challenges and opportunities for risk managers
TRANSCRIPT
CONTENTS
2 Introduction—TheNextDecade:
MoreChangeThaninthePast100Years
5 BeyondCOVID-19—GrowthCreates
NewOpportunitiesandNovelVariables
7 FossilFuels—ConventionalEnergy
EnduresinaVolatileEnvironment
9 Decarbonization—Renewables
Rise,TransformingtheGrid
13 Conclusion—EnergyRiskRedefined
17 Endnotes
CHALLENGES AND OPPORTUNITIES FOR RISK MANAGERS
Introduction — The Next Decade: More Change Than in the Past 100 Years
FIG. 1: FOSSIL FUEL MARKETSGLOBAL ENERGY SYSTEM ASSETS AND FINANCIAL FLOWS Fossil fuels, financial market size, 2019
Fewindustriesfacethesamescaleorcomplexityofriskastheenergysector.
Whetherfinancingadecade-long,multi-billion-dollaroffshoreoilproject
orfinessingthetermsofapowerpurchaseagreementbetweenautility,its
customer,andthedeveloperbuildingawindfarm,riskmanagersintheenergy
sectormustaddressfinancial,geopolitical,cyber,andothernewandold
challengessimultaneously,andindifferentcombinations,dayinanddayout.
Withthetransitiontorenewableenergyandtheeffectsoftheeconomic
crisiscausedbyCOVID-19,theenergysectorfacesevengreaterchallenges
asitheadsinto2021.Theevolutiontowardlower-carbonenergywillremake
notjustthemulti-trillion-dollarglobalenergyindustrybutalsothefinancial
ecosystemthatfuelsitwithcapital.In2019,notincludingtherenewables
sector,thefossilfuelindustrytransactedupto$10trillioninfinancialflows,
whilemanagingmorethan$70trillionworthofassets(Fig.1).
$18
$8
Equity
Demand
$22Debt
$10
$14 - $129
Supply
Supply
Demand
Asset value,
$ trillion
Financial flows,
per year,$ trillion
$1 $1 - $2
$3 - $4
$1 - $3
Fossil fuelsPhysical
infrastructureFinancial markets
Source:CarbonTrackerwithBloomberg,IEA,Tong,etal.https://carbontracker.org/reports/decline-and-fall/.
Introduction—TheNextDecade:MoreChangeThaninthePast100Years garp.org | 2
Byadaptingandextendingtechniquestocalculatefinancialrisk,the
energyindustryhasalreadybeguntocultivatetoolstonavigatethese
risks,builtonadisciplinedcultureofexpertisefocusedonmarkets,credit,
andoperations.Yet,ashistorysuggests,theindustryofthefuturewill
requirenewskillsandexpertisetomanagerisksthatweknowwillevolve
morerapidlyanddramaticallythananticipated.Indeed,giventhearray
ofvariablestheindustryfaces,andtheloomingclimatechangecrisis,the
science—andart—ofmanagingriskintheenergyindustrywillcontinue
toevolve,creatingaworldofopportunityforriskmanagers.
Todaythepracticeispushingquicklyintochallengingnewsub-specialties
toaddresstheemergingchallengesoftheenergytransition.Overthepast
decade,climatehasdrivendramaticnewriskdynamicsintotheworldof
energy,includingrisktophysicalinfrastructure,newrealmsofregulation,
rapidtechnologicalchange,andgeopoliticalfactors.Newskills,including
thefollowing,willberequiredtohelptheenergyindustryhandletheissues
itfaces.
• Physical risk —Forbothenergycompaniesandtheircustomers,
climatechangeisarisklikenoother.Predictingenergydemandhas
becomedifficultduetoextremetemperaturesandweatherpatterns.
Droughthasimpactedtheoutputofhydropowerdams.Moreintense
stormshaveoverwhelmedutilities’responsesandrecoveryplans.The
implicationsoftheseintensifyingphysicalrisksareripplingthrough
practicallyeverylayeroftheenergyindustry.
• Regulatory risk—Theenergysectorrestsonanintricatelatticework
ofregional,national,andglobalrules,touchingoneverythingfrom
waterqualitytolaborsafetyandfinancialpractices.Astheindustry
morphstodevelop,fund,andoperatemorerenewables,legacyrules
areundergoingscrutinyandrevisiontomatchnewmarketrealities.
Carbon-relatedregulationsareemergingasanewfrontofrulemaking,
withregulatorsestablishingamixoffees,caps,andtaxesonglobal
warmingemissionsandotherunpricedexternalities
• Cybersecurity and technology risk—Datalinkstoucheverything
fromhouseholdsmartappliancestonuclearpowerplants.Energy
infrastructureisanincreasinglyfrequenttargetforhackers,whether
curiousteensormaliciousstateactors.Onceinsulatedbydatasystems
notconnectedtothewidergrid,energyproducersnowfacemarket
pressurestodigitizetheiroperations.Adoptingmachinelearningto
modelcomplexproblemsinenergymeansdatacompletenessand
accuracyarekey.Theseadvancespromisetoenhanceefficiencybut
openupissuesofdatasecurityandintegrity.
Introduction—TheNextDecade:MoreChangeThaninthePast100Years
• Geopolitical risk—Theenergytradehaslongbeenglobalandthus
hasalwaysbeenpolitical.The21stcenturybringsbignewenergy
marketssuchasAfrica,China,andIndiaintoplay.Thisincreasesthe
mixofglobalactorsonboththedemandandsupplysidesofenergy
markets,asbillionsofpeopleascendintothemiddleclassandseek
moreenergyservices.
Through2050,trillionsofdollarswillbemobilizedtotransformtheenergy
industry,aslow-carbontechnologiesclaimalargershareofglobalsupply.
Asthischangeunfolds,thedecisions—andopportunities—facingrisk
managerswillbeincreasinglyvaried.
Amixofregulatorypressures,technicalinnovation,andmarketincentives
willchange“businessasusual,”andspuragrowingnumberofenergy
riskjobsinsidetraditionalenergycompanies,atbigcorporatebuyersof
energy,andamongbanks,traders,andotherfinancialintermediaries.
Withadeeperunderstandingofthechangingenergylandscape,
executives,energyconsumers,andfinancierscanmakesmarterdecisions
onhowtosteertheircompanies,careers,andpolicy.
A MIX OF REGULATORY
PRESSURES, TECHNICAL
INNOVATION, AND MARKET
INCENTIVES WILL
CHANGE “BUSINESS AS USUAL”
Beyond COVID-19 — Growth Creates New Opportunities and Novel VariablesToday,theglobalenergyindustryremainspredominantlyfossilfuel-based
evenaslow-carbonsourcesgrowfaster.Globalprimaryenergyconsumption
roseby1.3%in2019.Chinaaccountedforthree-quartersofthisgrowth,with
IndiaandIndonesiacomprisingthenextlargestshares.1Growthwillcontinue
tobecenteredinAsiathrough2030.Bycomparison,energydemandis
expectedtofallinEuropeandtheU.S.inthesameperiod.2
Thoughtheyaccountforasmallshareoftotalenergyconsumed,renewables
suchassolarandwindruletheindustry’sgrowthstory,bookingfastergrowth
thanallotherformsofenergysince2010.In2019,theyaccountedforabout
11%ofglobaldemand(includinghydropower),whileoil,coal,andnaturalgas
togethersuppliedover84%(Fig.2).3
33%
Oil
27%
Coal
25%
Natural gas
4%
Nuclear
5%
Renewables
6%
Hydro
25
158
193
29
38
142
World primary energy demand by fuel, 2019, exajoules
FIG. 2: FOSSIL FUELEDOIL, COAL, AND NATURAL GAS SUPPLY OVER 80% OF GLOBAL ENERGY DEMANDWorld primary energy demand by fuel, 2019, exajoules
Source:BPStatisticalReviewofWorldEnergy,2020,page4.
BeyondCOVID-19—GrowthCreatesNewOpportunitiesandNovelVariables garp.org | 5
Tobesure,theeconomicimpactofCOVID-19hasbeenmassiveand
complicatestheoutlookincomingyears.Hundredsofmillionshavelostjobs,
andglobaleconomicactivitybrieflyfroze.Inthesecondquarterof2020,
overallenergyconsumptioncollapsedbyabout25%,asdemandforroadand
airtravelallbutevaporated,accordingtotheInternationalEnergyAgency
(IEA).Whilebillionsquarantinedathome,subways,shops,andofficesallwent
dark,causingelectricpowerconsumptiontofallby10%-20%.Fortheyearasa
whole,sector-wideinvestmentwillshrinkbyabout20%,toaround$1.5trillion.4
Furtherout,theglobalenergysectorisexpectedtoresumeitslong-run
averageannualgrowthrateinthelowsingledigits.Drivenlargelybygrowth
inAsia,bymid-century,overallenergydemandisslatedtoriseby50%,the
U.S.EnergyInformationAdministration(EIA)anticipates.5Inthatperiod,fossil
fuel’ssharewilldeclineslowly,asacombinationoffallingcostsandpolicy
supportcontinuetoliftrenewables.6
Althoughfossilfuelsplayamajorroleinthecurrentenergymix—accounting
forthelion’sshareofsupply,employment,andinvestment—agrowingflow
ofdollars,policyfocus,andjobcreationisshiftingtowardrenewablesand
otherlow-carbontechnologies.Investmentinlow-carbonprioritiesislikelyto
notonlyrecover,butsurge,drivenbyawaveofmulti-trillion-dollarCOVID-19
recoverystimulusprogramstakingshapearoundtheglobe,ledbyproposals
inChina,Europe,andtheU.S.7
Indeed,theneteffectoflayoffsintraditionalenergyfirms,combinedwith
increasedspendingoncleaneralternatives,mayspurashiftinhiring,sector-wide.
By2023,theInternationalRenewableEnergyAgency(IRENA)seesthe
potentialfor5.5millionnewjobsgloballyinenergy-transition-relatedfields,
evenasthefossilfuelsectorbearsthebruntoftheCOVID-relateddipinenergy
consumption,shrinkingbysome1.1millionjobs.Lookingtomid-century,IRENA
seesthepotentialfor40millionnewjobsinenergy-transition-relatedfields.8
Theshiftisunderwayalready.Europeanoilcompaniesarehiringutility
marketexpertsastheyenterpowergenerationbusinesses.U.S.electricity
firmsareheadhuntingrenewablesgurusastheyfinancemoreexoticenergy
technologiessuchasoffshorewind,demandreduction,andstorage.And
globally,bigcorporateenergybuyers—fromairlinestoclouddatagiants—
arelookingfortradingandhedgingexpertiseastheytakegreatercontrol
overthesourcing,use,andcarbon-intensityoftheirenergysupplies.
Implications for risk managers:Asgoesthewiderenergyindustry,
sogoesthedisciplineofriskmanagement.Traditionallycenteredinoil
companies,oncommoditiesdesks,andatutilities,theranksofenergy
riskmanagersarepoisedtotrackintonewniches,too.
IRENA SEES THE
POTENTIAL FOR
40 MILLION NEW JOBS IN ENERGY-TRANSITION-
RELATED FIELDS
BeyondCOVID-19—GrowthCreatesNewOpportunitiesandNovelVariables garp.org | 6
Fossil Fuels — Conventional Energy Endures in a Volatile EnvironmentOilandgasremaincentraltotheglobaleconomyandareoftenembedded
inwaysthatareinvisibletoconsumers.Beyondsupplyingunprecedented
volumesofaffordableenergytopowerourindustries—heatingand
coolingourbuildingsandpropellingpracticallyeveryformoftransport
—fossilfuelshavealsocatalyzedaccesstomanyoftheplanet’sother
resourcesandacceleratedthedevelopmentofkeystoneindustries.
Thetransitiontozero-carbonalternativeswillbechallenging,givenhow
deeplyfossilfuelsareembeddedintheglobaleconomy.Nitrogen-based
fertilizers,forexample,afossilfuelproduct,areheavilyusedinagriculture.
Petroleum-derivedasphaltisusedtopaveroadsandtherawingredientsfor
plastics,usedforavarietyofhouseholdandcommercialproducts,come
fromrefinerieswheredistillatesofcrudeoilandnaturalgasareprocessed
intosecondaryuses(Fig.3).9Heavyindustries,suchascement,steel,and
pharmaceuticals,relyonfossilfuelsinwaysrenewablescan’tyetmatchto
achievetheveryhightemperatures—beyond900degreesFahrenheit—
necessarytotransmutemineralsandotherrawmaterialsintomorevaluable
concrete,metals,andchemicals.10
Lookingtomid-century,conventionalfossilfuelfirmsfaceacomplexmix
ofopportunityandunprecedenteduncertainty.Demandforoilandgaswill
endure.Untanglinghydrocarbonsfromtheglobaleconomyisdifficult.The
pursuitofsubstitutesisunderway,fromelectricvehicles(EVs)thatmay
replacepetrol-poweredcars,to“green”hydrogenthatcouldstepinfor
naturalgas.Yetthereisseriousdebateoverhowquicklytheworld’senergy
habitswillchange.Somearguethetransitioncouldcomeindecades,far
fasterthanpastshiftsfromoneclassoffueltoanother.11Historysuggests
thatpasttransitionshavetakenlongertounfold.
Theoutlookisfurthercomplicatedbyastrategicdivergencethatsplits
oilmajorsacrosstheAtlantic.Guidedbygovernmentpolicyandpublic
opinion,Europeanenergyfirmsaremovingmorequicklytowardclimate-
aggressivepoliciesthanaretheirU.S.peers.“Inmoderntimes,there’s
neverbeenabiggerstrategicspreadamongthemajor[oil]companiesas
existstoday,”saidDanYergin,aPulitzerPrize-winningenergyhistorian
andvicechairmanofconsultancyIHSMarkitinaninterviewwithAxios.
“They’realllookingatthesameevidence,buthowtheydefinetheirroleis
quitedifferent.”12
CONVENTIONAL
FOSSIL FUEL FIRMS
FACE A COMPLEX MIX OF
OPPORTUNITY AND UNCERTAINTY
FossilFuels—ConventionalEnergyEnduresinaVolatileEnvironment garp.org | 7
FIG. 3: CRUDE PRODUCTSWHEN REFINED, EACH BARREL OF CRUDE OIL CAN BE TRANSFORMED INTO MANY END USESBased on an average 42-gallon barrel of U.S. crude, 2018
Source:AnjliRaval.“CantheWorldKickItsOilHabit?”FinancialTimes,February13,2020.
https://www.ft.com/content/dddb57ec-4d2d-11ea-95a0-43d18ec715f5.
Gasoline, 19 gal. Fuels cars, SUVs, pickups, boats, and other vehicles that run on internal combustion engines.
Diesel, 11 gal. Powers heavier trucks, buses, trains, and equipment used in construction, forestry, farms, and the like. More energy per volume than gas, but dirtier.
Jet fuel, 4 gal. Also called kerosene, used to power jet aircraft. With a very low freezing point of –40°C, stays liquid even in the deep freeze at high altitudes.
Other, 6 gal. The heaviest remnants of the barrel include asphalt, used to make roads, as well as the molecular ingredients for lubricants, medical items, and clothing.
Residual fuel, 1 gal. A low-grade leftover, used in furnaces and boilers to heat buildings, homes, and for industrial processes, as well as to generate electric power in factories.
Hydrocarbon gas liquids, 2 gal. A mix of fuels including propane, butane, and ethane used for space heating, portable power, and as an ingredient to make durable plastic.
“Tomakeaswitchfromaglobaleconomythatdependsonfossilfuelsfor80percentofitsenergytosomething
elseisavery,verybigjob,”YergintoldTheNewYorkTimes.But,headded,“Thesecompaniesarereallygoodat
big,complexengineeringmanagementthatwillberequiredforatransitionofthatscale.”13
Implications for risk managers:Againstthisbackdrop,energyriskmanagersfaceagrowingknowledge
challenge.Thoseintheoilpatchmustlearnthefundamentals—fromextraction,totransportation,
refining,anddistribution—thatmakeoilcentraltotheglobaleconomy.Theymustalsoreckonwithafast-
changingsetofgeopoliticalissues.Andriskmanagersinallenergysectorsmustalsostayontopofhow
rapidlyevolvingalternativeenergytechnologiescouldalterthiswebofdynamics.
Note:Duetorounding,totalsdonotsumupto42gallons.
FossilFuels—ConventionalEnergyEnduresinaVolatileEnvironment garp.org | 8
Decarbonization — Renewables Rise, Transforming the GridVastaspetroleum’srolehasbeeninpoweringtheeconomyofthe20th
century,thescaleofchangefacingtheenergyindustryinthe21stmaybe
evengreater.
Someindustryleadersarebeginningtohedgestrategicrisksbysteering
theirfirmsthroughsupertanker-sizedadjustmentstotheirstrategic
courses.Forinstance,ininterviewslayingoutplanstodecarbonizeaspects
oftheirbusinesses,theCEOsofbothBPandShellsaidthatthere’sa
chance2019maymarktheall-timehighforglobaloildemand.14,15
Thecascadingcrisesthathittheoilsectorinthefirsthalfof2020offer
acasestudyintheinterplayofrisk.InMarchandApril,theCOVID-19
shutdownsuffocatedenergydemandglobally,shortlyafterSaudiArabia
andRussiahadtakenstepstoboostglobalsupply.Thesuddenglutofoil
shockedglobalmarkets,brieflycrashingoilpricestonearzero.
Astheywrotedownthevalueofoilreserves,oilcompaniesinturnshaved
billionsofdollarsfromtheirbalancesheets.Acrossthesector—fromsmall
wildcatterstopipelineoperatorstothesupermajors—acreditandcash
crunchsetoffawaveofspendingcuts,consolidations,andbankruptcies.
OnbothsidesoftheAtlantic,ashifttowardrenewablesandelectrification
isemergingasahedgeagainstbothnear-termmarketvolatilityaswell
aslong-termclimaterisks.Asrenewableshavefallenbelowthecostof
conventionalmethodsofgeneratingelectricity,theyhavefundamentally
alteredthebasiceconomicsofthegrid,acceleratingtheretirement
ofscoresoflegacyfossilfuelandnuclearpowerplantsindeveloped
economies.In2019,thepriceofsolarphotovoltaicmoduleswasjust
one-tenthoftheir2010price;batterieshavefallenbyasimilaramount,
andcostsforwindturbinestumbledbyhalf.Inmostmarkets,renewables
arenowcheaperthanthelowest-costformoffossil-fuelgeneration,
irrespectiveofanysubsidiesthatmaystillbeavailable(Fig.4).
Theupshothasbeenaspectacularboominrenewable-energyinstallations.
Forthedecadethrough2019,worldwideinstallationsofsolar,wind,and
hydroaccountedfor1,377gigawattsofnewcapacity,outpacingcoal
andnaturalgasby27%.16Powerfromthesunandwindnowaccountsfor
around7%ofglobalelectricitygeneration.17
Decarbonization—RenewablesRise,TransformingtheGrid
Fornon-renewablessuchascoalandnuclear,whichgeneratedthemajority
ofU.S.poweruntilrecently,theoutlookisdiverging.Coalsparkedthe
industrialrevolutioncenturiesagobutcontinuestotaperoutoftheglobal
supplymix,duetocoal-phase-outpoliciesandlower-costcompetitionfrom
bothnaturalgasandrenewables.
Come2030,globalcoaldemandwillbe8%lessthaninpre-COVID-19.And
inadvancedeconomies—suchasEurope,Japan,andtheU.S.—coalwill
fallby45%overthe2020s,predictsIEA.WithChinaplanningtotapernew
coalplantconstruction,too,onlyIndiaandSoutheastAsiaareexpectedto
continuetoseenewcoalcapacityadditionsinthatperiod.18
Nuclear,ontheotherhand,mayyetthriveagain,asthepushtodecarbonize
renewstheallureofitszero-emissionvirtues.Newnuclearplantshadbeen
allbutstalledintheWest,thevictimofhighconstructioncostsandthe
challengesoflong-termnuclearwastedisposal.Theindustrywaspushed
closertothebrinkbythe2011Fukushimadisaster,whenanearthquakeand
tsunamitriggeredatrioofmeltdowns.Aroundtheworld,manyexisting
reactorspowereddowninresponsetothecrisis.
FIG. 4: CHEAPER ELECTRONSU.S. COSTS FOR NEWLY BUILT ELECTRICITY (LEVELIZED, UNSUBSIDIZED), 2019$ per megawatt-hour, nominal
Source:2020SustainableEnergyinAmericaFactbook,page43.PDFfile.
BloombergNEFandTheBusinessCouncilforSustainableEnergy,2020.http://bcse.org/factbook/#.
Onshore wind
Tracking solar photovoltaic
Non-tracking solar photovoltaic
Large hydro
Combined-cycle gas turbine
Combined heat and power
Onshore wind and storage
Non-tracking solar photovoltaic
Demand response
Open-cycle gas turbine
Utility-scale battery (4h)
Pumped hydro
500
450
400
350
300
250
200
150
100
50
0 26
59
36
57 61
40 38
76
38
76
52
108
39
112
176
5774 75
272
185251
444
171
416
Decarbonization—RenewablesRise,TransformingtheGrid garp.org | 10
Inthedecadesince,asenergyandclimateplannersreckonwiththechallenges
ofmigratingtonet-zerocarbonbymid-century,manyhavebeguntogingerly
reconsidernuclearenergy.Nozero-carbontechnologiescanmatchitsblend
ofday-and-nightreliabilityorlarge-scaleoutput.Worldwide,newreactor
buildsareconcentratedlargelyinChina.Butanemergingclassoffactory-
assembledminireactorspromisestoradicallylowerbothconstructioncosts
andoperatingrisks.19
Whilethegridisontracktodecarbonizemorequicklythanotherslicesof
theworld’soverallenergypie,it’shelpfultokeepinperspectivethat,even
asnewinstallationsswitchtorenewables,thescaleofexistingcapacity
meansdeeperchangewilltaketime.Todecarbonizeeven50%ofglobal
electricityby2030wouldmeanafive-toten-foldincreaseincurrent
renewablecapacity.
That’sasteepchallengegiventheneedtoplan,finance,site,source,and
buildmillionsofwindmillsandsolarpanels.Windandsolarfacilitiesoccupy
abiggerfootprintthanthermalplants:foreachmegawatt,windneeds7.6
hectares,andsolarneeds1.7.Today,theworld’ssolarandwindfacilities
occupysome52,000squarekilometers(5.2millionhectares),roughlythe
sizeofCostaRica.20
Otherindustriesarepacingbehindutilitiesastheydecarbonize.The
world’scarcompaniesarenextinlinetodoso,aspolicyspursashiftfrom
acentury-longrelianceongas-anddiesel-fueledengines.Agrowinglist
ofautomakershasceasedfundingdevelopmentininternal-combustion
engines,astheyshiftteamstowardEVs.21
Spurredbyfallingpricesandpublicincentives,EVsarethefastest-growing
segmentintheglobalautomarket.Yetin2020,only0.5%areEVs,estimates
BloombergNEF,andby2030thatsharecouldhit8%.22Absentlowerprices
and/orstrongerincentivestoaccelerateadoption,itmaytakeageneration
orlongertoturnovertheworld’sfleetofonebillion-plusvehicles.
Other,majorsourcesofcarbonemissions—suchastheindustrialand
transportationsectors—trailfurtherbehindintheshifttodecarbonize.
Someindustriesaretakingtheleadthemselves,makingdealstofund
renewablepowerprojectsandcommittingtobecarbon-free—consumer
titanssuchasAmazon,Apple,Microsoft,andUnilever,amongothers,have
allcommittedtocarbonneutrality.
DECARBONIZING
50% OF GLOBAL
ELECTRICITY BY 2030
WOULD MEAN A
FIVE- TO TEN-FOLD INCREASE IN CURRENT
RENEWABLE CAPACITY
Decarbonization—RenewablesRise,TransformingtheGrid garp.org | 11
Formoreenergy-intensiveindustries—likesteelplants,pharmaceutical
makers,andaviation—it’smoredifficulttodecarbonize.Whether
necessarytocreatevolcanictemperatures(suchasthecokingcoal
usedbysteelmills),ortostoreenergyinliquidthatwon’tfreeze(like
thekerosenejetenginesrequire)orasaversatilerawmaterial(suchas
themethanepetrochemicalplantstransformintoplastic),low-carbon
alternativesthatcanmeettheperformancestandardsofincumbentfossil
fuelsremainimmature,andinsomecases,areyearsaway.
Implications for risk managers:Themixoffuelsthatpowerour
planetissettochangemoreinthenextdecadethanithasinthe
pastcentury.Chartingtheinterplayofnewclimatepolicy,disruptive
cleantechnologies,theriseofrenewables,thefateoflegacyfuels,
andtheimplicationsforfinancialrisksacrossalltheseareaswill
occupyenergyriskmanagersforagenerationtocome.
Decarbonization—RenewablesRise,TransformingtheGrid garp.org | 12
Conclusion — Energy Risk RedefinedTomorrow’senergyriskmanagerswillneedtocultivateawider
understandingofbothconventionalandemergingenergytrends,aswellas
adeeperfluencyinhowlocal,national,andglobalregulationsarerewriting
therulesofenergymarkets(Table1).
Formanyoilmajors,thistransitionwillbegradual,guidedasmuchbythe
familiarlogicofmarketreturnsasbymorespeculativejudgmentsonwhere
regulatorywindsareblowing.Indeed,thetwofacesoftheenergysector
—establishedfossilfuelsandemergingrenewables—areincreasingly
intertwined.Thisisnotnew:Everypasteraofenergyevolutionhasbeen
heavilydependentontheenergyinfrastructurethatcamebefore.
Considertheverywindturbinesandsolarpanelsthatarereorderingthe
electricitysector.Thegearamountsto“pureembodimentsoffossilfuels,”
asenergyhistorianVaclavSmilwrites.Whetherthesteelinthetowersand
trussesthatsecuresolarphotovoltaic(PV)panels,ortheplasticresinsand
coatingsthatletturbinebladesandsolarpanelslastfordecades,orthe
enormousships,trucks,andcranesnecessarytodeliverandinstallthese
state-of-the-artenergysystems—alloftheseinputsaremadefromand/or
poweredbyfossilfuels.23
Thisblurringofboundariesbetweenconventionalandrenewablegoes
bothways.Asthepriceofrenewableshasplummeted,moreoilfirmsare
relyingonsolarandwindtorunpower-hungryequipment.InWestTexas,
forexample,oilmajorshavebuiltrenewablestopowerthehugepumps
andothergearneededtoliftcrudefromdeepintheearthintopipelines.
Powerfromthewindandsun,itturnsout,offeredthecheapestenergy.24
Lookingoutatthenext30yearsoftheenergyindustry,fewthingsare
certain,andthecomplexityofcomingchangesiswithoutprecedent.
Tobesure,theimpactsofCOVIDontheglobaleconomywillretreatin
time.Andpublicrecoveryspendingmaytilttowardgreenjobsprograms
anddecarbonization.
Yet,oilisatextbookcommodity,amarketwhereineverypricebustsets
thestageforthenextboom.Asoilcompaniesfail,investmentretreats
andsupplyshrinks,leadingtoshortagesandapricespiral.Already,some
marketwatchersarepredictingoilcouldspiketo$150perbarrelinthe
nextfewyears,aroughlytenfoldreboundfromitsCOVID-eralowin
April2020.25
THIS BLURRING OF
BOUNDARIES BETWEEN
CONVENTIONAL AND RENEWABLE GOES BOTH WAYS
Conclusion—EnergyRiskRedefined garp.org | 13
Thisconvergenceofoldandnewdynamicsintheenergyindustrycan
seemcontradictory.Yet,viewedthroughtheframeworkofriskassessment,
thesectoroffersmoreopportunity—andchallenges—thaneverbefore.
Acrossthespanofthenextcenturyandbeyond,andunlikepractically
everyothermajorfuturerisk,climatechangeisnearlycertaintohappen.
Whathappensbeforethenisamultivariablethicketofrisk,thelikesof
whichfinancialengineerspridethemselvesonbeingabletomodel.
Frommonthtomonth,andquartertoquarter,thenatureofthoserisksis
chartedterritory—whetherit’sthemarketriskofcurrencyvolatilityorthe
creditriskofanewcustomer.Lookingoutfurther,toyearsanddecades,
thedecisionsenergyprofessionalswillfacestretchintonew,uncharted
realms—whetheraprojectmanagershouldrecommendasiteinaflood-
pronecoastalregionorachiefexecutiveshouldpushherboardtoexita
businesslineimpairedbycarbonrisk.
Thesedecisionswillincreasinglyrequireanewbreedofriskmanagers.
Conclusion—EnergyRiskRedefined garp.org | 14
TABLE 1: REAL WORLD TALES OF ENERGY RISKONCE FOCUSED PRIMARILY ON FINANCIAL ANALYSIS, THE PRACTICE OF ENERGY RISK MANAGEMENT IS EXTENDING ACROSS STRATEGY AND OPERATIONS
RISK TYPE EXAMPLES
Market Marketriskcentersonpricingandthesometimessubtlefactorsthatcanaffectit.Inearly2020,
U.S.oilpricesbrieflywentnegativeevenasglobalpricesstayedpositive.Akeyculpritbehindthis
unprecedentedinversion?Shortagesofstoragecapacity.Withnobuyerstotakeoilstillflowingfrom
U.S.wells,storagesitesmaxedout.TankfarmsinCushing,Oklahoma,werefulltothebrim,andinthe
GulfofMexicoafleetofsupertankerssatidle,fullofexcessoutput,butwithnowheretosellit.
Credit Creditavailabilityfortraditionalprojectsisdryingupasinvestorsseekgreeneralternatives.Energy
projectsdependonaccesstocreditandcollaborationwhereaprimaryprojectdeveloperrelieson
scoresofspecialiststobringaprojectonline.Acreditcrisisamonganyofthosepartnerscanhalt
allprogress.Considerawindproject.Oncefinancing,siting,andengineeringarecompleted,thebig
turbinesneedtobehauledin,piecebypiece.Bladescanbeupto200feet,fourtimesthelengthof
aregulartractor-trailer.Theserequireexotictrucksdrivenbyspecializedteamsabletoexecutehair-
raisingmaneuvers.26Ifatransportprovider’sweakcreditpositionwentunnoticed,andfinancingfor
itsbigrigsfellthrough,thewholeprojectcouldskidtoahalt.
Health,
safety,and
environment
(HSE)
Whetherrefuelinganuclearpowerplant,weldinganunderwaterpipeline,orconnectinghigh-voltage
linesatasolarfarm,theenergyindustryroutinelyreckonswithsomeofthemostextremehealth,
safety,andenvironmentalrisksofanyindustry.Evenlessexoticrolescanfaceunusualdemands.
ConsideracookworkingonaNorthSeaoilrig.Hercoreexpertisemaybeknowinghowtonourish
dozensofworkersfromcrampedkitchenquarters.Butshe’llalsoneedtobeproficientineverything
fromfiresuppressionprotocolstoopenwatersurvivaltechniques.
Costrisk/
Operations
Scrutinyofaproject’sfinancialbaseandoperatingassumptionshasneverbeenmoreintense.
And,whileprojectfinanceandothercapitalexpendituresdefinemostdeals,operatingriskposes
anoftentougher-to-modelchallenge.WallStreetexpectsawindfarmprojecttoperformas
modeled,forinstance.Butwhatiflong-termwindpatternsunexpectedlyfalloff?Trackingsuch
variablesandbuildingintermstohedgetheriskofsucheventualitiesdemandsevermore
resourceful—andcreative—applicationsofriskmodeling,financialengineering,andexpertisein
energysystembehaviors.
Regulatory
andreporting
Overthepastcoupleofpastdecades,thevarietyofreportsenergycompaniesissuehassoared.
Oncelimitedmostlytofinancial,safety,andenvironmentalregulatoryfilings,ariskprofessionaltoday
mustalsonavigateanemergingarrayofvoluntaryself-assessments,includingsustainabilityreports,
industry-backedESGstatements,andothervoluntarymeasuresofsustainabilityriskexposureledby
thelikesoftheUN,EU,andNGO’s.Theseadditionalmeasuresofcorporateperformancecanaidrisk
assessmentbutareoftenfast-evolvingasstandardsandpracticesgofromdrafttoofficial.
Conclusion—EnergyRiskRedefined garp.org | 15
RISK TYPE EXAMPLES
Cyber In2017,theU.S.Dept.ofHomelandSecurityidentifiedawaveofcyberattacksaimedatcontractors
tolargeutilities.Bygainingaccesstotheserversofpowercompanies’trustedbusinesspartners,the
suspectedRussianhackerswereabletoaccessmajorU.S.utilitymanagementsystemspreviously
consideredsecure.Noharmwasdone.Butoneexpertsaidthat,forRussia,thehighlysophisticated
operation“preparedthebattlefieldwithoutpullingthetrigger.”U.S.andindustryinitiativeshave
increasedvigilance,butstateandnon-stateactors—includingChinaandNorthKorea—continueto
advancemoresophisticatedtactics.27
Sustainability Inrecentyears,“sustainability”hasemergedasasetofprioritiesandrelatedrisksthatextend
beyondthecorporatebalancesheettothepeopleandcommunitieswhereenergycompaniesand
theirsuppliersoperate.Forexample,oilcompaniesandotherextractiveenergyfirmsworkingin
emergingmarketsfacescrutinyoverthepotentialimpactsonlocalcommunities.And,asbatteries
becomemorecommonplaceinEVsandrenewableenergyprojects,companiesarereckoningwith
theriskofforced-and/orchild-laborinsupplychainsforkeymineralssuchascobalt.28
Policy InWashington,D.C.,Brussels,andbeyond,energyandclimate-relatedpoliciesareevolvingatan
unprecedentedpace.Rulemakersareincreasinglyevaluatingphysical,regulatory,andlegalrisks
arisingfromclimatechange.Forexample,inNovember2020,theU.K.unveiledrequirementsinline
withtheTaskForceonClimate-relatedFinancialDisclosures.Underthenewrules,effective2025,
Britishcompaniesmustdisclosethedegreetowhichtheiroperationsareexposedtorisksposedby
globalwarming.WhiletheU.K.isthefirstmajoreconomytomandateclimatereporting,othersare
expectedtofollowsuit.29
Transition Transitionrisk,inmanyways,representstheoverarchingmixofallenergy-andclimate-relatedrisks.
Firmswhoproveunable,orunwilling,totransitiontheirstrategycouldfacesharpshiftsintheir
competitivepositions.Forinstance,between2009and2015,Moody’scuttheaveragecreditratingof
Europeanpowerutilitiesbythreenotches,inpartduetoclimaterisk.Andsince2000,coalproducers
intheU.S.haveseentheirmarketcapitalizationsdecimated,asnaturalgashastakenmarketshare
andinvestorslookedelsewhereforhigherreturns.Fromoilreservestolegacypowerplants,owners
offossil-fuelheavyassetsarereckoningwithprospectsthattheirassetswillhaveshorterlives,or
evenbecomestranded,fasterthananticipated.
Source:GARP
Conclusion—EnergyRiskRedefined garp.org | 16
Endnotes1. BPStatisticalReviewofWorldEnergy2020,page3,PDFfile.
https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html
2. “OutlookforEnergyDemand–WorldEnergyOutlook2020.”IEA,2020.
https://www.iea.org/reports/world-energy-outlook-2020/outlook-for-energy-demand#abstract
3. BPStatisticalReviewofWorldEnergy2020,page4,PDFfile.
https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html
4. “COVID-19:ExploringtheimpactsoftheCovid-19pandemiconglobalenergymarkets,energyresilience.andclimate
change.”IEA,2020.https://www.iea.org/topics/covid-19
5. “EIAprojectsnearly50%increaseinworldenergyusageby2050,ledbygrowthinAsia.”EIA,2019.
https://www.eia.gov/todayinenergy/detail.php?id=41433
6. “Energyin2040-2050:MarketstoBeTransformed,butThere’sNoSilverBulletforClimateCrisis.”CapgeminiUS,February
6,2020.https://www.capgemini.com/us-en/news/energy-in-2040-2050-markets-to-be-transformed-but-theres-no-silver-
bullet-for-climate-crisis/
7. “SustainableRecovery–Analysis.”IEA,2020.https://www.iea.org/reports/sustainable-recovery
8. “Post-COVIDRecovery:AnAgendaforResilience,DevelopmentandEquality.”IRENA,2020.
https://www.irena.org/publications/2020/Jun/Post-COVID-Recovery
9. “ThePast,PresentandFutureofClimateChange.”TheEconomist,September21,2019.
https://www.economist.com/briefing/2019/09/21/the-past-present-and-future-of-climate-change
10. Aston,Adam.“ThisCarbonChallengeIsBiggerthanCars,AviationandShippingCombined.”Greenbiz,August13,2020.
https://www.greenbiz.com/article/carbon-challenge-bigger-cars-aviation-and-shipping-combined
11. Tsafos,Nikos.“MusttheEnergyTransitionBeSlow?NotNecessarily.”CenterforStrategicInternationalStudies,September
14,2018.https://www.csis.org/analysis/must-energy-transition-be-slow-not-necessarily
12. Geman,Ben.“Generate,”e-mailnewsletter.Axios.com,August6,2020.
https://www.axios.com/newsletters/axios-generate-934dc544-cb1d-4561-8f5b-d0c51b5b76c7.html
13. Reed,Stanley.“Europe’sBigOilCompaniesAreTurningElectric.”TheNewYorkTimes,August17,2020.
https://www.nytimes.com/2020/08/17/business/energy-environment/oil-companies-europe-electric.html
14. O’Sullivan,Meghan,“TheGeopoliticsoftheGlobalUpheavalinOilMarkets.”Videointerview.HarvardKennedySchool,
June3,2020.https://harvard.zoom.us/rec/play/6J0rcOH9rjo3T4bEtASDC_Z_W9XsfKKs0yRL-voOmki3USZWYwehZroTZ
yifYdj9GYzqEOvJ2oWoPhY
15. Brower,Derek.“ShaleBossSaysUSHasPassedPeakOil.”FinancialTimes,July13,2020.
https://www.ft.com/content/320d09cb-8f51-4103-87d7-0dd164e1fd25
16. Bullard,Nathaniel.“RenewablePowerWillSoonComeOutonTop.”Bloomberg,June11,2020.
https://www.bloomberg.com/news/articles/2020-06-11/solar-and-wind-power-top-growth-in-renewable-energy-
worldwide
17. BNEFExecutiveFactbook,pages25-27,PDFfile.BloombergNEF,April22,2020.
https://data.bloomberglp.com/promo/sites/12/678001-BNEF_2020-04-22-ExecutiveFactbook.pdf
18. “OutlookforEnergyDemand–WorldEnergyOutlook2020.”IEA,2020.
https://www.iea.org/reports/world-energy-outlook-2020/outlook-for-energy-demand#abstract
19. Wade,Will.“Mini-ReactorsAreGainingTractioninthePushforGreenerGrids.”Bloomberg.com,August31,2020.
https://www.bloomberg.com/news/articles/2020-08-31/mini-reactors-could-mark-nuclear-power-s-return-in-the-push-
for-greener-grids?sref=QNR0gc4Q
Endnotes garp.org | 17
20. SebHenbest.“IntheFuture,SolarandWindWillBeEverywhereYouLook.”Bloomberg,July23,2020.
https://www.bloomberg.com/news/articles/2020-07-23/the-next-big-home-decor-trend-will-be-solar-panels
21. Lambert,Fred.“DaimlerStopsDevelopingInternalCombustionEnginestoFocusonElectricCars.”Electrek,September19,
2019.https://electrek.co/2019/09/19/daimler-stops-developing-internal-combustion-engines-to-focus-on-electric-cars/
22. “ElectricVehicleOutlook2020.”BloombergNEF,2020.https://about.bnef.com/electric-vehicle-outlook/
23. Smil,Vaclav.“ToGetWindPower,YouNeedOil.”IEEESpectrum.February29,2016.
https://spectrum.ieee.org/energy/renewables/to-get-wind-power-you-need-oil
24. Barron,James.“HowBigBusinessIsHedgingAgainsttheApocalypse.”TheNewYorkTimesMagazine.April11,2019,
page48.https://www.nytimes.com/interactive/2019/04/11/magazine/climate-change-exxon-renewable-energy.html
25. Wallace,Joe.“OilWentBelow$0.SomeThinkItWillReboundto$150OneDay.”TheWallStreetJournal.July9,2020.
https://www.wsj.com/articles/oil-went-below-0-some-think-it-will-rebound-to-150-one-day-11594287002
26. “RemarkableManeuverwithWindTurbineBlade.”CNN,2020.https://www.cnn.com/videos/world/2017/10/05/trailer-
turning-scotland-wind-turbine-blade-sje-lon-orig.cnn
27. Smith,Rebecca,andRobBarry.“America’sElectricGridHasaVulnerableBackDoor—andRussiaWalkedThroughIt.”The
WallStreetJournal,January10,2019.
https://www.wsj.com/articles/americas-electric-grid-has-a-vulnerable-back-doorand-russia-walked-through-it-11547137112
28. Sanderson,Henry.“Congo,ChildLabourandYourElectricCar.”FinancialTimes,July7,2019.
https://www.ft.com/content/c6909812-9ce4-11e9-9c06-a4640c9feebb
29. AlastairMarsh,andAkshatRathi.“CompaniesCanNoLongerDodgeClimateRisksasU.K.RaisesBar.”Bloomberg.com.
Bloomberg,November10,2020.https://www.bloomberg.com/news/articles/2020-11-10/companies-can-no-longer-
dodge-climate-risks-as-u-k-raises-bar?sref=QNR0gc4Q
Endnotes garp.org | 18
garp.org
ABOUT GARP |TheGlobalAssociationofRiskProfessionalsisa
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