Energy Market Fundamentals

Introduction

The global energy sector is one of the most complex, highly integrated and sophisticated industries covering various forms such as conventional, alternate and renewable sources consisting of; crude oil, natural gas, coal, commercial nuclear, hydroelectric, solar, wind, biomass, to name a few. Major energy projects, being largely infrastructure based, are highly capital intensive and in many cases having an economic and operating life of multiple decades. These projects must undergo various critical phases as follows:

Project Development (12 to 36 months)

·         Feasibility

·         Permits & Clearances

·         Transactional Contracts

·         Financing

·         Financial Closure

Project Execution (12-36 months)

·         Design Engineering

·         Procurement

·         Construction

·         Start-up

·         Commissioning

·         Commercial Operation

Project Operations (10-30 years)

·         Operations

·         Asset Management

·         Maintenance

·         Retrofits/Revamps

·         Renovation & Modernization

As stated above, major energy projects also have an intricate interrelationship between techno-economic-financial viability as well as transactional contracts coupled with asset management, operations and maintenance which form the critical basis of a project’s long-term sustainability. Major energy projects also cover a very broad end-to-end asset value chain from raw materials / energy sources to end-consumers.

Electric Power

·         Generation

·         Transmission

·         Distribution

·         End-Consumers (Wholesale & Retail)

Fuels & Feedstock

·         Exploration & Production

·         Processing

·         Transmission

·         Distribution

·         End-Consumers (Wholesale & Retail)

 

Key Market Fundamentals

Major energy projects follow some very basic and key market fundamentals which must be adhered to in order to assure and enhance project viability and sustainability. Typically, project owners, investors and lenders undertake a very detailed market assessment during the early stages of the project development phase to assure “bankability” thereby providing high comfort levels to both equity investors as well as lenders. Primary emphasis is on; higher current income, higher net profits, long-term capital appreciation, pre-defined returns on investment as well as an exit plan. Broadly, the key elements of a typical market assessment are; Supply Scenario, Demand Scenario; Influencing Factors; Sector Balance & Analysis, Alternative Fuels Scenario; Infrastructure Aspects, Tariff and Project Viability. As an example, below figure is a sample of the approach and methodology for a Liquefied Natural Gas (LNG) project’s market assessment.

The required market assessment must be based on quantitative analysis and modeling which is undertaken via Excel spreadsheets with various key assumptions, influencing factors and indices as well as graphical representation resulting in determination of combinations and permutations of optimistic, most likely, and worst case market scenarios. The results of a high quality market assessment serve as a basis and critical input into a major energy project’s techno-economic-financial analysis to satisfactorily demonstrate investment objectives, project viability and likeliness of the project to succeed.

 

Summary

Any successful major energy project is critically based on a high quality market assessment which is inherently based on quantitative analysis and modeling of key market fundamentals which serve as a critical input to determining an energy project’s viability, sustainability and “bankability”.