Houston lives at the center of global energy. Built on more than a century of growth and innovation, the city’s energy industry ranks among the world’s leaders in nearly every segment — from exploration, production and refining to storage, transportation, marketing and legal services. According to the Greater Houston Partnership, more than 4,600 energy-related firms call Houston home, employing more than 237,000 people and doing business across the globe.
With the world now at a pivotal moment on the road toward a carbon-neutral future, broad expectations are that tomorrow’s energy mix won’t look like today’s. Yet a recent report from the Houston Energy Transition Initiative (HETI) — developed with strategic input from Vinson & Elkins — shows that Houston looks poised to lead once again.
Thanks to a diverse talent pool and deep industry expertise — along with robust infrastructure, favorable geography and an established local financing community — the city already has many of the tools it needs to serve as the world’s energy-transition capital in the critical years ahead.
But for Houston to meet this moment, tools will be only one part of the solution. The city will also need a surge in energy-transition investment to put them into action: a steady rise to $150 billion a year by 2040, according to the HETI report, or 10 times the estimated $15 billion in energy-transition investment in Houston in 2021.
Three Key Priorities
Every corner of the financing community — banks, private equity firms, infrastructure funds, venture capital funds and others — will need to play a role in scaling up energy-transition investment in Houston. But securing this investment will fall largely to Houston itself, and the city would be wise to focus on three key priorities as it works toward that end.
First, Houston should champion energy-transition entrepreneurship. This means engaging energy-focused incubators and accelerators to support entrepreneurs and their burgeoning ventures by providing mentorship opportunities, a forum for exchanging ideas and access to resources that would otherwise be unavailable, including capital.
In recent years, we’ve seen this community flourish. This includes important work at Greentown Labs, where Vinson & Elkins is proud to serve as a founding partner, and the Rice Alliance Clean Energy Accelerator. It also includes significant growth in corporate venture programs and in venture capital and growth equity investments.
Championing entrepreneurship also means strengthening talent recruitment at local universities and law schools, encouraging entrepreneurs to explore energy-transition work and base it in Houston, and working with programs dedicated to driving research and development in — and raising money for — energy-transition initiatives.
Houston’s second key priority should be to foster a supportive regulatory environment. Here, the city would do well to adopt policies that empower entrepreneurs to develop projects, implement them and scale them up — and to advocate for similar policies at the state level.
These policies could include tax holidays, direct pay subsidies, property tax abatements and loan enhancements, among others. Committing to them long-term would give entrepreneurs confidence to move their energy-transition projects to Houston, and this commitment is no less important than the policies themselves.
In our work with clients developing large-scale infrastructure projects, we routinely see how incentive programs can motivate companies to choose Texas or Houston over other locations. At the national level, our clients are choosing to invest in energy-transition projects in the United States, as a result of the Inflation Reduction Act.
As a third key priority, Houston should connect outside financiers — both U.S. and international —with companies that seek to launch projects that can advance the energy transition. Stakeholders must continue to showcase Houston’s potential as a center for world-class energy-transition talent and ingenuity through events designed to educate financiers on the city’s energy-transition opportunities and to encourage them to invest in Houston-area companies and projects.
As Demand Soars, Projects Abound
As global demand for energy continues to soar in the coming years, moving away from carbon-intensive sources will only become more urgent. Doing so will be a monumental endeavor — one that will take ample initiative, innovation and investment to accomplish. We are already witnessing this in the fields of low-carbon hydrogen and carbon capture and sequestration.
Due to the refining and petrochemical industries, Houston and the Gulf Coast region have been a natural hydrogen hub for decades. Vinson & Elkins has a long history advising Houston-area companies in the development of these projects, and more recently our clients are using carbon capture in the development of these assets.
In addition, our clients are developing new ways to produce hydrogen through electrolysis and pyrolysis, so that carbon emissions do not occur in the first instance. Even more interesting, hydrogen developers are overcoming the lack of open-access hydrogen transportation infrastructure by developing on-site low-carbon hydrogen product solutions for both new and traditional hydrogen consumers — in areas such as energy storage, power generation, mobility and steel production.
Much of the experience and expertise held by traditional energy companies and personnel — whether in upstream, midstream or downstream — will be vital to the development, construction, ownership and operation of energy-transition projects. These projects include low-carbon hydrogen production plants and carbon capture, transportation and sequestration facilities.
In counseling clients on projects such as these, we often begin by drawing from transaction and commercial contract structures from traditional energy projects that are most akin to the energy-transition project at hand. In working on a CO2 transportation and sequestration agreement, for example, we can borrow many of the fundamental building blocks from a natural gas transportation agreement. At the same time, these energy-transition projects require ingenuity, creativity and flexibility from commercial teams, financing parties and lawyers to identify how and where these projects differ — and to tailor the transaction structure accordingly.
Houston has long been the dominant U.S. city in all things energy, and it’s ready to lead once again — to be the energy-transition capital of the world.
About the Authors
Sarah Morgan co-heads V&E’s mergers & acquisitions and capital markets practice group and is a member of the firm’s partnership admissions committee.
Alan Alexander focuses his practice on project development, project financings and joint ventures.
Danielle Patterson‘s practice focuses exclusively in the energy and infrastructure industries, but across a broad spectrum of sectors, including the upstream and midstream oil and gas and renewable power sectors.
Publisher’s Note: This content is premium subscriber thought leadership and is published outside of our paywall. Click here to listen to a podcast featuring Sarah Morgan; Bobby Tudor, CEO of Artemis Energy Partners and co-founder of TPH; and Jane Stricker, executive director of HETI, Greater Houston Partnership.