While Europe’s move towards low-carbon energy sources and renewables has accelerated in recent years, with hindsight insufficient time has been devoted to the security of supply of energy sources non-renewables, according to Tom Nelson, portfolio manager of global natural resources strategy at Ninety One, the global investment manager established in South Africa in 1991.

Speaking in a podcast conversation with Julia Newbould, Managing Editor at Conexus Financial, Nelson predicted that Europe’s energy crisis will drive up prices and demand for non-renewable energy sources around the world, and argued that oil and gas companies with clear transition plans were likely to do “exceptionally well” in the years to come.

The Russian-Ukrainian conflict, in jeopardizing Europe’s fundamental natural gas supply, saw the rare collision of two historic events, Nelson said.

“It’s a very, very unusual meeting of these two events: an energy supply shock and an energy transition,” Nelson said. “We’ve seen energy supply shocks before, we’ve seen two energy transitions, we’ve never seen two collide.”

The third energy transition

We are now experiencing the “third energy transition,” the first being the 19th-century shift from burning wood and biomass to coal, and the second being the Industrial Revolution and shift to oil and gas, Nelson said. The third is the shift from fossil fuels and hydrocarbons to low-carbon and renewable energy sources.

These transitions are historically extremely volatile, with new supply sources and demand trends driving large price swings, and “we should expect volatile prices throughout the transition,” Nelson said.

Energy transitions “tend to take a little longer than expected,” usually 30 to 50 years, though that transition can be accelerated by the urgency of climate change, Nelson said. They also tend to be “more a case of energy supply diversification, rather than an overnight revolution where the incumbent is effectively jettisoned.”

“So we didn’t stop burning wood and biomass when we found coal,” Nelson said. “Unfortunately, we also didn’t stop burning coal when we discovered oil and gas. And I think what we may be starting to learn in real time is that the advent of the arrival of low-carbon and renewable sources of energy is not going to mean that we will just stop burning oil, gas and coal overnight.

As consensus forecasts are made on replacing old energy sources with new ones, central market players stop investing in new supply of old sources, making the system more vulnerable to shocks and disruptions supply, he said.

“That’s one of the reasons why recent price action, since the invasion of Ukraine, has been as pronounced and as dramatic as it has been,” Nelson said. “We just don’t have the spare capacity, or the buffer, if you will, to lean on. The system was quite tense at first.

Switch to trusted sources

The Russian-Ukrainian conflict and the apparent urgency to switch to reliable and dependable energy sources will likely accelerate the long-term transition, but there will be short-term negative effects, Nelson said, noting “you can’t remove about 35 percent of natural gas from Europe and not create, in other parts of the energy matrix…increased levels of demand for other things”.

“So we are likely to see more coal burned in Europe in the very short term. We are likely to see Europe become a very strong bidder, and probably the number one port of call for global liquefied natural gas shipments.

If gas supplies that would have been destined for Asia are diverted to Europe, Asia is likely to burn more coal in the short term, he said.

Oil and gas companies that demonstrate clear and consistent transition plans, and potentially even “solution providers and, if you will, diversified energy companies of the future,” will do “exceptionally well,” he said. he said, citing European oil and gas majors. such as BP, Shell, TotalEnergies and Equinor.

“The ability of us as investors in these companies to buy these stocks today with five, six, seven times earnings in an environment where a lot of people are not comfortable owning these names. That as active investors, we can buy these companies, we can engage with the management teams, we can help them drive this transition – we think that’s a tremendous opportunity,” Nelson said.

In the longer term, demand for metals like lithium, copper, nickel and zinc will see structural tailwinds, driven by electrification and the energy system shifting to more metal-dependent energy sources such as wind and solar, he said.