Energy sector trends

Discussion in 'Commercial Awareness Forum' started by Lauren, Jan 12, 2021 at 8:06 PM.

  1. Lauren

    Lauren Valued Member

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    Hi,

    I wrote an application answer on shell cutting its dividend for the first time since the second world war and I am expecting follow up questions at interview.

    Should my research cover things like balancing investment in renewables Vs higher profit generating fossil fuels , the Saudi Arabia-Russia oil price war and more general technology trends? Such as the Internet of Energy?

    I would be very grateful for any advice on what you think is the best way to prepare.
     
  2. Dheepa

    Dheepa Legendary Member
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    Hi Lauren,

    I think the most important trend you should focus on is the overall transition to green energy. Some of the other points you mention actually feed into this overall trend and I think that no matter what news article you read about the energy industry, it's good to keep the green energy movement at the back of your mind and think of the implications to that. I've summarised my thoughts below, hopefully they give you some pointers.

    The price wars and the overall reduction in oil prices due to COVID have had the most significant impact on energy companies ability to a) pay off their debts (remember that this is one of the most heavily leveraged sectors) b) borrow more for the necessary diversification into renewables c) pay dividends and complete share buybacks that were promised to investors. The flipside to point c) is that while some investors are upset that they didn't see returns, you have other investors that equally feel like these companies are not doing enough to cope with the energy transition and so are choosing to reduce their shareholdings. You can think about this from the perspective of institutional investors as well (pension funds, sovereign wealth funds etc.) that are increasingly pressured by new ESG regulation (see the EU Sustainable Finance Action Plan) and public perception (think of the Extinction Rebellion protests which aimed to force governments to take climate action seriously and see how Blackrock's chairman's letter to shareholders clearly shows how climate action has tangibly affected the investment community). In my opinion, this just means energy companies are caught in a catch 22 situation. On one hand they're being forced to diversify into an area with lower returns or risk becoming redundant, on the other hand they no longer have as much liquidity to do so and while governments do have subsidies for green investment projects, these will run out sooner or later. On the Internet of Energy point, this again points to why energy companies are trying to move into power generation, electricity and utilities because its again being necessitated by the green energy transition.

    I've mentioned quite a bit there that you can read into further and try to unpack. This article on TCLA is extremely detailed and helpful https://www.thecorporatelawacademy....pipe-covid-19s-impact-on-the-energy-industry/

    Hope that helps! :)
     
    #2 Dheepa, Jan 13, 2021 at 2:51 PM
    Last edited: Jan 13, 2021 at 3:21 PM
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  3. Lauren

    Lauren Valued Member

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    Thank you, this is so helpful!
     
  4. Jon

    Jon New Member

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    I think Dheepa is absolutely right about fitting things into the overall trend. The article she linked is good for oil, which seems like something you're focusing on. Definitely think about 'stranded assets', as the article mentions.

    In addition to the above, here’s a video that was published by the Economist on their YT channel yesterday, if you haven’t already seen it: . It gives a broad look at how climate change is affecting/will affect firms, so quite relevant to green energy. Some interesting comments on regulation too.

    Some key takeaways from the video:

    - Climate change could “cost 215 big global firms a collective $1 trillion – much of this over the next five years.” Mitigating climate change induced risks will likely become important for businesses (much like cybersecurity a decade ago, as the video mentions). Funding for this will be needed (~$180bn, according to the vid - unfortunately I don't know what the source for this is!).

    - Heavy regulation of corporations to meet climate change goals likely. Businesses will be required not just to disclose emissions they produce, but also those from their supply chains – but most businesses aren’t ready for this. Some businesses have already made pledges, but how they’ll achieve these isn’t so clear (Microsoft recently pledged to be carbon negative by 2030, as mentioned in the vid).

    - An interesting quote from the video: “Between 2000 and 2010 about 20 climate-related cases were brought against businesses. But in the past decade that figure has soared to around 120.” “Bankruptcy, negligence, indictments, loss of reputation” – potential consequences of ignoring climate change for businesses that the video notes.

    The following is some more information on investors, a follow-up from the video and perhaps more relevant for you.

    Here’s a short article published today that briefly addresses private investor concerns: https://www.investorschronicle.co.uk/ideas/2021/01/14/ideas-farm-turning-up-the-heat/. The risks facing businesses as a result of climate change is a concern for investors – that is, most businesses don’t really know how climate change will affect them, and this impacts investor confidence. As the article mentions, though: “There has been some movement on this front. Chancellor Rishi Sunak announced last year that by 2025, publicly-listed UK companies will have to disclose their climate change risks in line with guidance from the TCFD [the global Task Force on Climate-related Financial Disclosures].” More about that at the end of the article (i.e., calls to give shareholders voting power on businesses’ climate actions plans).

    So, one of the main issues at the moment is understanding risks resulting from climate change. Investors want to understand these risks, which is why they’re calling on companies to report them. There will likely be further legislation on this, at least in the UK. Take a look at https://www.ft.com/content/9063f7c0-574c-4d82-825f-44e00add2818 for another perspective. The last paragraph is quite important. Of course, there is a difference between understanding the risks of climate change and actually doing something about it – some potential for class-action there? Misleading investors? Public nuisance claims?

    You also have to remember this is all in the context of different governments making different pledges:

    - By law, the UK has to be net-zero by 2050 (https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law - 2019).

    - China pledged to reach “peak carbon” before 2030 and to be “virtually” 0 by 2060 (https://www.theguardian.com/environ...n-pledge-put-energy-system-reverse-wind-solar – the article goes into more depth about the challenges there).

    - Joe Biden has also made a number of climate pledges (https://www.dw.com/en/joe-bidens-climate-pledges-are-they-realistic/a-56173821 - this article situates the US globally, I’m sure you can find articles on the domestic view quite easily).

    - And also remember that in November of this year the delayed COP26 will be taking place in the UK. Countries will be required to increase pledges in accordance with the ‘ratchet mechanism’ (https://www.carbonbrief.org/timeline-the-paris-agreements-ratchet-mechanism - the infographic gives a clear explanation of how that should work, in theory).

    As mentioned before, there is a big difference between pledges and action. But with the potential for a change of policy in the US (especially now the Democrats control the Presidency and both Chambers in Congress!), perhaps pledges will translate into action.

    Sorry for the long ramble! Here are some final thoughts in relation to the move towards clean/green energy, in the UK in particular:

    Offshore wind/renewable energy sources

    The UK is a leader in offshore energy and this area will see large expansion over the next decade. There are some obvious issues here: applying for leases from the Crown Estate to build in UK waters, infrastructure required to transport electricity to demand centres, and interconnectivity with the EU.

    Network development

    A lot of energy infrastructure is outdated. The UK’s electricity grid will need to be updated. A lot of the network is around the north, but demand is stronger in the south. How will the connection to the North Sea be improved? What will the connection with the EU be like as well?

    Electricity demand will increase, will renewables be able to keep up with demand? We’ll need to be more efficient in our use of electricity – two ideas: virtual power stations (selling electricity back to the grid – how will this work?) and ‘smart cities’ (improving data gathering – will there be data protection issues...?)

    Electric vehicles

    One of the main issues with the move from ICVs (internal combustion vehicles) to EVs (electric vehicles) will be charging points. Where should they be built? The pandemic and WFH trend are pushing people away from city centres, will more charging hubs need to be built in rural areas? Are people using public transport less because of the pandemic (will this last)? Definitely an area to keep an eye on – planning permission, leases, other real estate issues with private/public land are all issues that come to mind.

    You could also look into the fact that batteries for EVs use lithium. There are considerable consequences of mining for that (especially deep-sea mining). Unfortunately, I haven’t read enough around this area to be any more specific!

    -

    Not sure if any of this is useful at all (and I’m sure you were aware of most of these!) but this is just some wider info on the 'green revolution' in general that may come in handy!
     
    #4 Jon, Jan 14, 2021 at 10:18 PM
    Last edited: Jan 14, 2021 at 10:34 PM
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  5. Lauren

    Lauren Valued Member

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    Amazing, thank you!
     

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