Current Investment Efforts and Their Environmental Impact

Investments in the Oil and Gas Sector

Investments, at their most fundamental level, examine risks versus returns, minimizing the former and maximizing the latter. Longer term investments carry greater risks and, therefore, carry higher rates. Projects that work with more established partners or within more established industries carry fewer risks, so it is easier to raise capital in those conditions. This system is the basis for much of the world's economy, especially in capital-intensive industries such as the energy sector.

Energy companies need to raise capital, either through debt or equity, in order to fund R&D, acquisitions, expansions, and projects: solar farms, wind farms, hydraulic fracturing operations, oil rigs (see above, figure i). As such, banks play a significant role in financing projects with the energy sector. Typically, the projects are broken down within the oil and gas sector into upstream (extraction and processing), midstream (transportation and pipelines), and downstream (refining and distribution).[1] Midstream projects are typically have longer-term financing due to those projects generating revenue over many years and being more stable.[2] Up and downstream projects, on the other hand, are more exposed to commodity pricing due to their revenue being tied to demand and end-point sales.[3] All of that translates to pipelines being longer-term investments, though not necessarily due to the risk, and extraction or refining operations being heavily based on the price of oil or gas now and several years down the road.

In recent years, we have seen the share of electricity generated by coal fall dramatically, largely due to the increasing favorability of natural gas (see right, figure ii).[4] Coal has many issues associated with it, not least of them being the greenhouse gases and other hazardous emissions released by it. Natural gas, on the other hand, has become significantly more attractive due to the commercial utilization of LNG technology, the advent of hydraulic fracturing, and, because of its comparatively lower carbon emissions, it is seen as a "cleaner" alternative, especially in the face of environmental regulations.[5]

Royal Dutch Shell's Ursa platform (figure i)

Share of U.S. Electricity Generation by Source (figure ii)

The Economics of Renewable Energy Investments

Those environmental regulations, however, are not driving the needed investments in the renewable energy sector. For one, they have targeted coal power plants specifically, largely due to their disproportionately large carbon emissions. As of right now, future regulations concerning energy and the environment are not being factored in too heavily when it comes to project financing.[6] Those in the industry believe that the government, regardless of which party is in the majority, will recognize the immensity of the U.S. energy sector and work to enact regulations gradually; the current administration is even going so far as to relax many regulations put in place by previous administrations, increasing the favorability of investments into the oil and gas sector.[7]

ExxonMobil, a oil and gas behemoth, has openly challenged the profitability and growth of renewable energy.[8] And while some energy companies are making sincere efforts to transition towards a more renewable and environmentally sustainable business model, many are still deeply entrenched within the oil and gas industry and will for many years to come.[9]

Some of that is founded: Companies, especially ones as big as ExxonMobil or Shell or BP, take on added risk to transition their entire portfolio into an energy sector that they have less experience in, be it in R&D, financing, or global supply chain management. However, there is an unprecedented urgency surrounding the need for such a transition towards sustainable energy generation. Moreover, oil and gas industries have had decades of infrastructure investment and development that renewable energies simply haven't been afforded. The International Monetary Fund has additionally put "global subsidies for fossil fuel energy implied by the underpricing of supply and environmental costs at a staggering $5.2 trillion in 2017, or 6.5 percent of world GDP."[10]

Total Annual Average Investments by Energy Sector, 2016-2050 (figure iii)

Change in Annual Average Investment by Energy Sector, 2016-2050 (figure iv)

Investments in the Renewable Energy Sector

Presently, investment banks and private equity funds are increasing their proportion of renewable energy financing. This financing is primarily directed towards the solar and wind energy sectors, with many projects being financed at around 4-5% over relatively longer-terms.[11] That 4-5% is based on the London Interbank Offered Rate (LIBOR) which currently hovers around 2.5% plus a 1.5% risk premium typically associated with the renewable energy sector. However, that rate is what has produced the current level of investments into the renewable energy sector—a solid volume, but it needs to be significantly higher if we are to dramatically reduce carbon emissions by 2030 as a country and by 2050 across the entire world (see right, figure iii and figure iv). With unpriced externalities such as established infrastructure, environmental damages, and healthcare costs working in favor of the oil and gas sector, it is economically infeasible for renewable energy projects to compete without additional changes, and while some investors are willing to pay an appropriate premium for sustainability, there can and will never be industry-wide shifts so long as the investments required would make the projects unprofitable.[12][13]

Sources:

Ashwin Telukuntla and Chris Niemczyk, interview by the author, New York City, NY, May 15, 2019.
Telukuntla and Niemczyk, interview by the author.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Jesse Barron, "How Big Business Is Hedging Against the Apocalypse," The New York Times Magazine, last modified April 9, 2019, accessed May 13, 2019, https://www.nytimes.com/interactive/2019/04/11/magazine/climate-change-exxon-renewable-energy.html.
Barron, "How Big Business," The New York Times Magazine.
IMF, Uneven Effect, photograph, IMF Blog, May 3, 2019, accessed May 22, 2019, https://blogs.imf.org/2019/05/03/getting-real-on-meeting-paris-climate-change-commitments/#post/0.
Chris Niemczyk, "Renewable Energy Investment Projects," e-mail message to author, May 15, 2019.
IMF, Uneven Effect.
Chris Niemczyk, "Renewable Energy," e-mail message to author.

Figures:

Phil Carter, Shell's Ursa Platform, photograph, NPR, June 16, 2017, accessed May 23, 2019, https://www.npr.org/sections/health-shots/2016/06/17/482203447/invisibilia-how-learning-to-be-vulnerable-can-make-life-safer.
U.S. Energy Information Administration, Annual Share of Total U.S. Electricity Generation, photograph, U.S. Energy Information Agency, March 16, 2016, accessed May 23, 2019, https://www.eia.gov/todayinenergy/detail.php?id=25392.
IPCC, 2016-2050 Total Annual Average Investments by Energy Sector, photograph, IPCC, October 2018, accessed May 23, 2019, https://www.ipcc.ch/site/assets/uploads/sites/2/2019/02/SR15_Chapter2_Low_Res.pdf.
IPCC, 2016-2050 Change in Annual Average Investment by Energy Sector, photograph, IPCC, October 2018, accessed May 23, 2019, https://www.ipcc.ch/site/assets/uploads/sites/2/2019/02/SR15_Chapter2_Low_Res.pdf.

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