Global Financial Crisis Impact of the Current Financial Crisis on the Energy and Utilities Industry...

Global Financial CrisisImpact of the Current Financial Crisis on the Energy and Utilities Industry

Update

Eric Stojkovich

PQ SynergyTM 2011

©2010 Eric G. Stojkovich. All rights reserved.

Without question, we live in a vastly different world than that of a year ago and the environment remains dynamic and challenging. Global energy markets drive local utility prices.

The energy sector will always be capital intensive.

Debt and capital commitments play a prominent role in funding the operations and growth of energy companies.

© 2011 Eric G. Stojkovich. All rights reserved.

Global Financial Crisis


Global Financial Crisis

As a result, tight credit markets can have considerable impact on the industry.

Sovereign debt and government budgets are under extreme stress



Global Financial Crisis Expect the Unexpected!



Global Financial Crisis Updated



U.S. Debt Visualized:How it Literally Stacks Up



U.S. Debt Visualized:How it Literally Stacks Up

15 Trillion US$

U.S. National Debt passes 20% of the entire world’s GDP



Summary of the Impacts of the Financial Crisis

• Oil and Gas Producers - BAD• Oil Field Service Companies - BAD• Mining Companies - BAD• Transmission and Pipeline Companies - BAD• Utilities and Merchant Generators - BAD• Alternative Energy Providers – BAD

UPDATE – CHANGE HAPPENS!



Global Financial Crisis Updated - Modeling



Impacts of the Financial Crisis on Oil and Gas Producers

The key focus for any producer is its annual capital budget for exploration and development.

A number of independent producers finance exploration activity through a combination of equity and debt.

Equity is generally more expensive, and many independent producers and private equity funds use debt to leverage invested capital




There are two additional considerations that can exacerbate these financing issues:

1. To reduce exploration risk, producers often enlist partners in individual prospects.

2. Producers also place heavy reliance on key oilfield service contractors to execute their exploration and development activities.




As a result, the capital investment made by a producer may be placed at risk by the financial instability of these key partners.




The impact on the large national oil and gas companies wasn’t considered meaningful until an accident like the Deep Water Horizon.

The impact on many of the independent oil and gas producers is obvious.



Impacts of Political Crisis on Oil and Gas Producers




Because of the Arab nation’s oil production, the most direct effect caused by the political unrest in the Middle East consist of rising oil prices.

The prices of all commodities rise when the price of oil goes up.




The price of crude oil has gone from under $90 per barrel in mid January, to a recent 30 month high of $103 made on February 24th. The price level for oil had been steady before the protests in Egypt and started climbing dramatically as developments unfolded in Libya.

Pick any Political reason and crude will react again!!!




Earlier this year, inflation data out of the United Kingdom, the United States, China and the Eurozone, indicate inflation was increasing worldwide and there would be pressure central banks to raise interest rates, making money harder to borrow and consequently those nation’s currencies more in demand.

China is the only major industrial country that has an inflation problem now.



Impacts of the Financial Crisis on Oilfield Service Companies

Platforms, rigs, drill ships, drill pipe and services are financed through both debt and equity.

Oil and natural gas producers locate the hydrocarbons, but the contract with oilfield service companies to actually drill and to build the facilities to support field development and production activities.



Impacts of the Financial Crisis on Mining Companies

As is the case with oil and gas producers, analysts want to see that a mining company is not only growing its level of production and reserve base, but finding costs lower than their peers and at a reasonable level in comparison to projected market prices.

As a result, the key focus for most mining companies is their annual capital budget for exploration and development.

.



Impacts of the Financial Crisis on Transmission and Pipeline Co.Globally, the need for electricity transmission is

more prevalent, but in certain global markets, major pipeline projects are also planned.

These are generally long-term projects that are heavily financed through debt.

Because these projects are typically owned by regulated companies or governmental entities, they also tend to have significant political issues.



Impacts of the Financial Crisis on Transmission and Pipeline Co.Projects are generally fairly secure, but they

require significantly longer-term financing.

Difficulties in obtaining financing can curtail planned projects and inhibit the ability to serve the market.



Impacts of the Financial Crisis on Utilities and Merchant Generators

The most significant issue for utilities is that the demand for electricity has been growing during a time when power plant and transmission line construction has been lower than normal.

This reduced level of construction has occurred due to:

• Deregulation discussions over the past decade• Aging power plants that are less

environmentally friendly and fuel-efficient




The Edison Electric Institute is projecting that about $800 billion in new construction over the next 10 years will be required to meet generation and transmission needs just within North America.


http://www.inmagine.com/masterfile-198/ptg00663985-photo



The International Energy Agency anticipates that the capital investment in energy infrastructure necessary to support global demand will cost approximately $20 trillion through 2030.

Investments will focus on nuclear facilities (last year’s observation), alternative energy sources, transmission lines and retrofits to reduce carbon emissions from existing facilities.




Fukushima Nuclear Disaster




Many of these plants will be regulated and cost recovery need to be reasonably assured, but they still must be financed!

Even if a recession dampens the demand for electricity to some degree, substantial investments will be required.

Tightness in the capital markets could put a considerable constraint in the industry’s ability to keep pace with the demand for electricity.




Generation facilities take an average of three to 10 years or more to build.

Consequently, short-term factors generally will not have much influence, but reduced construction levels could have a significant long-term economic impact on the affected regions.



The Japanese government agreed earlier this year to set up a fund with taxpayers’ money to help Tokyo Electric Power Co (TEPCO) compensate victims of the crisis at its tsunami-crippled nuclear power plant and avoid financial collapse.

New Reality for Private Utilities - Bailout

© 2011 Eric G. Stojkovich. All rights reserved


The government issued special-purpose bonds to help finance the scheme, which will allow Asia’s largest utility to make compensation payouts expected to run into the tens of billions of dollars. There will be no ceiling set on Tokyo Electric’s liabilities.

.




In return for public backing, the government will exert control “for a certain period of time” over management of TEPCO and other power utilities, which will also be asked to pay annual premiums into the fund.




New Reality for Private Utilities - Guarantees


Following the Fukushima nuclear meltdown, the inherent risks of nuclear power and the overall safety of the U.S. nuclear power plant fleet have been raised. Because the nuclear power industry is virtually incapable of building new plants without taxpayer-backed loans, the potential for cancelled projects and defaults on loans, the American taxpayer is at risk of losing $22.5 billion they are set to have tied up in these projects.


New Reality for Private Utilities - Subsidies


Subsidies have a cost that needs to be financed from somewhere.

In the past, subsidies from the government budget seemed to be the best option in most utility sectors and countries. However, government budgets have been slashed and many subsidies have been phased out. The result has been the financing of maintenance and rehabilitation costs with the government assuming only a minimum of the responsibility for the accumulated debt in order to prevent the utility collapsing.


Government Privatization?Earlier this year Greece passed an austerity bill

that imposed fiscal austerity measures. The state power utility Public Power Corporation (PPC) owns 93% of the installed power capacity in Greece. PPC is the largest business in Greece in terms of asset value and like all inefficient state-owned industries is subject privatization.

New Reality for Government Owned Utilities



Impacts of the Financial Crisis on Commodities and Retail Providers

Energy commodities are significantly more volatile than stocks and bonds.

Commodity traders, marketers, refiners and generators often hold and manage multiyear commodity contracts that are subject to extreme levels of volatility.

This results in significant capital costs to the holders of such instruments that may tie up credit lines and available capital.



Impacts of the Financial Crisis on Commodities and Retail Providers

Significant tightening of the credit markets can lead to contract failures and liquidity failures within the energy and utilities markets.

Given the widespread dependence upon energy commodities, this can have a substantial impact on the global economy.



Impacts of the Financial Crisis on Alternative Energy Providers

Alternative energy providers were having some difficulty creating value even when energy prices reached historic highs.

The recent volatility in oil, natural gas, coal and electricity prices – coupled with a financial credit crisis and government budgets that are now overextended – will make life more difficult for investors and operators of alternative energy.



Impacts of the Financial Crisis on Alternative Energy Providers

However, most people agree that continued investment and research in this area is a priority, so over the long run, further investments and subsidies for this sector are anticipated.


http://www.inmagine.com/maksymenko-002/ptg00432985-photo


Conclusions

The Global Financial Crisis impact on the capital intensive energy and utilities industry is not likely to have the same significant impact as other Industries.

Debt and capital commitments play a prominent role in funding the operations and growth of energy companies.

Each sector within the energy and utilities industry has potential risk that require analysis


Global Financial Crisis Impact of the Current Financial Crisis on the Energy and Utilities Industry...

Documents

Transcript of Global Financial Crisis Impact of the Current Financial Crisis on the Energy and Utilities Industry...