Tonya: This is the S2G podcast. I'm Tonya Bakritzes. In this episode: what does the war with Iran mean for global energy, today and in the decades to come?

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With gas prices ticking up at pumps across the country, most Americans are already feeling the impact of the war with Iran in their daily lives. 

And while the hit to affordability is real and immediate, the ripple effects on global energy are far-reaching and could reshape the system for years to come. 

In this episode Sanjeev Krishnan sits down with Bala (Na Ga Ra Jin) Nagarajan and Frank O'Sullivan, S2G's energy co-leads to zoom out from the headlines and unpack what this current disruption actually means for the long arc of the energy transition. 

Together they lay out the context, explore the shifting balance between energy sources, and trace how the blockade of the Strait of Hormuz and strikes on critical infrastructure in the Middle East are already showing up in kitchens in India, heating bills in Europe, and fertilizer costs in the American Midwest. 

If you want to understand how this moment could lead to one of the biggest shifts in the global energy system in a generation, this episode is for you.​

Sanjeev: I'm excited to host another episode of the S2G podcast. I'm joined by our two co-eds of the energy investment business for us. Frank and Bala, welcome to the podcast.

Frank: Thanks, Sanjeev.

Bala: Excited to be here.

Sanjeev: So there are a lot of topical issues to cover. I don't want to cover them at the moment because I wanna look at the long arc of this a little bit more and then get to it. It is my framing, and I'm curious how much you agree or disagree that the climate transition is the longest economic mega trend in human history. And the way I define it is taking useful energy and turning it into useful materials. And so useful energy historically was fire, photosynthesis, fossil fuels, and then whatever comes next. And the useful materials are calories, electrons, energy, density molecules, and water. How much credence would you give that equation as a framing?

'Cause I think a lot of it, people think it's a hoax, or people think it's an inconvenient truth. It is literally the most convenient economic truth that we have over 10,000 years as we've evolved as a species, in my opinion. 

But how do you guys think about that equation? As a framing for what we do?

Frank: Yeah, no, I see where you're coming from ultimately, your arc there, Sanjeev, in terms of primary energy to useful energy to subsequent service or product, even if you're in the stone age, like that has obviously been evolving. And we went from wood to coal, and then we went from coal to hydrocarbons in the form of gas and oil. And now we're at an interesting juncture in that there are some other things on the horizon, and how that plays out. We can talk more about it, but just to come back to your question about, or your point around how that has evolved. Efficiency has driven almost every one of those steps.

And moving from wood to coal and then from coal to gas, to oil and natural gas. Each one of those steps was delivering some efficiency gains, right? But there's always an inherent efficiency loss thermodynamically in a system where you have to combust a fuel and then convert that fuel into whether it's mechanical energy or whatever.

The thing that I think people may not realize right now is that we have arrived at a period of time where we can take the primary energy source, of which there are really only two. There's the sun, there's three technically, there's the sun, and solar energy broadly.

Sanjeev: OG Fusion.

Frank: There's nuclear energy.

And there's gravitational energy. Those are the three primary sources of energy. And now we are at a point, interestingly enough, where we can quite effectively convert direct primary energy in the form of solar, for example, to the most useful form of energy that is electrical energy.

And so that makes things quite interesting. Where the tension, I would argue really exists right now? Sanjiv. And this is where fossil fuels have had an advantage, at least let's call it over the last hundred or 200 years, is that they're very useful storage mechanisms for it. And there's no question, anybody who's sat in an electric vehicle recently will notice what it's like to sit in an average electric vehicle versus an average gasoline vehicle. The electrical performance is significantly better, and that's because you can convert electrical energy into useful mechanical energy much more effectively within a much smaller package, all of that good stuff, but it is, of course, challenging to store that electrical energy.

And so I think that balance is an interesting place for us to find ourselves at, and we as a kind of broader economy, need to start thinking about how we find balances around all of that. Now, there's this whole question about the let's call it the unpriced externalities and all of that of fossil fuels.

But put that aside. The reality is that the primacy or superiority of fossil fuels as a kind of mechanism, I think, is really in question in many contexts right now. And we need to begin to embrace that. And we see in our own business as Bala and I see it every day, and you see it at the IC Sanjeev there's lots of really interesting tech solutions now that are popping up that are not like over the horizon thing, but they're just, augmentations of existing systems that are taking advantage of some of this technology that are actually able to deliver, cleaner, better solutions as cost effectively, or maybe even more cost effectively than what we were doing 50 years ago with a kind of plain, basic, let's call it fossil fuel system. So as I'm thinking about it, that's how I tend to frame things.

Sanjeev: No, that's very useful, and both of you are rooted, and I think have the training sort of fossil fuel and when you were at Equinor and other places, what have you. Just before getting to geopolitics and some of the unpriced externalities, but just how have you seen the evolution of just the physics and economics of an all the above approach?

Meaning there's obviously tremendous positives to fossil fuels, but like, how have you seen sort of the physics and economics evolve in terms of the all the above. Just 'cause both of you have great empathy for that all the above notion of primary and secondary energy sources.

Bala: Yeah, I started my stint in the energy sector pretty much at the cusp of when the shale gas and oil boom kicked off in a meaningful way, and I have lived through scenarios where people said gas is at $10 and will never get cheaper, and gas became $2 and never got more expensive.

And neither of those is true. So the economics of energy have humbled many souls, including myself which is a cure for high prices is high prices. It's an incredibly interlinked commodity, both from a markets perspective, geopolitics perspective, and economics perspective. Much of, in particular, fossil fuels have substitutes.

There is a switching cost involved to some extent, though. The biggest lesson I take away from having worked in particular at Equinor, is to always follow demand, not supply. So the pace of change needs to follow where the customer is going. Don't get ahead of that because you might be too far ahead of your ski.

Sanjeev: I’ll move on to phase two of this podcast, which involves my favorite film, one of my favorite films, Syriana. And there's a great line in Syriana. I have a firm full of lions that are sheep. Maybe you're a sheep that's a lion. But that's a great line.

But the film itself, I think, thinks about a fossil fuel system not just as an energy system, but the thesis is it's a geopolitical system. And I think we've all known that. That's part of, frankly, why I chose this career, in addition to climate and other externalities, was really energy security and all the above approach.

I was 22 when 9/11 happened, and this was before shale took over, to your point, Bala, and it was clearly one of the motivations for me to enter this field and career. And Frank, you wrote a recent blog post around what's happening in the Strat of Hormuz and the current war in Iran. Maybe just for our audience, summarize this for them? Just 'cause it, provides a bit of a table setting for I think what we're about to talk about.

Frank: Yeah, absolutely. I think for our generation at least, this is a truly, like the first energy crisis in the true sense that we've seen. Because what's playing out right now, and this is irrespective of what happens going forward, but what has already played out is a disruption, a dislocation, a shock to a nexus in not just the oil system, but the entire global energy complex, global energy and global industrial complex that has ripples and wake effect that is going to have significant, probably medium to long-term impacts. And so let's talk about that a little bit.

In the near term, obviously, what's happening in the Strait of Hormuz is a disruption that's been put in place to the delivery of 20 million barrels of oil a day. That's a big issue. Now, there are mitigating mechanisms playing out right now to try and reduce that kind of disruption to that near-term flow.

Analysts out there are suggesting that regardless, and if we pull every lever we have, we're still going to be three to 5 million barrels short relative to where we were before. So that has an immediate effect in a system that's tightly balanced, and we're gonna see that ripple through the price of liquid fuels for a period of time.

The more interesting element for me, to be very honest, Sanjeev, I think, is the fact that, and people don't realize this as much, the Strait of Hormuz are also crucial in the natural gas market. Natural gas is, really, the kind of hidden hero of the energy system in that LNG in particular has become the vector for delivering energy to many countries around the world.

And that system is exquisitely tightly coupled and balanced. And so now we're in a situation where Qatar Energy has two of six or seven trains they've taken offline. It's taken about 20% of their production capacity offline. And that means that the world is short of LNG and will be short of LNG for years to come, regardless of what happens, right?

So we're gonna see structurally higher LNG prices owing to the balance that exists in that market and the fact that Qatar has major infrastructure offline for a period. Now what does that mean? First thing I think it means is that countries dependent on LNG that's physically sourced in the Gulf, Southeast Asia and even into Europe, both of those countries have already seen a major uptick in their price of natural gas, and that's going to lead to real questioning about how they want to power their economies from an electrical point of view going forward.

And I think actually just creating a very interesting tailwind for alternative sources, whether it's nuclear, whether it's low carbon sources like solar, more wind, exactly the same thing as playing out in Europe. The price of gas has doubled at the TTF in Europe in the last couple of weeks. And you're seeing the momentum already beginning to return around the need to really focus in on our local energy independence. 

But I think the most interesting point might be in the US context. The reason we have low or cheap natural gas isn't necessarily that we have a lot of natural gas. We have lots of natural gas, but it's because we haven't been strongly linked to the other international markets where the prices were structurally higher, and it was expensive to trade that gas.

But over the last decade, there's been a lot of change. We've begun to build LNG export capacity, and now we have meaningful LNG export capacity. We're actually the largest LNG exporter in the world. That capacity is pretty full, but we have meaningful capacity that's gonna come online here in the next, let's call it six, twelve, eighteen months.

That capacity is gonna fill the Qatari gap. And that capacity, the cargoes that flow, they are going to go at the new price for international gas that's gonna be higher, and that's gonna pull real upward pressure on natural gas prices in the United States, in my view, structurally over the longer term. We are now more coupled to international gas prices, and that's gonna have repercussions in terms of the cost of obviously gas, but more importantly, probably the cost of power from gas in the US over the medium and longer term. And that has a whole host of other repercussions in terms of the relative cost effectiveness of nuclear, of wind, or solar, all by the way, resources that we have a lot of to exploit and that are pretty cost effective already.

So I think we're gonna see a meaningful shift, Sanjeev, in global energy system focused design. And the balance that exists between pure economics and questions around security of supply over the next while. And then the final point I would add, and we should spend some more time on this, maybe later, is beyond the gas itself.

Gas is the key input into a whole host of crucial derivatives for the broader economy, the most obvious one being fertilizer. And we're having a major disruption in fertilizer supply globally because of this conflict as well, which will take time to play out. Right now, we're entering the planting season in North America.

We're structurally short of fertilizer. There's a real question about what balance of crops are going to be planted because of that. We could find ourselves, in fact, I'm pretty certain that we're gonna see real inflationary pressure in the food system flowing from all of this, and that obviously has a whole host of broader implications as well.

So those are some kind of just, interesting kind of outcomes from two or three weeks of a minor kerfuffle in the Middle East and how it could play out for us over years to come.

Sanjeev: I think I looked at the forward curve on the Henry Hub on Friday. The Jan 27 number had a five on it. We'll see what happens. And then, we have a lot of tentacles in obviously the food system and urea is up 30% since the start of the bombing. And the other thing that I don't think people appreciate is a lot of the food system is based on logistics and frankly, trucking. That is gonna have implications on obviously diesel, logistics, and food inflation. Bala, where are you seeing these things play out, and then, obviously, it's only been 30 days, but what have you seen already, and where do you think we're headed?

Bala: Yeah, I'm gonna make this a lot more personal. What I mean by this is two weeks after the Middle East conflicts arose, I called my mom, and she was complaining to me about how she did not have access to liquified petroleum gas, LPG, which in India is distributed through cylinders.

We don't have pipe gas. So the conflict from the Strait of Hormuz had translated to an impact on the stoves in Chennai, which is for my entire life, my mom has told me that cooking South Indian food on an induction style, it's a complete no. And what she was doing was pulling out the induction stove from an attic and putting it to work because the security of supply of the next cylinder coming through was not there.

So I think the impact, particularly from the Middle East conflict, is spreading faster to the east because of what Frank alluded to, which is that much of the supply was going towards the east. So we've seen Singapore jet fuel prices rocket up. We've seen Newcastle coal prices set an all-time high. Sri Lanka declared Wednesday is a public holiday.

So this has some real implications on human life and livelihoods. And to Frank's point, because of how the US in particular is insulated to some extent, we've not seen the price hike flow through as yet, but it's coming, and it's coming in the form of, to your point, diesel prices being at $5 and gasoline prices now inching above four.

But we've seen this happen before with the Russia-Ukraine War. Europe saw this happen, prices went up, and we thought there was gonna be a structurally higher price for energy security, a premium for energy security. Unfortunately, that didn't happen. It’s possible because there was more supply coming, especially from Qatar and from LNG.

So prices went back down. So we didn't really see that sort of stick for a long time. So my big question that I'm watching for this time around is will it be different? And this time around, will we ascribe a premium for energy security?

Sanjeev: Yeah, Frank sent me the paper and I said, mean reversion, because we've all seen this several times, and humans, for whatever reason, have a panache for status quo, mean reversion. Having said that, I think the longer this drags on and I wanna bifurcate the implications in three geographies.

One geography is broadly, the actual economies that are impacted, to your point is really East Asia and then some of the emerging markets that draw their importation. What I've heard the group thinks say is long coal. Because you need security of supply but two, a greater desire to embrace all the above solar, wind, mainly solar battery, EV. Do you guys buy that group? Think we're going, three different geographies, but the geography most acutely impacted. This gives an opening, frankly, for China to come in and offer, Hey, Sri Lanka, Hey, geography X or Y, and even before the crisis, Pakistan was deploying a ton of rooftop solar at a dramatic level.

Do you believe that this could be an accelerant to that all the above? Particularly in those geographies?

Bala: Yes, and it's never black or white. There's always some gray in all of these. But I say yes because I read that I go back to induction stoves as a leading indicator here, to some extent. The demand for induction stoves on Amazon India was up 30 x compared to the week before the conflict arose.

And to some extent, maybe the way I would draw the distinction is especially in Southeast Asia. The demand for all of the above, the demand for alternative sources is being pulled both by onsumers at their level and by the government. Consumers because they wanted to add resilience and governments, because your fiscal deficit is gonna go up. You have to protect your currency, you gotta raise interest rates, which is not good. Whereas maybe in the other geographies that we’ll discuss, the consumer hasn't felt the pinch yet, and therefore it's delayed.

And therefore, maybe the governments are the ones leaning in today. But over time, it'll happen across both.

Sanjeev: Frank, what are your thoughts on that?

Frank: So different geographies, definitely. But I also think like different kinds of ex-anti circumstances. I really think we're at a point today, Sanjeev, where if you are sitting down to build tomorrow's energy system, i.e., you have Greenfield's growth needs to fill. You don't make the same decisions.

You don't build a system that looks like the system that we've had in the US or in Europe for decades. Bearing in mind that those systems, they really haven't seen very much growth for decades, right? If you take power, for example, your Pakistan example is a great one. I think the entire continent of Africa is gonna be another interesting one, right?

How do you go about building for future demand? And my view is that we're going to see materially more solar in particular. Different countries will take different approaches, but solar is particularly effective. Solar plus storage 'cause solar plus storage is already quite a compelling solution in many contexts.

If you strip away things like tariffs and so on, storage is very cost-effective in many regions. I think you're gonna see more electrification of transport. We see people still buying lots of pickup trucks in the United States, but you go to Europe now, and to your point about China.

I go to Europe every six months, there's a new Chinese brand of car on the street every six months that I've never recognized before. And they're really high-quality products. And that's not just in Europe, that's in Africa, that's all over Asia, that's in Australia. And in South America, by the way.

So I think the United States, to a certain extent, maybe, we’re living in a kind of insulated little bubble, thinking, Yeah, this isn't happening. The world is changing in that respect. I think for us here, things are a little bit different obviously, because you have such an established stock of assets and so on.

However, we're also seeing real demand growth. And I think, despite what we're seeing in terms of like policy direction and so on, at the moment, people that really need to fill capacity, demand, and so on, right now, see the rationale in building lots of solar plus storage alongside some additional gas and so on.

I'd also say that, and I think this is an interesting leading indicator. The big producers of gas turbines, I think are being very sensible this time around. They're being disciplined in terms of not putting too many products on the market. I'm not quite sure whether that's rent taking, certainly some of it is rent taking, but it might also be a view that the medium to longer term isn't necessarily gonna be as gas-centric as one would imagine.

We'll see, but that's a suspicion that I have.

Sanjeev: Speaking of gas-centric, let's move to Europe. They just can't win. Like Russia and then now they had a pivot to obviously Norway, in that region and Qatar and to a certain extent the US. What does Europe do?

Bala: Yeah, it's tough being in Europe, unfortunately. And this is one of the reasons why Europe, in particular, and UK embraced offshore wind because that was their ability to electrify at scale in the power sector. But an average UK household uses three times as much gas as electricity.

And even that electricity is powered by gas, right? So you just can't get away from gas if you're in Europe. What I've read is that much of the impact of Russia- Ukraine, resulted in de-industrialization. So it's not that demand has ever picked up, it's just gone completely with many refineries and production and industries being shut down.

So truly, they need a new version of a Green New Deal or a new deal to start with, to get back to growth, get back to industrialization. But that all starts with cheaper electricity. I was reading that even Japan is reconsidering nuclear.

When you have LNG prices at wartime prices, people rethink their priorities. And this is where I go back to just the priorities of change now, which means every country should be thinking about bringing back nuclear. Every country should be embracing local oil and gas production. The UK is rethinking gas production.

There are plenty of resources in the North Sea, and embracing Norway in particular, because Norway is a secure supplier. And therefore being willing to do more longer-term offtake contracts with a supplier in Norway who should enable Europe to get to a better footing. But it's not easy.

Frank: I think Sanjeev, the problem for Europe, first, there's the economic problem, right? But then there's also a security of supply problem. So to Bala's point, I think, you could get back to business, drill more in the North Sea. You can certainly rely on the Norwegians. All of that's fine, but that asset or that product is ultimately going to be coupled into the global market one way or the other, and very difficult to shake that dependence.

And so I think that what Europe needs to do. And I think they're trying to figure out a way to do this, but is to at least bring more decoupled electrons onto the system. And, offshore wind, largely, there's a lot of solar being built in Europe too, but offshore wind is and will continue to be a big vector for growth there that will help to mitigate the worst effects of the price volatility issue.

The broader issue of just pure security of supply. That's a question, I suppose, in terms of the trajectory of their overall economy. And as Bala said, does the de-industrialization trend accelerate further? Who knows? But I think they find themselves in a really tricky energy situation right now.

Bala: Maybe on a positive note. This is my favorite data point, especially coming out of Germany, which is prior to the Russia-Ukraine war, Germany was consenting or permitting four gigawatts of onshore wind. Post Russia, Ukraine War, they announced a planning reform similar to what we are trying to do in the states in terms of permitting reform.

And last year Germany permitted 16 gigawatts of onshore wind four times as much as pre Russia-Ukraine. So what that tells you is that if there is a will, there is a way. And this was done clearly with the intent of security of supply to Frank's point, and more countries should be leaning in on this to unlock energy resources that are decoupled from international markets.

Frank: Yeah. I think that's a great example. I would say, all of this, by the way, is suffering from decades worth of ambivalence that has been allowed to build up in terms of institutional programs and capacity and process around energy and energy security, right?

And in Europe I see this all the time. In my own little part of the world in Ireland, fantastic example. Ireland has been talking about building offshore wind for as long as I've been like an aults. And it has a fantastic offshore wind resource, and it still hasn't managed to get a commercial facility in the water. And that's a little country that sits out there with one single connection to the natural gas grid in the UK as its only alternative. The entire economy is sensitive to a compressor in Scotland. That's it. 

And it's crazy, but that mindset has evolved from the kind of broader complacency politically that the last 20 or 30 years of our lives certainly have allowed, and everything has now changed. So I think there needs to be a truly kind of politically driven focus on, hey, the old rules are no longer relevant.

We need to build things. We need to stop judicial reviews. For every small Mickey Mouse point, there is a collective need and a collective good that has to be focused on. Because what you've seen in many countries, take building a transmission line, for example. We need to build a lot of transmission, but it is nearly impossible now.

And that's always because there's some individual property right issue. Fair enough. But there is this kind of challenge of what's the collective good relative to that single kind of single issue, and how do you strike that balance? So all of that is now on the table. There's just so much more dynamic now than it was over the last 20 or 30 years I think.

Sanjeev: Yeah. The other thing that I've tried to learn more about it and see if there's a theory of change around is can you couple this energy diversification with industrial defense policy, which I think has broadly got consensus and as NATO continues to weaken, as a core thing, that could be the best thing that happens to Europe, and Frank, to your point, create a crisis to build. And you pair an industrial defense complex for Europe, by Europe with an energy transition, that could be a theory of change.

TBD. I wanna bring us back to the US. Obviously, we've got a lot of just intelligence from our own portfolio, our own co-investment partners are strategic, et cetera, et cetera.

What I want to get to a little bit first is I've heard this thesis that we're just like, and Frank, I wanna go to you 'cause you literally wrote the paper on this is we've got a ton of shale gas, it's infinite, and therefore we're good. And I want to get to the L&G point, but do we have an infinite flow of shale gas?

Frank: So in the concept of resource economics, there's the technically recoverable resource and the economically recoverable resource. And then there is the resource. And the resource is a spectrum that is enormous, truly enormous, the technically recoverable resource and the economically recoverable resource Sanjeev, these are coupled dynamics. And typically how it works is when prices increase enough, you are able to spend more on the technology to broaden the technically recoverable resource. And shale gas is exactly that, right? So to be clear, 20 years ago, 30 years ago shale gas was not considered a technically recoverable resource.

It certainly wasn't an economically recoverable resource. And we were producing gas from fields in the Gulf of Mexico that had permeabilities in the millidarcy range. I don't wanna be too technical here, but just bear with me.  

Sanjeev: Let’s nerd out.

Frank: We gotta nerd it out, right? So that's how easy it was for the gas to flow through the rock, basically, view it as a sponge, right?

It's effectively a pipe, actually, just a framework through which the gas could flow. Even good shale has microdarcy permeability. So a thousand times less capacity to flow gas. That's why we have to frack it, et cetera, et cetera. So it is definitively a worse resource, but if you are willing to spend more to put more energy into it, you can get that energy out.

And that's exactly what played out because, when the shale boom really took off, prices of gas were actually eight, nine, $10. We were gonna be a huge LNG importer, if you remember.

Sanjeev: Yeah, Greenspan went on in front of the Senate and said, we need to build all the L&G import facilities. 

Frank: So suddenly, we figured out, oh, we might have a lot of gas in these rocks. And you saw this huge boom. The boom is like a classic bit like, clean energy investing, and so on. A huge amount of money rolled into it. I'll be very honest with you. I don't think very much equity value at the primary extraction level was created. But what I did do obviously was provide for the nation a resource base.

Now that's much more expanded. Same story with the oil and tight oil. We are producing a lot of oil now, but we're producing oil from really very marginal rock, relatively speaking, right? So we need the prices to be pretty high for them to work anyway. And I think none of that's gonna change.

This is a one-way process here. But if we move into a world, Sanjeev, where the US gas price is coupled more tightly to international gas prices, we will have more than enough gas in the system in order to deliver into that market for a long time to come.

I think that the question is, though, do we have a lot of cheap gas? And the answer there is, I don't think we have that much cheap gas. And very specifically. We have a lot of gas today that's coming about just because it's being co-produced from Oil.

Now, if that oil production wasn't taking place, you would not be producing that gas, and the price of gas would need to be higher in order to supply that gas

Sanjeev: Which is where we sat pre this war, I would argue.

Frank: Completely.

Sanjeev: Bala, for two years, I would just call Frank on weekends or nights and be like, particularly with Russia-Ukraine does gas go from local regional pricing, which we've all lived through to some sort of global couple, similar to oil, effectively has some coupling to the global markets, obviously two or three different benchmarks, principally three.

Where are you on this? Do you think this is as important as I'm making it, like understanding where the gas price sits?

Bala: Yes. For two reasons. One, I look at sort of other examples of what has happened in other countries. Let's take the example of Australia here. Australia is a huge exporter of LNG. What effectively happened as a consequence of them exporting so much LNG was that they were importing international LNG prices into their domestic markets.

And soon enough, whether it's steel, aluminum, all of the industrial companies are like, holy crap, why am I paying this much amount for my gas? You need to reserve gas for local domestic production. You need to guarantee US prices, which are lower than international markets. And nationalism, to some extent, that trend started in, in a big way, and I think it's still there in Australia to a large extent.

One of the first things that I think post-conflict that I saw, the US administration announced is that we will not be curtailing exports of oil. 'Cause you can naturally see where that was heading towards. So at a time when demand for gas has never been higher, in particular because of demand from data centers, right?

And much of the data center needs are being met by gas. So far, we've lived under the presumption that hyperscalers in particular are marginal buyers who are relatively price-insensitive. But if cash prices double, will they still remain price-insensitive? It is a big question. Hence, the importance of knowing how much of gas inflation will we be bringing into our shores is critical. Maybe the last point here is, I don't see that directly impacting residential customers as yet because much of our bill is linked to cost to serve, then cost of energy, and that has a lag. And over time, that's not a huge driver.

But certainly from an industrial perspective, that'll have more near-term implications.

Frank: One thing before we finish on that, Sanjeev, just to state that this is a little bit like the argument about putting tariffs on solar panels. The higher gas prices in the US are effectively because we link into the global market, which is effectively a tariff on US, value-added use of that gas.

Relatively speaking, we make much more money, and there's much more economic advantage to doing things with very cheap gas than there is to selling the marginally more expensive gas. And so, it'll be an interesting question over the next 10, 15 years as to whether or not that's a good thing for us to be producing more expensive gas, and whether it's shipping it elsewhere or whatever.

What does that mean for the industrial advantage that the US has had for a long time?

Sanjeev: One fashionable thing, particularly in the last 12, 18 months has been, hey, the easy button is gas because of dispatchability and reliability. Do you think our friends in data center land come up with new frame, like new design metrics or new design features or are we still betting on gas because of dispatchability and reliability?

Frank: I dunno, Bala, your thoughts on this? My view is a five-handle is not a problem for these guys to be very candid. If it were a 15 handle, or certainly a 10 handle that's more interesting. But I think the data centers, Sanjeev, they have a bigger problem in that they just can't get the power.

They would take that power any which way they can get it for a period of time now. Five years down the line, the question is, what's the marginal value of that next data center that might be materially different? Because I do think if we step all the way back, not to dive into data center land too much.

There is already a shift beginning to emerge, beginning to reflect on whether or not data centers are actually a tech product or is it actually some sort of infrastructure product? I think we're gonna veer more towards its infrastructure, and as we move towards infrastructure and just the plumbing of the economy, then I think the cost of the input energy is gonna become more and more relevant over time.

Sanjeev: Bala, just as we do this collective magical thinking around the token economy, the highest conviction thesis I have is physical AI and autonomy. And one of the places I have that is electrification of transport because I just think ICE engines just can't compete if you're doing 80 to a hundred thousand. Where do you see that playing out in terms of mobility and electrification and EVs and fleets and other things? Is this an additional tailwind and the top of the physical AI, or is this episodic and mean reversion will happen, and all goes back to 65, 70. How do you know, how do you think about mobility and transport and electrification?

Bala: Yeah, autonomous vehicles is a huge tailwind for electrification, but one that has emerged to your point in the last sort of 12, 24 months. People knew it was coming, but the speed at which people have adopted autonomous vehicles, and in particular ride share, has urprised many and will continue to surprise many.

So I think there is clearly an inherent demand, and that's backed by incredibly well-capitalized players. So this is not a trend. And this administration and the previous administration have been in favor. So I see all signs pointing towards more of it and therefore, that driving electrification. Setting that aside, fleet electrification has gone through a fairly challenging time of the last sort of two years, right?

And the recent spike in gas prices would certainly capture the attention of fleet owners. But for durable adoption to happen, you need to know whether the OEMs are behind it at scale, whether charging reliability works. So I don't think anybody's rushing to buy electric vehicles just because gasoline prices today are five, but certainly they are dusting out the math and making sure they're looking at it again, and certainly maybe pausing buying ICE vehicles now and thinking about secondhand EVs as a potential option.

So this is an incredible tailwind for electrification. And one, if you're the CEO of big oil, the last thing you want is a crisis like this. Because you are literally at the point in time where people are not talking about net zero. The whole green thing had gone away from the zeitgeist to some extent.

And just then, you have price hikes, which will eventually result in adoption of newer technologies. Every customer who moves from an ICE vehicle to an EV is one that you've lost forever, right? So that is never coming back. I'm putting a circle on this to some extent to say even big oil hates this despite the fact that they're making tons of money.

And hence electrification around autonomous vehicles is here to stay. But fleet electrification, not yet.

Sanjeev: Are there any, and this is a just ball for both of you, is there anything that's like off the headlines are non-obvious that you think, oh, this could actually like spur investment in this or reduce demand in that? Is there anything that you're seeing either through our work in the portfolio or new pipeline of investing or just discussions with strategics or co-investors? They're like, Hey, I didn't think this was occurring.

Bala: I was talking to a friend of mine in New Jersey who said he put rooftop solar because he knew that the utilities in New Jersey, in particular, were raising electricity bills by 40%. This had nothing to do with tax credits, he was like, the economic case made sense, and therefore I adopted rooftop solar.

I think behind the meter, energy efficiency solutions so far have always struggled because the economic case was marginal and reliant on tax credits. If you believe, and we've been in this camp of there is higher for longer power prices, utility rates are going up. with this geopolitical shock, and that's staying even higher, potentially, there might be a much bigger tai wind for energy efficiency behind the meter solutions and distributor energy resources more broadly.

Frank: I'd also add Sanjeev, quite aside from just there being a range of niche, I won't say necessarily very niche, but niche applications where electrification now is just the right option relative to, let's say, a fossil fuel sourced solution. I think that one trend we're seeing a lot now, not quite in the US, although that's changing in the US too, but certainly in Europe, is the value of standalone storage is now being framed in terms of its capacity value as opposed to what a lot of, particularly standalone storage, has spent a lot of its life trying to be like an arbitrage exercise. And that's a bad idea in general because it'll be arbitrage until you kill the arbitrage.

But now very sensibly, people are beginning to see the value in what storage really is, which is a bucket that you can put some energy into. And there's a willingness to pay for that capacity. So in Germany, for example, they've had quite an immature utility-scale battery space.

They haven't had great rules around it and so on, market structures. That's changing rapidly. They have many hours where the price of power is upside down badly and power traders and so on are seeing the value just having capacity contracts in place with storage tolling batteries effectively, which is really helping to accelerate that value.

And it's also importantly, for us as investors, it's putting in place a new framework where I think you can make a more considered, less risky bet on a portfolio of storage assets. I think what's playing out right now more broadly in the kind of energy upheaval is only going to accelerate that.

And here in the states, similarly, you're seeing obviously lots of solar being built, but all that solar is coming with a battery now, and all that battery capacity is there in order to provide capacity. I saw a fascinating graph a few days ago. Batteries provided 50% nearly of the instantaneous power in California a few days ago during the ramp down in solar and the ramp up in gas.

That's exactly what they should be doing. So I think we're gonna see the role of storage really coming to the fore. The flexibility that it offers, the system really being exploited more. I think that's a good thing.

Sanjeev: Yeah. And I think in terms of just a system level, some of the things that I think are gonna happen and certainly our colleagues believe this, in the ocean side, this is probably the greatest vector for ocean intelligence mapping and understanding, particularly, it's gonna be a huge sort of CapEx spend from both defense and other applications. 

I think in the food system certainly, urea and alternatives to that there's a tailwind there. Logistics issues, a huge issue there. Interestingly, though, there's also, and I know it divides the masses, but there's a lot of interest in renewable and fuels from a biomass perspective, I think they're trying to learn the lessons of the last time we tried it, but still, I think there's a greater interest, particularly in the emerging markets, to your point, Bala, around some of the core, like just functional things that folks need.

So although this started as an energy crisis, it has implications beyond that, just given how core it all is from a system's perspective to the point around, useful energy turning into useful materials.

Frank: As a slightly I won't say controversial comment, but

Sanjeev: Let's end with that. I like it.

Frank: I would question, really I would say it's fair to say that the current US administration has really led a refocusing on the priorities for the energy system and so on. And again, that can be debated, but it is what it is.

But I think quite interestingly, what's currently playing out right now may in fact lead to a more collective reframing and re-imagining of how we approach our broader energy system in a way that might be much more effective than anything that the Paris Accord or whatever was able to deliver.

This is a moment, without a doubt, in the energy history of our careers. I think there are a number of different directions that things could go from here, but I think that whatever the direction is, it's gonna look quite different, I think, in 10 years than what the status quo was two months ago.

Sanjeev: With that, you have the last word, Frank.

Frank: I'm good with that. Thanks.

Tonya: Thank you for tuning into the S2G podcast. If you enjoyed this episode, please subscribe, leave us a review, or share it with a friend. For more information or to connect with us, check out s2ginvestments.com.