Reflections and Future Vision
The effects of the conflict scenario are largely felt in the reduction in output value, with lost output from the Middle East region, and a significant increase in capital expenditure required for replacement and reinvestment elsewhere. This assessment ignores the increase in revenue that would be generated to an energy company from the rising price of energy from its operations elsewhere as a result of the war in the Middle East. The natural catastrophe scenario principally results in increases in operating cost, decreased working capital, and increased capital expenditure. The output loss as a proportion of the total cost of the event is not expected to compare to output losses from Scenario #1, where regional conflict reduces output for lengthy periods over a wide area. The third scenario, litigation liability, results in very significant payouts in settlements and legal fees, which are treated as additional non-operating costs on a business balance sheet and has a moderate impact on output and additional operating cost as a proportion of the total loss.
A quantitative analysis may consider how these scenarios will impact the balance sheet of energy companies and organizations in the energy value chain. Each scenario will impact the balance sheet of individual companies differently, depending on how much exposure they have to the risks represented by these scenarios, for example how much of their output and assets are in the geographical regions affected in these scenarios. Figure 13 shows a relativity of loss to different elements of a business’ five year cashflow, if these scenarios were to occur to a notional company that has exposure to these scenarios. In this figure we consider the lost output value, relative to additional operating and non-operating costs that would be incurred by the business, and also the decrease in working capital, and increase in capital expenditure that would ensue. This primarily illustrates the qualitative differences of impact of each of these emerging risks on various parts of a balance sheet.
Figure 13: Balance Sheet Impacts from Cambridge Scenarios Balance Sheet Impacts from Scenarios
Geopolitical CrisisConflic t in Middle East Middle East Conflict Natural Catastrophe Hurric ane in Gulf of Mexic o Hurricane in Gulf of Mexico Liability Risk Climate Change Litigation Liability Litigation Against Carbon Emissions 0%
10%
20%
30%
40%
50%
60%
70%
Lost Output Value
Additional Operating Cost
Decrease in Working Capital
Increase in Capital Expenditure
80%
90%
100%
Additional Non-Operating Costs
Source: Cambridge Centre for Risk Studies
Scenario Applications: Stress Testing Companies in the Energy Value Chain
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Cambridge Centre for Risk Studies
