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'Squarely on strategy': CPPIB says stake in California oil and gas producer fits ESG plan

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aerea-cppib-gs0301

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.

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“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.”

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