INVESTORS IN RUSSIAN AND CASPIAN ENERGY FACE CRITICAL QUESTIONS

As a new president takes office in Russia and the global economy continues to face uncertainties, investors in Russia and the Caspian region will encounter critical questions in their decision making:

• Russia currently faces the possibility of declining oil and gas production, even as global demand increases. The rapid oil production increases seen earlier in the decade have slowed, raising fears that oil production is set to decline. In addition, Russia has run through its Soviet-era legacy of cheap gas production. What will be the policy response by the new government, and what opportunities may arise for foreign investors?
• Caspian energy production has accelerated rapidly in the past several years, but export capacity has not kept pace. New investment in export capacity for both gas and oil will increasingly figure into investors’ decisions about undertaking projects in the region.
• Political change both in Russia and throughout the region will have an impact on investment decisions.
  • In Russia the orderly transition from President Vladimir Putin to President Dmitri Medvedev may not ensure the continuity with the Putin years which is widely expected.
  • With high commodities prices, investment is flowing into the Caspian region from various sources, yet the familiar flashpoints will continue to contribute to political instability.

BIG QUESTIONS FACING THE EUROPEAN POWER INDUSTRY IN 2008

Through 2008 the European power industry will see the finalization of plans to address the three energy policy objectives of sustainable, secure, and competitive energy supplies. As the European landscape shifts, companies need to reevaluate their strategic direction and reconsider their asset portfolios. This Decision Brief presents CERA’s take on the big strategic questions facing the European power industry in 2008. These questions identify the drivers that will shape the future of the industry and serve as a framework for targeting the issues that CERA’s European power team will analyze in its research.

• Increased environmental regulation will radically change the European power landscape by 2020. Given the lead times and lifetimes of power assets, companies need to make decisions in the shorter term on positioning and investment that will lead to longer-term profitability.
• The drive for greater competition and an integrated market will change the rules of the game for many players. Companies need to be ready to play in a more competitive market.
• Growth has been achieved through merger and acquisition (M&A) activity. As the remaining M&A opportunities become relatively smaller, companies will need to rethink their approach to continued growth.

BIG QUESTIONS FACING THE EUROPEAN GAS INDUSTRY IN 2008

The year 2008 has the potential to be a defining one for the European gas industry, as significant decisions will be made that could affect the structure of the market, and the future of the corporate players within it, for many years to come. Many players will be reexamining and attempting to reposition their strategies to set up a winning hand for the next decade and beyond. The first step in developing a winning strategy is to understand the big questions facing the industry; this Decision Brief presents CERA’s Big Questions for the European gas industry for 2008. These questions revolve around the drivers that will shape the future of the industry—both upstream and downstream—and serve as a framework for targeting the issues that CERA’s European gas team will analyze in its research and advice to clients.

• High commodity prices and the increasingly global nature of the gas market mean that the next decade will look fundamentally different from the previous one. The challenge of finding and developing gas supply for European markets is enormously increased: successful strategies of the past will not endure uniformly across the value chain.
• The priority of the environmental agenda in Europe complicates the demand side for gas. It is not clear whether Europe’s focus on a low-carbon sustainable agenda will threaten the traditional drivers for market growth or will reinforce the imperative of gas as low-carbon fuel that is more readily available than the no-carbon alternatives of nuclear, renewables, and carbon capture. Resolving the demand dilemma will be crucial for strategy identification.
• Gas companies will face challenges as the role of the transmission business is redefined on a wider, or pan-European, scale. Europe’s midstream businesses will need to adapt their commercial practices to a world in which many companies develop a new focus on transmission as a standalone business, and at the same time concentrate on strengthening the horizontal links across national borders. In some cases this may lead to a process of company redefinition; in many others cases it will lead to a reassessment of contracting and trading practices and of the approach to pricing.

BIG QUESTIONS FACING LATIN AMERICA'S ENERGY SECTOR IN 2008
For players already in the market or those monitoring events on the sidelines, evaluating and understanding Latin America’s energy sector is a daunting task. In our effort to create a consistent and coherent analytical framework, CERA has identified five key questions facing Latin America’s ever-changing energy sector that will shape our Latin America Energy research agenda for the upcoming year.

• The need for investment in all sectors is apparent throughout the region. Fuel diversification, energy supply infrastructure construction, and liquefied natural gas development will provide several opportunities for investors in Latin America. The capital costs and pricing, fuel inputs, and timing of these opportunities will be crucial in determining the best strategy.
• The rules of the game in Latin America’s energy sector appear not only to vary from country to country but also to be in a constant state of flux between state- and market-oriented reforms. Although a hybrid market might offer more accessibility, it is often the most difficult to navigate. Additionally, the industry structure and the roles of the players are evolving. Understanding the nuances and the opportunities that emerge in such a market landscape will be critical for investors.
• The scarcity of natural gas and the interdependency among Latin American countries for supply highlight energy security and pricing concerns. At the same time, a new type of interdependency based on ideological and political alliances is shaping the region’s energy landscape and discouraging investment in some countries, triggering a new set of challenges and opportunities in the region.

DOWNSTREAM PROJECT COSTS: THE REGIONAL AND LOCAL EFFECTS

The Downstream Capital Costs Index (DCCI) tracks the costs of 30 projects in 18 different countries. Examining the DCCI regionally highlights the considerable level of variation by area.

• The first DCCI, released in November 2007, showed that the global cost of building downstream projects had increased 66 percent since the base year 2000. However, when the DCCI was split by region, the project cost escalation ranged between 54 to 113 percent.
• In the local breakdown, the area with the highest rate of project cost escalation was Russia with downstream project costs 113 percent higher than the year 2000.
• The local area with the highest absolute cost level was Alberta. The cost of building a downstream project in Alberta was at least 40 percent more expensive than building the same project on the US Gulf Coast.
• Although low-cost countries still retain wage rates at less than 10 percent of the West’s, record escalation combined with an increasingly global workforce is starting to gradually close the regional cost gap.

BIG QUESTIONS FACING THE OIL INDUSTRY FOR 2008

The global oil industry faces an unprecedented set of interrelated business dilemmas that will require new strategic approaches. The first step to developing a winning strategy is to understand the big questions that need to be addressed. This Decision Brief presents CERA’s Big Questions for the oil industry for 2008. These questions identify the drivers that will shape the future of the oil industry—both upstream and downstream—and serve as a framework for targeting the issues that CERA’s Global Oil team will analyze in its research.

• Current high oil prices, rising capital costs, and a shifting political, economic, and environmental context mean the next decade will not look like the previous one. The successful strategies of the past will not endure uniformly across the value chain. But amid change, there has been one constant: the world’s demand for liquid fuels to satisfy aspirations for higher living standards and greater mobility. These dynamics highlight a critical big question: How will characteristics of winning companies evolve in response to the competitive environment and aboveground risks?
• Increased diversity of liquid fuel and continued oil demand uncertainty complicate investment decisions for refiners. New vehicle efficiency and biofuel standards—the result of energy security and climate change concerns—could alter traditional patterns of demand growth for petroleum-based fuels. At the same time, the composition of supply growth is changing, dominated by light liquids such as condensates, natural gas liquids, and biofuels, along with a heavier crude oil slate.
• Oil’s role in the global economy takes on new dimensions. The relationships among oil consumption, price, and economic growth have evolved dramatically in recent decades. The global economy is less oil intensive, but oil remains the lifeblood that sustains global mobility. The degree to which the oil industry can convert challenges into opportunities will shape future industry structure, influence international relations, and ultimately determine whether oil continues to be an enabler of economic growth or becomes a constraint.