This guest commentary was written by SailingStone Capital Partners.

The Energy Transition | Outlook And Implication For Upstream Commodities  - z11


Tackling climate change is one of the world’s top priorities. In 2019, a survey of more than 30,000 people from 28 countries revealed that more than half believed climate change was “very” or “quite” likely to bring about the extinction of the human race.

At the same time, it is widely acknowledged that energy access is essential for economic progress and advancements in living standards, particularly in emerging regions. As a result, there is growing momentum across government, industry, academia, and the investment community to identify and implement solutions that will reduce greenhouse gas (“GHG”) emissions without sacrificing economic and humanitarian imperatives.

Since energy consumption generates more than 70% of total annual anthropogenic GHG emissions and is responsible for the vast majority of growth over the last 25 years, the prospect of a greener future is tied to the development of a clean, expansive, cost-effective energy network.

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Source: World Resources Institute

This evolution, commonly referred to as the energy transition, revolves around electricity and transportation as they are the primary GHG culprits.

The Energy Transition | Outlook And Implication For Upstream Commodities  - 7 9 2020 1 32 31 PM

Source: CAIT Climate Date Explorer via Climate Watch. C02 and Greenhouse Gas Emissions, Ritchie and Roser

Critically, a large, stable installed electrical generation/transmission/distribution network already exists, and renewable power technologies are becoming increasingly viable.

At the same time, the transportation sector is being revolutionized by the rapid improvement in and availability of affordable electric vehicles. So, the idea is to “green the grid,” and then electrify as many different sources of energy demand as possible.

Today, this is more than just a theoretical modelling exercise as technological advancements and scale are driving down costs and improving the efficiencies of renewable energy sources, electric vehicles, and storage solutions.

In addition, there is growing consensus around the world that these initiatives can support economic activity and employment while also working to address pressing socio-economic concerns related to energy access.

However, the path forward is not without its potential pitfalls. The influence and inertia of incumbents, questions around funding sources, the lack of pricing externalities for carbon emissions and key but immature technologies have all been identified as possible stumbling blocks.

One area which has not received as much attention is the implication of the energy transition for upstream commodity demand and the ability of different commodity complexes to meet that demand.

In fact, to the extent that there has been any focus on what the energy transition means for upstream commodities, typically it has been in the context of divestment, stranded asset risks, etc. And for some commodities such as thermal coal today, and perhaps oil longer term, the outlook is fairly dire. However, certain raw materials absolutely will be required to implement the technologies and infrastructure necessary to reduce carbon and other emissions and improve access to energy on a global basis.

This creates an intriguing 10- to 20- year secular backdrop which has yet to be appreciated by most investors. More immediately, the fundamentals for parts of this upstream complex are improving cyclically while valuations remain depressed.

In other words, we find ourselves in one of those rare moments in time when we can invest in what looks to be a compelling secular opportunity just as the cycle is moving in our favor.

In this paper, we will attempt to put some context around historical and future energy supply and demand and review the key enablers for the energy transition. Then, we will investigate what the emergence of green energy means for two commodities which we believe will be central pillars in the creation of an energy complex that will support the world’s ability to “electrify everything” – natural gas and copper.



This is a Hedgeye Guest Contributor research note written by SailingStone Capital Partners. Based in San Francisco, SailingStone Capital is a solutions-oriented manager focused on investing across the global natural resources space. This piece does not necessarily reflect the opinion of Hedgeye.