What I Revealed in My Windsor Briefings: Part II
In the last OEI, I summarized what I told the Windsor Castle energy consultation in my first briefing on March 4. However, it was the second of my two briefings that occasioned the greatest reaction.
This one dealt with what I saw in energy finance trends for 2017, including the rise of a major new element in funding global projects and related other related initiatives. This latter portion was already anticipated by some of the policy makers gathered at Windsor. They had been in the audience when I advanced the subject during my address before the Iranian Natural Gas and LNG Summit two weeks earlier in Frankfurt.
Several of them even requested that I extend my comments at Windsor. I had intended to do so anyway, but the request was welcome nonetheless.
Entitled “The New Energy Financiers,” the second briefing considered both traditional and new themes in providing energy investment. Some of the highlights and a few of the slides used in my briefing follow.
Summarizing the substance, the briefing began with what I saw as the main parameters for “traditional” energy investment. In my approach, that includes three categories of funding: CAPEX/OPEX (for “capital expenditures” and “operational expenditures,” i.e., direct funding for projects and their ongoing operations); institutional, and sovereign wealth funds.
These are viewed as distinct sources of funds, necessitated to allow me to distinguish them from a fourth route (the “new” one).
I first noted that greater emphasis was moving into renewable energy from hydrocarbons, with a push taking place by 2020.However, I also said that I thought the magnitude of this transition was being overstated. Among the slides presented here was a favorite of mine.
This one was used by Bloomberg to proclaim “The Beginning of the End,” a reference to the end of hydrocarbons in the generation of electricity worldwide. The left-side chart is unrealistic in its estimation of how steep this is going to be through 2030, especially considering the widening use ofnatural gas and the continuing reliance on coal in Asia for at least the next several decades.
On the other hand, the right-side chart does provide what I consider to be an acceptable breakdown of the “clean energy” sources.
Meanwhile, project CAPEX/OPEX should rise 8% year-on-year, with aggregate expenditures remaining below those of 2014 levels. In terms only of crude oil investment, the amounts are clearly tied to the market price for oil, as indicated by this slide from my briefing:
Institutional investment will increase 12% over 2016, also remaining below overall levels from 2014. Sovereign wealth funds (SWFs) are likely to rise at least 5% year-on-year, although given the close ties such funds have with governments (primarily energy producers as well as China) and their lack of transparency, the figures are more difficult to estimate with any precision.
A regional breakdown of SWF investments offered by one specialist analytical firm suited the purposes of this general briefing, as depicted in this slide:
But it was the discussion of the “new” investment venue that attracted the most attention, both at Windsor and two weeks earlier at Frankfurt.
This is a combination of private individual wealth, private and family trusts, limited access funds, a range of specialized investment and asset vehicles, and related holdings. I estimate that these sources, considered in combination, will rise at least 117% year-on-year, and be subjected to a much greater available amount through various leveragingstrategies.
Until recently, these sources have been lumped together with what is usually categorized as “alternative investment structures.” But the sources I am referring to are now being distinguished not simply by the amount of additional funding becoming available. For example, the $93 billion being applied by to “cherry picking” undervalued U.S. oil and natural gas sector assets by foreign investors – a subject I have previously discussed here in OEI and on which I have advised specific plays for Energy Advantage and Energy Inner Circle subscribers – is part of this new investment environment.
Rather, the single most significant changes are found in the targets to which the funding is being applied. I refer to this as “layering,” figuratively presented by the following diagram:
PRIVATE INVESTMENT “LAYERING”
In this approach, investors are attempting to control both market and trading forces coming to bear on a single series of ongoing transactions. Traditionally, an investment in a project would await return from the sale of production. Now, the project, the company operating the project, the control over what volume flow results, debt incurred and the credit swaps resulting, the use of assets (including volume still in the ground), and an array of new derivative paper resulting from the interchange among these elements, are all wrapped into the same investment instrument.
This investment strategy is targeting all major aspects of an energy initiative and requires a very different and integrated approach to both risk analysis and risk management. I provided an initial model of what a risk “matrix” would look like, following a request from Iranian policy makers prior to the summit in Frankfurt. That involved the interrelationships among at least 12 distinct market elements what such an approach would involve.
There is much work to be done here, not the least of which in the development of algorithms to allow detailed analysis of these interrelationships. This is the next stage of my work with such investment groups.
Much of this will involve moves well beyond those available to retail investors. However, two matters are now certain. First, well before 2017 is finished, the energy investment world will look different than it has been to date.And second, being tuned into what these sources are doing, I’ll have early indicators of how the average investor will be able to profit from decisions made by the private mega movers.