Energy security agenda starts to make its mark

BlackRock’s new permanent capital fund underlines how much opportunity – and risk – will come from Europe’s decision to wean itself off Russian gas.

When we came back from our Global Summit in March, we wrote that energy security was the one theme that came to the forefront over and over, and was certain to drive infrastructure investment for many years to come.

It has not taken long for energy security to make its mark. Enter BlackRock’s new perpetual capital fund. In development for over a year, what began as a pure-play energy transition vehicle has now acquired a strong energy security flavour, with Europe set to account for more than half of its initial investments.

“This is the evolution given what we’ve seen in Ukraine and the humanitarian crisis and where we’re seeing opportunities arise,” Anne Valentine Andrews, global head of BlackRock Real Assets, told us. “Given the REPowerEU announcements and the ways they’re looking to wean themselves off Russian gas … we’ve seen a lot of opportunities from existing relationships, both on the renewables side and deploying [liquefied natural gas].”

LNG is indeed where a lot of the opportunity set will be found, as Europe looks to build new terminals and transmission capacity to help cut its dependency on Russia. However, there’s healthy scepticism over how quickly – and at what cost – that can be achieved.

“The inconvenient reality about LNG [is that] there is a four-to-five-year lead time to bring on new LNG supply,” consultancy Timera Energy wrote last week. “That means new investment in LNG supply that has been triggered by Europe’s pivot from Russian gas to LNG will have no impact until 2026 at the earliest.”

In the meantime, Europe is almost guaranteed to keep natural gas prices high as it squabbles with other regions to get its hands on as much LNG as possible. “To attempt to replace even half of [imported Russian gas] with incremental LNG imports would likely drive gas prices much higher up an inelastic global supply curve,” noted Timera.

Like it or not, the war and Europe’s pivot away from Russian imports have underlined natural gas’s role as the energy transition’s ‘necessary evil’, ensuring it will be a fixture for many years to come.

That does not change natural gas’s very real environmental pitfalls or the stranded asset risk that natural gas infrastructure carries, as Andy Lubershane, managing director at Energy Impact Partners, warned:  “I do think the industry needs to be careful not to over-invest because, at the end of the day, almost every ‘net-zero by 2050’ scenario you look at does have natural gas declining.”

BlackRock appeared to acknowledge that risk, stating it would invest in “natural gas and storage and transport facilities, where adaptable to incorporate hydrogen”. It’s worth noting there’s healthy scepticism around that idea too (see here and here).

While climate change policy detractors are having a field day with the resurgence of realpolitik, that has little bearing on the reality of the climate emergency, which continues unabated. The question for investors then becomes: at what point will the climate emergency force a change to business as usual, what Climate Adaptive Infrastructure founder Bill Green called “the handbrake effect”?

Since we appear to be heading back to the 1970s, it seems fitting to turn to 1972 bestseller The Limits to Growth for answers. Or rather, to Gaya Herrington’s 2021 data check on the book’s forecast model, which she found surprisingly accurate at predicting the future. Using data from 2019, Herrington, now vice-president of ESG research at Schneider Electric, found that we are headed to one of two scenarios: either technological innovation will save us from outright collapse, but not decline; or we will have outright collapse. “Both scenarios … indicate society will see a halt in industrial, agricultural and welfare growth in the near to medium term,” Herrington wrote. That means around 2040-50.

For an industry focused on the long term, that range might be useful to keep in mind when navigating our new energy landscape.