34 BARRON’S October 21, 2019
Other Voices
ByAdamLevinson,SriramVasudevan,andParagKhanna
A New Energy Paradigm Tests Investors
THE RECENT ATTACKS ON SAUDI ARABIA’S EN-
ergy infrastructure caused the sort of oil-
price spike not seen since Iraq’s invasion of
Kuwait in 1990. But prices have quickly re-
treated,illustratingthemanydifferencesbe-
tweenglobalenergymarkets,thenandnow.
Callitthenewenergyworldorder.Nolon-
gercontrolledchieflybytheOrganizationof
PetroleumExportingCountries,orOPEC,to-
day’senergymarketischaracterizedbyabun-
dantanddistributedsupply.Whiledisruptions
willfurtherreshapetheenergylandscapein
the coming years, and cause more gyrations
inthepriceofoil,thegrowingdiversityofen-
ergy supplies—and suppliers—presents new
and exciting opportunities for investors.
Hydrocarbonmarketsaretheprimarylo-
cusofpotentialsystemicdisruption,withthe
U.S.replacingSaudiastheworld’slargestoil
producer and a permanent swing supplier,
given strategic petroleum reserves that can
be exported to calm markets. Beyond the
U.S., the inter-American supply surge has
greatly reduced OPEC’s centrality.
OilmajorssuchasExxonMobilhavebeen
strengtheningtheirfootholdfromthePerm-
ian basin of West Texas and New Mexico to
thenewoffshorediscoveriesofGuyana.While
once-abundant Venezuelan supply has been
constrainedbypolitics,aneventualchangein
leadership in Caracas would mean a revital-
ized Petróleos de Venezuela, or PdVSA. In
all,thegreaterAmericaswillsoonaccountfor
atleastathirdoftheglobalsupplyofoiland
natural-gas liquids.
Equally important, rising production of
naturalgasandliquefiednaturalgas,courtesy
ofLNGmegaprojectsnowunderway,willin-
creasethesupplyofliquefiedpetroleumgas,
orLPG,asanalternativepetrochemicalfeed-
stock. Since 2015, gas has been the leading
fuel for electricity generation in the U.S.
An accelerating move to harness renew-
ablessuchassolar,wind,andhydrogen,and
alternative-power sources such as wave-en-
ergy,natural-gas,andnuclearpower,hasalso
diversified the global energy landscape dra-
matically. Even without subsidies, the sharp
decrease in capital costs of solar and wind
plantsinChina,India,andmuchofthedevel-
opingworldhasrenderedtherich-poordivide
moot when it comes to renewables.
In the European Union, meanwhile, nu-
clearpowerandrenewablesnowaccountfor
60% of energy production, a figure that will
riseasGermanyprobablyreturnstonuclear
to meet its Paris agreement targets.
Addressing the climate-change challenge
proactivelylikewisehascatapultedcleantech
venturestogreatervisibilityandscaleinboth
publicandprivatemarkets.Atleast$200bil-
lionayearisinvestedincleantechfunds,with
abouthalfcomingfromChina.India’sinvest-
mentisalsoclimbingrapidlyafterthecollapse
in 2018 of solar and wind-power tariffs.
Thedrivetotackleclimatechangeandits
consequenceshead-onismotivatingthestate
ofCaliforniaandotherstakeholderstorestore
the enterprise value of traditional investor-
ownedutilitiessuchasPacificGas&Electric.
PG&Esoughtbankruptcyprotectionafterits
equipmentwasblamedforlastyear’scataclys-
micwildfiresinNorthernCalifornia,andthe
companyrecentlycutpowerprophylactically
to many homes in the fire-prone region. The
bankruptcyprocesswillneedtohonortheutil-
ity’spower-purchaseagreements,anessential
move to demonstrate the commitment to re-
newable-power sources.
Financialmarketsarecriticaltofinancing
newexploration,fundingcleantechresearch
throughcommercialization,andpricingregu-
latory impact. Thus far, the Carbon Disclo-
sureProject’sanalysisofcorporatereporting
from 7,000 large companies suggests that
most have yet to meaningfully quantify the
potentially trillions of dollars of climate-
changeliabilitiesintheirportfoliosandsup-
ply chains, even though much of this expo-
sure might appear within five years. From
droughts in Brazil that lead to write-downs
onbanksexposedtoagribusinesstotheris-
ingcostofcoolingdatacentersandthepoliti-
cal and regulatory pressure to strand coal
andotherassets,corporatemarketcapsare
likely to take some severe hits.
Somelargeinstitutionsaretakingthelead
in pricing climate risk. Norway’s sovereign
wealthfundisdivestingfromcoalandother
environmentallyharmfulindustries.Asmore
jurisdictions move to quantify such risk,
highly polluting sectors such as automotive,
aviation,shipping,andconstructionaretran-
sitioning towards cleaner fuels.
Theshifttowardelectricvehicles,forex-
ample,continuestoexceedearlierforecasts.
Weestimatethatby2025,EVswillrepresent
15%ofnew-carsales.Bythemid-2020s,Eu-
rope could have more lithium-ion battery
powercapacitythantheU.S.EVsalesinEu-
ropeareclimbing30%annually.Thesimulta-
neousfallinthecostofcommoditiessuchas
cobaltandrenewable-powergenerationwill
mean higher profit margins for companies
acrossthespectrum,frombatteryproducers
such as Samsung and LG Chem to power
producers and utilities providing charging
mostly during off-peak hours.
While seemingly independent of one an-
other,thesetrendsinenergymarketsareall
reinforcingtheoveralltrendtowardaworld
ofdistributedenergycapacityandproduction
thatcanminimizethedurationofshocks.The
Saudi attacks weren’t the first and won’t be
thelastsuchthreattoenergysupplies.Itis
imperative that portfolios globally take this
new energy paradigm into consideration.
Adam Levinson is managing partner and chief
investmentofficerofGraticuleAssetManagement
Asia.SriramVasudevanisapartner,commodities,
andmanagingdirectorofGraticuleAssetManage-
mentAsia.ParagKhannaisfounderandmanaging
partner of FutureMap, a strategic advisory firm
based in Singapore.
Distributedenergyproduction
canhelptominimizethe
durationofoil-priceshocks.
Italsoopensupnew
opportunitiesforinvestors.
Amr Nabil/AP Images
Workers repair a Saudi oil facility after the Sept. 14 attacks in the kingdom.