IEA’s World Energy Outlook reports that the Covid-19 pandemic has caused more disruption to the energy industry than any other crisis in recent history. Regulatory changes, global instability, financial pressure and tighter environmental requirements can lead to a range of issues for projects within the industry.
Matteo Bianciotto, Associate Director at Osterwald Rathbone & Partners - a London based firm that focuses on providing industry-led consulting advice to corporate entities and their legal representatives – tell us the latest on global energy disputes, and how ESCP’s MSc in Energy Management (MEM) equipped him with the right tools to build a successful career.
What have been the effects of the global pandemic on the energy sector? What is your view on Covid-19 and its aftermath?
Covid-19 has triggered one of the worst health and economic crises of the last hundred years. It has caused a sudden and radical change in our social standards, and its consequences have spread across every sector. All energy industries have been impacted, and the effects can be seen by global demand dropping by approximately 5%. However, it is important to keep in mind that the energy sector is extremely resilient and has a remarkable capacity of adapting quickly to unforeseen circumstances. For instance, a couple of years ago, we were investigating oil & gas activity in the North Sea and found that companies operating assets in the area managed to cut their costs by almost 40% since the oil price slump in 2015. Periods of crisis bring disruption and downturn but at the same time allow businesses to understand what is essential and pushes them to do their “house-cleaning” more often. There are always lessons to learn and tough times are usually the best opportunities for this.
What can be done to protect energy projects from further waves of the virus or future pandemics?
It is difficult to say what should be done in order to protect energy projects. Covid-19 mostly caused operational interruptions and a drop-in energy demand, which are issues that are almost impossible to control or prevent. In my opinion, the pandemic is acting as a catalyst. Projects involving old technologies in industries undergoing a phase of decline will tend to suffer more and potentially be abandoned, while it will fortify the position of new and rising industries with a forward-thinking mindset. For instance, in 2020, the demand for energy produced by coal dropped by over 6% while renewable energy maintained a growth trend.
What effects may Covid-19 have on the commercial dispute industry?
The overall number of commercial disputes has been progressively growing over the last few years, transforming it more and more into an established industry. For instance, every year there are over 3,000 new arbitration cases accepted by the 10 main arbitral institutions, the UK Commercial Court alone saw over 800 claims issued in 2019. Looking at the past, we have noticed that when the energy sector undergoes a period of sudden disruption, companies with projects that may have experienced delayed financing or interrupted operations, tend to rely on commercial disputes to recuperate any damages.
Please give us some examples of commercial disputes in different sectors and industries.
Since I started working with Osterwald Rathbone & Partners, I have been involved with a large variety of commercial disputes. The energy industry has been predominant, but we have also assisted clients with cases in the banking and telecommunication sectors. Disputes have generally been a mix of expropriation cases under bilateral agreements, delayed construction cases or sudden termination of existing commercial agreements which may have caused substantial damages to one of the parties involved.
Most of the time, our role is to quantify the damages suffered by our clients through a full valuation of their business or a specific lost profit assessment.
Examples of projects I have personally followed include the assessment of economic losses suffered by a company managing a central European oil pipeline, following the cessation of crude oil shipments; a valuation of a Hydropower project in the Balkans; and the valuation of a telecommunication business which had its production facilities expropriated.
In these types of cases, my job usually consists of studying the operations in great detail, as well as the performance of the targeted company of the dispute. I conduct a review of the market in which it operates and prepare a valuation report that will be then submitted to the tribunal to be used as evidence for the quantification of damages.
Typically, each of the parties involved has the right to submit this type of report and the tribunal will compare the findings of various consultants, choosing the one that is more credible and compelling. It is an exciting process where the debate among parties involved can often be intense and extremely strategic.
With the current oil prices, what are the challenges faced by upstream oil & gas when it comes to disputes?
Often, medium and small upstream companies tend to experience cash issues when oil prices collapse drastically. Arbitrations are expensive processes which can consume a considerable amount of funds and time. Additionally, prices are usually one of the components factored in the valuation, and low-price forecasts tend to negatively impact the overall value of a project, regardless of the specific merits of the case.
How does the pandemic impact the prospects for rapid clean energy transitions?
The first two waves of the pandemic did not necessarily have a negative impact on the clean energy transition process. For instance, due to the drop-in electricity demand, the contribution from peak coal-fired power was substantially reduced with obvious positive effects on the CO2 emissions connected with electricity generation. Energy demand for coal dropped by over 8% in 2020, while renewable contribution increased by 1%, according to the IEA 2020 Outlook.
IEA data shows that last year the overall level of investment in the energy sector declined by 18%, but most of this downtrend was caused by exceptionally low oil & gas prices and therefore, primarily impacted the upstream industry, which is very volatile in its nature and often exposed to sudden shifts in direction.
Investment in renewable power was only marginally impacted and I believe this was mostly due to the operational challenges caused by the pandemic. Within the next few years, there are possible revenue risks for renewable power plant projects, which relate to momentary drops in demand and consequently, negative wholesale electricity price trends. However, in general, the electricity market seems more resilient and less prone to sudden changes.
In terms of investment, what is expected for renewable energy and its technological challenges?
As a consequence of the electrification process of the transport and building sectors, the global electricity demand is expected to double by 2050. At the same time, climate change requires drastic intervention in terms of CO2 emissions, as the current global energy mix is still heavily reliant on coal. The challenges are therefore evident: from one side, it will be necessary to expand the installed capacity while at the same time, substituting CO2 intense power plants with a mix of renewables and gas. All this must be done by creating a generation system that is reliable and capable of supporting the electricity demand under any type of environmental condition.
The issue gets even more complicated when looking specifically at less developed countries. These are often burdened by the twofold challenge of growing their internal economies, supplying the cheapest possible electricity, and at the same time, cleaning their energy mix from coal or oil-fired power plants to respect international agreements.
I hope the upcoming COP26 provides clear answers on this topic. The implementation of carbon market mechanisms and of funds for loss and damage is becoming more and more crucial. More vulnerable countries, with heavily subsidised electricity markets, need support to unlock the development of renewable resources and achieve the targets in terms of emissions reduction.
From a technological perspective, I believe the two main challenges that need to be solved soon, in order to achieve a sustainable energy transition, are those concerning hydrogen and storage. It is interesting to see how all the energy outlooks, forecasting the full transition to a less CO2 intense energy sector, rely on large implementation of a combination of these two technologies which, as of today, are not entirely viable yet.
In Europe, renewables (15.5%) and nuclear (10.3%) energies are more developed, but fossil fuels remain the dominant energy source (74.2%). In reference to environmental, social and governance (ESG), how can companies across sectors improve their ESG strategies? What has been done so far by governments and financial institutions?
A lot has been done, but there is still a long way to go. In the last 10 years, most governments have invested a lot in studying the best policies aimed at accelerating the transition towards a sustainable economy and some brilliant results have been achieved. For instance, the UK power sector managed to phase out coal from its energy mix, from over 40% in 2012 to less than 4% in 2019. From an energy efficiency prospective, looking at more recent initiative, the 110% Superbonus scheme launched recently in Italy, is particularly interesting and is generating a lot of momentum in the building sector. These are brilliant examples of positive developments, but what has been done so far is not enough and the effort needs to increase.
In regards to financial institutions, and to a certain extent, private investors, it is interesting to see how social and sustainability elements are progressively more integrated in their capital allocation process. The world in which large corporations operate is the same in which their investors live, and the environmental and social challenges that need to be faced in the next 10 to 20 years are evident. Consequently, there is growing interest for rating businesses, not only from a credit perspective, but also to determine how resilient these companies are to medium and long-term ESG risks.
Companies need to be forward-focused. In a rapidly changing social environment they need to be champions of change, to lead it and not be dragged into it. They must introduce new technologies to monitor their operations, rethink their values, and make sure that they keep speaking the same language as their clients and investors.
It seems that your current role is quite unique in this specific area, were you always interested in consulting or did you just fall into it?
Ever since I decided to join the MSc in Energy Management, I have always looked at consulting as an interesting opportunity to further develop my career. The idea of being involved in projects within different industries and companies with a wide range of assignments has always been attractive to me. I am naturally curious and extremely driven by expanding my knowledge and insight with entirely new challenges each time we take on a new case. As a professional, I believe that you need to keep learning, and consulting has always facilitated that by allowing me to ask and answer different questions each time. Osterwald Rathbone & Partners is a small boutique consulting firm that offers a variety of services from commercial and strategy advice to litigation support, but not all our projects are necessarily disputes. For instance, we often help investors creating financial projections and business plans to help them raise finance.
What was your position before starting the MSc in Energy Management at ESCP Business School?
Before joining the MSc in Energy Management programme, I was working in the Hydropower industry. After completing my MSc in Mechanical Engineering in Turin, I worked at the EPFL of Lausanne for three years and then spent another three years with Andritz Hydro as an R&D engineer. It was during this time that I realised how passionate I was about the Energy sector and how I wanted to pursue my career in it.
You have an engineering background; how did the content of the MSc in Energy Management help you in your career? How was the transition from engineering to consulting?
I think that the two titles complement each other perfectly. As an engineer, active in the energy industry for over six years, I managed to collect solid knowledge and insight about the technical aspects of energy production and power generation. The MSc in Energy Management completed this offering, providing me with a new set of skills and strong knowledge in finance, accounting, and operational management that have been fundamental during my consulting work. It is a tough and intense programme - The more you invest of yourself, the more you’ll be rewarded. The master’s programme is really designed to get you ready for working in the energy industry in a large variety of roles, and to equip you with all the tools you need to contribute from day one.
What’s the most useful advice you’ve received when it comes to your career?
This will make you smile, there is a quote from a famous green mystic that says, “Do. Or do not. There is no try.” The way I interpret this is, “Dive into your challenge and fully embrace what you are doing”. Changing career from engineering to financial consulting was a big leap and not everyone initially understood my drive to do it, but everything is possible if you are determined to work hard and are fully committed to achieving your goals.
To the new students joining the programme, I suggest going in there with a humble and open-minded attitude, especially if you already have a few years of previous working experience. Try to identify what the weak points are in your professional profile and use the programme to fill those gaps. Enjoy the opportunity to be reawakened.
Feeling enthused by Matteo’s career? To follow in his footsteps, check out ESCP Business School’s MSc in Energy Management.