Outlook for the energy & utilities sector


Financier Worldwide Magazine

January 2019 Issue

FW moderates a discussion on the outlook for the energy & utilities sector between Ogan Kose, Miguel Gonzalez-Torreira and Rory Skrebowski at ATIOS (Accenture Trading, Investments and Commercial Optimisation Strategy).

FW: Over the last 12-18 months, what major trends have you witnessed in the energy and utilities sector in your region? How would you characterise the general performance of companies in this sector?

Kose: From a global perspective, the return to higher oil prices has allowed oil companies to take a pause from damage control and limiting the risks of ‘lower for longer’. They are increasingly looking at their overall portfolio strategy and assessing the much bigger question of what their role in the energy transition will be.

Gonzalez-Torreira: In the Middle East, the political disruptions of Iran, the Saudi reforms and to a lesser extent Qatar have all produced some level of uncertainty. We continue to see big capital investments in adding value to their domestically produced energy and strong local demand underpinning these investments. While diversification away from oil and gas has been talked about a lot, we still see companies elsewhere more rapidly diversifying and making bolder investments. In the Far East, we are seeing a lot of ambition and progress being made by the national oil companies of the region. They are becoming increasingly sophisticated and are threatening the previously easy margins of trading and international oil company (IOC) players.

Skrebowski: In Europe and North America, we have seen fuel growth turn negative and the impact on the companies in these markets has been huge. We have seen consolidation such as Marathon’s Andeavor acquisition. We have seen oil companies taking large stakes in power players, such as Total buying Engie, and we have seen bold moves into new business models entirely with BP buying Chargemaster. A lot of players in these markets are considering how they will use their current revenues from their existing businesses to buy a stake in the future.

We have seen some interesting moves by players in the utilities segment, in the face of strong pressures in their retail divisions.
— Rory Skrebowski

FW: What particular risks and challenges are energy executives facing in today’s market? How are these factors impacting business activities?

Kose: Energy executives are facing big challenges of income volatility. The last couple of months have shown how crude prices can be bid up and fall down, with little relation to underlying production-cost economics. This means that good portfolio management and having assets which can produce income certainty, but can also capture upside opportunity, is so important. While ‘lower for longer’ might not be the current narrative, ‘uncertainty forever’ probably should be.

Gonzalez-Torreira: Another challenge we see is a variant on the old labour versus capital equation – except this change is not happening on the factory floor, but in the offices and trading floors. With increased digital technology and the promise of gains with artificial intelligence (AI), the question executives are seeking help with is whether to invest in building capability in people or to develop capability in AI and digital. We do not see this as an either/or choice, but a question about how best to enhance the productivity of your workforce by investing in the right technology and training your workforce to take full advantage of it.

Skrebowski: Some of the biggest risks and opportunities executives wrestle with come from the uncertainty surrounding the pace and timing of the energy transition. Invest too early and you get caught with assets without a customer base, or betting on first generation technology which funds the second and third generations your competitors invest in. However, if you invest too late, the competition has already taken the lead and in order to gain a foothold you end up buying in at high multiples of earnings. While many oil and gas companies have the skills to assess these types of portfolio risks in the exploration and production (E&P) divisions, it is typically in the downstream segment where the opportunities to buy into the energy transition exist. Often, our work is about helping to bring those portfolio skills to bear on new problems.

FW: How do you expect the energy mix – nuclear, coal, shale gas, and so on – to evolve in your region over the coming years?

Kose: Globally, there is still plenty of life left in all energy sources. We still see high demand for energy coming from China, South-East Asia and India. This is without even considering the energy poverty of many elsewhere in the world. It is sometimes easy for people to confuse what they might like to happen with what is most likely to happen, which is continued high and growing demand for more energy as the world population continues to grow.

Gonzalez-Torreira: In South-East Asia and the Middle East, energy demand is growing and, with the exception of nuclear, all forms of generation will have a key part to play in meeting future demands. People are quick to condemn countries for building new coal-fired plants, but faced with the option of either power outages due to shortage versus building these assets, it is unsurprising that more of all sources of power are being installed. While the Middle East continues to be incredibly energy rich, the demographic growth we are still seeing in this region is pushing for much higher energy demand and production.

Skrebowski: We expect to see further pressure on coal and nuclear, both from conventional, liquid natural gas (LNG) and unconventional gas, as well as renewables. In Europe and to a lesser extent the United States, consumer demand and shareholder activism is forcing companies to reassess what they build, invest in and develop. We have seen Maersk divest its oil assets due to shareholder pressure, Statoil change its name and energy focus, and a number of utility companies make bold moves to increase their renewables share or shift entirely to non-carbon sources of power. Solar cost per megawatt is coming down to make it cost effective against other generation. The use of battery storage for peak load management will release a number of combined cycle gas turbines (CCGT) assets, which will slide down the value chain and start to challenge traditional baseload coal and nuclear. Interestingly, this trend is happening in countries with and without high carbon pricing, so initiatives in that area only exacerbate the trend.

China deciding to step up and become a more active player in discussions around energy and climate change is an interesting development.
— Miguel Gonzalez-Torreira

FW: Have there been any notable energy policies and regulations introduced in your region over the last year or so?

Kose: The global trend for energy market deregulation is likely to continue, despite the rise of nationalist policies and rhetoric. We have seen how the need for investment in national infrastructure in countries across the globe has led to interest in inviting in foreign capital to both grow the asset base and to bring in experience and skills not available locally. This trend has been strongest in the Far East in the last year and the Middle East could be the next region looking to open up its markets.

Gonzalez-Torreira: China deciding to step up and become a more active player in discussions around energy and climate change is an interesting development. With the US deciding to not engage in this area, we expect that a good degree of future progress with be delivered through the decisions and actions of the Chinese government and the policies it pursues. There have also been a number of changes across several countries that will shape trading strategies in the future.  Gas network deregulation in Thailand, a refreshed energy policy in Indonesia with new investments coming on line are examples of this trend that are bringing new market opportunities across the energy value chain. The next big area to watch out for is the Chinese power market deregulation.

Skrebowski: Another area of interest is increased licensing for large scale battery technology in power markets. The economics of peak and reserve power is being fundamentally disrupted by these plants and there is an increased need to understand both what the impact will be on the existing capital base and how best companies can deploy this technology to steal a march on competitors. Within Europe, the Trans European Replacement Reserves Exchange (TERRE) is the regulation we are watching most closely and advising on. The move to 15-minute settlement requires not just an investment in changing existing systems, but also a need to look at whether AI or other technology can deliver more accurate position management than humans alone. The delay in producing a full set of network code updates and guidelines has left many companies with a big ‘to-do’ list, without much support on how to implement this. Of course, it is also worth noting the risks that a disorderly Brexit poses to overall market activity.

FW: Have you seen an increase in restructuring initiatives undertaken by energy and utilities companies? If so, what are the underlying drivers?

Kose: As oil companies have found themselves released from the strictures of low energy prices, we now find them with cash reserves and uncertainty about where best to place them. Already, we have seen some bold moves – for example Total’s recent acquisition spree – and we expect more to follow.

Gonzalez-Torreira: A major trend among nearly all energy and utilities players is a continued focus on costs. There are several companies that have managed very well their divestment and cost reduction programme, which will continue to deliver over the next few years. We are seeing a number of players looking at how to cut their costs and using tools to look at budgets, costs, spend and organisation in order to deliver significant savings. This focus on cost is partly a legacy of the lower oil prices seen in previous years, but also a recognition that the ‘easy’ savings made in the prior downswing will not be available if there is another one. A common lever being used across the industry to reduce costs and increase efficiency is digitalisation.

Skrebowski: We have seen some interesting moves by players in the utilities segment, in the face of strong pressures in their retail divisions. The rise of ‘challenger brands’, with lightweight systems, small numbers of staff and low cost to serve, is really cutting into what traditionally were good margin business. In the UK, with more consumer-protection regulation promised, companies are looking at whether to set up their own challenger companies. Once proven out, they would then migrate existing customers. Some feel this would be the best way to address persistent high cost bases which have survived all other attempts to cut them down.

Globally, there is still plenty of life left in all energy sources. We still see high demand for energy coming from China, South-East Asia and India.
— Ogan Kose

FW: How would you describe M&A activity in the sector? What factors are spurring deals?

Kose: M&A is up, but I believe it is only just getting started. While the focus of the deal market has been on the technology sector recently, the high multiples and leverage used in those deals compares quite unfavourably when you look at the income potential and low multiples of the utilities and oil & gas space.

Gonzalez-Torreira: Market entry has been the real driver for M&A activity in South-East Asia and we have seen numerous joint venture (JV) and acquisition conversations to this end. In the developed markets, fuels growth and power demand is slow or negative. To counter this we are seeing major companies looking to South-East Asia to fuel their next rounds of growth.

Skrebowski: Within Europe and North America, we believe there are still some undervalued companies out there with great assets. What we expect in these markets is a period of consolidation, where scale plays become more valuable. You only have to look at the bold move by Marathon recently to get a sense of what we expect to see more of in the future. Companies are looking to balance their portfolios, with a good mix of ‘above-ground stable and below-ground cheap’ assets, which for many means US shale and deepwater, combined with riskier but cheaper-to-produce oil in developing countries.

FW: What major developments do you expect to see going forward? What issues do you believe will shape energy policy and market activity in the months and years ahead?

Kose: The big questions the industry faces include: How quick will the energy transition be and hence how quickly does investment need to shift? Will the rise of digital technology threaten my business model now or going forward? Will the convergence of mobility and power be won by energy players with deep pockets, power companies with tight control of their costs or technology companies with more rapid innovation? The energy transition, or, to be more accurate, the transportation transition, will happen too slowly to satisfy the business cases of many automotive manufacturers, and far too quickly for the business cases of many oil companies. Automotive companies have been shocked by the valuation of Tesla into heavy investments into new capacity, but the lack of charging infrastructure will be a major drag on the general population’s adoption of e-vehicles. The buying decisions of many are focused not on their regular commute needs, but on the perception of their needs for their longest journeys – adoption of compact commuting cars, for example, is still not as high as one would expect if people were purely focused on their day-to-day running costs. City taxi fleets is the one area where both policy and running costs converge to make for a differentiated value proposition. However, the business cases of many oil investments are made on 25-year horizons which have not fully accounted for the impact e-vehicles will start to make in 10-15 years’ time.

Gonzalez-Torreira: Digital technology has a significant role to play in making companies more effective and increasing the efficiency of both decision making and central overhead costs. However, these businesses are still heavily asset-driven and centralising selling, general & administrative (SG&A) expenses does not make or break asset viability. Furthermore, investments in pre-digital optimisation of assets, using people and traditional analytics, has already squeezed many efficiencies out of the market. While they will be effective at increasing profitability and should be thoroughly deployed, the underlying market dynamics will be the main drivers of the industry.

Skrebowski: Energy convergence is not likely to be won by just one of the three players, but by those which have an adaptable business model and the ability to learn from and invest in the skills deployed by the others. Oil companies need to get better at cost control and innovation in their business models. ‘Fail fast and learn’ is somewhat anathema to an energy company, yet to enter into some of the new markets they are trying to expand into, they will need to raise their risk tolerance. To play in the power space, they also can learn much from utilities about tight cost control and standardisation. For power companies, finding the spare funds to invest while appeasing shareholders will be their limiting factor. For technology companies, they will need to understand how entrenched infrastructure and investments will limit their market penetration and growth ambitions. A $1000 phone and a $40,000 vehicle have very different purchasing dynamics and conservatism to change in transportation will be a limiting factor to their growth ambitions.


Ogan Kose is the global managing director of ATIOS (Accenture Trading, Investments and Commercial Optimisation Strategy). He runs a global network of teams helping companies in the oil, gas, power and commodities space to adapt and change to their biggest strategic challenges. He can be contacted by email:

Miguel Gonzalez-Torreira is a managing director at ATIOS, responsible for ASEAN, China, Australasia and the Middle East. He has recently been helping companies with market deregulation, digitalisation and investment into growth markets. He can be contacted by email:

Rory Skrebowski is a managing director at ATIOS, responsible for Europe and North America. He has been involved in helping companies with their investment decisions around new market entries, M&A and navigating the energy transition. He can be contacted by email:

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