Text on screen: Quick Takes: What's Ahead for Energy Investing?
Shots from PIMCO's secular forum.
Greg Sharenow, Portfolio Manager, Real Assets: As we look over the secular horizon, one of the greatest challenges facing energy investors is uncertainty around forward demand.
Shots of an oil refinery and an oil rig.
The forward demand outlook is highly impacted by growing concerns around environment and climate change.
Shots of a wild fire by a highway and shot of heavy waves crashing on a walkway.
When we start thinking about the outlook for upstream investments, it is this concern that is driving capital away from the space today.
Over the next three to five years, we expect substantial oil demand growth to continue as long as the global economy expands.
Chart: A three-bar chart compares global energy investment by sector in 2018 (oil & gas upstream, 59%; renewables & non-carbon intensive, 41%), annual average investment 2025-30 (new policy scenario) (oil & gas upstream, 56%; renewables & non-carbon intensive, 44%), and annual average investment 2025-30 (sustainable development scenario) (oil & gas upstream, 39%; renewables & non-carbon intensive, 61%).
However, the top line shows 2018 investment levels and you can see that slightly more investment went into oil and gas upstream than renewables.
But over the next five to 10 years, as the energy transition progresses, there are two scenarios presented. The first scenario is current policy combined with best intentions. In this scenario, both energy investment in upstream oil and gas as well as renewables need to grow from current levels. In the second scenario, one in which sustainable development goals drive faster energy transition, we see an actual drop in the required investment in oil and gas upstream and a very substantial increase in renewables.
Chart: The chart is a bar graph that shows the annual average investment 2025-30 (sustainable development scenario) for oil & gas upstream (39%) and renewables & non-carbon intensive (61%).
It is in this latter scenario, where the greatest vulnerabilities may arise should there be a mismatch between where demand is growing and where our investment and supply is going. We can see a situation in which this could be one of the bigger surprises that brings the oil market back into the forefront of investment opportunities.
Energy investors against this backdrop need to be diligent in their investment decisions.
One of the main conclusions investors can take away from this is that there’s significant uncertainty in the outlook. This significant uncertainty drives investment opportunities that requires active management to capture.
And an incredible amount of due diligence to adjust to both the energy transition and the policy changes that are happening globally.
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