The energy transition needs money, and lots of it. Today’s Energy Flux takes a quick look at energy infrastructure, where at least one big private equity firm sees big growth potential, and how capital markets are taking a more pessimistic view of risks and rewards in upstream oil and gas.

In today’s issue:

Sempra’s new energy infrastructure arm lures private equity giant KKR
Harbour Energy shares flop after listing on London stock exchange
Transmission lines – energy transition stories you might’ve missed

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Sempra’s new energy infrastructure arm lures private equity giant KKR

If you were in any doubt about the critical role that energy infrastructure will play in delivering the energy transition, look no further than deals being done by private equity investors seeking exposure to this segment.

Sempra Energy yesterday struck a pretty big deal to sell global investment firm KKR a 20% stake in its new North American infrastructure division for $3.37 billion, valuing the enterprise at more than $25 billion (including $8.37 billion of asset debt).

Sempra Energy is restructuring its non-utility activities in the US and Mexico under a single platform, Sempra Infrastructure Partners. This will house the group’s liquefied natural gas subsidiary, Sempra LNG, and its Mexican subsidiary, IEnova, under a single entity with shares listed in both Mexico and New York.

Sempra Infrastructure Partners (SIP) was conceived as a growth platform to “support the global energy transition” via “new investments in renewables, hydrogen, ammonia, energy storage and carbon sequestration”. Sempra will use the KKR’s money to help fund its $32 billion capital program, centred on its US utilities SoCalGas and SDGE — which have both committed to ‘net zero’ emissions by 2045.

The SIP portfolio already spans 4GW of renewables capacity in development, construction or operation in Mexico, 45 million tonnes per annum (mtpa) of LNG export capacity at various stages of development across North America, and various cross-border and in-country gas pipelines in both countries.

Bringing these bits of Sempra under the SIP umbrella makes a lot of sense, as there was already some overlap. For example, Sempra LNG and IEnova are joint venture partners in ECA Liquefaction (ECA LNG), a project to convert an under-utilised LNG import terminal on Mexico’s Pacific Coast into an export facility fed by US shale gas. The ECA LNG project recently secured equity investment from French oil major Total.

The energy transition is not without risks, and private equity investors know this. KKR has negotiated its way out of funding any of SIP’s infrastructure projects it doesn’t like the look of, including legacy investments that aren’t paying off.

An SEC filing reveals that KKR has carved Sempra’s Guaymas-El Oro gas pipeline out of the SIP deal; this project was delayed by several months after the Mexican government insisted on renegotiating tariff terms it deemed to be “onerous” on state utility CFE.

Gas began flowing along the pipeline only after Sempra acquiesced to less generous commercial terms. If Sempra presses ahead with any projects against KKR’s wishes, the private equity giant is under no obligation to participate.

KKR’s multi-billion dollar play for SIP is the largest investment of its kind since mid-2020, when a consortium of institutional investors including Global Infrastructure Partners and Brookfield splurged $10 billion on a 49% stake in ADNOC Gas Pipelines, a new subsidiary of Abu Dhabi National Oil Company (ADNOC). But this was more of a low-risk opportunity to make steady returns on a highly de-risked operational asset base with lower emphasis on growth potential — which is why pension funds also piled in.

In a similar vein, a group of private investors led by Apollo Global Management is reportedly negotiating a $10 billion investment in Saudi Aramco’s oil pipelines. They’ve apparently pipped Brookfield and Blackrock to the final round of talks.

Other recent-ish private equity energy deals include KKR’s acquisition of a stake in Finnish power distributor Caruna; Blackstone’s buyout of pipeline operator Tallgrass; and BP Energy Partners’ stake in Cryopeak LNG Solutions. These deals all seek to exploit niche energy infrastructure opportunities with strong growth potential.

PE investors are also taking a punt in clean power generation and digitalisation: Blackstone last week partnered with Strata Solar to develop utility scale solar and storage assets across North America; while boutique outfit Huck Capital last month invested in Uplight, a software company that helps utilities balance power supply and demand.

Not all private equity bets pay off, of course. Our next story tells a cautionary tale for private equity firms seeking an exit from upstream oil and gas positions.

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Harbour Energy shares tank after listing on London stock exchange

Independent UK-focussed oil and gas producer Harbour Energy flopped in debut trading on the London stock exchange last Thursday, highlighting the challenges facing oil stocks even with Brent crude trading in the low $60/barrel range.

Shares in the newly listed company, forged by the merger of private equity-backed Chrysaor and independent producer Premier Oil, fell 15% at the opening bell. Analysts are bullish on the potential for dividend and/or value growth, but nobody should overlook the profound structural changes in oil markets that precipitated the merger (see also this gem from the Energy Flux archive).

Harbour Energy is selling itself as the last remaining option for investors seeking exposure to a diversified independent producer. It paints itself as on top of the net zero challenge by committing to climate neutrality by 2035 – but this applies only to operational Scope 1 and 2 emissions, not the much larger Scope 3 end-use emissions that must be addressed if the UK is to achieve its legally-binding net zero by 2050 target.

Harbour Energy’s pitch to capital markets is that it is the last remaining independent E&P player with an international footprint. Others either retreated to the US onshore (ConocoPhillips, Hess, Marathon Oil, Apache) or were bought up by bigger rivals (Noble Energy, BG Group, Anadarko).

Harbour’s strategy is to capitalise on the energy transition by snapping up bargain-priced international upstream assets being offloaded by squeezed oil supermajors as they streamline their portfolios. There are lots of recent examples of the likes of Chevron and Shell selling shale assets at a heavy loss (see here and here).

But if Harbour Energy is the last minnow standing, it is for a reason. Other independents saw the writing on the wall and consolidated. So, will Harbour really be able to profit from the energy transition forces buffeting the sector, or merely succumb to them?

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Transmission lines

Energy transition stories you might’ve missed

The US shale patch seems to be immune to good advice. While analysts and investors have been begging for financial discipline as oil soared above $60/barrel, fracking companies are throwing caution to the wind. Permian-focussed independent Pioneer Natural Resources has struck a deal to acquire rival DoublePoint Energy for $6.4 billion, including an eyebrow-raising $1 billion cash element and assumption of DoublePoint’s $0.9 billion of debt. Wall Street was mightily unimpressed; the PXD ticker duly crashed >7% at the opening bell on Monday

Post-publication addendum: DoublePoint was backed by private equity outfits Apollo Global Management, Quantum Energy Partners, Magnetar Capital and Blackstone Credit — so their investments may well have paid off, to the detriment of PXD shareholders

Another day, another defensive oil and gas merger framed as an environmental, social and governance win: Canadian producer Whitecap Resources is acquiring Kicking Horse Oil & Gas to “enhance [its] ESG profile” by, er, adding 8,000 barrels of oil-equivalent per day to its production profile. Whitecap didn’t trouble investors with an explanation of how this enhances ESG — but it’s OK, because the company is reinjecting some CO2 to enhance oil production in the province of Saskatchewan (which is nowhere near Kicking Horse’s acreage). Energy Flux explored drillers’ fickle embrace of ESG in November

Green investing 'is definitely not going to work’, says ex-Blackrock executive. The ESG investment surge is destined to fail because the profit motive will always prevail over environmental or societal concerns, according to ex-sustainable investment officer Tariq Fancy. For an even more candid take-down of the ESG “scam”, listen to The Angry Clean Energy Guy podcast

For the record:

The US Permian shale basin is ‘ground zero for a billion-dollar surge of zombie oil wells,’ reports Grist. More than 100,000 oil and gas wells in Texas and New Mexico are lying idle, of which 7,000 are now orphaned – meaning states are responsible for their cleanup, at an estimated cost of >$1 billion

Construction giant Vinci swaggers into the renewables game by acquiring Spanish contractor ACS in €4.9 billion all-cash deal. “Major strategic move” creates “a global player in energy contracting” with 15GW portfolio of development projects across Spain, Mexico, Brazil, Peru and Chile

The US Environmental Protection Agency is underestimating drilling methane emissions, according to new research. A Harvard study found emissions from oil and gas production were 90% and 50% higher respectively than the EPA estimated in its latest inventory

Japanese and US investors team up to convert ageing US coal-fired power plant into a solar PV and energy storage facility. J-Power USA, the US arm of Tokyo-based developer J-Power, and Fortress Investment Group will build out the 50MW solar plant and 190MW battery at the site of Birchwood Power, a coal plant commissioned in 1996

Japanese utility and steelmaker scrap plans to build a gas-fired power plant near Tokyo. Chugoku Electric Power and JFE Steel concluded the project “would not be feasible from the perspective of wholesale power prices and utilisation factor”

World installed record 260GW of renewables capacity in 2020, beating previous record by almost 50% despite Covid-19, according to trade body IRENA

California aiming to install 1,700MW of new battery storage by summer. The state is set to add more battery capacity this year than all of China, according to BloombergNEF, in bid to avert a repeat of last summer’s blackout. See also: Apple to build one of America’s largest battery projects in California

Germany awards second round of permits to close hard coal plants. More than 1,500MW of coal-fired generation will be shut from 8 December

Xcel proposes 85% cut in carbon dioxide emissions by 2030. Colorado utility envisages greater reliance on wind, solar and battery storage facilities as it weans itself off coal-fired power

Biden administration to review ‘broken’ US oil leasing program. New leases have been paused while the Interior Department decides how to improve American taxpayers’ “return on investment”

Enel Green Power, Monsson Alma to develop 1 GW of renewable power in Romania, split evenly between wind and solar projects

NextEnergy Capital Group energises two new ‘subsidy-free’ solar farms in the UK with a combined installed capacity of 115MW

Chinese solar PV tech giant enters hydrogen market. Longi Green Energy Technology reportedly registers new H2-focussed business arm

And finally…

Here’s a very droll take on the mooted investment by Apollo in Aramco’s oil pipelines. You certainly won’t read this in the press release when the deal is done (⚠️morbid humour alert⚠️):

Unquantified Upside @EnergyCap1

Key investment highlights: -No exposure to US Fed lands -Very far from US anti-pipeline protestors -Local CO2 tax of $0.00/ton -Saudi women being allowed to drive could stimulate local oil demand Key risks: -Management history of beheading people they disagree with #ESG

That’s all for today, more 🔥Energy Flux🔥 tomorrow!

Show me the money: Energy infrastructure…