Balancing act: The role of natural gas in the energy transition and emerging players

The world is rapidly transitioning to renewable energy. Governments have set ambitious net zero targets and subsidised solar, wind, battery storage, and other renewable technologies in Europe, China, and the US. However, as one might expect, the primary driver by far has been economics.

As the price of solar panels continues to drop - down 85% in the last 10 years - deployment in Southern Europe has been expanding at record rates. According to the IEA, solar is now the cheapest electricity source in history, and with continuing advances in efficiency and manufacturing, the economics will only improve.

Wind is not far behind, especially in countries that have been blessed with ample wind resources, such as the UK. In Northern Europe, wind turbines are being deployed in record numbers all across the North and Baltic seas with 260 GW of new capacity planned in Europe by 2030, doubling its current installed base.

As turbines continue to grow in size (a twofold increase in swept area yields a fourfold increase in energy generated) and economies of scale make manufacturing cheaper, the economics of wind should continue to improve as well.

HOWEVER, it is currently impossible to rely on 100% renewable generation, and will remain so until the energy can be cost-effectively stored and used when needed. While grid-scale battery deployments are increasing, it is still very much a nascent technology, accounting for a tiny fraction of total generation.

In the meantime, natural gas has been the unsung hero of the energy transition. This is for two main reasons. First, natural gas is relatively clean burning and has by far the lowest emissions of any fossil fuel. And second, it plays a key role in the energy mix to meet peak demand, or when generation is rapidly needed to ensure the grid has enough capacity to match demand.

The second point is a key function of gas due to the unpredictability of solar and wind. As the latter's contribution continues to grow within the global energy mix as baseload, so will the the need for rapid regulation. Moreover, as electrification of transport continues its upward trajectory, demand for electricity will follow, requiring every tool in the toolbelt to ensure a stable and constant grid.

Until batteries are ready to take over, gas will be essential to meet the nightly demand spike of EV charging while solar generation is zero, especially when the wind is quiet too. Therefore, natural gas remains a critical component of the energy transition due to the inherent need to supplement a renewables-dominated energy mix. Gas infrastructure is also highly developed and readily available, ensuring affordable, quick, and ready supply to support the rapid growth of solar and wind.

Countries know this too, including European governments with highly ambitious renewables targets, who realise gas will be necessary for some time, and want to minimise reliance on Russia. One example is Italy where the government recently lifted hydrocarbon exploration and extraction restrictions for certain areas of the country, aiming to fast track gas projects and strengthen Italy's energy security.

While it is tempting to lump together all suppliers of fossil fuels, they differ significantly in the exact product mix they supply, how they prepare for and support the energy transition - eg what renewables projects they have in progress, how much they are controlling emissions, and what ESG initiatives they have undertaken.

In this roundup, we present you with 5 smaller players that in our estimation excel in supporting the energy transition while scoring high ESG marks and ensuring an affordable, geopolitically safe, and responsibly derived supply of energy for Europe and the world.

Jersey Oil & Gas

Jersey Oil & Gas (JOG) Follow | JOG is an independent energy company based in Jersey, Channel Islands, focused on the UK continental shelf region of the North Sea. The company places a strong emphasis on environmental stewardship and minimising carbon emissions while supporting the UK's energy requirements through its transition to net zero.

JOG's North Sea operations are focused on maximising recovery from the hydrocarbons-rich region while minimising environmental impact, and the company has the track record to back up its environmental claims. JOG closely monitors and reports on key environmental indicators and corresponding targets related to flare and vent volumes, greenhouse gas emissions associated with power generation, and discharge of produced water.

The company's approach to sustainability is closely aligned with the UN Sustainable Development Goals, which should appeal to ESG investors. JOG's main contributions are to the following goals: good health and well-being, gender equality, affordability and clean energy, decent work and economic growth, climate action, life below water, and peace, justice and strong institutions.

JOG's North Sea portfolio is focused on the Greater Buchan Area (GBA) and specifically the redevelopment of the Buchan oil field, with regulatory approval targeted for 2024 and first production in late 2026. The GBA consists of two licences, P2498 and P2170, which contain Buchan, the J2 and Verbier oil discoveries, and several drill-ready exploration prospects. In aggregate, the GBA licences are estimated to contain a gross resource of over 100 MMboe.

JOG's selected Buchan redevelopment plan delivers the lowest full-cycle carbon footprint solution for the field. In order to effectively decarbonise its North Sea production, JOG is electrifying its offshore facilities, such as the FPSO vessel that will be used for the GBA project. The plan will reuse existing infrastructure located directly at the Buchan field, giving the 'electrification-ready' vessel the ability to connect to one of the anticipated floating wind power developments, intended to be built in close proximity to the GBA.

In the past year, JOG completed 2 significant GBA farm-out transactions with NEO and Serica, and the business has a clear path to monetising its GBA assets without the need for additional equity. With a cash balance following completion of the Serica farm-out of £15m, JOG is well-funded for its Buchan redevelopment programme. The project is progressing well, with FEED work remaining on track along with execution of the offshore geotechnical survey campaign that commenced in May 2024.

i3 Energy

i3 Energy (I3E) Follow | I3E is an AIM and TSX-listed energy company with a diversified and growing production base in Canada's most prolific hydrocarbon region, the Western Canadian Sedimentary Basin, and appraisal assets in the North Sea. I3E's portfolio holds significant upside across years of potential growth with ample opportunities within I3E's existing asset base, adding to expected future acquisitions of more long-life\low-decline production assets.

Building on a highly productive 2022 work programme, i3 Energy delivered a steady 2023 despite multiple headwinds, including the Alberta wildfires, high inflation, and volatility in commodity prices. The company still managed to achieve record production of 20,711 boepd with 12 new gross wells, and maintain reserve volumes flat. I3E's 2P reserves are now valued at c. US$1bn or £0.67/share - a significant premium to I3E's current share price.

I3E has announced an even more ambitious US$50.9m 2024 capital programme that will see the development of 15 gross wells across its acreages in Canada. The new work programme is estimated to deliver an annual production increase of 5-10%. It will be fully funded from existing resources and support a long-term dividend, with c. £12.3m to be returned in FY24, representing 1.0260/p for the year and a forward yield of 8.1% based on a share price of 12.66p for I3E. Investors should note that the 2024 capital programme will be c. 85% H2-weighted to take advantage of stronger forecast winter gas pricing.

Looking ahead, the group has more than 390 booked drilling locations to support future growth, and a healthy balance sheet following the negotiation of a new CAD$75m facility with National Bank of Canada, replacing last year's Trafigura facility, as well as the recent sale of non-core royalty production for US$25m. I3E returned £15.33m in dividends last year per its "total shareholder return model", and remains a solid choice for dividend investors.

I3E is also a good choice for ESG investors, as the company takes its ESG commitments seriously. In 2023, i3 continued to make progress in reducing Scope 1 and Scope 2 carbon emissions - it completed electrification of 25 pumpjacks and 2 natural gas generators, resulting in an emissions reduction of 4,268 tCO2 and 907 tCO2 per year respectively. I3E also replaced 295 gas-driven pneumatic pumps with solar-powered ones, expected to eliminate 8,971 tCO2 annually. At 3 locations, high-pressure natural gas-driven pneumatics were converted to compressed instrument air, yielding an annual methane emissions reduction of 660 tCO2.

In 2024, I3E further executed Phase 1 of its previously announced ALT FEMP programme, which images methane emissions from the air. The effect of this program was an annual emissions reduction of 3862 tCO2e, with Phase 2 currently underway. During the period, I3E also downhole abandoned 4 wells, and in January 2024 published its 2022 ESG Report.

I3E is well positioned for the energy transition with a very diverse asset base, which is composed of over 50% of gas production and 2P gas reserves of circa 550 bcf. Canada is on the cusp of commencing its first ever direct gas exports to the global market via the start up of the LNG Canada project on its western seaboard in British Columbia, which will initially export over 10% of current national gas production and achieve international LNG pricing. This is expected to have a very positive impact on gas prices realised by domestic Canadian gas producers.

I3E's projects have strong economics, characterised by low cost and high-returns. Efficient "strong finding, development and acquisition" (FD&A) metrics of US$5.67/boe (PDP), US$2.32/boe (1P) and US$1.76/boe (2P) translate to robust recycle ratios of 2.17x (PDP), 5.31x (1P) and 6.97x (2P). I3E remains well funded after the aforementioned debt restructuring and sale of non-core royalty assets. The company has a significant pipeline of booked development locations, plus a large inventory of future unbooked locations, providing strong visibility.

Prospex Energy

Prospex Energy (PXEN) Follow | PXEN, an investor in European gas and power projects, last year announced the development of Project Helios, a photovoltaic hybridisation solar project to be built adjacent to the company's El Romeral natural gas power plant in Spain. Helios will cogenerate with El Romeral, increasing its output by 60% via existing infrastructure.

Helios will occupy 20 hectares adjacent to the El Romeral plant. The project will consist of a solar array with a maximum output of 5 MW. The existing grid connection has a 8.2 MW output allocated to El Romeral, which is currently utilising only 2.7 MW. Prospex says further grid capacity is available to accept increased output within the existing infrastructure.

The project is the result of Prospex's hybridisation plan, i.e. using resources and income from electricity generation from conventional natural gas production to reinvest in renewable energy generation from a photovoltaic plant. This is a prudent diversification strategy, given solar deployments in southern Spain have an ROI of only 3-4 years, making this an ideal hedge for the company.

Project Helios will allow Prospex to increase its power export in the near term alongside a capacity increase expected from the drilling of 5 new gas wells on the existing El Romeral concession. Combined, the two programmes represent significant upside over the next year.

Meanwhile, the company added a second asset at Selva Field, Italy in the past year, where its PM-1 gas facility has been outputting a steady 80,000 scm/d sold to BP. The addition of a second producing asset has materially boosted cash generation and derisked the business, with revenues expected to be significantly higher in FY24 over FY23. In Q1/Q2, revenues from the well reached €2.6m net to PXEN as of May 24, 2024 after a total of €1.3m was generated from the concession in all of FY23.

Selva has further upside as operator Po Valley is advancing agreements with local landowners and permitting in order to deliver planned drilling programmes at Selva North, South, and East. Production income from PM-1 will help fund development drilling for Selva North and Selva South, and to convert prospective resources at Selva East into proved, developed and producing reserves in the near term.

As mentioned in the introduction, the improved regulatory environment in Italy, including a reform of the permitting process and schedules, should significantly boost development and long-term revenues from Prospex's Selva concession.

The most significant change was the overturning of PiTESAI in Q1 2024, which previously restricted hydrocarbon exploration and extraction activities in the country. The regulatory changes came as Italy aimed to strengthen its energy security and reduce reliance on Russian natural gas and imports.

The new conditions have enabled fast-tracking approvals for all discoveries and prospects at Selva, which should bring more wells into production more quickly than originally planned. PXEN has already applied for 4 new wells on the concession.

Savannah Energy

Savannah Energy (SAVE) Follow | SAVE is an Africa-focused energy company that is a strong believer in Africa's transition to renewable energy. While Savannah's portfolio is still primarily in the oil and gas sector, the company is aggressively diversifying into renewables, aiming to become one of the largest renewable energy development companies in Africa over the next few years. With a rapidly growing pipeline of solar, wind, and hydro power projects, Savannah aims to have 1 GW of renewables projects in motion by end of 2024 and 2 GW by end of 2026.

Currently, Savannah has 696 MW of renewable projects in motion throughout Africa. In March 2022, the company announced its inaugural renewable energy project, the 250 MW Parc Eolien de la Tarka wind farm project in Niger. This is targeted to increase the country's on-grid electricity supply by up to 40% with project sanction expected in 2025. Following the signing of two new renewable energy agreements in 2023, SAVE currently has up to 525 MW of hydroelectric, solar photovoltaic and wind projects in motion in Cameroon and Niger.

Savannah delivered robust operational and financial performance in FY23, with revenues, costs and capex exceeding guidance as the company's core business continued to perform strongly. At the same time, SAVE continued to expand and diversify its portfolio, advancing two significant hydrocarbon acquisitions in South Sudan and Nigeria (PETRONAS and SIPEC), as well as its renewables portfolio.

Savannah continued to increase its footprint in Nigeria during the period, with gas sold to 9 customers, and a number of new and extended sales agreements signed totalling 101 MMscfpd. Furthermore, a 10-year deal was signed with Amalgamated Oil Company Nigeria for up to 20 MMscfpd of gas for SAVE's customers, providing a commercial route for the 3rd party stranded resource.

The strong sales momentum in Nigeria continued post-period, with a 12-month contract extension signed in January 2024 with FIPL to supply up to 65 MMscfpd to its FIPL Afam, Eleme, and Trans Amadi power stations. To further grow its gas production in Nigeria, SAVE is advancing a US$45m compression project, expected to complete in H2 2024.

As mentioned, a deal was signed in March 2024 to acquire 100% of SIPEC, whose main asset is a 49% interest in the Stubb Creek field in Nigeria, consolidating SAVE's interest in the asset. SAVE plans to double production from the field to 4.7 Kbopd within 12 months via a de-bottlenecking programme. SAVE is also in the process of acquiring PETRONAS' assets in South Sudan, which yielded 149 Kbopd in 2023.

From its hydrocarbon business, SAVE maintained low carbon emissions in FY23 of 10.7 kg CO2e/boe, 45% lower than the Supermajor average.

Savannah believes the African renewable energy market represents a significant opportunity of 242 GW by 2030, requiring an investment of over US$40bn in 2026-2030, and that its experience in hydrocarbons is directly transferable to this space.

Overall, Savannah's business is growing in all four countries where it operates. The growth trend of the past 5 years is expected to continue into FY24 and beyond, especially as the company's renewable portfolio begins to add value. SAVE maintains ambitious guidance for FY24, expecting total revenues in excess of US$245m, operating and administrative expenses of up to US$75m, and capital expenditure of up to US$50m.