See important disclosures at the end of this report
Inconvenient Truths
An analysis of the real-world implications of the Energy Transition with a focus on the opportunities and challenges facing capital allocators and policy makers.
October 19, 2021
The world is committed to achieving net zero by the second half of the current century.
Hundreds of billions, soon to be tens of trillions, of dollars will be spent on carbon
abatement solutions ranging from green ammonia to utility-scale storage to high-
speed EV charging applications. In many ways, this level of commitment from capital
allocators, consumers, corporations, lenders and governments is cause for optimism –
the Energy Transition will be one the most capital intensive and complex of any
undertaking in human history. However, it seems that policy and capital allocation
decisions are occurring in an echo chamber, focused on what we wish to be true rather
than what is possible based on a rational examination of economics and technology. In
this paper, we examine the realities of the current situation as well as the unintended
consequences of policy decisions. Our intention is to help create a more objective,
fulsome discussion which is a necessary precursor to achieving the ultimate goal: a
net-zero global energy system which supports the needs and aspirations of the world’s
population.
See important disclosures at the end of this report.
Inconvenient Truths
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INTRODUCTION .................................................................................................................................................................................................2
RAW MATERIALS AND THE ENERGY TRANSITION – NATURAL GAS ............................................................................... 4
U.K. Case Study ............................................................................................................................................................................................... 5
Natural Gas Key to Decarbonization Efforts ................................................................................................................................... 8
THE ENERGY TRANSITION WILL BE INFLATIONARY ................................................................................................................ 14
THE HYPOCRISY OF DIVESTMENT AND ESG INVESTING ..................................................................................................... 18
CONCLUSION – INVESTMENT AND POLICY IMPLICATIONS ............................................................................................... 25
DISCLOSURES ................................................................................................................................................................................................. 26
Inconvenient Truths
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10/19/2021
Inconvenient Truths
If you don’t know where you are going, you will probably end up somewhere else.
-Laurence J Peter
For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.
-Richard P Feynman
INTRODUCTION
Natural gas prices are surging around the world, part of an emerging global energy crisis that is shaping up to
be the worst in the last 50 years.
Figure 1 - Global Natural Gas Pricing
Source: Bloomberg; Bernstein Research, European Integrated Energy, October 6, 2021
The run-up in natural gas is spilling into coal and carbon markets, causing power prices to spike. This, in turn,
is creating a series of knock-on effects, ranging from a sudden lack of carbon dioxide for food processing in
the U.K. to government intervention in Europe to an emergency mandate for Chinese banks to prioritize lending
to coal mines and power plants.
This is quite a turn of events. In 2020, U.S. natural gas prices hit the lowest levels since the mid-1990’s, driven
by the emergence of advantaged shale gas basins, the overcapitalization of the shale oil industry, and a short
period of disequilibrium while incremental demand from LNG and chemical plants came online.
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Figure 2 - US Natural Gas Pricing ($/mcf)
Source: Bloomberg
Fifteen months later, prices are at their highest seasonal level since 2008 as associated gas from shale oil has
declined and as global demand for gas causes U.S. LNG facilities to run at full capacity. So much for “perpetual
sub-$2.50 gas.”
While prices and availability will normalize over time, the current environment exposes a number of realities
which run counter to conventional wisdom and highlight the risks of allowing politics and ideology to interfere
with scientific debate and economics. Specifically, there are three interrelated topics that deserve special
consideration:
1. Raw materials are integral to the Energy Transition. Creating the energy complex of the future will
require raw materials. In this piece, we’ll focus on natural gas which is a key enabler to reducing carbon
emissions today and keeping energy prices in check while we invest in the technology and
infrastructure necessary to attain net zero in the future.
2. The Energy Transition will be inflationary. The inherent limitations of renewables, rising input costs
driven by geology and capital scarcity (see point 3 below) and the introduction of carbon pricing will
result in structurally higher energy prices going forward.
3. The Hypocrisy of Divestment and ESG Investing. Refusing to invest in responsibly sourced enabler
commodities increases global emissions while exacerbating income inequality on a global basis, thus
resulting in outcomes that run directly counter to the stated objectives of these policies.
These issues are co-dependent and create a self-perpetuating cycle. There is no question that the Energy
Transition will be material intensive, which tends to put upward pressure on prices. Beyond rising input costs,
we believe that there are structural reasons that the Energy Transition will be inflationary as well. Finally,
policy-driven capital constraints, no matter how well intentioned, only serve to amplify these inflationary
pressures while simultaneously increasing global emissions and safety risks.
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As is so often the case, those who can least afford it will end up being disproportionately impacted by these
dynamics. We hope that this analysis serves as the basis for a sober discussion about the future of the Energy
Transition, one based on data and cost/benefit assessments, not storytelling and hyperbolic arm waving.
RAW MATERIALS AND THE ENERGY TRANSITION – NATURAL GAS
Because natural gas is a hydrocarbon, generally it is assumed that the fuel must be either largely or completely
removed from the global energy system in order to achieve long-term net-zero targets. For example, the chart
below shows the IEA Net Zero Estimate scenario in which natural gas falls immediately from about 25% of
total energy supply in 2020 to 15% in 2030 to less than 10% by 2050. This is rather remarkable, since today
renewable power penetration is in its infancy and there is no technology that exists at scale to backstop the
intermittent, non-dispatchable nature of solar and wind energy.
Figure 3 - Total Energy Supply - IEA Net Zero Estimate
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Source: I.E.A https://iea.blob.core.windows.net/assets/beceb956-0dcf-4d73-89fe-1310e3046d68/NetZeroby2050-ARoadmapfortheGlobalEnergySector_CORR.pdf
Since the majority of the global economy has already committed to net zero, it is critical that we understand
the ramifications of such a pivotal set of assumptions.
Figure 4 - Number of Countries and Share of Global CO2 Emissions Committed to Net Zero
Source: Ibid
Just how feasible is it to remove, or at least drastically reduce natural gas from our energy systems? It seems
that spreadsheet math is running well ahead of both technical feasibility and economic realities. The current
U.K. energy crisis is an interesting case study.
U.K. Case Study
Renewables (largely wind) have displaced coal from the power stack over the last decade, increasing the
reliance on natural gas-fired plants to provide base-load electricity since utility-scale battery storage solutions
are in their infancy and nuclear power is only 20% of supply.
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Figure 5 - UK Power Stack by Energy Source
Source: Bloomberg
70% of the U.K.’s natural gas storage capacity was shuttered in 2017, with regulators expecting a combination
of natural gas imports and new-build renewables to meet demand. Unfortunately, policy makers don’t get to
determine when the wind blows or what other countries’ energy requirements may be at any particular point
in time.
With limited storage capacity and domestic production falling more than 65% since 2000, the U.K. is reliant
on LNG imports at a time when both Asian and European consumers also are actively bidding for volumes.
U.K. retail customers are paying the price, with day ahead power prices 4-10x higher than historical norms.
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Figure 6 - UK Day-Ahead Power Prices (GBP/MWh)
Source: Bloomberg
Renewables were supposed to fill the void, but the U.K. has endured a period of colder than normal weather
and lower than average wind speeds. In the absence of dispatchable baseload power supply (natural gas,
nuclear power, battery storage), renewables simply cannot be relied upon as a primary source of energy.
In fact, based on the most complete, objective analysis that we have seen, renewable energy likely is capped
at about 25-30% of generation, after which intermittency and other real-world constraints cause power prices
to increase with limited improvement in the emission profile and considerably more exposure to exogenous
events…like calm, windless days.
Figure 7 - Energy Cost and Grid CO2 Intensity Based on Renewable Penetration
Source: Thundersaid Energy, Power Grids: Tenet?, September 20, 2021
The reality is that absent widespread deployment and integration of utility-scale energy storage, or the sudden
proliferation of nuclear power plants, the world cannot afford to simply wish away natural gas from our energy
systems.
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Natural Gas Key to Decarbonization Efforts
Whether it was Voltaire or Montesquieu, for the Energy Transition, the phrase “le mieux est le mortel ennemi
du bien” is right on point.1 There is a path to net zero, but as the U.K. example illustrates, a refusal to optimize
what is possible today while simultaneously investing in the solutions of the future is increasing costs and
accelerating permanent harm to our environment.
Fortunately, there are currently available solutions that can reduce carbon emissions immediately without
handicapping economic growth in developing economies. One of the most impactful steps is to replace coal
with natural gas in the global power stack.
Remarkably, coal has maintained its share of primary energy consumption over the last 50 years, while gas
and nuclear power have usurped oil.
Figure 8 - Global Primary Energy Supply by Fuel
Source: IEA, Total primary energy supply by fuel, 1971 and 2019, IEA, Paris https://www.iea.org/data-and-statistics/charts/total-primary-energy-supply-by-fuel-1971-and-2019
However, total primary energy supply has increased by 250% over the last 50 years, meaning that coal
consumption has increased by a similar amount. China represents the bulk of that increase, as coal still
constitutes approximately 60% of China’s total energy consumption while natural gas is less than 10%.
1 “The best is the enemy of the good.”
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Figure 9 - China vs Global Coal Consumption
Source: https://chinapower.csis.org/energy-footprint/
Unsurprisingly, given the carbon intensity of coal-fired power and heat, China is also the world’s largest emitter
of C02, surpassing the OECD for the first time in 2019.
Figure 10 - 2019 Net GHG Emissions as Percent of Global Total (million metric tons CO2 equivalent)
Source: https://rhg.com/research/chinas-emissions-surpass-developed-countries/
Why does this all matter? First, carbon dioxide is a permanent pollutant – it doesn’t degrade over time. Per the
EPA, “carbon dioxide’s lifetime cannot be represented by a single value because the gas is not destroyed over
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time, but instead moves among different parts of the ocean-atmosphere-land system.”2 While getting to net
zero in 30 years is a wonderful aspiration, the reality is that we have a growing problem today.
Figure 11 - Cumulative CO2 Emissions from Fossil Fuel and Cement, 1750-2019 (gigatons)
Source: https://rhg.com/research/chinas-emissions-surpass-developed-countries/
That problem is being exacerbated by the fact that China built three times more new coal-fired capacity than
the rest of the world combined in 2020, equivalent to more than one new coal fired plant per week, and initiated
another 73GW of new coal projects, more than five times the rest of the world.3
Figure 12 - New Coal Plant Proposals
Source: https://globalenergymonitor.org/wp-content/uploads/2021/02/China-Dominates-2020-Coal-Development.pdf
China burned more than 50% of the world’s coal in 2020. If coal is key to mitigating C02 emissions, China is at
the heart of the issue.
The most expedient – and realistic – way to drastically lower China and other developing countries’ emission
profile is by displacing coal with natural gas. China’s coal consumption generated about 20% of total global
2 https://www.epa.gov/climate-indicators/greenhouse-gases 3 https://globalenergymonitor.org/wp-content/uploads/2021/02/China-Dominates-2020-Coal-Development.pdf
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emissions in 2020. Assuming that natural gas has about 50% of the carbon intensity of coal (a gross
simplification given how inefficient the bulk of China’s coal fleet is) simply switching from coal to gas would
create an immediate 10% reduction in global emissions every year. For context, the COVID pandemic caused
total global emissions to fall by 5.6% in 2020, but they are on the rise in 2021 as the global economy recovers.4
China prudently is creating a balanced power portfolio, expanding its nuclear and renewable fleet (in addition
to building new coal plants) as a way to reduce its emission intensity while still supporting economic growth.
Its reliance on coal is more a function of limited global LNG export capacity and the primacy of energy security
than a statement about the climate.
Both in terms of economics and emissions, natural gas-fired power should be a preferred source of
incremental supply since it can be built quickly with the lowest capital intensity and fixed O&M costs of any
major power source, including renewables.
Figure 13 - Levelized Cost of Electricity - $/MW
Dispatchable technologies
Ultra-supercritical coal NB NB NB
Combined cycle 87% $ 7.00 $ 1.61
Combustion turbine 10% $ 45.65 $ 8.03
Advanced nuclear NB NB NB
Geothermal 90% $ 18.60 $ 14.97
Biomass NB NB NB
Battery storage 10% $ 57.51 $ 28.48
Non-dispatchable technologies
Wind, onshore 41% $ 21.42 $ 7.43
Wind, offshore 45% $ 84.00 $ 27.89
Solar, standalone⁴ 30% $ 22.60 $ 5.92
Solar, hybrid⁴’⁵ 30% $ 29.55 $ 12.35
Hydroelectric⁵ NB NB NB
Source: U.S. Energy Information Agency, Annual Energy Outlook 2021
Furthermore, gas-fired generation is modular (think jet engine on skids) making it ideal for addressing more
distributed energy requirements that exist in the many regions of the world with antiquated, localized grids.
There will be a day when the world runs on renewables with an appropriate mix of storage to ensure grid
stability and access to cheap, readily available electricity. In the interim, neither sustainable economic
development nor the emergence from economic poverty can occur without access to clean, stable, cheap
energy.
4 https://www.unep.org/news-and-stories/press-release/covid-19-caused-only-temporary-reduction-carbon-emissions-un-report
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Figure 14 - Relationship Between Energy Cost and Per Capita GDP
Source: Stern, D. I, Burke, P. J, & Bruns, S. B. (2019). The Impact of Electricity on Economic Development: A Macroeconomic Perspective. UC Berkeley: Center for Effective Global Action. Retrieved from https://escholarship.org/uc/item/7jb0015q
The regions of the world with the most pronounced energy poverty are largely reliant on dirty fuels, have the
fastest growing populations and will not tolerate being asked to bear the burden of “net zero” in advance of
economic development. We need to find solutions which allow these economies to grow while reducing
emissions, not strangle them with expectations of zero emissions.
Natural gas is one such solution, which is why, contrary to most forecasts, we remain confident that demand
will continue to increase on the path to net zero.
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Figure 15 - Total Net Energy by Fuel Source: 1750-2050
Source: Thundersaid Energy, Power Grids: Tenet?, September 20, 2021
In our view, this energy mix is much more realistic than those presented by agencies like the IEA and IRENA
which are often viewed as the default experts by policy makers. This conclusion is important because even in
the most optimistic (i.e. lowest) demand scenario, current capacity and known future additions will not be able
to meet the global call on supply.
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Figure 16 - Natural Gas Supply and Demand
Source: Bernstein Research, European Integrated Energy, October 6, 2021
Serious practitioners of the Energy Transition
recognize that we need to reduce C02 emissions today
without undermining the economic growth that is key to
addressing famine, disease and poverty in the
developing regions of the world. Attempts to hinder or
eliminate supplies of a large and growing fuel source
such as natural gas with no feasible alternative is more
than just bad policy. It’s inhumane.
THE ENERGY TRANSITION WILL BE
INFLATIONARY
We continue to believe that most investors expect that
technological innovations and the zero-variable cost
nature of renewables will perpetuate the deflationary
world that we have been living in for most of the last
decade.5
5 Inflation and the Energy Transition
Business-as-usual
Net Zero (OECD + China)
Net Zero (All)
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own long duration, low-cost, mission-
critical assets at very depressed
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We contend that the opposite is true. The Energy Transition will be one of the most capital- and resource-
intensive undertakings in the history of mankind, which will put pressure on raw material prices as a means to
incent incremental supply.
More broadly, the introduction of carbon prices and a lack of capital being invested into key enabler
commodities will result in higher energy prices until we are saturated with renewables, grid-level storage and
nuclear power, which seems like a multi-decade prospect.
The capital intensity of the Energy Transition is unlike anything that we have seen. Relative to 2020 investment
rates, spending needs to increase about 10x and hold steady for the next three decades.
Figure 17 - The Energy Transition in Context
Source: CNNfn and Birinyi Associates, Rystad Energy, BloombergNEF, and the International Renewable Energy Agency (IRENA)
While this analysis largely ignores raw material requirements, the move to “electrify everything” will place
serious pressure on commodities like copper, nickel and lithium. Even though the Energy Transition is in its
infancy, prices have already started to react.
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Figure 18 - Recent Commodity Price Changes
Source: Bloomberg
Since the Energy Transition is just getting started, rising raw material prices reflect maturing geology and
insufficient reinvestment, not sudden demand spikes. However, the implementation of carbon prices already
is impacting the cost of production in power-intensive industries like aluminum, which ironically is considered
a foundational building block of a decarbonized future due to its strength and light weight.
Figure 19 - Aluminum Incentive Price by Region With and Without Carbon Price
Source: BMO Research, 4Q21
There are less direct but equally important inflationary pressures emerging as well. Based on our analysis, the
copper intensity of renewables under the EU Green Deal represents more than 110% of current annual mine
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supply. Just for renewables, just in Europe. Nowhere in the €10 trillion plan is there acknowledgement that
incremental production will require incremental capital, and that the owners of mining companies need a clear
price signal to green-light the billions of dollars required to build new mines.
More immediately, if spot North American natural gas prices were to prevail for an entire year, it would
represent a 50bp direct drag on GDP. At current European or Asian prices, the impact would be closer to
3.5%. The current environment isn’t solely a function of decisions related to the Energy Transition, but it
does serve as a reminder of what happens when policy makers and capital allocators tamper with an
extraordinarily complex, interconnected ecosystem on the basis of less-than-fully formed, or perhaps more
accurately, pre-determined conclusions.
Finally, adding renewables to the grid increases the cost of electricity, despite the fact that there are no input
costs to pass along to consumer. This relationship is clearly evident when looking at retail power rates vs
renewable penetration around the globe and is a function of the non-dispatchable and highly intermittent
nature of renewable energy production.
Figure 20 - Electricity Prices Correlated with Renewable Penetration
Source: SailingStone Capital Partners, https://ourworldindata.org/grapher/share-elec-by-source?time=latest, https://www.statista.com/statistics/263492/electricity-prices-in-selected-countries
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In our opinion, questions about future inflationary pressures are a matter of degree, not direction. As we wrote
back in June:
Why does this matter? Hundreds of billions of dollars have been invested in the Energy Transition
already, and a hundred plus trillion will need to be deployed over the next three decades to achieve
the mission’s two primary objectives: carbon abatement and addressing global energy poverty. Despite
the massive material requirements of this undertaking, and the incredible valuations that exist today
for many mission-critical projects, the majority of investors appear to be anchored in a deflationary
world view, bound by overly simplistic ESG considerations.
Capital allocators who are serious about achieving net zero status while assisting the billions of people
facing energy poverty on a daily basis must actively find opportunities to expand the supply of raw
materials necessary to increase the supply of clean, abundant energy. Capital allocators who have a
mandate to identify and exploit uncorrelated return streams must look beyond the convenient, well-
trodden path of renewables and EV’s where much of the blue-sky scenario is already reflected in asset
values and find ways to gain exposure to the same structural trends but with a free option on the
unknowable future. And, lastly, capital allocators charged with preserving the long-term purchasing
power of their portfolio must find assets classes which both benefit from inflation and where the
premium on that insurance policy isn’t so onerous that it defeats the purpose of insurance to begin
with. We believe that we are in the very early stages of a cyclical recovery which is coinciding with one
of the most important and material-intensive undertakings in the history of mankind.
THE HYPOCRISY OF DIVESTMENT AND ESG INVESTING
The responsibilities of capital allocators and fiduciaries are enormous. From apartheid to tobacco, the markets
repeatedly have shown the ability to catalyze socially beneficial outcomes by curbing investment flows. While
we have always argued that assessing ESG risks is an integral component of due diligence, since poor
performance often creates existential risks to a company’s social license to operate, market participants
increasingly seem willing to outsource this analysis to third parties or to adopt binding policy statements which
preclude any further discourse.
The emergence of “ESG as an asset class” has certainly created some wonderful marketing opportunities for
financial service firms and consultants alike. It appeals to what we refer to as the new institutional mandate:
to do well and to do good and as such has enormous influence over which industries receive capital and which
do not. However, much like various aspects of the Energy Transition, the lack of rigorous analysis and the
comfort of narratives as opposed to debate has created unintended consequences which run directly
counter to the stated objectives of ESG-driven investment decisions.
We are focused on carbon abatement as one of two key tenets of the Energy Transition. Carbon accounting,
which involves the measurement and classification of greenhouse gas emissions into Scope 1, 2 or 3
categories, has been around for more than a decade. Simplistically, Scope 1 measures direct emissions from
an organization’s activity, Scope 2 measures electricity indirect emissions (i.e. from the consumption of
purchased electricity, heat, cooling or steam) and Scope 3 measures “value chain” emissions, or the emissions
released either upstream or downstream by the use or processing of a product.
The problem with this categorization lies in determining who is responsible for “the use or processing of a
product.” Should energy companies be penalized for industrial and commercial demand for their products, or
is it the market’s job to incentivize the consumer to switch to lower carbon alternatives? Prosaically, is the
farmer responsible for obesity? Is the fertilizer company responsible for alcoholism since they helped grow
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the corn that made the mash that went into the bourbon? Clearly, it’s easier to vilify “big oil”, but the framework
seems custom suited to achieve a singular output – reduce fossil fuel production – without considering the
global implications of the objective.
To make matters worse, the reporting mechanisms in place are highly subjective, designed to fit a story as
opposed to creating an analytical framework. For instance, in 2020, Amazon reported that it emitted 51.1 million
tons of C02, about 48 million tons of which is directly related to their business (i.e. excluding lifecycle emissions
related to customer trips to Amazon stores but including corporate purchases, capital goods, business travel,
etc). On a similar basis, Chevron emitted 58 million tons of CO2. How is it possible that Amazon is included in
virtually every Clean Energy/ESG vehicle and most assuredly Chevron is not?
Part of the answer lies in the weightings used by ESG data providers which vary considerably by industry.
Figure 21 - MSCI ESG Weightings by Sector
Top 5 "E" Topics for Energy
Carbon Emissions 18% 12% 5% 12% 2%
Biodiversity 13% 5% 1% 4% 0%
Toxic Emissions & Waste 10% 9% 6% 13% 0%
Opportunities in Clean Tech 2% 0% 10% 4% 12%
Water Stress 1% 10% 0% 11% 2%
Top 5 "S" Topics for Energy
Health & Safety 13% 3% 10% 7% 0%
Community Relations 9% 1% 1% 3% 0%
Labor Management 1% 0% 15% 7% 5%
Human Capital Development 0% 12% 1% 0% 20%
Privacy & Data Security 0% 1% 2% 0% 10%
Source: Pickering Energy Partners, 3Q21
The carbon directly emitted from Amazon’s activities is no different than the carbon directly emitted from
Chevron’s. The inherent bias in the ESG analytical framework used by most market participants today is
exacerbated and in many cases reinforced by divestment decisions made by many institutional investors in
the name of “protecting the environment” or “combatting climate change.” While these are noble causes, it is
worth considering whether the objectives are helped or hindered by these relatively simplistic policy stances.
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The impact of either explicit or implicit divestment decisions, particularly for capital intensive industries, is
obvious. The cost of capital rises. In fact, Goldman estimates that investor ESG pressures have created a 10-
15% WACC premium for carbon intensive investments relative to renewable projects.
Figure 22 - Cost of Capital by Energy Source
Source: Goldman Sachs, Carbonomics: Five Themes of Progress for COP26, September 24, 2021
Most would argue that this is precisely the point of divestment – to starve a “bad” industry of capital. The
problem, of course, is that the world still runs on hydrocarbons, and by constraining access to capital, the cost
of production increases. In fact, Goldman estimates that these ESG pressures translate into a $40/ton implied
carbon price for LNG and an $80/ton for new offshore oil and gas developments.
Figure 23 - Implied Carbon Price of New Hydrocarbon and LNG Projects
Source: Ibid
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2013 2014 2015 2016 2017 2018 2019 2020
IRR
Offshore oil
LNG
Solar
Onshore wind
Offshore wind
0
20
40
60
80
100
120
140
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E
Ca
rbo
n p
ric
e im
plie
d b
y t
he
pre
miu
m
in p
roje
ct
IRR
re
lati
ve t
o r
en
ew
ab
les
(US
$/t
nC
O2
)
Offshore oil range
LNG range
Offshore oil base case
LNG base case
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Herein lies the first directly counter-productive impact of divestment and biased ESG analysis. It results in
higher costs for the production of materials that are still needed today and will be needed for the
foreseeable future. For any commodity, higher costs equals higher prices. In other words, decisions to
blindly exclude companies or industries from investment consideration might be comfortable and
convenient, but in reality they represent a direct and regressive tax on those who can least afford it.
Figure 24 - Percentage of US Households with High Energy Burden
Source: https://www.aceee.org/sites/default/files/pdfs/u2006.pdf
5.2 million
14.2 million
17.2 million
4.6 million
18.5 million
20.8 million
30.6 million
4.6 million
15.9 million
4 million
13.2 million
12.5 million
6 million
540,000
3 million
4.4 million
25.8 million households
0% 20% 40% 60% 80%
Non-low-income (>200% FPL)
Built after 1980
Owners
Multifamily (5+ units)
White (non-Hispanic)
Single family
All households
Hispanic
Built before 1980
Building with 2-4 units
Renters
Older adults
Black
Native American
Manufactured housing
Low-income multifamily (5+ units)
Low-income (<200% FPL)
The percentage and number of all households with a high energy burden (>6%) in 2017
Severe Burden (>10%)
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Figure 25 - Global Access to Clean Cooking Fuels
Source: http://data.worldbank.org/data-catalog/world-development-indicators
The second direct and counter-productive result of divestment is that by focusing on supply and not
demand, which continues to grow, it simply forces production of the “undesirables” into regions of the world
with less stringent health, safety and environmental regulations.
For instance, methane is a potent greenhouse gas, with the Intergovernmental Panel on Climate Change
estimating that it has a global warming potential 28—87 times that of C02 on a per ton basis. About 40% of
emissions are from natural sources, followed by agriculture which is the largest anthropogenic contributor.
The energy sector is next, approximately evenly split between oil, natural gas and coal.
Figure 26 - Methane Emissions by Source (million tons of methane)
Source: IEA, https://www.iea.org/data-and-statistics/charts/sources-of-methane-emissions-2
0 billion
2 billion
4 billion
6 billion
8 billion
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Without access to clean fuels for cooking With access to clean fuels for cooking
0 50 100 150 200
Wetlands
Agriculture
Energy
Waste
Other
Biomass burning
Natural
Anthropogenic
Gas
Coal
Oil
Bioenergy
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It is estimated that about 2.5-3.0% of methane is leaked each year on a global basis, although percentages
vary significantly by country and even within each country. The U.S. and Europe have leak rates of about 0.6%
according to Equinor and the EPA, while developing countries may have rates as high as 10%. Using flaring as
a reasonable proxy for methane emissions (if you are willing to burn gas instead of capturing it, you probably
aren’t that focused on leaks) the disparate approaches to methane capture across the globe are quite clear.
Figure 27 - Flaring Intensity by Country - Top 20 Flarers by Volume
Source: Global Gas Flaring Reduction Partnership, https://www.ggfrdata.org/
0
5
10
15
20
25
30
35
40
45
50
2012 2013 2014 2015 2016 2017 2018 2019 2020
m3/b
bl
Russia Iraq Iran US Algeria
Venezuela Nigeria Mexico China Oman
Libya Malaysia Egypt Saudi Arabia Indonesia
Angola Rep of the Congo Turkmenistan India Kazakhstan
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And, similar to the global comparison, different regions of a low-methane-leak country like the U.S. have very
different emission profiles as well.
Figure 28 - Methane Leak Rate by Basin
Source: Thundersaid Energy, Global Gas: Catch methane if you can?, March 2021
So, if gas is a key input to providing cleaner, inexpensive energy as means to mitigate carbon emissions today,
then investors should be focused on the safest, cleanest supply available. Remarkably, one of the lowest cost,
cleanest sources of natural gas in the world sits in the U.S., yet many institutions have decided to divest from
hydrocarbons while retail and institutional investors alike are piling capital into all things “ESG” or “clean
energy.”
Since demand for natural gas is rising, not falling, these investors are relegating production to less safe, higher
cost regions of the world with far weaker regulatory oversight than exists in the U.S., Canada and Europe. In
effect, divestment decisions increase the cost of energy, increase income inequality, increase the
probability of injury or death for the labor force and increase greenhouse gas emissions. Claiming otherwise
is evidence of either willful ignorance or a lack of due diligence that is requisite for these entities to fulfill their
dual mandates as capital and societal fiduciaries.
In other words, taking a “wish-based” approach to ESG results in outcomes which are in direct contradiction
to the stated mission of ESG investing. It is the most obvious, and least discussed, hypocritical stance in the
market today, and it is having a profound impact on our collective ability to decarbonize the planet while
meeting the pressing, real-world issues associated with energy poverty.
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
0 2000 4000 6000 8000 10000 12000 14000
Me
tha
ne
Le
ad
ke
d a
s P
erc
en
t o
f M
eth
an
e
Pro
du
ce
d (
%)
US Production by Basin (kboed)
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CONCLUSION – INVESTMENT AND POLICY IMPLICATIONS
There are three primary implications from these Inconvenient Truths.
1. We cannot wait until the world’s economy is powered by renewables – we need to mitigate greenhouse
emissions right now. Combatting climate change means taking a pragmatic approach to what is
feasible today and identifying and capitalizing the innovators who will deliver a solution for tomorrow.
By encouraging the responsible production of key enabler commodities like natural gas, copper,
aluminum…we could go on for a while…investors and policy makers can both accelerate and lower the
price tag of the Energy Transition.
2. The future is likely to be far more volatile and inflationary than the last decade. Valuations will matter
again, as will the ability of portfolios to weather periods of rising prices. Long-term investors would be
wise to consider ways to insulate their capital from the rising probability of these shocks while
insurance is cheap.
3. It is incumbent upon investors to engage in objective ESG discussions so that we can address
responsibly the risks and challenges facing us all as global citizens. This is particularly true for those
charged with allocating capital – the most important ingredient on the path to net zero.
There are enormous opportunities, and enormous risks, as we collectively undertake the herculean task of
decarbonizing our energy systems while addressing global energy poverty. This will be a multi-decade,
hundred plus trillion-dollar effort. We will all be better served if we can put aside pre-formed conclusions and
engage in a serious, rational discussion about the future of our planet, and the best way to protect it.
Inconvenient Truths
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DISCLOSURES
This report is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions
expressed herein represent the current views of the author(s) at the time of publication and are provided for limited purposes, are not
definitive investment advice, and should not be relied on as such. The information presented in this report has been developed internally
and/or obtained from sources believed to be reliable; however, SailingStone Capital Partners LLC (“SailingStone” or “SSCP”) does not
guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this
article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-
looking statements speak only as of the date they are made, and SSCP assumes no duty to and does not undertake to update forward-
looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.
Actual results could differ materially from those anticipated in forward-looking statements. In particular, target returns are based on
SSCP’s historical data regarding asset class and strategy. There is no guarantee that targeted returns will be realized or achieved or that
an investment strategy will be successful. Target returns and/or projected returns are hypothetical in nature and are shown for illustrative,
informational purposes only. This material is not intended to forecast or predict future events, but rather to indicate the investment returns
SailingStone has observed in the market generally. It does not reflect the actual or expected returns of any specific investment strategy
and does not guarantee future results. SailingStone considers a number of factors, including, for example, observed and historical market
returns relevant to the applicable investments, projected cash flows, projected future valuations of target assets and businesses, relevant
other market dynamics (including interest rate and currency markets), anticipated contingencies, and regulatory issues. Certain of the
assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the
reasonableness of the assumptions made or that all assumptions used in calculating the target returns and/or projected returns have
been stated or fully considered. Changes in the assumptions may have a material impact on the target returns and/or projected returns
presented.
Unless specified, all data is shown before fees, transactions costs and taxes and does not account for the effects of inflation. Management
fees, transaction costs, and potential expenses are not considered and would reduce returns. Actual results experienced by advisory
clients may vary significantly from the illustrations shown. The information in this presentation, including projections concerning financial
market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events
or for other reasons. Target Returns and/or Projected Returns May Not Materialize. Investors should keep in mind that the securities
markets are volatile and unpredictable. There are no guarantees that the historical performance of an investment, portfolio, or asset class
will have a direct correlation with its future performance. Investing in small- and mid-size companies can involve risks such as less publicly
available information than larger companies, volatility, and less liquidity. Investing in a more limited number of issuers and sectors can be
subject to increased sensitivity to market fluctuation. Portfolios that concentrate investments in a certain sector may be subject to greater
risk than portfolios that invest more broadly, as companies in that sector may share common characteristics and may react similarly to
market developments or other factors affecting their values. Investments in companies in natural resources industries may involve risks
including changes in commodities prices, changes in demand for various natural resources, changes in energy prices, and international
political and economic developments. Foreign securities are subject to political, regulatory, economic, and exchange-rate risks, some of
which may not be present in domestic investments.
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