Russ Steenberg likens how easy it is to find lucrative energy investments to what happens when a little boy throws a big rock into a pond.
"There are incredible numbers of ripples that go out from the splash," the head of BlackRock's $18.8 billion Private Equity Partners said in a recent interview. "Well the energy revolution right now is the rock. The ripples are all of the things in the economy that support the energy revolution … that provide all kinds of investment opportunity."
That opportunity has the private equity industry salivating. PE funds have raised $157 billion since 2009 to invest in energy, according to data from intelligence firm Preqin. And they're in the middle of raising even more, with nearly $32 billion collected by 33 funds this year. Energy-focused PE funds that launched between 2002 and 2011 average net returns of nearly 14 percent annually, versus 9.5 percent for the industry generally, according to Preqin.
Warburg Pincus, for example, announced in October that it raised $4 billion for a new energy fund, $1 billion more than it had originally sought. Energy Capital Partners said in April that it collected more than $5 billion for its latest offering, blowing by the original $3.5 billion target. And Carlyle Group is making "great progress " to its goal of gathering nearly $8 billion for two energy funds by 2015.
"It's an unlimited opportunity set," Steenberg said of dramatic changes he anticipates in energy.
"Three letters: L-N-G."
That's what David Foley, CEO of Blackstone Energy Partners, said when asked what investors are doing now that will shape the future of energy.
Indeed, natural gas appears to be private equity's biggest play (the L refers to "liquefied"). Thanks in large part to advances in drilling technology, the U.S. now dominates production of natural gas. Despite environmental concerns around fracking, production has surged because of the country's large shale reserves in places like North Dakota and Texas. BP projects that shale gas supply will continue to be dominated by North America: the continent produces 99 percent of it today; in 2035, it will still create 70 percent.
Foley said that the low cost of natural gas compared to crude oil represents a major arbitrage opportunity. "In commodity businesses where there's usually easy substitution, that's amazing to have that kind of difference in price per Btu," he explained. "Btu" refers to British thermal unit, the most common gas metric.
In 2012, Blackstone invested $1.5 billion in Cheniere Energy Partners to help it build the first natural gas liquefaction export facility in the continental U.S. The project, still under construction, will be one of the first links between massive American gas reserves and the global oil market. Blackstone has approximately $8 billion of equity invested in energy globally.
Foley estimates that gas will generate about 35 percent of electricity worldwide in 2039. Coal will account for 35 to 40 percent, wind and solar 20 percent, and the rest a combination of nuclear, biomass and other sources (biomass refers to plant-based sources of power, such as corn or wood).
William Macaulay, chairman and CEO of PE energy pioneer First Reserve, agreed that natural gas will be a "dominant factor" in 25 years.
He said one major play for First Reserve, which has raised more than $30 billion since its inception in 1983, is backing companies working to improve the producing, moving, storing and processing of natural gas. The firm's current investments include Aubrey McClendon's American Energy Utica, a exploration and production company focused on natural gas in Ohio; Caliber Midstream Partners, which offers oil and gas pipelines to harvest Bakken Shale in North Dakota; and First ECA Midstream, which owns "natural gas gathering systems" serving the Marcellus Shale in Pennsylvania.
"The trends are in place for you to see more natural gas," Macaulay said about the future of global power generation. Combined with renewables—which Macaulay expects are unlikely to generate more than 20 or 30 percent of global power supply—he thinks gas will continue to gain share as the use of oil declines. Gas will ultimately dominate, he said, especially in the U.S.
Shale rock also holds oil, and private equity has been active in backing companies that extract it. After years of declines, U.S. oil production has picked up dramatically since 2010 thanks to the so-called "shale revolution. "
Oil also isn't going away globally. PE execs say crude remains a valuable energy source and will continue to be an important source of power and fuel in 25 years.
"A barrel of oil is incredibly difficult to replicate," said Greg Beard, head of natural resources at Apollo Global Management. "There's simply nothing like it in terms of how much energy content you get from just one barrel."
Beard pointed to the relative ease of transporting oil, the large number of existing pipelines, tankers, refineries and other infrastructure, and the still dominant gas-fueled car.
"If we were going to see major changes in energy consumption by 2039, we would need to be making major changes in the energy system and its infrastructure right now," Beard said. "We are not."
Blackstone's Foley added that oil will still be part of the equation in 25 years, despite a move to electric cars and lower long-term production.
"There isn't really yet a large scale substitute for crude oil as a source of transportation fuel," said Foley. "It'll be a hell of a lot more expensive, but we'll still be using oil in 2039."
But the "revolution" Steenberg and other investors see as shaping energy sources over the next 25 years doesn't take the form you might think. Private equity sees the most opportunity in natural gas and oil, thanks to more effective technologies like hydraulic fracking and horizontal drilling and related opportunities to harness the increased supply.
Instead of a world dominated by renewable sources of power like wind and solar—as people concerned about the dangers of climate change would hope—PE execs see gas, oil and even coal as a substantial component of electricity and fuel sources in 2039, according to recent interviews conducted by CNBC.com on the future of energy as part of CNBC's 25th anniversary.
"People have been predicting the end of oil and other fossil fuels for decades," said Beard. "While there will be some change in the mix, I don't think energy consumption will be that much different than it is today."
That view isn't unique. BP estimated this year that fossil fuels will still represent 81 percent of energy in 2035, compared with 86 percent in 2012. The company also thinks renewable sources will increase from around 2 percent today to 7 percent by 2035, while the prevalence of hydroelectric power and nuclear energy will remain mostly unchanged. Renewables will overtake nuclear in 2025, and only by 2035 will they match hydro, according to BP.
Regardless of the exact mix, private equity is excited by the massive amounts of investment needed to keep up with growing global demand. An estimated $40 trillion will be required to satisfy energy needs through 2035, particularly from emerging markets like India and China, according to recent estimates from the International Energy Agency. The biggest chunk is $23 trillion for fossil fuel extraction, transport and oil refining. Nearly $10 trillion is needed in power generation, including $6 trillion in renewables and $1 trillion for nuclear. Another $7 trillion is needed for general transmission and distribution, according to the IEA.
"PE is barely making a dent given the trillions of dollars the energy industry needs to transform itself," Beard added.
Those investments can make big money; PE firms target returns ranging from nine to 14 times their money on an asset before leverage, according to a senior executive who asked to remain anonymous. A 10-times return over six years, a hypothetical holding period, means an investor rate of return of 46 percent, although returns are inherently diluted by other investments in the portfolio. PE firms generally target internal rates of return of at least 20 percent.
Much-maligned coal too will still be in the mix. Matt Rogers, who focuses on oil, power and gas at McKinsey & Co. and recently published the book "Resource Revolution, " acknowledged threats to coal from the growth of natural gas and increased regulation. But he added that there have been "terrific" innovations in making burning coal cleaner, and more could come.
The demise of coal, he said, "has been widely reported, but is not quite a fact yet."
Rogers said he thinks that energy in 2039 will be a dynamic mix of coal, solar, wind, gas, nuclear and oil, with no one power source dominating. "It will be an amazing competition, thanks to a slew of technological advances across the energy space," Rogers said.
Coal is likely to maintain an outsized presence in emerging markets, according to observers.
Foley said that coal will still likely be the majority power source in 25 years in developing economies like China and India, as they have large domestic coal supplies and less domestic competition from natural gas. "It's cheap and domestic," Foley said. "Even if it doesn't get that much cleaner, coal will still be a primary fuel source for power generation."
In all, coal, oil and gas aren't going away.
"A good percentage of the assets that are operating today will still be operating in 25 years," said Ian Simm, founder and CEO of Impax Asset Management Group. "You can't just wipe the slate clean and imagine that is 25 years time. We're going to end up with a completely different set of assets."
"The mix of the energy will change with time, and it certainly will not be as dominated by oil and gas," said BlackRock's Steenberg. "But rest assured, oil and gas (are) not going away, certainly in this (25-year) time frame, if ever."
Some experts think that private equity's focus on fossil fuels is short-sighted, even if it's rational. Stefan Heck, a consulting professor at Stanford University and former adviser to energy PE funds at McKinsey, said the oil and gas bets make sense in the short term.
"Most private equity investment is still in traditional energy—there's a lot of money to be made there," Heck said, noting a typical PE investment time horizon of 3 to 7 years. "They're not yet making the shift proactively."
But Heck, who believes renewables could generate 50 percent of energy in 2039 and that most vehicles will be electric, said PE firms often think renewables are a riskier investment than they really are and should be doing more in the space.
"There's a misperception," he said. "If you had large investors get into the space in a larger way, it could expand much more quickly."
The focus on old fuel sources, particularly in emerging markets, isn't good news for climate change. BP projects that global carbon dioxide emissions will rise by 29 percent by 2035 as part of a 41 percent overall increase in global energy consumption—virtually all of it from developing economies.
"If left unchecked," the United Nations warned this month, "climate change will increase the likelihood of severe, pervasive and irreversible impacts for people and ecosystems."
To be sure, private equity is doing plenty of renewables investing.
Blackstone, for example, invested $300 million in Indian solar company Moser Baer Projects in 2010. Warburg Pincus led a $75 million financing round in 2009 for Suniva, a U.S.-based manufacturer of solar cells. And Impax has big money invested in on-shore wind farm plays in Finland, Ireland, France and Germany—with plans for even more from its about $400 million New Energy Investors II fund.
Average returns for renewables are difficult to calculate given the low number of funds focused on the sector. Overall, PE and venture capital investments in clean energy have fallen from a peak in 2008 of $12.4 billion, according to Bloomberg New Energy Finance, to $4.1 billion from October 2013 to September 2014.
It's just not as much as clean tech advocates think makes sense.
Jigar Shah, the founder of large solar company SunEdison and a clean tech advocate, thinks between 90 percent and 95 percent of electricity will come from renewable sources in 2039.
Read MoreBlackstone makes wind, solar play
Shah said that less than half will come from solar and wind and the rest will be a mix of biomass, small hydroelectric, geothermal (derived from underground heat) and nuclear.
Shah said that private equity firms and other large investors didn't start to take renewables seriously until around 2010. While there have been some investments in wind and solar projects, the most mainstream renewable plays, he said investors aren't doing much to innovate in the sector.
"I wouldn't say there's a ton of leaders here yet," he said. "There are a bunch of people doing individual transactions. But almost no one has said that this is a thematic investment that we're going to raise money around resource efficiency."
Shah also said he believes that the narrative on better oil and gas extraction technologies, like fracking, is misguided and the costs are much higher than estimated. He said there's strong initial profit from a new drill site, but the economics deteriorate quickly, especially as oil prices fall.
"The cost of actually doing deep-sea drilling, the cost of doing fracking in North Dakota, the cost of tar sands, the cost of Arctic drilling is way, way, way higher than anyone admits," Shah said.
Or perhaps it's just about economics, and the private equity industry isn't really in charge.
"I'm not sure that investors are really shaping the outcomes for energy markets. It's much more the fundamental economics," said Simm of Impax, citingincreasing demand, advances in technology, and environmental pressures as the main drivers.
"The capital," he said, "will go wherever the best risk-return is."