Themes of the Year: A change in perspective for energy infra?

2020 will be remembered as the year when investing in energy infrastructure has, arguably, undergone a fundamental shift in perception.

Until this point, trends such as growth in renewable generation or battery storage capacity were still outliers compared with the capital that sought exposure to oil and natural gas infrastructure, particularly midstream. When institutional investors sought specialised sector exposure, traditional energy infrastructure funds were the most common by far.

But the pitfalls of lining a portfolio with conventional energy infrastructure were laid bear with the onset of the coronavirus pandemic.

First and foremost, volatility struck early and hard. Economies around the world began to contract as government measures to slow the pandemic’s spread forced businesses to shutter, travel to halt and people to stay at home. In response, demand for oil plummeted all the way into negative prices, at one point in April, which was a first for a global economy that has moved on the price per barrel of crude for more than a century.

For most of the year, oil prices vacillated between $20-$40 per barrel, down from the mid-$60s at the end of 2019. And as one market specialist told Infrastructure Investor this year, $30 per barrel of oil “does not work for anyone”, especially in the US. “If these pricing levels persist, we expect to see a significant reduction in drilling. We expect to see a lot of bankruptcies, which will impact the midstream side as well.”

As one might imagine, that sort of negative volatility is not what investors sign up for when seeking stable-returning infrastructure exposure. “You have to be prepared for a lot of ups and downs,” said Paul Chapman, the director of real estate and real return at the New Mexico State Investment Council. In response to this year’s volatility, Chapman said his team at NMSIC is “deselecting strategies, where we can, that have a high propensity to invest in US midstream assets”.

NMSIC doesn’t appear to be alone with this notion. In a survey of 79 global LPs conducted by placement agent Probitas Partners in early May, only 26 percent of respondents said they had interest in new exposure to energy or power assets, sixth on the list behind infrastructure mainstay sectors such as transportation, telecommunications and wastewater management.

For some, the game has now shifted to almost exclusively focus on natural gas assets. A showcase example of that came in June when Global Infrastructure Partners led a group of investors to purchase a 49 percent stake in 38 gas pipelines in the United Arab Emirates in a $10 billion deal, one of the year’s largest.

“This is an investment in UAE’s existing and future industrial strategy,” GIP’s founder and managing partner Adebayo Ogunlesi said in a June interview with Infrastructure Investor. “We like the steady cashflow profile that a transaction like this provides… if commodity prices go up, terrific, but we won’t make more money from that. But if they go down, we’re protected.”

But for many others, this year has meant not even coming close to sniffing a traditional energy infrastructure deal, in part for volatility reasons and also due to increased environmental concerns from stakeholders. This has led to even more attention being placed on promising growth sectors such as renewables as well as digital infrastructure assets.

It would be wrong to make the claim that investments in pipelines, storage containers and export terminals have been scratched from a GP’s strategy forever. While the energy transition to cleaner generation sources may be accelerating, the timeframe for oil and natural gas assets becoming obsolete is likely to be measured in decades.

What 2020 has done is dramatically underscore the volatility inherent to the sector, while also highlighting there is an expiration date for many of these traditional energy infrastructure investments. In that sense, this year could end up changing the way investors view parts of the sector for good.