Deloitte Energy Predictions report suggests an improved state for the Energy and Resources sector
DELOITTE CONSULTANTA S.R.L. - 15 February 2010
Greater energy efficiency, acceleration of renewable energy production and rise of the Smart Grid technology are at the top of the Energy & Resources industry agenda this year, combined with a new wave of cross-border consolidation, a tendency to centralize decision-making and much more focus on talent management, according to Deloitte's Energy Prediction 2010 report.
'Global growth and various industries may be cyclical and 2010 is likely to challenge all within the Energy and Resources industry. However, from a long term perspective one has to note how important a role energy plays and how its use affects each and every person on the planet, together with the expectation of growth in world population and emerging economies becoming ever larger part of the world economy. The need for energy remains a constant element that is expected to grow while technological advancement results in better economy, efficiency and environment,' said Farrukh Khan, Partner and Energy & Resources Industry Leader Deloitte Balkans. 'Energy Predictions 2010 is the first of an annual series by Deloitte Touche Tohmatsu outlining a perspective on the state of the industry across its various sectors. The methodology for developing this set of predictions involved in-depth interviews with clients, industry analysts and the most senior energy practitioners from Deloitte member firms.'
Valeriu Binig, Director Financial Services Energy & Resources with Deloitte Romania, added: 'The current report takes a closer look into the near future, anticipating the mutations within an industry that has long ago broken all geographical and state boundaries. Romania however has yet a long way to go, in view of the major and necessary restructuring currently under way. Although some of the trends identified in this report do not apply to an industry with a national and partly regional impact like Romania's, our country will eventually have to align to the same energy efficiency levels and environmental-friendly technologies. Moreover, given its strategic location and primary energy resources, Romania has the potential to become a significant player in the region, in the near future. In this view, the speed of reform, technological progress and the attraction of necessary financing become all the more vital for the local industry.'
Deloitte Energy Predictions highlights
1. A global economic turnaround will begin to take shape but what shape will it take?
No matter what shape the recovery takes (V-shape, U-shape or W), it is becoming more apparent that 'easy does it' should be the watchword. The global economy cannot withstand another extreme rise in oil prices without severely impacting economic growth. A key unknown is the ability of energy measures/initiatives such as renewables to help drive the shape of the recovery.
Some economists are predicting a W-shaped, or 'double dip' recession; in this scenario, overall economic growth experiences a modest upturn but the economy remains weak in certain segments. Such a recovery could result in rising commodity prices, but with more variability and ongoing risk for oil & gas companies struggling to improve cash flow.
2. It's acquire or be acquired for many as M&A rebounds
Apart from the oil supermajors, consolidation will be likely across sectors. Oil & gas independents, as well as small mining companies will be possible targets for reserve-hungry majors but also potential beneficiaries of portfolio rationalization among larger players. Power and utility companies will likely look at M&A activity to bolster their strategic positions, provide access to markets, and to raise cash for capital improvements.
3. Think fast: The lure of centralized decision-making
The shift from decentralized to centralized decision making is likely to increase over the long-term, giving companies an opportunity to exert more control over increasingly complex and costly E&P projects.
The advantages of this strategy are many. Simplifying organizational structures can help to speed up decision-making by cutting layers of management. Plus, centralized decision-making can help make operations more efficient through performance improvement as well as organizational excellence.
This does not appear to be just a onetime fad, but rather a lasting trend that can be used to increase a company's chances for long-term success.
4. Like attracts like as NOC-to-NOC transactions continue to increase
National Oil Companies (NOCs) are aggressively looking for corporate M&A opportunities to accomplish three goals: bolster their market strategies; expand their reserve portfolios; and develop strategic alliances. In 2010, NOC-to-NOC transactions are likely to increase dramatically as countries continue to see economic and political value in this type of activity.
5. Making every electron count: The rise of the Smart Grid
Power and utilities companies will likely face their own set of issues. The most important of these is the continued rise of the Smart Grid which has the potential to revolutionize the power sector by reducing energy consumption by up to 30 percent and decreasing the need to construct new power plants.
Electricity is projected to supply an increasing share of the world's total energy demand and is the fastest-growing form of end-use energy worldwide approximately over the next decade. Given the growth and importance of electricity throughout the world, it is shocking to note that the average efficiency of the world's existing electricity grids is only around 33 percent. This contrasts with 60 percent efficiency for grids based on the latest technology.
Smart Grid technologies have the potential to reduce up to 30 percent of electricity consumption and dramatically decrease the need to construct new power plants or to operate environmentally harmful sources of generation.
Smart Grid companies are poised to become the biggest and fastest growing sector in the GreenTech – and possibly even the entire – technology market according to several recent market studies.
6. Pressure to resolve the coal conundrum intensifies
Coal is the fuel of the future. The International Energy Agency (IEA) estimates that coal will account for 29 percent of global energy requirements in 2030, compared with 26 percent in 2006. To meet this growing demand, coal production is projected to rise by almost 60 percent between now and 2030. Most of this growth will come from non-OECD countries including China and India who will likely see their coal output double.
But coal has a downside. Burning coal emits approximately one ton of carbon dioxide (CO2) for every megawatt (MW) of electricity generated. For countries, including the U.S., that are highly dependent upon coal, commercial-scale carbon capture and storage (CCS) technologies might be the answer. Experimental projects are underway in several countries
7. Renewable energy production heats up in key oil-producing regions
The Middle East and North Africa are synonymous with oil and natural gas. But soon, the connotations of these resource-rich regions will begin to shift toward renewable energy production. Many believe that the geographic and demographic conditions are just right for the birth of a new type of energy leadership in the traditional cradle of fossil fuels.
The acceleration of renewable energy production within the world's largest oil producing region heralds a paradigm shift in how the world thinks about energy. More and more countries are grasping the inter-relationship between climate change and energy security. To this end, they are looking for ways to reduce energy-related CO2 emissions while meeting rising energy demand.
8. Sector-specific cap-and-trade schemes emerge as viable options in carbon-intensive industries
If the energy industry wants to remain in control of its own destiny, it cannot take a 'wait and see' attitude regarding carbon reduction. It must, instead, proactively develop technologies and processes to lower emissions as well as play an active role in shaping the type of carbon trading mechanism that will be employed.
More cap and trade sector-specific schemes are being initiated in the US, with a purpose to prevent possible distorsions of economic-wide initiatives.
9. Waste not, want not: Energy efficiency goes from optional to essential
Despite the recent economic slowdown, worldwide energy consumption is still anticipated to grow at 1.6 percent per year on average between 2006 and 2030 — an increase of 45%. Building more fossil-fuel-fired power plants does not appear to be the answer, either economically or environmentally.
In 2010, the world will likely see increased conservation and energy efficiency efforts from both individuals and businesses. More capacity isn't the answer; greater energy efficiency is. The technologies needed to conserve energy already exist today.
10. 'Employment Nationalism' Poses another Access Issue for IOCs
The ultimate success of oil & gas companies, whether IOCs or NOCs, will hinge on their ability to effectively attract, develop, deploy, and retain their human capital.
IOCs have developed innovative ways of closing the talent gap by forming partnerships with petroleum-focused universities in parts of the Middle East and Asia, but making up ground in this area will take some time.
As NOCs continue to purchase assets and globalize their operations, talent management will increasingly be one of the critical success factors.
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