On Why CPP Investments is 'Squarely on Strategy' Buying a California Oil & Gas Producer
If there’s a deal that articulates the Canada Pension Plan Investment Board strategy when it comes to ESG investing, it’s the recent purchase of a 49 per cent stake in Aera Energy LLC, the second-largest oil and gas producer in California, responsible for nearly 25 per cent of the state’s production.
CPPIB bought the stake in Aera from German asset manager IKAV after the latter acquired the company from energy giants Shell and ExxonMobil. A source familiar with the transaction, announced on Feb. 28, said CPPIB paid close to US$400 million to buy its 49 per cent stake from IKAV.
Unlike some Canadian pensions, CPPIB has indicated that blanket divestment is not its strategy. Rather, the plan is to invest in legacy energy assets and renewables, while putting money towards the energy transition.
“This is a really good fit for our strategy and portfolio,” said Bruce Hogg, head of sustainable energies at CPP Investments.
“It enables us to provide low-carbon oil to California to provide energy security and very naturally transition to renewable energy using this site and ultimately using carbon capture and sequestration sites.… So it’s squarely on strategy for us.”
The partners plan to make Aera carbon neutral in 10 years, continuing to meet California’s conventional energy demands while building up carbon capture and storage alongside a renewable energy portfolio including solar to power Aera’s existing operations.
Hogg said the oilfields in California are accessible and low cost but are also mature and will naturally start to run off.
“Over time, the oil and gas production will reduce, the solar power that’s currently on site can be expanded to provide power to the grid,” he said
“That runoff actually works quite well with increased steps to build that renewable power and decarbonization on site.”
Despite the Canadian pension fund’s minority stake, Hogg said the investment alongside IKAV will be run as a partnership.
“The governance is equal,” he said. “It’s being created as a partnership, and we both bring complementary things to the table.”
The Hamburg-based asset manager has owned and operated other U.S.-based energy assets, including former BP gas operations in Colorado and New Mexico.
“They’ve done a similar effort already in the U.S. quite successfully, and this is a chance for them to scale up things they’ve already done,” said Hogg.
Importantly, he added, IKAV has pilot projects in the promising area of concentrated solar technology, which uses mirrors to concentrate the sun’s energy to drive traditional steam turbines or engines that create electricity, according to the Solar Energy Industries Association. Hogg said a related process that uses molten salt to generate steam can replace the use of natural gas to generate steam needed for wells pumping heavier oil.
“We felt that that (IKAV’s experience with concentrated solar power) was a really important thing for them to bring,” he said, adding that CPPIB has looked at the technology in the past.
For its part, the Canadian pension brings broader focus on the energy transition, including wind and traditional solar power and carbon capture, he said.
“We were a natural fit for them, given our scope and breadth.”
Hogg pushed back on the suggestion that CPPIB may face criticism for moving too slowly on the energy transition with the acquisition of an asset that will continue producing oil and gas for years.
“We’re going very fast,” he said, noting that the pension fund has invested “aggressively” in clean technologies and renewables including offshore wind assets, while “recognizing what’s required to attain near-term energy security.”
CPPIB has committed to its portfolio and operations being “net zero of greenhouse gas emissions across all scopes” by 2050.
As for the current investment, Hogg said the first focus is to decarbonize production. Down the road, as new technologies are added, carbon capture opportunities could be created for third parties. If the model is successful in California, it could be exported to other sites, Hogg said.
“We would love to be able to do things like this elsewhere.”
Great interview with Bruce Hogg, head of sustainable energies at CPP Investments.
Last week, I covered CPP investments, IKAV, Aera Eenergy and how the world really works in a no-holds-barred post where I went after naive environmentalists who think Canada's large pension funds should divest out of oil & gas.
I went after the Shift people in particular who wrote a comment back in February criticizing CPP's net-zero by 2050 commitment, stating "CPP’s apparent belief that it can eliminate Scope 3 emissions from its oil, gas and coal assets is a fantasy."
I have no time for nonsense, I prefer to listen to people like Vaclav Smil, economist and professor emeritus at Canada’s University of Manitoba who says rapid decarbonization is a fantasy.
"What about CDPQ, they divested out of oil & gas and you always praise that organization on your blog for being global leaders in sustainable investing."
CDPQ is a global leader in sustainable investing but it's not because of the fourth pillar of its 2021 climate strategy which I openly question and think it's wrong on many levels and places its clients at a disadvantage.
And the truth is a lot of portfolio managers internally at CDPQ were hopping mad about this decision and thought it wasn't well thought out.
So please, spare me that Canada's large pension funds should follow CDPQ and divest out of oil & gas. This country has so many problems, real deep structural problems (like lack of productivity growth), that I'm at my wits’ end with idiots who think Alberta is the devil and we should kill the oil & gas industry.
Our politicians need to get heir heads out of their asses and stop pandering to environmental zealots who simply don't understand how the world really works!
Ok? We cannot have every Canadian driving an EV by 2030, that's a pipe dream and it will lead to widespread power outages, not to mention exacerbate inflation.
I don't live in a world of pipe dreams, my world is very real and I need to be honest with many here even it hurts your feelings or offends some of you.
We are heading toward a global economic recession/ depression. We better wake up fast or we are in deep trouble.
That brings me to our central bank. I'm not impressed with the Bank of Canada and how poorly it has communicated monetary policy since the pandemic broke out and continues doing a lousy job of it.
Today, the Bank of Canada kept rates unchanged but I guarantee you the next move is up, not down, after this mini silly pause because of its poor communication in January.
By my estimation the Fed will raise another 100 basis points before it pauses and this divergence in policy isn't acceptable (50 bps in March is already baked in, another 50 in May isn't yet but it's coming).
The loonie will sink, we will be paying higher prices as import prices go up, so you bet the Bank of Canada cannot go it alone and pause indefinitely. This is pure nonsense!
Anyways, don't get me started on Tiff Macklem and the Bank of Canada, thus far they're not impressing me with their lackluster communication (stick to a simple message: "We are data dependent for the foreseeable future" PERIOD!!!).
The real risk I see ahead is stagflation as wage inflation picks up and the global economy slows significantly.
We shall see, a lot of people are smoking hopium believing the Fed and other central banks can engineer a soft landing. That is pure nonsense and I've been very active on LinkedIn calling this and other nonsense out.
Alright, let me wrap it up but before I do, take the time to read Richard Manley's latest insights where he provides an update on uptake of CPP Investments' Abatement Capacity Assessment Framework and the outlook for decarbonization.
I note the following on real estate which was the focus of his update:
Manley singles out the real estate industry as being particularly receptive and responsive to the Framework.
“The industry has historically been good at improving governance, health and safety in construction, environmental impact and tenant experience — now it’s wizening up to the fact tenants want green space,” he says.
The real estate industry is also where the Framework was piloted. As documented in The Decarbonization Imperative, CPP Investments’ wholly owned Trafford Centre, which is one of the top shopping malls in the United Kingdom, put the Framework to use and, in the span of just 10 weeks, a team found that 56% of Trafford’s Scopes 1 and 2 emissions could be cut economically.
Manley says there’s “a real snowballing of momentum” in the real estate industry because the payoff is evident. He cited figures showing that the price appreciation of green buildings outperformed so-called grey buildings by approximately 21 per cent over the last three years, while offering a higher rental yield and lower vacancy rate.
“So, while the broader market adoption of [the Framework] feels at the moment like it’s a big mountain to climb, organic grassroots adoption in a specific sub-area of our portfolio is a reason to be excited.”
So, more than a year since the Framework was initially presented, and a few months after being armed with The Decarbonization Imperative while doing the rounds at COP27 in Sharm el-Sheikh, Egypt, what’s next?
Manley says he’s hoping to see a flywheel effect take hold as word spreads about success stories like the Trafford Centre. The key, he says, particularly for the thousands of companies that have pledged to achieve net-zero emissions by 2050, is to embrace the solutions that are within reach.
“Turn down the thermostat, change the menu, upgrade the inefficient machine that needs replacing anyway. There are low-hanging fruit hiding in plain sight that I don’t believe we’re paying enough attention to, because we’re obsessed with this end state (in 2050).
“I think the opportunity of this is, how do we move the debate from what we need to do to what we can do — and make sure what we can do is in the business plan.”
If you want to discuss transition assets, in my humble opinion, real estate is where the biggest transition to less carbon needs to happen if we are going to attain net zero by 2050.
Below, CPP Investments' CIO Ed Cass discusses the investing landscape and portfolio construction in this on-camera interview.
Great short clip, I'd love to interview Ed and Geoffrey (Rubin) for 30 minutes each and ask a lot of tough questions.
Also, Former Fed Vice Chair Roger Ferguson on what's next for the Fed. With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Karen Finerman, Dan Nathan and Guy Adami.He thinks the disconnect between the Fed and market is ongoing. I do not agree with his softish landing scenario but he hedges it carefully.
Lastly, Mohamed El-Erian, Allianz and Gramercy advisor and president of Queens' College, Cambridge, joins 'Squawk Box' to discuss whether the Federal Reserve is still data-dependent, what the yield curve inversion means for the economy, and more.
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