Perspective

Webinar: Energy transition and energy security


Energy markets have been a regular feature of our conversations with clients over the last few months. This comes against the backdrop of Russia’s invasion of Ukraine, soaring energy prices and the ongoing climate emergency.

It is clear that the world is facing an energy crisis, currently centred on a shortage of conventional energy. Ultimately, we think recent developments will accelerate the energy transition, providing us with greater energy security as well as a more sustainable energy system. We think that energy companies that have historically been focused on fossil fuels have an important role to play on this journey.

Recent developments in oil and gas

Over the long term, demand for petrol will inevitably decline as governments restrict the purchase of petrol-powered vehicles. This could eventually reduce global oil demand by 20% from today’s level. This weak demand outlook is one of the main reasons why energy companies continue to restrict investment in new oil projects, despite current high prices. Demand for gas is likely to prove more resilient as it is seen as a “bridging” fuel. It generates 60% fewer emissions than coal.

In the near term, however, both oil and gas markets face supply shortages. There has been little new investment in oil production and inventories are being run down. There is also huge global demand for LNG (Liquified Natural Gas). In a short space of time, China has quickly become one of the world’s largest buyers as it transitions away from coal.

We believe that “conventional” energy companies can create value for shareholders while also playing an important role in the energy transition. Today’s high prices are allowing many companies to “future proof” their business models by investing heavily in renewables and alternative energies. Increasingly, institutional investors are recognising that these companies are not just part of the problem but also part of the solution.

Energy transition

Energy accounts for 40 – 70% of global emissions and it’s a key part of meeting our climate change goals. Policy support for energy transition is accelerating, with the US and China both announcing increasingly ambitious goals. These commitments are about decarbonisation – but also energy security.

We need to see change throughout the entire energy system. As well as more investment in renewable energy, there needs to be greater investment in electrification. Electricity currently accounts for 20% of global energy use but needs to be closer to 50% if we are to meet our climate change goals. We need a faster pace of investment in energy efficiency, transmission and storage. Lastly, we also need new fuels – such as green hydrogen, ammonia and methane. Again, we think the integrated energy companies have an important role to play given they have fuel storage and transmission networks in place.

Share prices of many energy transition businesses have been volatile this year, as they have been heavily impacted by rising costs and supply chain challenges. These companies have seen their valuations fall significantly since their peak at the start of 2021. However, the long-term demand outlook remains strong.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director james.brennan@cazenovecapital.com