Power Sector Revival

For some, 2009 was the hangover, for others it spelled readjustment and recovery. Platts Top 250 Global Energy Rankings for 2010 might be taken as a survivors’ guide to the financial crisis. Energy demand slumped in the OECD, while elsewhere the growth rates of the fastest developing economies were all but cut in half. The 2010 rankings, which are based on financial reports from 2009, thus provide a relative picture of which energy industry sectors proved most resilient to the cataclysmic events of the past two to three years.

Illustrating the scale of the shock, Platts physical crude benchmark Dated Brent averaged $97.26 a barrel in 2008, its highest ever annual average, only to slump 36.5% in 2009 to $61.67/b, below the average price level seen in 2006. This took its toll. Total profits for the top ten companies, which are dominated by integrated oil and gas companies, dropped precipitously from $214.042 billion in 2008 to $136.018 billion in 2009.

If oil prices suffered, natural gas suffered more. Globally, natural gas demand experienced what the International Energy Agency called an unprecedented drop in demand. Ex-change-traded natural gas prices, particularly in the United States, plummeted in 2009 in both absolute terms and relative to oil. Profits and prices were hit by the combined success of US unconventional gas production, expanding LNG supply worldwide and diminishing demand.

By contrast, gas sellers dependent primarily on oil indexation and take-or pay contracts for their long-term sales found a measure of protection that others facing gas-to-gas competition did not. The coexistence of these two ways of pricing gas created distinct pressures, impacting on selling and acquisition strategies. The 2009 financial year stood out because of the huge disparity between spot gas, which was cheap, and relatively expensive prices for oil-linked long-term gas sales.

But one person’s loss is another’s gain. As feedstock prices fell from second-half 2008, the power sector, expecting some much-deserved relief, was instead caught in a pincer movement between a near total lack of liquidity in the banking sector and a precipitous drop in demand. It has taken all of 2009 for these companies to find their feet.

Some did so more quickly and effectively than others. As energy feedstock prices have remained relatively low in 2009, oil and gas profits have fallen from 2008, but power sector returns have revived from often negative territory, bringing utilities in many regions of the world back up the Platts rankings.

Nevertheless, the last two years have forced a strategic rethink on the part of utilities and independent power producers. The demand and price outlook remains depressed, challenging previous expansion plans, while the environment regarding carbon pricing in key jurisdictions remains as uncertain as it ever was.

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