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31.12.2018 - Energy issues to watch in 2019

31 Δεκέμβριος 2018



The imposition of US sanctions on Iran could have the greatest impact on the sector

NICK BUTLER

FT 

Forecasting is a dangerous game and one of the easiest ways to invite ridicule. The following comments, therefore, are not forecasts but simply form an indicative list of the key issues that those involved in any way in the energy business should be watching in 2019.

The outcomes in each case will shape the market and the fortunes of the companies involved. First and most immediate is the impact of US sanctions on Iran. A year ago, Iran was exporting some 2.1m barrels of oil a day. By November 2018, that had fallen to 1.1m b/d. If the sanctions are applied strictly, exports could fall close to zero — the stated intention of the US, designed to bring Iran to the negotiating table over its nuclear plans. If Iran compromises or finds a way around the sanctions, exports will increase again and prices are likely to fall.

If the US enforces the sanctions in full, the fall in exports will stretch the current capacity of other producers to the limit, and prices are likely to rise. A variation of $20 or more either way from current prices is perfectly possible. No other single issue has such a potential impact or carries such uncertainty. 

The second variable has longer-term consequences. Will the energy business make the investment decisions necessary to fund the supplies and infrastructure the world will need over the next decade and beyond?

According to the International Energy Agencysome $2.2tn of investment is needed each year up to 2025, rising to $2.8tn a year beyond that. The private oil companies such as BP and Exxon Mobil, have achieved remarkable reductions in costs, restoring profitability and the potential for dividend increases even at today’s prices. But are they and the investors in large-scale natural gas facilities or the upgrading and extension of power systems ready to invest in the new capacity that is necessary to replace the old?

The private sector has the capability but may not have access to the resources that lie in politically difficult places such as Venezuela, Russia and Iran. Some might also lack the will to invest in areas of high political risk. At the same time many state-owned national companies are being starved of funds by governments that have not made the financial adjustment to low prices.

At least some of the state companies may not be capable of investing enough to maintain output or to put in place essential infrastructure such as smart grids capable of managing distributed power supplies and maximising the efficiency of energy use.

The third issue concerns renewables. Costs have fallen and by common consent there is to be a transition to a lower carbon economy. But who will invest to make that transition possible? The renewables sector is fragmented. There are hundreds of companies producing wind and solar power but many are financially stretched and lack the capacity for sustained long-term investment on a global scale. Nor can they make the commitment to research and development that is needed if renewables are to take over the mass markets dominated by hydrocarbons.

The sector badly needs consolidation. That could come from within, or from strong players in other sectors such as Apple or Google or financial investors with the vision to create global companies that could win dominant positions in a growing market. 

The fourth strand arises from the disappointing outcome of the UN climate negotiations in Poland in December. A form of words was found but substance was missing. With minimal progress being made despite growing evidence of the impact of climate change, those who care — starting with the non-governmental and campaigning organisations — will be looking for a new strategy.

The most promising path is the legal one — the attempt to make companies that produce and sell oil and coal liable to pay for the damage done by their products. So far, the actions that have come to court have all failed. The effort continues, however, most recently through a case brought by the New York state authoritiesagainst Exxon , which is accused of misleading investors about the emissions threat to its business. A recent US federal review of climate change could provide material for further action in the US courts.

 The companies will fight hard but even one adverse judgment could set a trend and undermine corporate valuations.  The message from these four indicators is that while there is no physical shortage of energy to meet growing demand, nothing is certain. An age of plenty is not necessarily an age of energy security. The sector is vulnerable to political conflicts and to uncertainty surrounding valuations, restructuring and the crucial unresolved question of climate change. The one safe prediction is that 2019 will not be dull.

A happy new year to all readers.

The writer is an energy commentator for the FT and chair of the King’s Policy Institute at King’s College London