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M&A activity in general, and in the energy sector in particular, was relatively mute in the last year[1]. Activity picked up towards the end of the year with BP's sale of its 51 per cent stake in its Indian solar power business to Tata, Repsol's acquisition of stakes in oil and gas fields in Mississippi, EDF's announcement to acquire Edison, and earlier this year Eon's planned acquisition of a stake in Brazil's MPX Energia. Despite that, 2011 overall was still a dull year for M&A transactions.
It is anticipated however for activity to dramatically pickup in 2012. The recent move by Cove Energy to put itself up for sale for an estimated $1bn has sparked renewed expectations for a much active year[2]. The argument is that due to the limited ability of the smaller companies to raise adequate capital (especially given current circumstances in the capital markets) to finance their expansion and the development of new fields, they are increasingly turning to the bigger players with much deeper pockets and/or better ability to raise capital to acquire them and invest in their growth opportunities.
Considering the increased complexity of energy projects as companies are entering a new technological era marking the end of "easy oil", there is a growing concern about the real preparedness of companies to deal with the new risks they are facing. The potential severity of those risks due to the important damages caused to the environment and their possible impact on populations explain this apprehension.
Though most energy companies have now put in place a risk management organisation and rigorous risk control systems, mostly to comply with new laws and regulations, the lessons drawn from the recent past indicate that it did not result in much improved safety performance [2]. In fact compliance is not enough; it does not guarantee that risks are effectively under control [3]. Most accidents are explained by transgression of safety rules and procedures, excessive risk taking or simply risk blindness. It demonstrates that risk management rules and procedures may exist but are not always taken seriously enough within organisations. Why is it so? Partly because efforts made in this domain are not reflected in the value of the company but rather have a negative impact on usual financial performance indicators.
Increased price and supply risk in the British gas market this winter suggest a need to further diversify sources of gas supply. The UK does not need to look far however, as homegrown shale gas is a way to lessen the risk premium on gas in future winters.
Before discussing shale gas, it is worth examining the situation the UK faced regarding gas prices this winter. According to broker prices compiled by Bloomberg, the first two weeks of February witnessed the highest price swings in day-ahead gas, as measured by 30-day historical volatility, since fall 2009, with price swings more than tripling over that period (Brown and Farey, 2012). Strong Asian natural gas demands and cold weather which strained on-hand gas supplies had no direct effect on consumers during this two-week period, but it certainly complicated energy utilities' efforts to supply electricity at stable prices.
Even a nuclear disaster like Fukushima cannot wipe out nuclear reactors from the world. Accidents, proliferation, social unease and high capital costs, all indicate that nuclear energy cannot grow fast, though in general, this is the case with almost all energy technologies that mature and succeed each other over many decades. Eventually, nuclear will play a larger role in electricity generation, but it will get there slowly.
In a pre-Fukushima report, according to the BP Statistical Review of World Energy (2010), energy consumption in the OECD countries during 2009 fell faster than GDP, marking the first decline since 1928 and the sharpest decline (in percentage terms) on record. The developing world on the other hand, experienced an energy consumption growth faster than GDP. Looking forward, based on the reference case scenario of the International Energy Outlook (2010) report, world marketed energy consumption, total energy demand in the non-OECD and in the OECD countries is expected to increase by 49, 84, and 14 percent from 2007 to 2035, respectively. The latter two demand percentages pinpoint the increasingly high importance that emerging markets play in the world economy, especially during and after the global economic recession that started in 2007. Most of the growth in energy demand mainly stems again from the non-OECD countries that are also expected to have by far the highest growth in energy consumption compared to the OECD countries (see figure 1). Even though most of the developed countries seem to have exited the recession, the recovery has been mostly led by countries such as China and India, with Japan and the European Union member countries being the laggards.
The recent run-up in oil price and other energy products between 2003 and 2008, and then their subsequent steep collapse within a few months, to many economists appears to be a huge bubble that was meant to burst (Eckaus, 2008). These developments in the price of oil and in other energy markets have been mainly attributed to the positions taken by financial investors on the futures markets, such as pension funds, hedge funds, investment banks etc. These peculiar dynamics of oil, and most of the energy commodities, have transformed them into financial assets, and as such, they are subject to speculative bubbles.
As Caballero et al. (2008) argue, the financial collapse of 2007 led investors into a search for an alternative asset class that has diversification properties able to deliver positive returns during a market downturn, and they found it in energy commodities and more specifically in oil. According to them, it is this huge inflow of capital towards energy commodities that created this huge rise in oil prices towards the end of 2008, leading to a speculative bubble that burst only a few months later. As Shleifer and Summers (1990) point out, investors' reactions to common signals or their overreaction to recent news can cause herding behaviour. However, in the case of the oil futures markets, Boyd et al. (2009) and Buyuksahin and Harris (2009) conclude that, during recent years, herding among hedge funds did not destabilise the futures markets because of its countercyclical nature. Moreover, in their study on the performance of various hedge funds and commodity fund investment styles during periods of bullish and bearish stock markets, Edwards and Caglayan (2001) find that commodity funds provide greater downside protection than hedge funds do.
Britain's new anti-corruption law, the UK Bribery Act 2010, came into force on 1 July 2011 after a legislative process that was long, complex, and controversial, mainly because of the implementing conditions. Companies in the energy sector, most of which have transnational business activities, are clearly covered under the law. This column will therefore briefly analyse the new set of rules and the scope of the law.
The origins of the UK government's adoption of the UK Bribery Act 2010 lie with the famous corruption case involving Saudi Arabia and the English defence company BAE Systems. The Serious Fraud Office (SFO) had decided to discontinue its investigation of the case for diplomatic reasons, setting off an outcry in British public opinion. It became necessary to reform UK anti-corruption laws, and a new paradigm was instituted through the Bribery Act.
There is a great hype about Brazil's pre-salt oil potential and the impact it will eventually have on the global oil market. Some sources say that it could vault Brazil to seventh place in the world rankings in terms of proven oil reserves behind Saudi Arabia, Venezuela, Iran, Iraq, Kuwait and United Arab Emirates. Others claim that Brazil could emerge as a major oil producer and exporter and that will certainly change the balance of oil distribution in the world.
Europe's shale gas landscape presents risks and opportunities over the next 10 years. As interest in developing a European shale industry expands, it is imperative that investment and partnering decisions are guided by an appreciation of risks that are of greatest consequence to the business strategy.
Relying only on hubs for price discovery makes sense in the US where numerous producers are in competition. This is not the case in Europe where the main external sources of supply in 2011 were Russia (24%), Norway (19%), Algeria (9%) and Qatar (7%), giving those four countries and their state-owned company c.50% of the market. So, with European gas supply on the verge of being mostly spot-indexed, after implementation of the third energy package, the EU Commission should foster domestic shale production as a diversification to boost not only security of supply but also to finally achieve a fully functioning gas market.
For many reasons, such as being the world's largest country, possessing vast natural resources and having a population of over 150 million people, Russia possesses good opportunities of investment for foreign companies. However, Russia also has a dynamic, unique, challenging and, sometimes, difficult to understand business environment that has caused problems for many foreign firms. As a result, businesses tend to perceive doing business in Russia more as a risk than an opportunity, and BP knows this - its difficult experience in partnering with its Russian counterpart illustrating this reality.
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