Active across the spectrum

The saying “Out with the old, in with the new” could quite feasibly be an appropriate company motto for First Reserve Corporation, the global energy investment firm. After all, a fast-changing world and equally fast-changing energy industry appear to be providing the business with a great current and future opportunity.

Explaining the big picture, First Reserve managing director John Barry says: “There is an enormous opportunity in energy infrastructure around the world, with huge demand from a large and growing world population.”

He goes on to highlight the additional need for substantial new investments to be made given that 1.2 billion people currently have no access to electricity. On top of this, there is a large base of ageing existing infrastructure that will need replacing as power grids and old power stations are extended and upgraded while infrastructure suited to the likes of coal and nuclear is replaced by that catering to renewable energy and gas-fired generation.

Change is also underway when it comes to sources of supply. In Europe, for example, historic sources such as the North Sea are now in a mature phase, meaning that much of the region’s oil and gas is now imported, with gas being transported there in the form of liquefied natural gas (LNG) or through pipelines from more distant areas such as Norway and Russia.

GOVERNMENTS CONSTRAINED

Furthermore, amid all this change and transitioning, the need for private capital investment is clearly evident. “Governments are more fiscally constrained than in the past, so they are less able to finance what’s needed,” Barry points out. “And utilities are now also less able and less willing to finance ancillary infrastructure.”

Of course, one market that First Reserve is very familiar with is the US – and it’s here that changes in the energy sector have arguably been as dramatic as anywhere in recent years. “The US has seen a big change from conventional sources and importing oil and gas to indigenous unconventional resources that need to be connected,” says Barry.

Indeed, a recent study by IHS found that newly discovered sources of US domestic oil and natural gas last year added more than $1,200 to the discretionary income of the average US family. And, as has been well documented, much of this revolution in the US oil and gas industry can be attributed to the exploitation of shale reserves.

Technological changes in the ability to recover reserves from shale surprised everyone,” says Barry. “And it’s meant that there has been a revolution in US oil and gas. It’s still early days but, in the last half a decade, the industry has expanded materially and there are already significant opportunities for investors.”

For First Reserve, the opportunity is across an investment spectrum covering upstream, midstream and downstream activities. But it’s the midstream aspect – where Barry says there is a “huge amount of opportunity”.

NOTABLE INVESTMENTS

In the midstream space, First Reserve has already made a number of notable investments. For example, in October 2012, the firm announced a joint venture called Caliber Midstream with Triangle Petroleum Corporation. The joint venture was set up to focus on midstream and infrastructure opportunities in the Williston Basin of North Dakota and Montana.

“Triangle had got a position in the region but didn’t have the infrastructure to support it,” relates Barry. “They had to bring in water and take out oil in trucks, which was uneconomic. We created a JV to build out full new midstream infrastructure in which our partner has a 50 percent share. And we have 15-year ‘take or pay’ contracts which provides very predictable cash flows.”

Similar ‘take or pay’ contracts were in place for another midstream joint venture which First Reserve had agreed a year earlier with Energy Corporation of America. This saw the two firms partner up to form First ECA Midstream, a platform to expand and develop gas gathering systems in the Marcellus Shale in Pennsylvania.

Barry insists that one of the reasons why First Reserve is able to strike agreements with exploration and production (E&P) companies is that it is itself an experienced E&P operator. “We are well known in the E&P space so we talk with many E&P companies to find ways to work with them,” he explains.

He adds: “We’ve been involved in E&P for 30 years so we’re seen as a safe pair of hands. We’ve drilled our own wells so people trust us to invest in the infrastructure. They know us, and we’re viewed as a strategic partner as much as we are a financier. That makes us different. We have run assets safely and sensibly over the long term.”

Barry thinks forming strategic relationships is a way of avoiding the risk of “buying blind in auctions”. And he also believes that the firm’s experience means it can look through contracts to the quality of the underlying asset or resource. He gives an example: “We’ve had variable gas prices in the US. You don’t want to partner in a high-cost area where people might turn the wells off when the price goes low.”

WIND AND SOLAR, TOO

But First Reserve is not just a major investor in oil and gas; it has also been at the forefront of investment in installed wind and solar opportunities. Through its Renovalia Reserve joint venture with Renovalia Energy, it has six wind farms in Spain, two in Mexico and one in Hungary – with a total capacity of approximately 500 megawatts (MW).

And, through its SunEdison Reserve partnership with SunEdison, it has a portfolio of 21 solar photovoltaic power generation facilities in Europe and North America. Its generation capacity of 255MW includes 70MW accounted for by the Rovigo plant in Italy – one of the largest facilities of its type in the world.

“There is a big brownfield opportunity to buy from developers who have built assets and need to recycle their capital,” says Barry. “Greenfield deals depend on the whole on subsides on tax support, but ultimately the goal must be to get renewable energy to grid parity. We’ve seen that through our Mexican projects, and it needs to be the end point for the US as well.”

The move to grid parity would be another development that First Reserve would seek to take in its stride, as it’s well accustomed to making transitions. “As one [energy] investment play matures, another becomes accessible,” Barry reflects. “It’s a constant process of renewal. But we’re about building a long-term business – and this is a long-term market.”