In recent years, as investors pushed the clean energy revolution at full throttle and ESG became an industry standard, market participants have billed natural gas as a critical ‘bridge fuel’ in the energy transition.
But is there a consensus on what exactly bridge fuel means? Or how long natural gas will serve that purpose? These questions are worth asking because future returns on a whole swath of pipelines and generation assets in the US depend on it. And yet, no one seems able to give a straight answer.
The newly installed Biden administration took the White House in part because of a campaign promise not to go too hard on regulations governing natural gas. Essentially, the pledge was that the industry – and thus voters’ jobs – has a secure future in the US market. Then Biden puts a freeze on new drilling permits on federal lands and waters, and his climate change czar John Kerry warns about the possibility of investors being “stuck” with stranded assets.
In an example from the private sector, an investor who has made his living over the past decade by building and managing natural gas assets recently sounded a note of defiance when he told Infrastructure Investor: “If the federal government is going to block new natural gas infrastructure, that’s okay because we already have a lot of [existing assets].” With that, his position on natural gas was, “in the short term, a little bit bullish”.
Then he muddied the waters by adding: “If supply goes down and demand stays put, prices go up. As prices go up, ultimately demand will fall.” Right now, the main opportunities in natural gas, he said, are “fire sales that bring attractive valuations”. He added there is a “hesitancy” to back new large-scale projects.
That does not sound promising for a sector that has been promised a future, at least for a little while. That sounds like code for “get out while you can”.
All of this is not to say natural gas is dead in the ground. Infrastructure Investor is hearing that many midstream assets are still generating healthy mid-teen returns. That is likely to continue as the last remaining coal plants shutter for good, truck fleets shift away from diesel and sprawling charging stations to support electric vehicles begin to be built – at least until renewables capacity ramps up significantly. We can also see selective, strategic generation and midstream assets having a long-term future.
But it is hard to imagine an industry continuing to grow if new infrastructure to support it is not being built.
There is a growing sense that investors are deciding today they do not want to be caught holding the bag when natural gas begins its eventual downturn, whenever that might be.
So, if a natural gas investment is pitched to you as an important bridge in the global energy transition, consider asking this: over how much troubled water will that bridge span?