Take Your Pick

Take Your Pick

By Robert J. Uek, CFA
Co-Portfolio Manager, Essex Environmental Opportunities Fund

We came across an article in today’s Financial Times discussing the growth opportunities in offshore wind power in the United States. The lead paragraph states that “US investment in offshore wind power is predicted to rise from nothing 10 years ago to a level that nearly matches spending on offshore oil drilling”.  As investors in clean energy and clean technologies, we are well aware of the growth in offshore wind development in the U.S.  The technology has been proven for years in the North Sea and other European locations. To us, the offshore wind opportunity in the U.S. isn’t the newsworthy take from the article.  From our perspective, the shocker is that someone is still choosing to spend more than $80 billion per year to develop offshore oil and gas projects in the U.S.

Think about that FT quote for a minute: there are an equal number of dollars betting that the risk adjusted returns from an offshore oil and gas opportunity are as good as or better than the risk adjusted returns from an offshore wind project.  To us this doesn’t make sense.

Offshore oil and gas development is one of the most expensive and dangerous endeavors in the energy business.  Companies spend millions of dollars trying to locate appropriate and economical oil and gas deposits.  They need to erect highly complex platforms in remote locations and put workers in hazardous situations to try to drill for the oil and gas.  They then need to hope the find is as big as they thought and the quality of the oil is as good as they thought and the ability to extract the oil is as technically feasible as they expected and that they can build the infrastructure to transport the oil from the well.  Finally, if all of those things go as planned, the energy companies still have no idea whether the price of oil will be high enough to make a profit when and if they finally get it out of the ground.   The risks associated with this effort are incredibly high even before we consider the injuries, loss of life and environmental damage that happens along the way.

Conversely, one can invest in an offshore wind project.  Data can be gathered to determine with high probability what the wind strength and patterns are.  Wind turbines from Siemens, GE and Vestas have been in service off the coast of Europe for years and are proven technologies.  And before the project is complete, typically long-term contracts are signed which outline exactly what the customers will pay for each unit of energy produced.  Of course, as with any investment there are risks involved in the offshore wind development arena.  But these risks pale in comparison to offshore oil and gas development.

Oh…and the biggest risk of all is that the money spent on offshore oil and gas could eventually be worthless.  There is a good chance these high-priced developments will end up as stranded assets as the demand for fossil fuels wanes.  New technology is allowing clean, renewable energy to be produced more reliably and more cheaply every single day.  The cost declines and efficiency improvements are relentless.  It is astounding to think that corporations and investors are still willing to spend billions on oil and gas development, particularly offshore where the risks are highest, when the deck is so stacked against them.  They’d be better off going to Las Vegas.  Or better yet, they should stop fighting yesterday’s war and join the trend.  Look at Orsted A/S as an example of a company that figured this out.  A former offshore oil and gas developer, Orsted pivoted several years ago to divest its legacy fossil fuel assets and focus on offshore wind development.  Today it is the largest offshore wind project developer in the world.

Disclosures: This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience, and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally, or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.