Commodities: Who is setting the energy agenda?

Energy sets the agenda

ENERGY HAS NOT only jumped to the top of the world’s agenda; it is also throwing agendas everywhere into confusion. This March 11, the US moved to Daylight Saving Time three weeks earlier than usual, shifting its clocks forward by an hour to give more daylight in the evenings and no doubt causing more missed appointments than usual. DST will also last a week longer than in the past, changing back to standard time on 4 November. The reason for the change is not so that people will have more daylight to enjoy themselves after work but to save energy – demand falls for electricity in the evening if it is still light.

The world economy is driven by energy and rapid economic growth, particularly in Asia, is working up a thirst that current capacity is finding hard to slake.

The amount of money being sought for new energy-related projects from oil exploration to power plant construction and liquefied natural gas ships is staggering. Saudi Aramco, the world’s largest oil company, plans to invest $50 billion over the next 15 the 20 years to raise production from 11 million barrels a day to 15 million. Angola is hoping to attract the same amount of money to its oil industry over the next six years. Shell’s, or rather Gazprom’s, Sakhalin liquefied natural gas project will cost another $20 billion. Yet despite all this, the International Energy Agency estimates that the world is still 20% short of making the $20 trillion of investment needed to ensure adequate energy supplies over the next 25 years.

Faced with the threat of energy insecurity and fears of global warming, politicians in the cash-rich but energy-poor world are taking bold measures, creating new markets and new industries of an unprecedented scale through regulatory fiat.

The combination of massive capital needs and the opening up of potentially huge new markets is creating enormous opportunities for investment banks and investors in the energy markets and energy-related industries.

Two banks, Goldman Sachs and Morgan Stanley, have long dominated these lucrative businesses, a position that is confirmed by new research from Greenwich Associates, revealed exclusively in Euromoney. However, the scale of the opportunities means that there is more than enough on the table for all the banks that are now trying to grab a slice of the pie.

Enough for everyone

"The energy business, in particular power generation and transmission and oil and gas production, is among the most capital-intensive economic activities in the world," says Peter O’Hagan, COO of global commodities at Goldman Sachs. "The magnitude of today’s equity capital investment needs are significant and in volatile markets the risks are significant as well. Alongside this huge requirement for investment capital, there is a complementary need for debt and risk capital for the mitigation of commodity price risk. Global demand is already high and rising with the pace of investment. It wouldn’t be sustainable for Goldman Sachs and Morgan Stanley to be the only sources or intermediaries of risk capital for this business in all its manifestations. The unprecedented scale of capital investment over the next decade is an industry megatrend that’s driving the evolution of the commodity sales and trading business across all sectors. The demand from major energy players for integrated service that combines capital raising, clear analysis, and commodity risk management with business advice will never be bigger. When something plays out on that scale, there is always room for competition."

In terms of market share globally, Barclays Capital has emerged as the only bank offering a credible challenge to Goldman and Morgan Stanley, distancing itself from rest of the chasing pack. The bank’s market penetration among corporate users of OTC energy derivatives is third globally but a very close second in Europe, where it beats Morgan Stanley but trails Goldman Sachs, and second in Asia where it beats Goldman Sachs but trails Morgan Stanley, which enjoys a significant lead over both.

In Europe, SG rivals Morgan Stanley in the second tier of providers. In the US, Bank of America and energy company BP form the second tier, according to the Greenwich Research.

Deutsche Bank and JPMorgan make up the rest of the six leading global banks in the OTC energy derivatives business, doing business with 18% of corporate users. The numerous other banks active in the market do business with 15% or less.

Of the numerous new entrants to the energy markets, JPMorgan, which began building its presence just two years ago, appears to have been the most successful to date, being placed number three behind Goldman Sachs and Morgan Stanley for best overall service quality. In a presentation to investors this March, JPMorgan said that energy initiatives were expected to add $100 million to $160 million to the bank’s annual income as early as this year. The bank also announced its intention to hire more energy traders in Europe and Asia to expand its business.

It is no coincidence that the leading banks for service quality are also leading M&A advisers. This is because many companies active in the energy derivatives market are producers or heavy consumers with significant exposure and for which the decision to hedge is often viewed as a strategic one made at the highest levels of a company’s management.

"More than half of the companies we interviewed said that they require senior corporate officers such as the CEO, CFO, or board president to approve energy derivative transactions with strategic importance for the business, which is a very high percentage compared with other markets such as FX or interest rates" Giovanni Carriere, Greenwich Associates