CHALLENGES AND OPPORTUNITIES FOR RISK MANAGERS

The Rise of Energy Risk

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

non-partisan,not-for-profitmembershiporganizationfocusedon

elevatingthepracticeofriskmanagement.GARPoffersrole-based

riskcertification—theFinancialRiskManager(FRM®)andEnergy

RiskProfessional(ERP®)—aswellastheSustainabilityandClimate

Risk(SCR®)Certificateandon-goingeducationalopportunities

throughContinuingProfessionalDevelopment.ThroughtheGARP

BenchmarkingInitiativeandGARPRiskInstitute,GARPsponsors

researchinriskmanagementandpromotescollaborationamong

practitioners,academics,andregulators.

Foundedin1996,governedbyaBoardofTrustees,GARPis

headquarteredinJerseyCity,N.J.,withofficesinLondon,

Washington,D.C.,Beijing,andHongKong.Findmoreinformation

ongarp.orgorfollowGARPonLinkedIn,Facebook,andTwitter.

© 2021 Global Association of Risk Professionals. All rights reserved. (01.21)

HEADQUARTERS111TownSquarePlace

14thFloor

JerseyCity,NewJersey

07310USA

+1(201)719.7210

LONDON17DevonshireSquare

4thFloor

London,EC2M4SQUK

+44(0)207397.9630

WASHINGTON, D.C.100119thStreetNorth,#1200

Arlington,Virginia

22209USA

+1(703)420.0920

BEIJING 1205E,RegusExcelCentre

No.6,WudinghouRoad

XichengDistrict,

Beijing100011,China

+86(010)5661.7016

HONG KONG TheCenter

99Queen’sRoadCentral

OfficeNo.5510

55thFloor

Central,HongKongSAR,China

+8523168.1532