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EDI Quarterly Volume 1, No. 1, June 2009
Editor’s Note
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by President of Energy Delta Institute Catrinus J. Jepma
Bridging the Knowledge gap. This is the first issue of the EDI-Quarterly. Our goal is to publish EDI-Quarterly with regular intervals in order to inform our readers not only about what is going on in EDI, but also and in particular to provide information, perspectives and points of view about gas and energy market developments. Let me assure you that the timing of the launch of our Quarterly - namely almost exactly at the moment of celebrating 50 years of Groningen field - is just an unforeseen but happy coincidence. Our focus in the Quarterly will be on news from the energy research community, presented in an accessible manner. What new and interesting studies have appeared that the industry should know about? Are there new academic papers or Ph.D’s on energy that deserve a wider attention than just the research community itself ? But also remarkable statistics, or sudden policy moves will receive attention in our Quarterly. The quality of the Quarterly obviously strongly depends on the quality and speed of the sources of information. Although it is the EDI Intelligence daily task to gather such information, they will benefit from assistance from others - and our partners in particular - to further enhance the Quarterly’s information quality. In fact, many researchers and others outside EDI may be interested in using our Quarterly to inform you about their findings and views. That is why we hope this Quarterly will gradually grow into a joint effort of EDI and its business and research partners, providing and disseminating innovative knowledge and bridging the gap between the ‘energy knowledge industry’ and the energy business. After all, knowledge is the base for progress.
Contents 1 Editor’s note 2 Energy companies face diabolic dilemma 6 The omnious parallels between finance and energy. 7 Joint venture Gazprom and Romgaz: increasing the pressure on Ukraine? 8
IIR Congress LNG North Sea 2009
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Deloitte Enery Risk Ma nagement Survey 2009
11 Books, reports and upco ming conferences 12 EDI News 13 References
Energy companies face diabolic dilemma • • •
Leo Hoenders Junior Energy Analyst, Energy Delta Institute
Economic turmoil deteriorates profits energy companies by 50-80%. IEA estimates $170 billion deferred or terminated investments in 2009. Timing of economic recovery key uncertainty for investment decision energy companies.
In the current turmoil environment, energy companies are presented with a diabolic dilemma. On the one hand, the current circumstances of tightening credit markets, falling demand, falling energy and material prices are all opposing the idea of investment. On the other hand, energy demand is expected to increase significantly in the future, warranting significant investments in production capacity. What complicates matters greatly is the uncertainty about the timing of economic recovery. According to the investment projections of several large energy companies, it appears that as of yet, the investment levels are maintained. It remains to be seen how long this attitude will prevail if the economy fails to recover on the short-term.
Figure 1: How is the financial & economic crisis affecting the energy outlook? Source: http://www.iea.org/Textbase/speech/2009/Tanaka/Tanaka_ip.pdf
Credit crisis It all started in the US. Declining housing prices in the US caused a crisis on the subprime market (loans and mortgages provided to more risky customers). Due to the world wide integrated financial system, the subprime market crisis was not contained to just the US. Several large financial institutes in the US and other parts of the world were exposed and had to write off billions of dollars on their portfolio. The financial landscape in the US radically changed, with the collapse of Lehman Brothers, the bailout of insurer AIG and the federal takeover of Fanny Mae and Freddy Mac as most notable events. Combined, these events caused unrest in the financial world. It was unclear who and to what extent was affected by the crisis. Banks became reluctant to lend out money which
caused scarcity on the credit markets. The major central banks started to inject billions of dollars into the financial system available for lending to avoid the collapse of the system. Governments injected billions of dollars in financial institutions and guaranteed loans to keep the money flow within the financial system going. But these interventions could not prevent the loss of confidence by investors in the financial sector. The low confidence level triggered a downward spiral of the stock markets to the lowest levels in more than a decade. By now, it has become clear that the crisis has not been contained to the financial sector but has spread to other sectors as well, hitting the real economy. Especially energy intensive sectors like the steel, chemical and automotive industries are hit
hard by the crisis and have cut back on production. As the impact of the crisis on the world economy unfolds, with great uncertainty about future recovery, the question arises how energy companies are affected. According to executive director of the International Energy Agency (IEA) Nobuo Tanaka, the effects of the crisis on investments in energy-supply infrastructure are three-fold: 1) It has become much harder for oil and gas companies to obtain credit for both ongoing operations and raising fresh capital for new projects, due to tightening credit markets. 2) Falling demand for energy caused by the economic slowdown has reduced the need for suppliers to invest in new production capacity. 3) The slump of the energy prices resulting from weakening demand has greatly reduced the cash generation capability of oil and gas companies and simultaneously made new investments generally less profitable.
Figure 2: crude oil prices 1998-2009 Source: EIA
Credit markets
Falling demand
The economic crisis has lead to severe liquidity problems on the credit market. One of the major problems is the lack of trust between financial institutions. The interbank market, which consists of the whole of deposits and liabilities for the short term that financial institutions have among themselves, has dried up i.e. the money flow between banks has stopped. It is worth mentioning a few factors explaining why it is hard to change this situation.
The IMF forecasts a world growth of 0,5% for 2009, which is the lowest rate in 60 years3. The Energy Information Administration (EIA) even predicts a world wide contraction of 0.8% for 2009, contrasting the economic growth of 4.8% the world experienced for the last four years4. Energy has been the fuel for the engine that generated the economic growth of the developed world. With the world wide recession, the demand for energy has dropped significantly. The oil price is fluctuating between US$40 and US$50 per barrel, coming from its peak of US$147 in July 2008, as figure 2 shows.
First of all, capital markets require that banks should have more reserves in the light of the current economic turmoil. Unlike public opinion, most of the government support is used to strengthen the balance sheet, which only leaves a small part available for providing credit. Secondly, the market for mortgages virtually seized to exist. This has far reaching consequences for banks, since banks have to value these mortgages according to their market value on the balance sheet. In the current situation, trading of these products has virtually stopped, implying that the market value of these products is unknown. This leads to massive depreciations by financial institutions and deteriorates their balance sheet. Thirdly, one of the main causes of this crisis is that banks were inadequately assessing the risk profile of parties to which they were lending their money. By now, banks are revising these criteria and are more risk averse. This implies that with the more strict requirements for lending, banks by definition lend out less money. In addition, the crisis is affecting the whole economy which makes it in general more risky to lend out money. These factors contribute to the lack of liquidity on the credit market. The energy business is a capital intensive sector. Maintaining current projects and developing new prospects require large investments. With the current state of the credit markets, energy companies find it more difficult to obtain credit to finance their current and new projects. This can even lead to the collapse of some energy companies. An increasing number of smaller gas producers are forced to file for bankruptcy due to the credit squeeze1. The eight-largest oil producer in Russia, Russneft, is also facing bankruptcy from loans2. This underlines the difficulties for energy companies given the current circumstances on the credit market.
The Organization of Petroleum Exporting Countries (OPEC) has reduced the production of oil by 4.2 million barrels per day (bpd), about 5% of daily world demand, since September 20085. The falling demand is best illustrated by figure 3. The US is the biggest oil consumer but as Figure 3 shows, it has been able to increase the US crude oil stocks 366.6 million barrels on 29-05-2009 due to reduced demand. Falling demand has consequences for oil producing countries. According to the EIA, the OPEC members currently hold roughly 4.8 million bpd in surplus capacity, compared to an average of 1.5 million bpd from 2004 to the peak of the market in 20086. Once the Khurais comes on stream, Saudi Arabia’s oil production capacity will be 12,5 million bpd by June, said oil minister Ali al-Naimi in an interview7. It is estimated that in the coming months, 35% of the oil production capacity will remain idle, coming at a costs of US$15 million per day8. In a recent meeting, the OPEC members decided on more compliance to the quota agreed upon in September, instead of lowering production quota even more9. The demand for gas is also falling. The price for gas traded on the Henry hub, the largest spot market for natural gas in the world, has dropped significantly. Figure 4 shows that prices dropped from US$12 to less than US$6 in about half a year. Gazprom lowered its 2009 gas export forecast from 179 billion to 140 billion cubic meters with an average price of US$260 per thousand cubic meters, said Alexander Medvedev, Gazprom’s deputy chief executive, in an interview10. In addition, Gazprom faces a drop in natural gas output of up to 18%, or 450 bcm, this year11. The Russian energy giant also said its export revenue will drop to US$42-47 billion, compared to US$66,4 billion in 2008.
Figure 3: US Crude Oil Stocks Source: http://tonto.eia.doe.gov/oog/info/twip/twip.asp
Energy prices The effects of declining energy prices are two-fold. On the one hand, energy costs for consumers have been reduced, giving them some breathing space. Nuon and Eneco have announced that due to the low oil price, the consumers bill for gas and electricity will be reduced by 35%12. In an interview, the executive director of the International Energy Agency (IEA) Nobuo Tanaka said, the world would get a US$1 trillion economic stimulus if oil prices stay around US$40 per barrel this year13. Lower fuel prices are now supporting an ailing world economy. However, on the other hand, the IEA fears that in the current circumstances, a supply crunch in the production of oil will appear in the future. According to their projections, the world will need about 40% more energy in 2030 as compared to the current consumption. Cumulative investment in energy supply infrastructure amounts to about US$26 trillion between now and 2030 to meet this demand14 . This implies that energy producers need to invest over US$1 trillion every year. According to Saudi Arabia, an oil price of US$75 is needed to make the necessary investments to prevent a supply crunch in the
Figure 4: Average price of natural gas in the United States, 2005-2008. Source: http://en.wikipedia.org/wiki/File:Henry_Hub_monthly_price.svg.
future 15. The high oil and gas prices stimulated investments in the development of oil and gas fields which, with lower prices, otherwise would not have been developed. Investment decisions are being delayed, deferred or canceled as a result of the current economic tidings16. According to the Times, more then US$60 billion worth of projects to extract oil from the bitumen-rich sands of Alberta have been delayed in the last three months of 200817. But also investments to maintain current production are threatened by low energy prices. The annual Oil & Gas UK 2008 Activity survey, which summarizes planned expenditure on the UK continental shelf by 75 oil and gas companies, shows that the combination of low oil prices and freezing of the capital markets will have a negative effect on the E&P activity in the next 12 to 18 months18. Their latest estimate is that investments will fall to somewhere in the range of GBP 3.5-4.5 billion (US$5-6.5 billion) as compared to the GBP 5 billion (US$7 billion) in 2008. Meanwhile, costs of developing and producing UK oil and gas in 2008 rose by 12% compared to 2007. The break even oil price for new field investment is now over US$40. In order to extract the future potential of the UKCS of 25 billion barrels of oil and gas equivalence (boe) sufficient exploration activity is required. The latest survey predicts that about 77 well will be drilled in 2009. This is far less then the 113 wells that were predicted one year ago.
Cash generation The decline of energy prices resulting from weakening demand has reduced the ability for oil and gas companies to generate cash and the profitability of new investments. According to the pecking order theory, companies prioritize their sources of financing new investments19, with internal financing as the preferred way. Under the current circumstances resources available for investment are declining. Figure 5 shows the results of the oil majors in the first quarter of 2009. Profits have declined in the range of 50-80%, having a negative effect on the cash generation capability and investments. As mentioned, issuing debt is becoming more expensive, which makes this option less attractive. Another option to raise capital is to issue new equity. The crisis has also deteriorated the conditions for this option. According to the PFC Energy 50 ( January 2009)20 , the combined market capitalization of the 50 largest energy companies fell 46% from US$5.2 trillion to US$2.8 trillion, the worst decline in the list’s history (see figure 6). The lost value reflects a combination of falling global equity markets and lower energy prices.
Figure 5: E&P EBIT (US$). Source: Deloitte gas conference 2009. Presentation Q. Mulder, Director Benelux smallmid caps/ oil services equity research, ING Wholesale
Figure 6: Share performance energy companies Source: PFC Energy 50 January 2009, also available on www.pfcenergy.com
Last year’s big gainers, the National Oil Companies (NOCs) have lost 64% of their combined market capitalization compared to the average losses of 35% by the Integrated Oil Companies (IOCs). A possible explanation provided by Antonia Bullard21 could be that investors, initially attracted by their potential value, started to favor companies with a more certain cash flow. The international oil companies have a much more diversified portfolio which makes them less vulnerable to the current economic circumstances. The loss of market capitalization for the energy companies further deteriorates the option of issuing new equity.
Investment behavior The deteriorating ability of energy companies to generate positive cash flows in combination with the freeze of the credit market should lead to low investment levels, as figure 7 suggests. Evidence of these effects are seen in the market. The International Energy Agency estimates that, because of the economic crisis, investment in oil and gas exploration and production in 2009 is seen dropping 21%, or almost $100 billion22. Between October 2008 and April 2009, over 20 planned large scale upstream oil and gas projects – valued at a total of more than $170 billion – were deferred indefinitely or terminated. Concrete examples include reduced investments by E.on24 , PetroChina25 and Petroleos de Venezuela S.A. (PDVSA)26. However, also other signs are visible. Royal Dutch Shell is to more than double its debt levels as it struggles to maintain its spending commitments26. Exxon Mobile will invest at record levels – between $25 billion and $30 billion annually over the next five years – to meet expected long-term growth in world energy demand27. Petrobras increases its investment to $174.4 billion for 2009 to 201328 . Companies, or countries, that do have significant cash reserves are looking for acquiring or taking a stake in certain projects of cash-stripped
Credit unwind causes problems • Direct problems – Energy companies can’t get credit – Customers can’t get credit
• Indirect problems – No credit -> low demand -> low price – Low price -> low cash flow – Low cash flow + no credit -> low investment
• Result: New investment drops greatly
Figure 7: Effects of the financial crisis Source: Gail E. Tverberg, the Oil Drum, 25 March 2009.
companies. Acquiring these companies is a cheaper method to increase their asset base compared to drilling new prospects. Canadian Natural Resources Ltd. believes that at the current gas prices, it is cheaper to buy than to develop reserves. Therefore it will be looking for acquisitions, particularly of distressed assets to increase its reserves29. Exxon Mobile has build up a large cash pile during the period of surging energy prices which it can use to buy its way into new production channels30. China has used its vast amounts reserves to provide Russia, Brazil, Venezuela and Kazakhstan a total of $49 billion in loans in exchange for energy supplies.The decrease in investments has lead to a decrease in project costs. Project costs in the upstream oil and gas sector are expected to fall by up to 24% this year . Royal Dutch Shell announced that the current crisis provides opportunities to lower its costs, due to the increased availability of spare capacity of the service industry . But as a result,
profitable projects are becoming even more profitable by delaying investment decisions as construction and material cost have all come down and might not yet have reached the bottom.
Future developments? Recent events display mixed movements. The oil price rallied to around $60 per barrel, influenced by the movements on the stock markets, the strength or weakness of the US dollar compared to foreign currencies, weekly oil inventory data, and the positive or negative global view of the economy.
build up some reserves which can now be used to maintain investment levels. However, uncertainty about the future recovery casts doubts how long these investment levels can be maintained. There are some better-then-expected macro economic data coming from the US yet analyst differ from opinion whether these are the first signs of recovery or that the negative growth is slowing down. The longer it takes for the world economy to start growing again, the more likely it will be that investments will be postponed or canceled, which could lead to price spikes in the near future similar to a year ago. These mixed signs make it hard to predict the future and complicates investment decisions significantly.
The record profits of the recent years have allowed energy companies to
The omnious parallels between finance and energy The world economy has two lubricants: the financial system and the energy system. There are important parallels between the two. The financial crisis might trigger politicians to act more decisively when it comes to financing the energy transition. The current economic crisis is providing new insights into the global financial and energy systems that the world economy runs on. Those who, a year ago, dared to warn about the proliferation of high risk financial products and predict the demise of financial institutions, were not taken seriously. It was also emphatically denied that politicians had completely lost control of capitalistic banking systems. We know better now. In his only admission of guilt to date, Alan Greenspan, the previous chairman of the American Federal Reserve Bank, stated that he had (completely) overestimated the self-cleansing ability of a capitalistic financial system. In the past few months two events occurred in the energy sector, which point up interesting parallels with the situation in the financial sector. The first is the announcement of Shell’s withdrawal from wind energy. The second is the take-over of Hungary’s Mol by Russian Surgutneftegaz. Shell has announced, without entering into details, that it will withdraw from wind energy. Shell’s justification for this did not go much further than the statement that the company had to set priorities. The underlying reason, however, is simple: Shell’s financial performance requirements are based on a high risk profile and a correspondingly high return on investment. Shareholders are rewarded with this princely return on an annual basis. The returns in the wind energy sector are too low to keep shareholders happy. In fact, Shell is opting for the same route as Exxon, which took the same decision many years ago. Some parallels with the latest insights into the mistakes in the financial sector are evident here. Financial institutions were driven
Mattijs van Gool Mattijs van Gool is a financial analyst who contributes regularly to European Energy Review on the financial aspects of the energy market
by commercial objectives only and their facilitating role in keeping the economy going became subordinate. They became so powerful and strong, that governments no longer dared to intervene. It now turns out that the same applies to energy companies. The commercial (shareholders’) interests have priority, the rest is subordinate. And governments dare not expand their regulations in the energy sector either. There is a lesson to be learned here. The commercial interests of energy companies will prevent them from cooperating with a politically motivated energy transition, unless they are offered comparable returns on investment through subsidy schemes. Then the take-over of Hungarian oil company Mol by Russian Surgutneftegaz. It is an illusion to think that Russian oil companies will not try their hardest to penetrate the European market. The weak brothers on the fringes of Europe will be their first prey. No doubt, the Russians have already lined up their take-over candidates and are waiting for the right moment to pounce. Obviously, it’s all about money, power and politics, not about ensuring security of supply in an affordable manner. This is a nightmare scenario for politicians in Brussels, who dream of a collective European approach to future energy supplies. These two events, plus the shocking demise of the financial sector, must raise all the alarm bells in the capitals of European member states and in Brussels. After all, the populations of Europe, as well as those on other continents, must be able to count on affordable energy today and in the future. They will, however, get no help whatsoever from the parties engaged in the conventional supply of fossil-fuel based energy. These parties are, apparently, only interested in a high return on investment. One thing seems certain: if regulators (politicians) allow the sector to do its own thing, things may turn out as badly as they have for the financial sector, with dramatic consequences for the economy.
How can governments solve this problem? It certainly seems out of the question that the private energy companies will be nationalised. Banks may be nationalised because are threatened with bankruptcy, but this will hardly be an option for energy companies. Furthermore, there are also many state-owned energy companies that are just as profit-driven as their private counterparts.
market, possibly up to €100 billion on a European scale. Financing would no longer be a problem, although to make consumers ultimately pay for the expenses might be more difficult. Are consumers prepared to pay the price? Germany has proved that they are. Consumers would rather pay extra for a transition to green energy and a secure energy supply than for a tax on archaic fossil-fuel based energy.
One obvious option is to subsidise new energy projects to the extent that the established companies can continue to generate their customary high returns. Governments rightly have not decided to take that route. But then who is going to finance sustainable, secure and affordable energy? In Germany, which has a system of feed-in tariffs, it is the consumer who ultimately pays. This system is a great success. Established energy companies are pulling out all the stops to convince the public that they can produce cheaper energy with nuclear and coal. The very fierceness of their claims proves the success of the system. The big advantage of the German approach is that it leaves no unpaid bills.
One major hurdle remains: governments profit handsomely from taxes on fossil fuels. They charge pollution taxes, fuel taxes, emission taxes, etcetera, and they get income taxes from energy multinationals. All in all, we are talking about tens of billions of euros per year in Europe alone. How are governments going to compensate for losses in tax income as a result of the transition to green energy and low-profit energy projects?
Another option is for governments themselves to invest in energy production, financed for example by inflation-indexed bonds. Sufficient pension capital is available to collect large amounts of money in the
Wisdom and a long-term vision are required. Unaffordable energy as a result of insufficient investments in alternative energy will lead to stagnation of the economy. It will cost a lot more in the long term to fix this than to invest today in a transition to green energy and later collect income taxes in a healthy economy running on affordable energy. Mathijs van Gool is a financial analyst who contributes regularly to European Energy Review on the financial aspects of the energy market.
Joint venture Gazprom and Romgaz: increasing the pressure on Ukraine? At the end of last month Russia’s energy giant Gazprom and Romania’s national gas company Romagaz signed the first collaboration agreement since the fall of the USSR in 1989 regarding direct gas imports. Romania’s Minister of Economy, Adrian Videanu, announced following his visit to Moscow on 20-21st of May that Gazprom and Romgaz are to set up a joint venture owned by both companies in an equal share of 50 per cent. The minister also stated that the collaboration between Gazprom and Romgaz entails the construction of 5-6 bcm gas storage facilities and several gas power plants. Furthermore, Romania plans to develop a strategic energy partnership with Russia. This follows up to a phone conversation prime minister Putin had with Romania’s president Traian Basescu in January this year. On that occasion Putin offered to sell Romania the whole volume of Russian gas that Ukraine needs in a year to be re-sold later to the authorities in Kiev. ‘
Marius Popescu Junior Energy Analyst, Energy Delta Institute
But I have a counteroffer for Romania that I think will be hard to refuse. Please forward this to president Basescu! We are willing to sell the whole volume of Russian gas Ukraine needs in a year to Romania who can re-sell it to Ukraine. Is the offer good? I hope you wrote it down.’ said the Russian prime minister at the press conference following the phone conversation. At the time, Putin’s bold offer was received with a fair amount of scepticism and was labelled by some specialist on Russia as another manoeuvre by Kremlin to insert animosity between Ukraine and Romania. However, one might raise the question whether scepticism is indeed the proper reaction to Russia’s proposal. After all, considering the January gas conflict with Ukraine that left the EU without most of its Russian gas for over two weeks and has cost Russia more than $2 billion (let alone the damage to its commercial reputation), this project might in the end make economic sense.
IIR Congress LNG North Sea 2009 In the short term, three LNG terminals (Gate and Liongate in Europoort plus a terminal in Eemshaven) will come on stream in the Netherlands. In Zeebrugge the second expansion of the LNG terminal is planned. At the first sight, these developments seem misplaced in an environment blessed with a large – but declining – gas supply of the Groningen field and the presence of excellent pipeline connections for the import and export of gas. A closer look reveals a number of developments which favour new LNG terminals. The European gas production is expected to decline rapidly in the medium term. Europe wants to compensate this by higher imports from Russia, but the investment level required for higher gas production in this country is insufficient. In addition, long distance pipelines from Russia and Central Asia are surrounded by geopolitical uncertainties and require large investments, comparable to LNG. In time it appears that investment costs of LNG and pipeline gas are converging, while LNG is not hampered by the same geopolitical issues as is the case for transit of pipeline gas. Already prices of LNG and pipeline gas are not far apart, as mentioned at the congress. LNG already seems a feasible option to compensate for the decline of pipeline gas and to reduce the geopolitical gas supply issues. In case Russia ceases gas supply via Ukraine to the west, the consequences are especially noticeable in Central-Europe. At this moment the Russians are threatening to cease the delivery of gas to Ukraine again. A structural solution of the conflict between the two countries is not yet in sight. No doubt LNG is going to play a role – if it is not doing that already – in reducing the dependency on Russian gas. Outside Europe large gas fields have been taken into production, and many more will follow, who are not easily connected via pipelines to the market. To bring these gas supplies to the market, the relevant gas producing countries have to rely on LNG. Even though they have to compete with cheaper pipeline gas, they will bring their LNG to the market as long as they can earn a reasonable return on their investments. In most cases political reasons play a (big) part in starting the production of these gas fields and keep on exploiting them. For a long time it has been projected that NW-Europe will experience strong growth in gas demand, related to continuous economic growth. Due to the current recession, the growth forecast will have to be downgraded. Only time will tell whether the recession will seriously harm the gas industry. The increasing demand for gas will be constantly accompanied by doubts about security of supply from Russia and Central Asia. Also the
Jos A.M. Bos Partner at Conway & Partners and chief editor at www.energierecht.nu
policy concerning CO2 emission reduction will have a constant upward effect on the demand for gas, especially if CCS turns out not (or not in time) to be commercially exploitable for coal-fired power stations. The number of transactions on the TTF and APX are increasing enormously, as showed at the congress. Within the market, both buyers and sellers apparently have a need for flexibility and optimisation of revenues. The importance of long-term contracts is declining, without getting out of the picture completely. Portfolio’s, consisting of contracts with different expiration dates, are becoming increasingly important. These portfolio’s can only flourish in a sufficient liquid market. LNG contributes to liquidity in the market. APX and TTF strengthen the liquidity within the NW-European market by facilitating a range of physical and non-physical transactions. The Netherlands – an important gas producer and consumer on its own – is a unique location for the supply of LNG. The harbour of Rotterdam can receive LNG vessels adequately and is connected to the Gasuniegrid with its excellent connections to its neighbouring countries. Europoort is well endowed with energy-intensive industry and power stations requiring substantial amounts of gas. The LNG terminals at Europoort can make use of the warmth generated by the industry and the power stations. In the future maybe they can use the cold if transport and storage of CO2 in Europoort takes off. The European Committee strongly supports (the import of) gas, taking into account the security of supply issues and the increased downstream competition. The Dutch government want to create a gas roundabout in the Netherlands, to which a large scale supply of LNG can contribute. In short, there is a lot of interest in LNG at all relevant government levels. Finally, it is worth mentioning that by now there is a clear picture of a joint initiative of gas producing countries to manage the global market. Not long ago the Gas Exporting Countries Platform (GASPEC) was founded by all major gas producing countries. The Netherlands, wanting to be the gas roundabout for NW-Europe, will soon come forward as an observer of the GASPEC. The stakes are huge for all involved countries to make sure the gas market functions in a responsible way. LNG will play its role, considering the number of participating countries which rely on LNG. The Netherlands need LNG to maintain its strategic position of gas roundabout. With that, LNG get’s recognition on the highest political-economical level and will remain present on world scale.
Deloitte Energy Risk Management 2009 Energy markets have changed tremendously over the last two years. In 2007, companies found themselves in a very different environment, as energy prices worldwide reached a long term peak and prices in the Netherlands were amongst the highest in Europe. However, the moment the financial crisis started to materialize, commodity and electricity prices dropped dramatically from their all time high. Energy prices, on average, have a considerable impact on
Figure 1: energy management triangle
Figure 2: risk monitoring
Oscar Balhuizen Capital markets / Deloitte financial advisory services B.V.
Doris Fahle Capital markets / Deloitte financial advisory services B.V.
production costs, especially for energy-intensive companies. In these times, characterized by significant changes and insecurity, it is essential to have a solid strategy to manage energy exposure adequately. In 2007 ever increasing energy prices were identified as one of the risks of energy management. Nowadays the greater challenge for many energy consumers is formed by the exceptional high volatility of energy prices.
The main areas of Energy Risk Management are covered by the energy management triangle, which is used widely by Deloitte Energy & Resources group. This triangle refers to three building blocks of energy risk management: Trading/Hedging, Risk Management and Reporting. The first block refers to trading and hedging; it primarily addresses issues on allocation of the right financial products for optimal hedging strategies. The second building block refers to risk management and deals with the assessment and management of energy risk related to the enterprise strategy on risk management. The third and last building block on reporting items refers to the current accounting standards, which are becoming more detailed, but arguably not more informative.
Risk monitoring 56% of the participants expect that their risk monitoring will evolve in the coming years. The participants expecting this evolvement see a change of risk monitoring mainly in a increased focus on positioning and reporting on energy risk and an increased focus on valuation and Mark to Market. When inquired about the greatest risks faced by companies nowadays, 67% of the respondents state that they consider price volatility the greatest risk. Other risks identified as important are supply and demand volatility, cash flow risk and counterparty exposure. Senior management Of the respondents, 65% agrees and 29% completely agrees with the statement that energy risk management has seen a strong increase in senior management attention. In 2007, before the economic crisis this perception was significantly lower. When asked more specific questions about energy risk management, 18% admit that they are not that satisfied with their current knowledge of their energy exposure and with the current effectiveness of the optimization of the energy portfolio. 31% of the participants even admitted that they think that their current risk management system is not capable of coping with the unique elements of energy risks.
Figure 3: hedged exposure
Figure 4a: senior management attention
Figure 4b: energy costs relative to total revenue
High energy costs relative to total revenues The respondents that completed the survey work for companies that are exposed to significant energy risk, observable in a high ratio of energy costs to total revenue. Due to the energy intensity of companies’ activities, it is not surprising that all of the respondents manage their energy exposure actively and 78% of them even have established a specific energy/commodity desk, that carries this responsibility. This report provides an overview of the current practice regarding energy risk management strategies of large Dutch energy consumers in 2009. The 75 major Dutch energy consumers were invited to participate in the survey by means of an email sent to the respondents directly,
containing the link to the online survey. The online survey was carried out in March 2009. Eventually, 18 respondents were used for this report. You can download the Deloitte Energy Risk Management Survey 2009 from the following address: http://www.deloitte.com/dtt/section_node/0,1042,sid%253D222928,00. html. Contactinformation: Oscar Baldhuizen Doris Fahle
obaldhuizen@deloitte.com dfahle@deloitte.com
Books, reports and conferences Austin, A. March 2009. State-owned versus Multinational Oil. EastWest Institute. This paper provides an overview of existing research on the outcomes of government ownership and intervention in the energy sector through the example of state-owned oil companies as they compare with their so-called private sector counterparts. Contact information: The EastWest Institute 700 Broadway New York, NY 10003, 212.824.4100 communications@ewi.info The paper is available at: http://www.ewi.info/ewi-study-calls-new-international-energy-tribunalstabilize-global-energy-markets
Pirani, S., Stern, J. and Yafimava, K., February 2009. The Russo – Ukrainian gas dispute of January 2009: a comprehensive assessment. Oxford Institute of Energy Studies. This paper outlines the background to, and the immediate causes and course of, the gas dispute between Russia and Ukraine. It offers an interpretation of two sides’ willingness to allow the dispute to damage their relationship with European consumers. It discusses the role of political and economic factors in the crisis, and surveys the likely consequences of the dispute. Contact information: The paper is available at: http://www.oxfordenergy.org/pdfs/NG27.pdf
Psarras, J., Flamos, A. and Patlitzianas, K., February 2009. Al Jisr Project: Public diplomacy and outreach devoted to the European Union and EU-GCC relations. Background paper: Enhancing the EU-GCC relations within a new climate regime: prospects and opportunities for cooperation. National Technical University of Athens. This paper outlines the energy dialogue between the European Union (EU) and the Gulf Cooperation Council (GCC). Nowadays, GCC governments are fully aware that they cannot depend on oil and gas for their income forever, especially in the prevailing situation of price fluctuations, the rapid populations and consequently the increasing demand for electricity throughout the region. As a consequence, the GCC countries are more looking to the use and development of Renewable Energy Sources (RES), Rational Use of Energy (RUE), enhancement of carbon sequestration technology and the application of nuclear energy. These issues are ranked high on the policy agenda of the EU but despite their shared interest, the cooperation between the EU and GCC countries on these issues remain underdeveloped. Contact information : E-mail: contact@epu.ntua.gr Internet: http://www.epu.ntua.gr
R.A. Heffner III. The GET: The Grand Energy Transition. February 2009. Heffner interests, Oklahoma city, USA This book describes the evolution of man’s energy use from solids (woods, dung, coals) to liquids (gasoline) to gases (natural gas, wind, solar, hydrogen) as a progression from dirty, carbon heavy complex chemical structures to cleaner, carbon light, fuels of a simpler chemical structure.
Contact information Hefner Interests E-mail: the-get@ghkco.com Tel: 405.858.9803
Upcoming conferences June 22-25: Oil & Gas Outlook Central Asia 2009 InterContinental Hotel, Almaty, Kazakhstan Contact: Chua Yee Ling Phone: +65 6322 2757 E-mail: yeeling.chua@terrapinn.com Website: www.terrapinn.com/2009/caoilgas
July 9-10: EU Emission Trading 2009 Brussels, Belgium Contact name: Selina Perry Website: http://www.environmental-finance.com/conferences/2009/ EUET09/intro.htm
June 25-26: Platts 3rd Annual Developing European Gas Supply Infrastructure Brussels, Belgium Contact name: Stacey Knox Website: http://www.platts.com/Events/2009/pc978/
August 9-12: Energy and Sustainability Newark, Delaware, United States Contact name: Erik Koepf Website: http://www.conference.solarigert.org
EDI News EDI developments The energy world today is confronted with great changes. This rapidly changing environment forces the energy companies to innovate in order to stay competitive. In addition to the increasing complexity of the business, the energy sector is confronting the possibility of a growing shortage of qualified personnel in the coming decades. The sector has only one choice: to invest in knowledge. For that reason the Energy Delta Institute was founded in 2003. A possible shortage of qualified personnel was addressed in a recent meeting in Doha, Qatar, which was attended by EDI. The International Energy Forum Secretariat held a symposium on "Tackling the human resources crunch in the petroleum industry" in Doha, 13-14 April 2009. Hosted by the Government of Qatar the event brought together representatives from oil and services companies from producing and consuming countries, as well as representatives of educational institutions. The symposium presented a timely opportunity to address the shared concerns of petroleum industry stakeholders regarding recruitment and retention of skilled employees. In a concluding statement participants stressed that de-bottlenecking the sector’s human resource challenges requires collective, targeted and innovative cooperation between government, educational institutions and industry. That is precisely the business of EDI. Even the EDI staff develops its own employability in the energy business. Recently, a marketeer left EDI for a new challenging position as account manager energy at Groningen Seaports. Kind regards, Rob Badoux Vice President EDI
New EDI Master Class: Gas Sales & Purchase Strategies in Liquid Markets EDI's Master Classes are a "meeting of minds" of national and international top-experts in the energy business. The new Master Class ‘Gas Sales & Purchase Strategies in Liquid Markets’ features speakers from a.o. APX, Akzo Nobel, DSM, Gasunie, the University of Groningen and Oxford International Institute for Energy Studies. Traditionally, the European gas market was driven by long-term gas contracts. We have now experienced a few years of shortterm trading. The equilibrium between bilateral gas contracts and the free gas market is still shifting and remains a challenge in the energy markets of Western Europe . Buyers and sellers constantly need to make the decision about where to buy and sell and therefore they need to be on top of the developments in these liquid markets. In 2007 and 2008, we have organized two previous editions of this course under the name of Master Class Developments in Gas Trading. We now take the course to another level. This Master Class will deal with the developments in sales and purchasing of natural gas and the impacts of short-term gas trading on the energy business. It is intended for sales and purchase managers in the gas industry or managers in related functions, who have extensive knowledge of the gas value chain, and who need to know more about these developments in order to make funded decisions on how and where to buy and sell natural gas.
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EDI Quarterly is published in order to inform our readers not only about what is going on in EDI, but also and in particular to provide information, perspectives and points of view about gas and energy market developments. Editor in Chief Prof. Catrinus J. Jepma President of Energy Delta Institute Editors Leo Hoenders Marius Popescu EDI Quarterly contact information: Energy Delta Institute Laan Corpus den Hoorn 300 P.O. Box 11073 9700 CB GRONINGEN The Netherlands Tel.: +31 (0)50 - 5248331 Fax: +31 (0)50 - 5248301 hoenders@energydelta.nl