Will Buffett’s $10 Billion Bet On Natural Gas Go Bust?
Mon, 07/20/2020 – 18:50
On the day on which Dominion Energy and Duke Energy canceled the Atlantic Coast natural gas pipeline, Dominion Energy said it would be selling substantially all of its gas transmission and storage assets to an affiliate of Berkshire Hathaway. For Dominion Energy, the nearly US$10-billion deal, including debt assumption, is part of the company’s push to zero-carbon electric generation by 2050.
For Warren Buffett’s conglomerate Berkshire Hathaway, it was the first major acquisition since the start of the coronavirus pandemic, and the biggest acquisition in four years.
While there are growing calls from environmentalists that natural gas should follow coal’s fate and start being dumped from power generation because it’s not as clean as the ‘cleaner-than-coal bridge fuel toward renewables’ narrative would like us to think, Warren Buffett is unfazed.
Buffett is looking at the asset the way he has always done with his investments – buy cheap assets that very few others are willing to buy. And betting that these assets will deliver returns.
Buffett’s bet on natural gas comes at a time when U.S. natural gas prices slumped to a 25-year-low, while natural gas is set to continue to dominate utility-scale electricity generation for years to come.
In 2019, natural gas accounted for 38 percent of utility-scale electricity generation in the United States, followed by coal with 23 percent, nuclear with 20 percent, and renewables including hydroelectric with 17 percent, according to EIA data.
Natural gas continues to displace coal-fired electricity generation, and so do wind and solar, but still, natural gas is expected to be the biggest source of power generation over the next few years.
Buffett’s US$10-billion bet on natural gas infrastructure shows that the billionaire investor believes that natural gas hasn’t run its course, regardless of what environmentalists and climate-conscious investors think.
Berkshire Hathaway Energy is buying Dominion Energy’s assets that include over 7,700 miles of natural gas transmission lines, 900 billion cubic feet of operated natural gas storage with 364 billion cubic feet of company-owned working storage capacity, and 25 percent in the Cove Point LNG export, import, and storage facility in Maryland.
“We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business,” Buffett said in a statement.
Berkshire Hathaway Energy will thus own 18 percent of all interstate natural gas transmission in the United States, up from 8 percent now, according to CNBC.
The fact that this acquisition was the first one that Buffett saw as attractive after the pandemic sent markets into turmoil in March suggests that the Omaha investor believes in the future of natural gas.
That’s despite growing calls from environmentalists that the world should be moving away from it as it is just another fossil fuel and not a “bridge fuel” as natural gas producers and traders pitch it.
Buffett’s natural gas assets acquisition is “a bet that the future doesn’t come as fast as some people think,” Jim Shanahan, an analyst who covers Berkshire Hathaway at Edward Jones, told Bloomberg.
Warren Buffett’s fortune is the world’s third-biggest with links to significant levels of greenhouse gas emissions, after the Koch family in the U.S. and the House of Saud, the rulers of Saudi Arabia, according to Bloomberg Green estimates.
Sierra Club’s Beyond Coal campaign, for its part, pointed out to Bloomberg that Berkshire Hathaway had made some bad calls on fossil fuel investments in the past.
Sierra Club, together with Earthjustice, published a report this month, saying that buildings account for nearly 40 percent of climate pollution in the United States, with much of that driven by the burning of gas for heating and hot water. The report refutes the idea that fossil gas alternatives are a viable alternative to building electrification.
Amid the increased environmental awareness toward natural gas, Warren Buffett looks at cheap assets with potential for good returns, and his first investment since the COVID-19 crisis suggests that he believes that natural gas will continue to be a dominant energy source in the United States.