Pick Your Environmental Sectors
By
Victor Bivell
Eco Investor,
October 2008
The global
stock market ructions have affected all investors and environmental portfolios
have shared in the downside pain. Within the emerging clean energy sector
there has been an enormous difference between the performance of the best
sub-sector - coal seam gas, and the worst - biodiesel. The recent share
market volatility may have accentuated the difference, but it has not
caused it. The causes are government support, market forces, and industry
strategy.
The rise of
coal seam gas (CSG) was apparent by early to mid 2007 but few could have
known how high it would fly. Then in February this year BG took a stake
in Queensland Gas and soon after bid for Origin Energy. In June Queensland
Gas entered the S&P ASX 100 Index and last month it was joined by Arrow
Energy. The latest quarterly rebalance also saw two junior CSG companies
enter the S&P ASX 300 Index, bringing the number of pure CSG plays in
the Index to five, the highest ever.
In hindsight
it makes sense. Both the Queensland and Federal Governments have shown
strong support for the emerging CSG industry. In Australia it was not
all that long ago that people were talking about the possibility of building
a pipeline from WA's north west shelf to eastern Australia to transport
natural gas. Then the lucky country came good again and presto, gas on
the eastern states' doorstep!
Demand for
energy is also rising around the world and the world's leading gas companies
have arrived to join the party. If that isn't enough, CSG is a low carbon
fossil fuel. The result is that while global stock markets crashed some
CSG companies were among the few to rise.
It's a very
different and sad story for biodiesel. Many biodiesel companies were caught
up in the rush to cleaner fuel and listed, but along with their own mistakes
the fundamentals of the sector failed them.
The government
initially promised support, but against much advice and lobbying the Howard
Government withdrew it and the Rudd Government seems to have washed its
hands of it. The prices of feedstock rose to uneconomic levels. They used
food as feedstock. They had resistance from the dominant oil industry.
Companies were overambitious and undercapitalized. And they blew the environmental
angle by clear-felling tropical rainforests.
With government,
suppliers, the oil industry, consumers, and environmentalists against
them, they have suffered a terrible loss of capital and it remains to
be seen if the sector can recover.
Like coal seam
gas and biodiesel, geothermal is another emerging sector that has attracted
a good number of companies to the ASX. But so far, it appears to share
much more in common with coal seam gas. It doesn't seem to have any enemies,
it is cleaner than gas, and if the technology is proven, which should
happen soon, it will be able to provide significant baseload energy and
thus have enormous growth potential. It has strong support from the large
energy corporates and investors, and perhaps most importantly, it has
strong Federal and State Government support.
The Minister
for Resources and Energy, Martin Ferguson, recently said the geothermal
industry has a significant role to play in securing Australia's energy
future. "The potential of the geothermal industry in Australia is truly
staggering. Geoscience Australia estimates that if just one percent of
Australia's geothermal energy was extracted, it would equate to 26,000
times Australia's total annual energy consumption," he said.
A recent report
for the Australian Geothermal Energy Association said that by 2020 the
industry could provide up to 40 per cent of the Government's 2020 Renewable
Energy target.
Not surprisingly,
there is a lot happening in the sector.
The Federal
Government recently launched the $50 million Geothermal Drilling Program
to provide grants of up to $7 million on a matching basis to support the
drilling of deep geothermal wells and proof-of-concept projects. The first
round of applications closed at the end of September.
Earlier this
year the West Australian and Queensland Governments opened large tracts
of their states for geothermal exploration. This followed the recent start
of exploration in NSW, Victoria and Tasmania, while commercialization
has been underway in South Australia for some time and is about to reach
proof-of-concept stage.
Energy majors
like the geothermal energy idea and have backed three of the listed geothermal
explorers: Origin Energy is behind Geodynamics, AGL Energy has backed
Torrens Energy, and TRUenergy has backed Petratherm.
It seems everyone
has high hopes for the geothermal industry in Australia, and it is not
hard to envisage that down the track there may be geothermal plants outside
each major city, as that is how the exploration leases are starting to
look on the map. But much more needs to happen before most investors will
see the payoff.
The ASX has
at least 10 geothermal explorers, and all 10 are early stage businesses
with no sales or revenue. They are all speculative investments and it
will be quite a few years before investors have the pleasant choice of
investing in profit making and dividend paying geothermal stocks.
But for investors
with a long time horizon it is still early days and the achievement of
key milestones by the companies should see their share prices benefit.
Likewise, failure by any individual company could see its share price
suffer significantly.
When considering
the fortunes of the coal seam gas, biodiesel and geothermal sectors, a
lesson for investors in emerging industries seems to be: first pick the
sector, and make sure the government likes it, then pick the stock.
This article
was also published in The
Australian newspaper
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