Hill+Knowlton Strategies

In the immediate aftermath of events at Fukushima, facts occasionally took a back seat in the global rush to reassess  nuclear power.

Today’s interim report on the implications of events at Fukushima goes some way to redressing the balance, pointing out the obvious, and less obvious reasons why a a similar situation in the UK would be extremely unlikely. Aside from the most glaring point – the UK is a long way from any major fault lines – Chief Nuclear Inspector Mike Weightman also pointed out that reactors in the UK are a different type to those used in Japan.

That’s not to say that everyone can sit back however. Weightman’s report also identifies 25 recommended areas for review by a mixture of industry, the Government and regulators. These include reviews of the layout of UK power plants, emergency response arrangements, dealing with prolonged loss of power supplies and the risks associated with flooding.

To stop any of this work ending up in the long grass, Weightman has called for plans on how each area will be addressed by the middle of June. It will be a busy month for some people, but the end result will be an interesting insight into the true level of preparedness in this country…

Brandz today launched their annual Brandz 100 list of the top global brands by brand value. Unsurprisingly Apple topped the table this year, but there were some interesting changes further down the table. This was especially true for the energy industry where BP’s brand value suffered significantly as a result of the GOM spill and dropped below Brazil’s energy giant, Petrobras (who in the interests of transparency, we should add are a client).

The full report has been published and although the energy & industrials team at Hill & Knowlton UK didn’t make the final cut in this year’s commentary it’s still an interesting read. The FT has committed a special report to it as well and more articles are to follow the openers in today’s FT.

Petrobras’ phenomenal rise in brand value has been replicated by other emerging market brands as the solutions to the energy challenges the world faces are being met by new emerging market giants. It will be interesting to see also how the majors respond and whether ExxonMobil and Shell can continue to capitalise as BP fights back.

We’re told by the authors that Petrobras’ increase is in part because they have strong momentum, they have very positive investor sentiment (following their record-breaking IPO) and the country brand of Brazil is strong (especially with the forthcoming World Cup and Olympics). It will also be interesting to see how this sentiment weathers inflation and the pressures of growth, but as pressures go it’s not a bad one to have to tackle.

The sun shone on Monday during my visit to Aberdeen to meet with representatives of the offshore energy industry in the Granite City, but the general mood of the industry appeared more glum under the gathering rainclouds of increased regulation and the changes to the offshore production levy.

The current consultation by the European Commission into offshore drilling may well be a pre-cursor to additional regulations for an industry still integrating learnings from the fallout of last year’s Gulf of Mexico spill. The key question will be the extent to which any new regulations place additional burdens (and costs) on an industry that has for many years set the bar for world offshore HSE standards.

There was an encouraging appetite for making contributions to the consultation among those that I met with, but evidence too that many were planning to make only collective submissions, which often has the effect of watering them down. What is clear is that DG ENER at the Commission are keen to review offshore drilling regulations and that such a consultation regularly results in regulatory changes. Now is the opportunity to engage in the process to avoid any nasty surprises.

Speaking of which it is clear that the energy industry operating on the UK Continental Shelf is still reeling from the changes to the offshore production levy introduced in April’s Budget. It seems that there are fresh headlines every day as different organisations up the ante and review investment decisions as a result of the changes. Certainly Energy Secretary Chris Huhne’s meeting with the Energy and Climate Change Committee yesterday has done little to settle industry concerns at the apparent intrasigence of the Government on this issue, especially when it comes to gas production and marginal fields. Although according to some the result of the AV referendum could bring about some changes.

This is an issue that we expect to run and run in the coming months, but I hope the storm clouds lift for long enough that we can enjoy some of the beautiful sunshine that is forecast.

Our team in Brussels will next week play host to the Director General of the European Commission’s Energy DG, Philip Lowe. The event is organised in conjunction with the British Chamber of Commerce and will take place on 5th April. It comes at an interesting time for European policy makers and energy business leaders.

People wishing to register can do so here, or contact our team in Brussels.

On a related note, saw some great infographics by European energy statistics. The navigation can be a bit frustrating and there’s no sharing tabs for the beautiful stats, but it’s a great way to present the data in an easy to understand format.

While the Chancellor’s freeze on fuel duty is likely to grab the headlines, on deeper reflection this afternoon’s Budget announcement is indicative of the Coalition Government’s struggle to fulfil its goal of reducing emissions at the same time as it looks to squeeze spending.

With DECC and the Treasury having fought a running battle over the Green Investment Bank’s ability to raise funds, it looks – as had been anticipated – as though the Treasury has got its way. This will undoubtedly be viewed as a setback for Secretary of State for Energy and Climate Change Chris Huhne, and his Liberal Democrat colleagues.

So much for ducks quacking and banks borrowing eh?

Worries about rising energy prices are also behind the decision to slash the CCS Levy, while the Government has clearly taken note of the need to incentivise the Green Deal at a time when most consumers are more concerned with making ends meet than lowering their carbon footprint (a subject that Huhne spoke about at the launch of the CBI report ‘Making the Consumer Case for Low Carbon’ which was held at H&K 2 weeks ago)

In this context, green campaigners and investors in green technology look set to be disappointed. Many have already begun to argue that the carbon floor price will not drive investment into the more conceptual forms of clean energy or improved efficiency at the proposed level. Nuclear looks like the winner in this regard at the moment, but events in Japan may well put the brakes on the new build programme in the UK as they have elsewhere.

Ultimately for all those involved in the energy sector, whatever their sentiment towards today’s announcements, the 2011 Budget serves as a stark reminder of the difficulties that lie ahead for the Coalition in its quest to become ‘the greenest government ever’ in an age of austerity.

As the saying goes, ’Trust is hard to earn and easily lost’. Equally its value is hard to quantify until it is lost (see the impact of GOM on BP’s brand value), which can sometimes make it difficult to invest in.

However, just because something is difficult both to do and then to test, does not mean we shouldn’t do it. As David Prosser notes in The Independent this morning the big six power generators have earned themselves an ignominious reputation, being less trusted than banks at the moment. That should be seen as a problem that needs to be addressed, not as an inconvenient truth.

One of the things that Ofgem has suggested in its reforms is that the big six sell off 20% of their generating capacity to increase competition and this is where the lack of trust could become a serious business issue. Just because customers have shown a reticence to switch in the past does not mean that an organisation who is very effective at communicating with customers and winning their trust will not come along and start to take share from the big six operators in the future. PA Cover Ofgem Announcement

These firms have a plethora of communications and policy issues to overcome at the moment, but a good start would be to simplify customer propositions, provide greater clarity about their operations, explain and educate about complexities of their business and engage in a better dialogue with customers and prospects. The low-carbon energy challenge in particular is one that I think most people would happily be more active in addressing and new-nuclear must now engage with a much wider group of stakeholders than it has until now to avoid the NIMBY reaction of people after the disaster in Japan.

First things first will be some research to test what has impacted trust historically and what influences different stakeholders trust.

Expanding unrest in the Middle East has jolted the oil market, sending crude to $119 a barrel since Egyptians first took to the streets in January. The oil market doesn’t like uncertainty, and nothing could be more uncertain than the volatility spreading to Libya, Africa’s third-largest oil supplier, and Tunisia. Some analysts are even concerned about Saudi Arabia.
Rising oil prices mean rising gasoline prices, which have surged to an average of about $3.13 a gallon at the pump in the U.S. This comes on the cusp of the summer driving season, when prices usually peak as Americans hit the roads.
Some analysts say oil could reach $220 a barrel if Libya and Algeria halt exports. The U.S. Energy Information Administration said Feb. 8 that the monthly average retail price for regular gasoline could exceed $3.50 a gallon during summer 2011. And that was before the Libyan situation developed.
What typically follows these price upticks is a round of Congressional hearings as indignant constituents’ wallets are squeezed.
Surging oil prices usually bring a fresh look at renewables too, so green energy companies should be prepared to seize the moment. Companies involved in alternative fuels such solar and wind can use this time of high oil prices to once again showcase their offerings.
This would also be an opportune time for oil companies to press for Gulf of Mexico drilling permits, long stymied by the ghost of Macondo.
Times of unrest often call for times of new beginnings.

This week I attended a seminar regarding the Bribery Act, which featured a panel including Richard Alderman of the Serious Fraud Office, some lawyers and a corporate investigator. The room was filled with other lawyers and quite a few large corporates keen to know what the impact of this gold-plated British version of the  Foreign Corrupt Practice Act might be for their business and their clients. 

There has been a lot of speculation in the media about the impact of this legislation and perhaps some scaremongering, but for organisations in the oil, gas and mining sectors the risks are clear. These are industries that as a matter of routine work in far flung parts of the world that have very different standards of governance and transparency to what they are accustomed to in say the UK. Of course the act will only apply to organisations with interests in the UK, but given that London’s capital markets have been popular for a long time with natural resource companies, we can expect this to impact a significant portion of the industry.

There is an absolute defence available for firms that can demonstrate ‘adequate procedures’ and although what constitutes adequate has not yet been defined by the Ministry of Justice or the Serious Fraud Office, I suspect that many larger firms in the energy and mining sector will already have the ‘”gold standard” of procedures that Mr Alderman referenced frequently during the discussion. 

That said there are other reasons that the impact of the Bribery Act should be of concern to businesses. Perhaps most significantly because we are currently experiencing a boom in merger and acquisition activity. It is important to note that the act will not apply retrospectively, but the glut of deals that we have seen so far since the start of the year are unlikely to end anytime soon and one wonders if the organisations buying assets in the UK fully comprehend the liabilities for their other operations that they are acquiring with the asset as a result of the Act.

The other aspect worth bearing in mind for businesses as a whole, but the natural resource industries especially, is the use of agents and the extent of liability for joint venture operations. Joint ventures are a regular feature of the natural resource landscape and very often firms based in the UK will use them as a means to enter a market where foreign stakes are limited. I’m not sure what the extent of the risk of liability is for these corporate structures, but am going to ask the question at the next seminar I attend on this subject.

Of course it is also worth noting that the SFO has been handed a paltry sum of only £2m for enforcement and the likely cost of a trial, if it comes to it, will put the prosecution rate fairly low, but as any organisation prosecuted under FCPA will tell you, reputations are expensive things to lose and the SFO is not shy of pursuing trophy prosecutions, especially when Mr Alderman moves on and his successor is looking to make a name for him/herself.

This will be an interesting one to watch as the guidance is published and the Act comes into force.

Forgot to mention on our January energy round-up that we have welcomed a new colleague to our office in Houston, none other than former Bloomberg Bureau Chief Kimberley Jordan.

Kimberley joins as a Vice-President in our energy practice after more than 17 years in journalism and said:

“I am delighted that my energy knowledge and journalism background can provide clients with valuable insights that will keep them informed and prepared regarding policy decisions and industry shifts.”

Here’s hoping we can have her come and guest blog for the Energy & Industry blog very soon.

Speaking of which we will try to have Glen Hodgson’s view on the Heads of State Summit in Brussels tomorrow. The agenda was set to focus on energy, although Egypt is bound to come up.

What a busy start to the New Year it has been, so much so that my attempts to blog have been thwarted by a desire to see my wife for a little more than a handful of waking hours during the week.

With so much having happened, we thought it worthwhile taking a little review of January in the world of energy.

To The Moon

First off we had President Obama’s ‘Sputnik moment’ . His suggestion that America needed to seize the moment and take the lead in the technological race for dominance in renewable energy and sustainable technologies. His state of the union address was widely regarded as being well delivered, though his policies and narrative  have been called into question. Ultimately though I’m not sure the Sputnik analogy is an accurate one. Sure there is a long way to go for renewable energy technologies to become competitive with traditional sources, but in many ways the technology is available, it is the infrastructure and subsidy that needs to be set in order for renewables to ‘take off’. China moved ahead of the U.S. by adding a larger installed based during 2010 than anywhere else, by providing long term policies. The control economy will provide the sort of certainty that investors in the U.S. sadly lack, particularly as Congress missed the opportunity to provide long-term certainty and rolled over subsidy levels for just one year.

Like Rabbits

It was the Chinese and other ‘BRIC’ based investors who took the lions share of deal-making since the start of the year. Of course there was the BP Rosneft tie-up, though more on that later. As well we saw Petrochina take a stake in the Grangemouth assets of Ineos and Sinopec looks to extend its relationship with Repsol YPF in Brazil and CNOOC increase its interests in U.S. shale gas assets. 2011 is almost certain to witness a surge in merger and acquisition activity as the war chests are further swollen by rising oil prices and if the start of the year is anything to go by the BRIC players will be at the deal table as much as the traditional majors. The 3rd of February marks the start of the Chinese new year – the year of the rabbit – which if the year bears any resemblance to the well-known attributes of our furry friends could bode well for the M&A advisory community.

Creative Energy

So far at least it appears to be an excellent first quarter for many of the oil majors despite BP’s first loss in 20 years. Although the FT’s Lex column  was quick to criticise the lack of ‘creativity’ shown by the majors is addressing the longer term threats to their business model simply summarised as declining reserves.

It was this threat that was well in evidence in the results of PFC Energy’s annual Top 50 energy company ‘league table’, which was perhaps notable most for the state owned companies not on the list. This list is compiled based upon market capitalisation of listed organisations, but the many NOCs missed off the list are the power brokers of the industry and it seems somewhat incomplete without them.

The Tip of the Iceberg

This is especially true in light of BP’s recently inked deal with Rosneft. Of course the AAR consortium will do all it can to ensure that this deal never sees the light of dayas it seeks to protect its investment in TNK-BP, however, assuming this does go through this will provide an example of one of the more creative ways that IOCs will be directing their strategies in moving forward (remembering my earlier reference to Lex). Unfortunately though this sort of investment represents a communications challenge on the same sort of scale as the Gulf of Mexico spill that BP struggled through last year. Exploring the Russian arctic is certain to redraw battle lines with environmental activists and a wide range of stakeholders that believe this represents an unacceptable risk. I saw Bruce Parry’s programme last night about the impact of the Alberta Oil Sands on the lives indigenous people of that region. I expect there to be many similar programmes in the future and BP will no doubt be making preparations for reputational fallout, or so we hope.

Wakey, Wakey!

BP also took the limelight with its recent release of its 20 year outlook , an annual event, which has been closely watched by the industry for years. The results as you may expect are not wholly surprising, but I did find Bob Dudley’s frank response to projections on the reduction of carbon emissions refreshing. “Overall, for me personally, it is a wake-up call”, is how he referred to the less optimistic view of political commitment to reducing emissions. What this means for BP’s policies remains to be seen.

In light of the EU carbon trading debacle and the reported €30 million plus theft that is alleged to have taken place, BP’s pessimistic projections are looking fairly accurate. The system for trading credits remains down, with no immediate end in sight. For a trading platform to work traders need liquidity and trust. Both have been killed off and will take a long time and a lot of cost to rebuild. Industry calls to speed up the process of creating a single platform for Europe have so far not generated any concessions. Based on the performance of the UK trading platform, which appears to have far better standards of governance and compliance than some of its European peers, London may prove a popular home for the EU system.  

Pumped Up Prices

The retail sector in the UK has also been the subject of many headlines since the start of the year as prices at the fuel pump and retail electricity and gas prices have also risen. It will be interesting to see whether an OFGEM price review will yield any results (unlike previous inquiries) and if the Chancellor will capitulate and halt plans to raise fuel duty. The Coalition government has since Q4 GDP figures were released (and to some extent beforehand) been challenged to unveil plans to support economic growth and this duty may well have to be conceded if there are no specific policies in the pipeline.

Egypt

Finally would like to sign off this post by wishing that our friends, colleagues and clients in Egypt stay safe in these troubled times.