Before the onset of COVID-19 in 2020, capital was moving freely. But after commodity prices went into freefall in the aftermath of the pandemic, stakeholders assessed environmental, social and governance (ESG) obligations with increasing scrutiny, and the Inflation Reduction Act (IRA) under the Biden administration opened the gates to diversifying portfolios. Merger and acquisition (M&A) activity boomed. This uptick outstripped usual investor margins as investors jostled for a stake in the latest clean technology.
Fast-forward to 2024; while some clean energy projects have accelerated, others have sputtered and stalled. And return on investment (ROI) is in the driving seat for decision-making.
Investors are enforcing discipline on oil and gas and expansion and diversification activities, and there’s competition for low-risk, proven technologies that align with sound investment principles.
The impact of the election on investor priorities: The administration in the White House after the election is unlikely to derail the limited partners’ (LPs) priorities. LPs will need to continue to demonstrate ROI, but the incentives made available to clean technologies under the new administration could impact where dollars are spent. Ultimately, a return to proven investment principles will maintain a focus on opportunities that make the most financial sense.
The IRA made billions of dollars available for various technologies and made everyone a winner, in a sense. Plenty of opportunities emerged for traditional oil and gas companies to diversify, as well as renewable and clean technology companies to innovate.
The election represents an inflexion point for tax credits and IRA. After the IRA ushered in a wave of incentives, parameters on how credits can be deployed is in flux. Many investors foresee the biggest change to biofuels, with a focus on how biodiesel is produced.
Although scaling back capital and grants would limit opportunities available for investment in clean technologies, tax credits are unlikely to be wiped from either administration’s agenda.
The impact of the election on investor priorities: The Republican party’s rhetoric leans toward limiting tax credits and redeploying capital to the exploration and production of oil and gas. But power to uproot existing legislation is limited, and the risk of spooking domestic and international investment into the U.S. economy is likely to outweigh any impulsive cuts.
Meanwhile, although the Democrat party engages in more discussion around clean technologies, fundamental questions such as lifting the pause on liquified natural gas and clarity around the deployment of tax credits will remain.
The impact of the Russia-Ukraine conflict has put security of supply at the top of the European priority list, in some cases, overtaking the focus on ESG which has dominated boardroom discussions in recent years. While ESG remains a core concern for stakeholders, the narrative in the U.S. is more focused on the profitability of projects providing more investment opportunities in oil and gas than would otherwise be available.
Meanwhile, China has emerged as a clean energy powerhouse, accounting for more than 40% of global installed capacity for wind and solar, and more than half of the electric cars in the world today. The advancement in technology is a gateway for other nations to accelerate their clean energy transition plans, but the Republican and Democrat parties have different approaches to relationships with China.
The impact of the election on investor priorities: While the Democrats are more likely to enter into negotiations, the Republican party are more likely to drive dollars away from projects that need technologies from China and back to oil and gas. While this may create a bubble of ROI in the short-term, longer-term sustainability of that growth will be dampened by global pressures to decarbonize. Investors will have decisions to make between short-term and long-term priorities.
The outcome of the election is unlikely to jackknife investment in natural resources overnight. The road ahead is likely to have new junctions, whatever the direction, but investment principles will continue to drive decision-making.
Marie is based in our London office and leads global broking strategy for Natural Resources. She previously worked as a senior broker within WTW’s Upstream team and has extensive experience of placing E&P, construction and third-party liability business as well as structuring offshore operational and construction programmes.
