Commodities and Global Markets Podcast Series

Episode 9 Transcript

Macquarie Podcast Series featuring Commodities and Global Markets

Speakers: Scobie Mackay with Ozzie Pagan

Recorded on 17 November 2020.





Voiceover: Welcome to the Macquarie podcast series.



Scobie: Hello, everyone. My name is Scobie Mackay and I'm a Managing Director in the Commodity Markets and Finance team in Houston. I'm delighted to welcome you to the ninth episode in our Macquarie Podcast Series, featuring Commodities and Global Markets. Today, I'm pleased to be joined by Ozzie Pagan, Senior Managing Director in the Commodities team.

Ozzie, thanks for joining me today. Before we talk about what Macquarie is doing in the energy transition and environmental space, can you tell us a little more about your career?



Ozzie: Sure. First, let me say it's great to be here with you, Scobie, talking about energy transition.

So, I started a while ago as an electrical engineer at an investor-owned utility in Florida. There I got to learn a lot about infrastructure control systems, operations and even some development. My career took a turn towards trading around the time that electricity markets were deregulated here in the US, and that opened doors into structured transactions, which I really enjoyed, especially around coming up with solutions for clients as well as finance opportunities. That was the late 90s, early 2000s era, where we were also in a transitional phase. Back then, as you might remember, we were changing from a coal fire generation and oil fire generation fleet into a much more cleaner and more economical natural gas fleet, which we still can see today.

How about you, Scobie, how did you get into this?



Scobie: I started off my career as a lawyer and after a number of years of doing that, I had the realisation that while I enjoyed some of the structured cross-border commodity finance work I was doing, the people that were really interesting to me were the ones that were actually designing the transactions that I was working on. And so I made the decision to go upstream, if you like, into deal origination and structuring. I did that with Standard Chartered and after a number of years there I had the fortune to be able to join Macquarie, which really attracted me because of the level of creativity and entrepreneurialism that it allowed and even expected from its staff. And that's what’s kept me very engaged and interested here.

Just a follow-up question, and this is one that we always ask on these podcasts before we get started: what was the best career advice that you’ve ever received?



Ozzie: So, it's really two which I condense into when I give advice: I say, keep a learning mindset, but the two best pieces of advice I found useful for myself were, one, was to pursue things in your career that you're interested in. It's just a natural extension of keeping a learning mindset because you keep wanting to get better and to learn more about it. The other piece of advice that I put together with the first one is don’t be afraid to fail. Many times when we're innovating and creating we don't have all the answers. The real key there is to learn from your mistakes, so you don't make the same mistake twice, especially in a place like Macquarie where we're kind of a bottoms-up organisation and it's the people in the market talking to clients and trying to meet their needs that will help us transition into future phases of what we do. It's really important that we keep learning, keep innovating and not be afraid to make mistakes that we can learn from and obviously non-critical mistakes that are associated with risks worth taking.

How about you, Scobie, what's the best piece of advice you've been given?



Scobie: I think I've been fortunate in my career and received quite a bit of good advice, but a couple that stick with me are, firstly, diligence is the mother of good fortune. Hard work inevitably, with the right outcome in mind, pays off and I think Macquarie is a place that recognises and rewards that. I think another piece that always stuck with me is I aim high, and again I think Macquarie is a sort of work environment where the sky's the limit. People will never discourage you from following through on an idea and thinking broadly. I think that really differentiates us. And then I think the third one is, don't be afraid to question the status quo and look for new ways of doing things. And again, I really do think for me, my experience at Macquarie has very much been that people are really willing to have a sensible risk reward discussion and think big and so I think this is the sort of place that allows for that sort of thinking.



Ozzie: You're certainly in the right place, Scobie. So why don't we turn to the energy transition. Can you walk us through what Macquarie is doing in in this space during this transition, but especially around our commodity efforts?



Scobie: So there's a huge amount going on across the group. And in fact, the group has what we call a global green committee, which is sort of an umbrella, which is intended to coordinate a lot of these efforts. Just zooming out for a minute before we get to commodities: within our asset management business and our principal investment business, we have a combined 46 gigawatts of renewable energy assets in operation or being developed. And I mean, that makes us quite a big player just in the renewable energy space alone. Within the commodities business, we're focused on a range of emerging themes, and there's quite a long list of these, but I'll just touch on a few here as sort of key streams of work that we're focused on. One of them, and one that maybe cuts across some of the other efforts in various verticals, is carbon as a commodity and as an asset class.

So what we're seeing is that carbon as a commodity has outperformed a lot of other commodity types and indices in the market over recent years, and there are emerging a plethora of different ways in which investors, traders and corporates can have access to carbon and carbon pricing in the carbon market. One of these key themes that we're quite focused on is carbon offsets and we can speak a little bit more about that later, but carbon offsets are seen to be a key tool in getting us towards a net carbon zero outcome in the coming decades. And we really just see a lot of emerging business around that. Associated with that, I think, is efforts around things like bundled commodity solutions: so, putting traditional commodities together with carbon offsets to create carbon neutral commodities, and we see a lot of opportunity there.

The next bucket, I suppose, which is related, is future fuels. So, within that, we would see things like hydrogen, which has been around for quite a long time, but there is a real renewed focus on hydrogen. And with that renewed focus, there are emerging some really promising, economically viable models for hydrogen deployment and build-out at scale along various supply chains of hydrogen and related infrastructure, and we really see that as an opportunity that we want to be involved in. Alongside that, in the future fuels bucket, we would see sustainable aviation fuel and biodiesel and other biofuels. These are interesting for us for a number of reasons, obviously partially because demand is growing and we think it will continue to grow, but also they put together various pieces of Macquarie’s existing business. So, the feedstock for a lot of these assets, these refineries are agricultural commodities that Macquarie has deep expertise in.

So, we can be involved both in the feedstock physically and, or from a hedging perspective, in the asset from a debt perspective, for example, and also in the offtake both physically and financially. And so that's a very interesting emerging stream of work.

A third stream is green tech and assets, and that's quite a broad category, but that would include things like battery storage, which we're quite focused on at the moment, carbon capture and storage. We've just made an interesting equity investment in a carbon capture and storage asset in the UK, which will be one of the first of its kind in the United Kingdom. Our Specialised and Asset Finance team are quite focused on waste and recycling, smart meters and zero emissions transport. So, there's quite a lot going on within that category. And then I think over the top, we have an umbrella which is exchanges and indices, and we have invested in – and are continuing to invest in – exchanges and related products. And we see a real emergence for environmental products that give investors access to things like carbon, but also plastics, recycled plastics, for example, and renewable energy products.



Ozzie: That's quite a comprehensive list of opportunities and you've obviously touched upon many of our existing energy and commodity segments, as well as some technology and emerging segments that we can see. But as you might remember, we've been here before in kind of the 2008, 2009 period. Could you maybe just tell us about what you think might be different around what's happening today, almost a decade later, as well as the scale of the opportunity in front of us?



Scobie: It's not an unreasonable conclusion to think that maybe this is just another cycle that we're going through and this interest will recede. But I think that if you zoom out far enough, you can actually see that the interceding decade between 2008/09 and here is probably the anomaly, and there's actually a much wider trend at play. If you look at the emergence and development of the wind and solar power sectors, I think you can see quite a long development curve there, with installed cost of power production coming down very dramatically over that period. And really this is just a continuation of an inevitable theme. In terms of the scale it's so large that it's very hard to comprehend, but there’s a few examples. So the Intergovernmental Panel on Climate Change (IPCC) has estimated that the investment required to achieve the low carbon transition ranges from something like $1.6 trillion to $3.8 trillion annually, going out to 2050. That's just on supply side energy systems alone. Separately, the global commission adaptation has estimated the cost of something like $180 billion annually just in this decade alone, just for the energy transition. And so essentially there is an extremely large change that needs to happen during this decade. We need to cut emissions by about 50%, according to the IPCC. And what that means is there is a very, very big challenge ahead of us, but there's also a big set of opportunities that we hope to capitalise on.



Ozzie: So, as you know, Macquarie’s been involved in renewables energy transition, and actually going back to 2005, we participated in the emissions trading system in the UK. Can you explain at a high level how carbon trading works?



Scobie: Obviously, there are a lot of different iterations of this, but fundamentally we could bucket it into two categories. So, the first category is compliance markets. And in compliance markets, as the name suggests, a regulator imposes a cap on emissions and that's imposed typically to different types of economic actors within the jurisdiction. Actors that are emitting below that cap are able to generate emissions credits and actors that are operating above their emissions cap go into deficit and then the credits and deficits for the credits can be traded. So people that are acting more efficiently from an emissions perspective are able to sell the credits that they generate to people that are in deficit, and that's referred to as a cap and trade scheme. The largest cap and trade scheme in the world is the one that you referred to, the European Emissions Trading Scheme. California has a well-developed one also, as do other states and provinces within North America.

And then there are other places in the world that also have compliance markets, like South Korea for example. Australia has its own, New Zealand has its own. In parallel to that you have what's called the voluntary international carbon market. And again, as the name suggests there, that market is voluntary and what that allows is for corporates to go into the market and to voluntarily buy a carbon offset to offset the carbon footprint of their business. What is an offset? Well, an offset is essentially, think of it as a negative ton of carbon. It's a ton of carbon that has either been sequestered or abated through a prescribed list of activities in a particular country and against which a carbon offset certificate has been issued. And the way that corporates use those is they say, well, I have a certain footprint in my operating activity at the moment. For the time being, I can't abate or sequester that carbon directly so I will buy a carbon offset and in the voluntary market to reduce my net greenhouse gas footprint. And that market has grown very significantly over time. There is currently a taskforce which Macquarie is involved in about trying to scale the voluntary market. And the estimation is that that market could grow anything between 15 to 160 times in the next decade in order to reach the scale that it needs to help us through this energy transition.

What about you, Ozzie? Can you talk us through some of the recent deals we've been involved in and our expertise in this space?



Ozzie: So, one that we just completed that maybe plays off the description you just gave is, we helped to finance, for a client, a bit of infrastructure that cleans up natural gas that is vented from a landfill. So by cleaning it up and putting it into a pipeline, we're now avoiding a venting of methane and the client is then additionally, then able to take that volume of natural gas somewhere else, where they can turn it into a transportation fuel. And we have something called the Renewable Fuel Standard here in the US and that activity of avoiding venting methane, and then displacing a dirtier fuel, creates something called a D-3 RIN, which then has value and is part of this construct of renewable fuels that you were describing a bit in your previous answer. I think transactions like that, as well as some of the transactions you're looking at where bundling some of these voluntary offsets with some of the traditional fuels, are quite interesting and I'm looking forward to how that market develops as we transition to technology type of fuels, like biofuels or beyond.



Scobie: As you know, Microsoft recently announced plans to achieve a net negative carbon footprint, taking all carbon out of the atmosphere since inception of the company on a net basis. These sorts of themes in the corporate world, along with the new Biden administration here in the US, are expected to renew focus on the environment and climate change. Do you foresee a boom in this area, in the short term, and how well-placed are we to be involved in that and take advantage of it?



Ozzie: With the $US2 trillion sustainable infrastructure in clean energy plan we expect from the new Biden administration, I think we'll certainly see a lot of new opportunity. However, I think the groundswell of corporate activity that's been fuelled by consumer expectation is the real engine behind ensuring that this transition is successful. It's certainly quite an important transition. And I think we at Macquarie will certainly be involved in doing our part to meet our client needs.



Scobie: Yeah, I think that leads us quite nicely into the last question which is, as we follow clients into these opportunities, can you describe what's next for the commodities group over the next 12 months?



Ozzie: I think the next 12 months looks a lot like the last 12 months have looked, and we'll keep rapidly adapting and expanding our products and services to help our clients meet their needs. And they're certainly unique, as you were explaining, in all the different client sectors. They all have different goals and are in different transition phases. I believe that our transition at Macquarie will be market-led and client-led. And I also think that we have an opportunity in the commodities group to team up with the other operating groups, especially the Asset Management Group here at Macquarie, as well as the investment banking group, Macquarie Capital, to help bundle solutions for clients so that Macquarie is meeting their needs as best as possible.



Scobie: Ozzie, thank you very much for joining me for that discussion around Macquarie’s efforts in the climate transition. For those listening, thank you for joining us on today's podcast. I hope it has provided some inspiration as you consider your own careers. We look forward to welcoming you to the next episode in the podcast series next month.



Ozzie: Thanks, Scobie.



Voiceover: Thank you for listening to the Macquarie Podcast Series. For more information, visit To find out where a career at Macquarie might take you, please visit


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