Natural Resources Record Newsletter - Summer 2017

June 2017

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Table of Contents

 


The Future of Renewables


By Basil Karampelas and Timothy Clackett

On June 1, President Trump withdrew the U.S. from the 2015 Paris Agreement—a move that sent ripples of shock throughout the energy industry and elicited strong reactions from state and local governments, organizations and individuals. While renewable energy—including wind, solar, hydropower, biomass and geothermal—has been on the public conscience for years, Trump’s decision rapidly thrust the subsector back into the spotlight and reminded the world of the significant role it has yet to play.

The fact remains that alternative energy has quickly become a more serious contender in the global energy boxing ring. Much of this growth has been driven by technological advances, regulatory developments and various other factors. While the subsector still has a long way to go before it surpasses oil, gas and coal, it is making up a bigger slice of the global energy pie each year.

For traditional oil and gas companies, the rapid growth of renewables has significant implications for the industry’s long-term growth and sustainability. Should energy companies wish to stay competitive, innovative and successful in today’s volatile, low-price environment, they must continue to diversify their energy portfolios to keep pace with the broader global shift to low-carbon alternative fuels.


Renewables on the Rise

According to the U.S. Energy Information Administration (EIA), renewable energy sources, led by solar and wind, accounted for about 10 percent of total U.S. energy consumption and about 15 percent of electricity generation last year. The EIA forecasts that this percentage will increase in the future, with total utility-scale solar generation capacity increasing by 48 percent from the end of 2016 to the end of 2018, along with increases in total wind capacity.

Global forecasts predict the international renewable market will accelerate at a much higher rate. According to a 2017 report by the Energy Transitions Commission, which includes senior leaders from General Electric Oil & Gas, Schneider Electric, Royal Dutch Shell, BHP Billiton Ltd. and several other key energy players, it will be “feasible in many geographies to build a near-total-variable-renewable power system” by 2035, which will make “renewables fully competitive with fossil fuels.”

The report further estimated that the 2040 global power mix outlook could consist of: 45 percent intermittent renewables, such as solar and wind; 35 percent other zero-carbon power sources; and 20 percent fossil fuels. While these predictions are ambitious, those from a McKinsey Global Institute report mirror a similar pace of growth—surmising that renewables could grow from four percent of power generation today to 36 percent of global electricity supply by 2035.

Much of this growth is happening in Asia, which accounted for 62 percent of total renewables jobs in 2016, according to the International Renewable Energy Agency’s annual report.

While these reports are based on various scenarios and assumptions, they indicate broader industry sentiment that renewables are the future—even if fossil fuels are the standard today.


Technological Innovation and Regulatory Pressures Drive Sector Growth

While numerous factors contribute to sector growth, two of the biggest drivers are the same forces transforming all industries: technological innovation and regulatory pressures.

While solar cells and wind turbines have been around for decades, technological advances have significantly brought down the cost of production and storage in recent years. Solar prices have dropped 62 percent since 2009, according to Bloomberg, and solar is expected to become cheaper than coal on average globally by 2025. Energy experts further predicted that onshore wind energy will see a median cost reduction of about 35 percent by 2050.

Falling prices and the emergence of cleantech, including electric vehicles (EV), are likely to contribute to more widespread use of renewables in coming decades. According to Goldman Sachs analysts, 25 percent of cars sold by 2025 will have electric motors, up from five percent today. While many of these cars will be hybrids that still rely partly on fossil fuels, it can be expected that overall petroleum dependency will decrease as more EVs make their way to the streets.

State and local policies aimed at reducing greenhouse gas emissions also play a significant role in pushing companies toward innovation and energy diversification, should they wish to remain in compliance—perhaps even more so than federal and global policies.

The most recent example of the power wielded by state and local governments can be seen in several states’ reactions to Trump’s withdrawal from the Paris climate accord. Despite the order, many states, cities and organizations pledged to continue upholding the accord terms and limit emissions. Whether they will be successful in convincing the United Nations to accept their pledge is to be determined; nevertheless, their response is a strong indicator of the bifurcation between the views of the executive branch and local views on the importance and role of alternative energy in the future.

Other state policies include the state renewable portfolio standards (RPS), which require utilities to sell a specified percentage or amount of renewable electricity. The standards have already been adopted by 29 states, Washington, D.C., and three territories as of late April, with ambitious goals to increase state-wide usage of alternative fuels. California, for example, aims to increase the percentage of renewable energy in its electricity mix to 33 percent of retail sales by 2020.

The Regional Greenhouse Gas Initiative, an initiative made up of seven northeastern states, has also set an ambitious goal to source 42 percent of its energy from renewables by 2030.


The Need for Energy Diversification

Many energy companies have already begun the process of diversifying their energy portfolio mix, either through external dealmaking or internal research and development, to meet regulatory and competitive pressures. According to Bloomberg New Energy Finance, acquisitions in clean energy totaled $117.5 billion last year, with $72.2 billion coming from renewable energy project acquisitions and $33 billion from corporate M&A.

One notable transformation is Denmark’s Danish Oil & Natural Gas (DONG) Energy’s recent shift from producing fossil fuels to renewables. Formerly an oil and gas company, DONG Energy has become a major champion of green energy in recent years, and is now the world’s largest offshore wind farm company with plans to divest its oil and gas business this year.

Other oil and gas companies have also taken strides to diversify, albeit on a smaller scale. In early March, Royal Dutch Shell’s Chief Executive Ben van Beurden announced the company’s plans to increase its investment in renewable energy to $1 billion a year by the end of the decade. Beurden further noted that the oil and gas industry risks losing public support if it does not transition to cleaner energy, according to Reuters.
Saudi Aramco, the world’s largest oil company, has also toyed with the idea of investing $5 billion in renewable energy firms to diversify from crude production. BP’s website states that “renewables will play an increasingly important role in a lower carbon future…projected to grow seven times faster than all other energy types combined.”

With many renewable energy company valuations depressed due to low commodity prices, now may be a good time for companies to diversify via external dealmaking opportunities.


BDO Insights: Looking Toward the Future

The path to green energy adoption and investment is not easy. Recent events in Washington indicate that the road may be even more difficult going forward, at least in the U.S. For traditional energy companies, the cost of acquiring, designing and/or building the renewable energy technologies and infrastructure necessary can be quite high. For renewable energy companies, ensuring that their technologies are commercially feasible, scalable and attractive is an ongoing challenge. Increasing Asian investment in renewables, along with sustained low oil prices, have also kept competition high and reduced consumer incentives to install and use alternative sources—at least temporarily.

Despite the challenges, clean energy presents an opportunity for energy companies to maintain relevance as the industry shifts and propel their business into the future. With renewable energy forming a bigger proportion of the energy mix year-over-year, traditional energy companies must begin to take steps to capitalize on the green revolution, if they haven’t already—or risk being left behind.

Basil Karampelas is a managing director in BDO’s Business Restructuring and Turnaround Services practice, and can be reached at bkarampelas@bdo.com.

Timothy Clackett is an assurance partner in BDO’s Technology practice and national leader of BDO’s cleantech initiative. Hecan be reached at tclackett@bdo.com.
 


On the Grid: Cybersecurity Threats to U.S. Critical Energy Infrastructure


By Christopher Mellen and Charles Dewhurst

In late March, the new administration issued executive orders removing roadblocks to two major oil pipelines: Keystone XL and Dakota Access. Both projects are expected to strengthen the U.S. energy infrastructure and establish routes of transportation between the U.S. and Canada, the nation’s largest energy trade partner. Now that construction is underway and the pipelines are one step closer to completion, the energy sector is facing an emerging question—are cyberattacks the next hurdle to overcome?


Securing critical infrastructure 

Pipelines are critical components of the nation’s critical infrastructure—defined by the U.S. Department of Homeland Security (DHS) as “the assets, systems, and networks, whether physical or virtual, so vital to the United States that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety, or any combination thereof.” The energy sector, which comprises electricity, natural gas and oil, is one of the 16 critical infrastructure sectors under the DHS, and includes the power grid responsible for powering much of the nation’s households, businesses and transportation systems.

The critical infrastructure sector facilitates many of the nation’s core activities, making it a prime target for high-profile attacks—from both private individuals and groups, cyberterrorists and those engaged in cyberwarfare. In January, the federal Quadrennial Energy Review Task Force warned in its report that “the U.S. grid faces imminent danger from cyberattacks,” due to the “rapidly evolving threats and vulnerabilities” in the current cybersecurity landscape. In early March, the Department of Homeland Security (DHS) issued a cybersecurity alert for critical infrastructure owners and operators outlining the top cyberthreats facing them today.

On May 11, President Trump signed a long-awaited cybersecurity executive order focused on strengthening federal cybersecurity networks and critical infrastructure. Under the order, Secretary of Energy Rick Perry, Secretary of Homeland Security John Kelly, and Director of National Intelligence John McConnell, are to work with state, local, tribal and territorial governments to assess the potential scope and duration of a prolonged power outage associated with a significant cyber incident. They are also to determine the U.S.’ readiness to manage the consequences of such an incident and report on gaps and shortcomings in the country’s assets or capabilities that could hinder its ability to mitigate these consequences.


Cyberthreats lurk for all energy companies—no matter how small

Large pipeline projects are by no means the only entities that could fall victim to a cyberattack. Virtually any company operating in the energy industry—whether their focus is exploration and production (E&P), oilfield services (OFS) or mining—could be, and likely will be, targeted by hackers. As technology used for exploration and drilling becomes more sophisticated, so will the cyberthreats impacting the industry.

There are many vulnerabilities and points of entry through which cyberattacks can occur today. Industrial control systems (ICS), which automate industrial distribution and processes, are often the point of entry for cyberattacks to critical infrastructure. Comprised of hardware and software components integrated via the Internet of Things (IoT), ICS and their continued functionality are vital to energy companies’ day-to-day operations. With increased connectivity, the security (or lack thereof) of each individual device impacts the whole system’s integrity. And because IoT devices fall outside the traditional scope of IT, they are often overlooked as potential vulnerabilities.  

Information technology controls and systems are susceptible to data breaches, ransomware and/or phishing attacks, among other threats. These systems house proprietary information, including reserves information, seismic data gleaned from exploration and sensitive financial data. If hackers gain access to this information, exploration projects could be compromised, and energy companies could realize a loss in revenue. Similarly, a disruption in any stage in the production process—for instance, with third-party vendors supplying oil rigs or refinery services—could create ripple effects throughout the supply chain.

Distributed denial-of-service (DDoS) attacks and the emerging threat of permanent denial of service (PDoS) attacks are also top of mind for the energy industry. DDoS and PDoS attacks aim to temporarily disable or permanently destroy technology—such as power grids, heating and cooling systems and Internet providers—by overwhelming the targeted system with traffic, thereby disrupting the distribution and delivery of a service. A DDoS attack on a Ukrainian power grid last December caused a power outage throughout the capitol and stole international headlines, drawing speculation that the attack was an act of cyberwarfare.


Confronting cyberthreats head on

Too often, companies may have basic cyber defenses in place but don’t prepare any real coordinated response plan until after an incident occurs, leaving their assets—and operations—at risk.

Prior to an attack, it’s essential to review internal controls, and legal and insurance considerations. Companies should also instate a comprehensive cyber risk management strategy that outlines the response structure, governance, policies and procedures, and training, as well as:
  • A comprehensive coordinated incident response plan that is regularly tested and takes into consideration cyberthreats to vendors or service providers that could create disruptions in the energy supply chain.
  • A crisis communications plan that includes both internal and external communications and is aligned with an existing enterprise risk management (ERM) framework.
  • Post-breach digital forensics and cyber investigations to identify the cause of the breach and implement remediation measures for affected areas of the companies’ technology and operating systems. Other post-breach activities should include system repair and data recovery. 
For U.S. energy companies, a cyberattack can mean more than simply a loss of revenue—but also the loss of human lives. Thus, it is critical that organizations take a long, hard look at their cybersecurity risk mitigation strategy to ensure they are acting in the most efficient, effective way possible. Having measures like these in place can help energy companies confront a cyberattack head-on and suture the infected area before the damage spreads. 

Christopher Mellen is a director in BDO’s Technology Advisory Services practice, and can be reached at cjmellen@bdo.com.

Charles Dewhurst is partner and leader of the global Natural Resources practice at BDO, and can be reached at cdewhurst@bdo.com.
 


BDO Spotlight: Q&A with BDO Saudi Arabia, Dr. Mohamed Al-Amri & Co.


With Saudi Aramco’s plans to IPO top of mind for the global energy industry, we spoke with Gihad Al-Amri, managing partner at BDO Saudi Arabia, Dr. Mohamed Al-Amri & Co. Read on for Gihad’s insights into how the world’s top producer of oil is tackling the global supply glut and energy diversification.

How have you seen Saudi Arabia respond to the recent slump in global commodity prices?
As the world’s top producer of oil, Saudi Arabia has always been very sensitive to the rises and dips in global oil prices. The recent slump in worldwide commodity prices spurred the Saudi government to launch a series of initiatives with the goal of reducing the country’s dependency on oil through the creation of new industries, diversification of its current energy mix and encouragement of investments that would add social and economic value to the nation.

One major program adopted by the government last year is the National Transformation Program 2020, which outlines various initiatives to be undertaken by different ministries by 2020. The energy-related goals include continuing to increase oil and gas production by upping the oil refining capacity from 2.9 million to 3.3 million barrels per day and the output capacity of dry gas from 12 billion to 17.8 billion cubic feet per day. An equally significant component of the program is the diversification of Saudi Arabia’s energy mix by: increasing its non-oil exports from 185 billion to 330 billion riyals (approximately US $49.3 billion to $88 billion); generating four percent of the country’s power from renewable energy; and increasing the mining sector’s economic output from 64 billion to 97 billion riyals (approximately US $17.1 billion to $25.9 billion). This national transformation program is part of the country’s broader “Vision 2030” platform, which sets strategic objectives to be achieved by the public, private and nonprofit sectors by 2030.

What energy subsectors are growing the fastest and attracting the most investment in the country?
While energy diversification remains a top priority, oil and gas continues to be Saudi Arabia’s bread and butter and vital to the Saudi economy. Following predictions that the world’s population will increase by two billion people by 2050, many energy executives, including state-owned Saudi Aramco’s president and CEO, Amin Nasser, have strongly advocated for continued investment in core oil and gas projects to meet future energy demand.

Nevertheless, energy portfolio diversification remains a top priority for the public and private sectors—with the Saudi government making mining, alternative energy and nuclear energy key focuses of the energy component in its National Transformation Program. In early May, Deputy Crown Prince Mohammed bin Salman announced plans to use up to 70 percent of the profits generated from the planned sale of Aramco’s post-IPO shares for the development of promising non-oil sectors, including mining and logistics. The profits will be distributed via the Public Investment Fund (PIF), the country’s top sovereign wealth fund.

Alternative energy is also gaining traction; several public and private renewable energy projects are in the works. Aramco, for example, announced earlier this year that it is considering investing US $5 billion in renewable energy, including solar and wind. Saudi Arabia’s energy minister, Khalid Al-Falih, has also reaffirmed the country’s intention to drive a “massive” renewable energy push that could involve up to US $50 billion in spending, with the goal of sourcing a minimum of 10 GW of electricity from solar, wind and nuclear by 2023. The overall goal is to generate 30 percent of the Kingdom’s electricity from renewable sources by 2030.

What advice would you give U.S. and multinational energy companies operating, or looking to operate, in Saudi Arabia?
The importance of establishing a physical presence in the country can’t be overstated. Without an established base, foreign energy companies will find it difficult to win the same opportunities to work with Aramco or other Saudi businesses as those with boots on the ground. As the government doubles down on its “Saudization” policy—the removal and replacement of foreign workers with Saudi citizens—foreign companies looking to do business here must look for ways to actively contribute to the local and national economies and communities. Saudi Arabia welcomes all kinds of investments, as long as they add economic and social value.

Saudization is a decades-old national policy and is continuing to evolve. Under the 2011 Nitaqat system, businesses are categorized into different levels based on the percentage of Saudi citizens they employ. Companies in the “red zone” are out of the running for government contracts and may be subject to hefty financial penalties. A new Nitaqat framework, previewed with the rollout of the Vision 2030 program, is expected to be announced in the next few weeks and will likely have a direct impact on global firms doing business in the region.

Another related initiative is Aramco’s In-Kingdom Total Value Add (IKTVA) program, launched in Dec. 2015 and aimed at increasing investment, economic diversification, job creation and workforce development within the country. To achieve these goals, Aramco requires its suppliers to meet a baseline metric for local content and value creation, scored from a combination of factors, including the percentage of localized goods and services, salaries paid to Saudi employees, employee training and development, supplier development spending and company revenue (related to spend from Aramco only). As one of the few firms authorized to audit the suppliers’ reports to Aramco, BDO has seen firsthand the value placed on contributions made to Saudi Arabia’s local economy. Many of our clients, including Siemens, Baker Hughes, General Electric, Halliburton and Hitachi Construction Machinery, among others, have also realized the importance of running a business that contributes not only to the economy but also the community—a necessity for long-term success.

Gihad Al-Amri, CPA, is a managing partner at BDO Saudi Arabia, Dr. Mohamed Al-Amri & Co. and Chairman of the Accounting Standards Committee of the Saudi Organization for Certified Public Accountants He brings nearly 20 years of experience working with Saudi businesses and foreign companies with an established presence in the country or looking to enter the Saudi market.
 


Did you know...

Global dealmaking in the energy and power sector totaled $139.6 billion during the first quarter of 2017, an increase of 62 percent compared to 2016 levels, according to Thomson Reuters.

The U.S. Energy Information Administration expects the share of U.S. total utility-scale electricity generation from natural gas to fall from an average of 34 percent in 2016 to less than 32 percent in 2017 and 2018 due to higher natural gas prices. 

Oilfield services company Baker Hughes Incorporated found that the U.S. rig count was 901 in mid-May 2017, an increase of 497 rigs from the year prior.

Global offshore wind turbine market revenue is projected to reach $58.7 million by 2025, compared to $29.4 billion in 2016, according to Transparency Market Research.

The U.S. Energy Information Administration estimated that OPEC members earned about $433 billion in net oil export revenues in 2016, its lowest earnings since 2004.
 

For more information on BDO USA's service offerings to this industry, please contact one of the following practice leaders:
 

Charles Dewhurst
Houston

 

Tom Elder 
Houston


 
Richard Bogatto 
Houston
  Vicky Gregorcyk 
Houston

 
Rocky Horvath
Houston
  Rafael Ortiz
Houston

 
Clark Sackschewsky
Houston
  Alan Stevens 
Dallas