With Renewables so Competitive, Big Plans for Oil and Gas Investments Look Risky

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As the time left to avoid climate catastrophe counts down, the U.S. oil and gas industry is making a massive bet on exporting its products to the rest of the world for the next several decades โ€” a sure recipe for blowing past the 1.5ยฐC (2.7ยฐF) increase inย temperatures scientists say would avoid the worst effects of global warming.ย 

โ€œPipeline Bubble,โ€ a new report from Global Energy Monitor, a fossil fuel and alternative energy research network, details this planned boom in new oil and gas pipeline infrastructure in North America. These plans not only allow North America to greatly increase oil and gas production, but those brand-new pipelinesย and related infrastructure are expected to last โ€” and be used โ€” for the next forty years. The report notes that the industry is currently planning $232 billion in new investment in oil and gas pipelineย infrastructure.ย 

But building and usingย this fossil fuel infrastructure for the next four decades is incompatible withย current climate goals. The Intergovernmental Panel on Climate Change (IPCC) reportsย that to limit global warming to 1.5ยฐC (2.7ยฐF) above preindustrial levels will require โ€œrapid and far-reaching transitions in land, energy, industry, buildings, transport, andย cities.โ€

In order to meet international climate goals, much of the planned and existingย oil and gas infrastructure will have to be abandoned before the end of its usable life,ย becoming what is knownย as โ€œstrandedย assets.โ€ย 

Global Energy Monitor makes the case that this massive bet on the future economy’s continuedย dependence on fossil-fueled energyย is a bad financial bet, putting oil and gas investors in the same losing position asย investors in the declining coal industry (an argument DeSmogย also recently made).ย 

Wind turbines in the foreground of a coal power station at Frodsham Marsh in Cheshire, England.
Wind turbines in the foreground of a coal power station at Frodsham Marsh in Cheshire, England. Credit:ย ARG_Flickr,ย CCย BYย 2.0

While that outcome isn’t for certain, whatย is clear is that continued major investments in the oil and gas supply chainย would dash the world’s waning hopes of averting the climate catastrophe expected with more than 1.5ยฐC of warming. A group of environmental activists recently made a similar case in a letter to EUย Climate Commissioner Miguel Arias Caรฑete and U.S. Secretary of Energy Rick Perry. They said that the oil and gas being produced by fracking in America andย exported to Europe is โ€œtaking the world far beyond safe climateย limits.โ€

On April 30, the Columbia Journalism Review and The Nation launched a new climate journalism initiativeย at an event in New York City, where MSNBCโ€™s Chris Hayes noted that some people’sย current position is to โ€œglide through the destruction of human civilization.โ€ That is an apt description for anyone currently investing in new oil and gas infrastructure, particularly in the U.S., where those investments have beenย booming.ย 

Warnings About Oil and Gasย Investments

Recently, however,ย signs have emerged indicatingย investors are increasingly turning away from oil and gas investments. Norway’s sovereign wealth fund โ€” a state-owned investment fund worth approximately a trillion dollars โ€” recently announced it would divest from oil and gas exploration and production companies in North America and around theย globe.ย 

A recent survey of European fund managers published by theย UK Sustainable Investment and Finance Association (UKSIF) and the Climate Change Collaboration showed that the vast majority of these investors agree that oil and gas companies will become bad investments within fiveย years.

โ€œThe writing is on the wall for oil companies that do not support global efforts to avoid a climate catastrophe by urgently phasing out fossil fuels and transitioning to a low-carbon world,โ€ said Simon Howard, CEO of UKSIF. โ€œThe investment community recognizes that these will make increasingly riskyย investments.โ€

This week the Houston-based energy investment groupย Tudor, Pickering and Holt released an investment note about the U.S. shale industry titled, โ€œDon’t Raise Your Budget,โ€ which, as Bloomberg reported, said, โ€œWeโ€™re struggling to comprehend why, when buy side, sell side, talking heads, and taxi drivers are saying not to, companies press on with budget increases and accelerated growthย plans.โ€ย 

Tudor Pickering summed up its opinion on increasing investments in fracked shale production by saying,ย โ€œPlease, for the love of God, donโ€™t doย it.โ€

And yet as Global Energy Monitor’s new report notes, the oil and gas industry is plowing ahead, gamblingย its future viability and profitability on whatย a growing section of the investment communityย apparentlyย considersย a badย bet.ย 

Renewables Haveย Crossed Natural Gas’sย Bridge

The oil and gas industry has successfully pushed the idea of natural gas as a so-called โ€œbridge fuelโ€ necessary to help the world transition to a point when renewables are viable, and it continues to make this case. The industry talking point has been so successfulย that in recent Congressional testimony on climate change, former Secretary of State John Kerry parroted this message whileย trying to make the case for climateย action.ย 


Slide fromย โ€œPowering to a cleaner energy future with gasโ€ย  Credit: Vimal Chauhan, GE

However, despite industry propaganda, the economic reality is that renewable energy and storage capacity is alreadyย competitive with natural gas for electricity. That fact should be a flashing warning sign to investors making long-term bets on natural gas as a โ€œbridge fuel.โ€ย The U.S. hasย already crossed the bridge to a point where renewables are cheaper than coal and often cheaper than gas for powerย generation.

Los Angeles Mayor Eric Garcetti recently announced the city would abandon plans for a multi-billion-dollar update to three natural gas power plants, instead choosing to invest in renewable energy andย storage.

And as Politico recently reported, a new analysis by energy industry consultants Wood MacKenzie predicts that utility companies might use battery storage in place of gas peaker plants for 80 percent of those planned by 2026. Peaker plants are used to quickly ramp up electricity in times of peak demand and do not run all theย time.

Another example of how quickly the economics of power generation are changing can be found in the recent decision by Southern California Edison to cancel plans to build a new natural-gas peaker plant in Oxnard, California, in favor ofย massiveย battery storageย instead. The plans for the gas peaker plant were originally approved in 2013 when large-scale storage, a key issue for renewables,ย was not an economically competitive option. But storage costs have been decreasing so quickly that now storage is seen as a viable replacement for peakerย plants.ย 

In March, U.S.ย Assistant Energy Secretary Bruce Walker commented on how much further storage costs are expected to come down in the next fiveย years.ย 

โ€œWeโ€™ve made some significant breakthroughs already in that space,โ€ Walker said. โ€œWe believe weโ€™re going to be able to drive the cost down to basically 20 percentย of what it is today over the next fiveย years.โ€

With storage already competitive with gas peaker plants, the prospect of its costs dropping so rapidly in such a short time means that gas peaker plants are not economically viable in most cases, which supports the idea that a huge natural gas infrastructure bubble is currentlyย inflating.ย 

However, the rapidly declining costs of renewables and storage now offer what is often a cheaper alternative to gas-fired plants. This makes the investors warning thatย oil and gas are a bad long-term investment look quiteย prescient.ย 

At a recent power industry conference, the last line of the last slide from oneย presentationย summed up the prospects for natural gas power: โ€œWhile natural gas generation remains favorable in the near term in many markets, there appear to be more risks thanย opportunities.โ€ย 


Slide from โ€œUpstream Fundamentalsโ€ 34th Annual Global Power Markets Conference. Credit: Kevin Sakofs, S&Pย Global

Plentyย of money is still lining up to take on those risks, but the rapidly changing economics of renewables and battery storage โ€” along with the global goal of averting climate catastrophe โ€” meanย those investments increasingly run the risk of becomingย strandedย assets.ย 

Main image:ย Pipeline,ย Cluden to Brighouse pipeline construction. Credit: Alistair Hamilton,ย CC BYย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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