Is investing in the transition fuel really fuelling the energy transition?

Natural gas should and will be a part of our energy mix as we move to a net-zero carbon future – that’s a reality of the energy transition. But the ‘transition’ element of that means the percentage stake it holds in the world’s global energy mix should ultimately get smaller and smaller. And that’s not happening yet.

Global natural gas consumption reached an all-time high of roughly 4.04 trillion cubic metres in 2021, according to Statista. Moreover, oil and gas giant bp’s June review of world energy revealed natural gas’s share of global power generation has barely moved the needle.

Since 2014, other data shows, natural gas’s portion of the world’s power generation has hovered at 23 percent, steadily on the rise. The only dip – and a modest one at that – came between 2020 and 2021. In 2021, the share stood at 24.66 percent, barely down from 24.78 percent in 2020 and up from 2019’s 24.15 percent share and 2018’s 23.9 percent.

That is despite last month’s report from the UN that current efforts to lower emissions are leading to what it described as a “catastrophic” 2.5C warming. Also last month, the International Energy Agency warned that “if clean energy investment does not accelerate as in the [net-zero] scenario then higher investment in oil and gas would be needed to avoid further fuel price volatility, but this would also mean putting the 1.5C goal in jeopardy”.

Businesses are growth orientated – and when growth is possible, you can’t blame companies for seizing it. But when those companies and their financial backers tout their ESG policies and stress they are “investing to accelerate the energy transition”, as bp CEO Bernard Looney stated last month, you have to do more than raise an eyebrow.

The uptick in natural gas investing – including from outlets with ESG policies, from companies with energy transition commitments, and at times straight from transition-focused strategies – has increased natural gas production.

That means investors are not ‘transitioning’ off the ‘transition fuel’ but enabling its growth.

While there is evidence that natural gas demand will peak by 2030, as stated in the IEA’s recent outlook, it is important to note that this prediction comes from evidence that renewables investing will increase in response to the energy crisis caused by the Russia-Ukraine conflict – not due to a decrease in natural gas investing.

Additionally, this analysis was done under the assumption that current policies related to fossil fuels worldwide will remain in place. However, measures such as the US opening up new areas for fracking this year and the EU’s classification of gas as ‘green’ are not exactly indicative of a tough policy environment. Energy security is also, too often, being used as a ‘get out of jail free’ card to allow investors to ramp up fossil-fuel investments.

The reality is that until reliable and mass-produced carbon-capture technology is possible, questions can and should be asked about what role fossil fuel investments are really playing in the energy transition. Arguments that natural gas assets will, in the future, be used to blend in clean hydrogen must first overcome recent research suggesting this is a far-flung prospect. Claims to the contrary smack of ‘greenwishing’ at best or open the door to accusations of greenwashing at worst.

Strategies that continue to target natural gas must also increasingly contend with LPs unable to come along for the ride. Following legislation last October, the Maine Public Employees Retirement System has tasked consultant NEPC with reducing its fossil fuel exposure, two-thirds of which comes from its infrastructure portfolio, and is valued at more than $700 million. Options being explored range from letting relevant private markets exposure naturally wind down to accelerating divestment via the secondaries market.

LPs with no such limitations should scrutinise what they are really being asked to put their long-term infrastructure allocations into: a growth story, or the twilight days of a fossil fuel?