Argus Live: Clean energy faces investment challenges

The shift to a lower-carbon future risks "de-commoditising" the energy market, which could discourage investment in the clean energy sector, the Argus Crude Live virtual conference heard today.

Over the past 40 years, centralised liquidity in a few core benchmarks has grown, resulting in the price discovery of major contracts, such as gasoline and crude, exchange operator CME's managing director and global head of research and product development Owain Johnson told the conference.

There are few concerns surrounding the operation of these core benchmarks as they are underpinned by strong liquidity, and they have established financial instruments and forward curves. The absence of these for clean energy products, such as hydrogen and cobalt, will make it difficult to lock in forward prices and for banks to secure their investments. Cobalt can be used to split water for hydrogen production.

"You're never going to get a seven-year curve on hydrogen or cobalt, you cannot lock in those prices. So if I'm a bank going to a cobalt producer or to fund a hydrogen project, how do I know I'm going to get paid in three years' time?" Johnson said.

This has raised questions whether banks take the more "dangerous" route of avoiding hedging or using an instrument that may be inappropriate, the conference heard.

"Do we need hydrogen instruments, or will people lock it in versus natural gas where there is more of a forward curve? Are liquidity and transparency better than an active hedge that really reflects what I need?" Johnson said. Fragmentation and multiple fuel sources in different regions do not lead to core price discovery, particularly on the forward curve that will attract finance into the sector, he added.

It is also important for the trading community to develop benchmarks and certification for clean and sustainable forms of oil, the IEA's chief economist Laszlo Varro told Argus Crude Live delegates.

"[CME] is trying to respond with products that support the energy transition, so you've seen us in ethanol for many years, we launched used cooking oil with Argus this summer as a risk management tool, and we've seen cobalt start trading just in the last few weeks," Johnson said. And there has been a shift from coal trading towards natural gas trading.

But early stages of the energy transition have had limited impact on crude and products trading, with the market still developing new contracts, oil benchmarks and risk management tools.

Investment in upstream oil and gas will still need to continue throughout the energy transition, Laszlo said. Under the IEA's sustainable development scenario, in which the world achieves net zero emissions by 2070, oil demand falls to 66.2mn b/d by 2040, from around 97.9mn b/d in 2019.

The Covid-19 pandemic resulted in oil and gas companies cutting upstream investment by around a third last year to around $300bn.

"[This is] broadly speaking the same volume of investment that you need year after year during the energy transition to supply this gently declining demand," Laszlo said. "The projects at the companies [which] survived the baptism of fire [in 2020] are actually quite well positioned for the transition."

By Rowena Edwards