capital to see shareholder returns in a longer-term perspective,” Saetre said.

Bottom line

Total chief executive Patrick Pouyanne said “sustainability is also about profits”, with the French major looking to generate between $1 billion and $1.5 billion from targeted investments in wind and solar capacity of 25 gigawatts by 2025.

“Ecology does not progress unless there are economic results. Sustainability means not only having green energy but means investing a lot in order to get cash that will allow us to reinvest,” he explained.

“If Total is embarking on this transformation to spend more and more of its investments on renewables it is because we have a strong belief and have demonstrated to ourselves over the past five years that we can do it profitably.

“We are shifting to producing renewable electricity as well as oil and gas as we believe the market is changing and this can be a new source of profits in the future.”

Wood Mackenzie’s head of corporate research Valentina Kretzschmar said European majors have the “skills, capabilities and financial strength” to drive development of clean energy projects, while the conference heard the energy transition presents opportunities to develop new technologies for wind, solar, batteries, hydrogen and CCUS.

Liebreich said a rapid costs drop for renewables in recent years is set to trigger a surge in such projects as they become more competitive with fossil fuels.

International Energy Agency executive director Fatih Birol said a number of trends were converging that brought hope that 2020 could be “a turning point for energy” - namely lower costs for renewables, stronger efforts by governments to meet emissions reduction goals and a shift in corporate asset portfolios to tackle climate change.

· A version of this article was originally published by Recharge sister title Upstream

Transition

European oil majors see 'great upheaval' as investors push for greener portfolios