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.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 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. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Contact Cazenove Capital

To discuss your DFM requirements, or to find out more about our services and how we can help you, please contact:

Nick Georgiadis

Nick Georgiadis

Head of DFM Team
Simon Cooper

Simon Cooper

Head of DFM Relationship Management