Despite the coming renewable buildout, it is clear, in our view, that there is a long runway for the use of natural gas in both power generation and home heating.
In fact, natural gas emits nearly 50 per cent less CO2 than coal. As a result, midstream energy companies are well positioned to expand pipeline infrastructure networks, which should provide cash flow certainty for investors. However, the sector should also benefit from opportunities as the world decarbonises.
One opportunity involves the usage and blending of renewable natural gas, which is created from biogas, with natural gas streams.
Another involves transporting hydrogen through pipelines. These are early days for hydrogen transportation, however, and midstream companies will need to understand how to repurpose their legacy assets to accommodate lower carbon fuels.
Carbon capture, utilisation and storage (CCUS) is an example of a technology that midstream companies are investing in as the world decarbonises.
Specifically, these assets capture carbon dioxide emissions and ensure they do not enter the atmosphere.
The carbon is then sent via pipeline to be stored deep underground or utilised and turned into a low carbon fuel.
We believe certain midstream companies that are early movers in clean fuel and CCUS are well positioned to participate in growth from the energy transition, while also generating strong cash flows from their existing asset bases.
Finally, in addition to a delayed energy transition, we believe investors will have to directly navigate risks and opportunities associated with climate change.
Infrastructure companies will have to strengthen and harden their systems to protect against coming hazards.
We believe active managers are best positioned to manage climate risk, and are prioritising investments in companies that are already taking initiatives to protect their asset base.
The world is undeniably moving toward a lower carbon economy, but the question that remains is the pace of the transition.
We believe 2050 net-zero goals are behind schedule, and this will extend the life of fossil-based assets. With that said, momentum is clearly building for renewables with broad political support.
Tax incentives, emerging technologies and increasing consumer demands are all clear tailwinds in the energy transition.
It is critical that politicians and business leaders, along with investors, understand traditional and renewable energy need to work hand-in-hand to solve the world’s energy problems.
We believe that cheap, plentiful natural gas and an aggressive ramp-up in renewables are the foundation for the world’s energy supply.
There is a place in the market for both the renewable developers, who will benefit from the growth that the transition offers, and the owners of conventional resources that will generate strong and durable cash flows for investors.
