Energy strategies are being put to the test

Energy demand has fallen sharply, and an oil price war has further destabilised the hydrocarbons sector.

Covid-19 has unleashed a fresh wave of disruption on the energy sector, wreaking havoc on the production and distribution of hydrocarbons and laying bare some of the challenges of the energy transition.

Midstream strain

For more than a decade, the midstream sub-sector had drawn large amounts of institutional capital allocated to low-risk, long-term infrastructure strategies.

But in the coronavirus pandemic era, the idea that midstream infrastructure plays are mostly insulated from commodity price swings is coming under renewed scrutiny. GPs are quietly admitting that at least one part of the midstream space – gathering and processing assets – entails risk as high as the drill puncturing the ground.

Investors say weakened contract structures are to blame for commodity price vulnerabilities. As one source with a Korean pension that has invested in North American midstream told us earlier this year: “If oil prices keep falling, and upstream companies close their businesses, midstream companies will definitely be impacted.”

However, natural gas transportation is seen as a bright spot in the sector. Matt Hartman, co-head of midstream at EIG Global Energy Partners, told Infrastructure Investor this year that natural gas midstream companies operating in gas-only basins stood to benefit from volatility in the sector.

North American energy continues to attract global investors

Going green

Renewables are now “the lowest cost [of energy] in two-thirds of the world,” as Actis’s Lucy Heintz told us in a webcast, and are unlikely to be destabilised by low oil prices.

The US renewables market continues to attract new suitors, with Quinbrook launching a new solar plus storage platform and InfraRed Capital Partners, at the behest of new owner SunLife, entering the market with plans to replicate its success in Europe.

Quinbrook’s focus on battery storage is not unique. Struggles with rolling blackouts in California have highlighted the glaring issue with renewables, and particularly wind power: if the wind takes a couple of days off, how can utilities provide adequate supply in a carbon-free system?

The pandemic has clearly put the energy transition into overdrive, but it is less clear exactly how direct the road toward a greener power grid will be. In the meantime, natural gas continues to justify its allocation for energy infrastructure strategies.

With no end to the uncertainty in sight, some asset managers are lining up to acquire struggling energy and power companies. And investors such as Blackstone, which closed its Global Energy and Power Infrastructure Fund III on $5.1 billion, are betting big on a North American energy rebound.