Powering the Future: Energy at a Crossroads

What this means for consulting firms and practices that serve the energy sector is not only more work, but different work. Energy practices must address more complex and increasingly global issues while adopting a more "integrated perspective," to borrow a term from Robert Zabors, a partner with Bridge Strategy Group, which was sold to India-based technology company Satyam earlier this year, in large part, to continue to broaden the consulting firm's global reach.

David Fornari, national managing director of Deloitte Consulting's energy and resources practice in the U.S., says that his practice has "evolved in a fundamental way" in the past two years. He and his team now examine the entire "subject of energy" when examining client issues; doing so requires a broader perspective than evaluating issues as contained to the industry. "When we think about the subject of energy, it naturally begins to take us to the interplay of other sectors [within the energy industry] and other industries."

If, for example, an energy client wants Deloitte's help in evaluating the production of an ethanol refinery in Ohio, Fornari says his team would work with agribusiness experts in the firm's consumer and industrial products practice and with public-sector colleagues intimately familiar with the state's politics and its balanced growth campaign.

The integrative nature of the challenges facing energy-industry clients was driven home in late August when New York State Attorney General Andrew Cuomo and Minneapolis-based Xcel Energy reached an agreement in which Xcel will detail in its SEC filings the potential financial impact of current and future legislation (related to climate change) as well as material financial risks to the company related to global warming. Billed as a "first of its kind" agreement, the new disclosure may soon be adopted by
other energy companies.

A consultant working with Xcel on the matter would have needed to possess a sharp understanding of several technical subjects, including energy production, financial reporting, climate change, numerous current and potential regulations affecting Xcel, and the Martin Act—a 1921 law that gives New York attorney generals the unique ability to, among other things, extract concessions from companies that do business in New York.

"The industry is much more complex and global now," notes Filsinger. "For example, you can't look at commodity pricing in the United States only. You have to look at global commodity pricing."

Challenges Are Opportunities

Fornari also asserts that many of the industry's challenges are opportunities. At the most recent Corporate Eco Forum, a number of intriguing start-up companies drove this point home. "I came across a company that takes the carbon dioxide produced from power plants and uses it to make cement," Fornari recalls. "You have greenhouse gasses to deal with. One view is capture and sequester. However, there may be other opportunities to incorporate [the captured gasses] into another industry's supply chain."

Other energy industry issues pose the similar sort of risk-reward dynamic that helps fuel the need for consulting services. Coal represents the country's largest energy reserve, yet its traditional means of production creates greenhouse gasses. Alternative or renewable energy sources, such as wind, promise opportunities for certain companies and geographies, yet transporting the wind power from its source (e.g., remote West Texas) to its area of need (e.g., the Houston metro area hundreds of miles east) poses significant challenges.

"Many states are looking at alternative renewable energy in part because they see economic development opportunities," Fornari reports. "These governments want to create green-collar jobs, whether it involves the manufacture of equipment and material for alternative renewable energy or the deployment of alternative renewable energy [production] in their states."

The primary issues confronting the energy industry can be loosely categorized into two areas: uncertainty (about supply and demand, and pending regulation and policy changes) and reliability (of the country's current and future energy infrastructure and the workforce as baby boomers retire in large numbers). Each of these issues affects commodity prices, which in turn affect public perception, political reaction and regulatory changes (which often, in turn affect commodity prices).

Rutowski identifies the top concern among Navigant Consulting's customers in the electric power and natural gas sectors as "uncertainty over fuel costs and regulatory effects such as future carbon and other environmental regulations, and their resulting impact on energy markets and generation assets." PA Consulting's Filsinger also points to the volatile commodity price environment as one of the top two concerns among PA Consulting's energy customers. Zabors, too, lists increasing costs as a top challenge among Bridge Strategy's energy customers. He points out that while rising costs are currently driven by fuel and commodities, electric and natural gas utilities will soon face costs associated with grid modernization, emissions control and renewable supply.

Interrelated Issues

Aside from an ongoing procession of new rules and regulations, the specific challenges/opportunities that leaders of energy consulting firms and practices say consume the most attention from clients in the oil and gas, power and utilities and mining (primarily coal) sectors include the following:

• Energy Supply and Security

As the early phase of the presidential campaign demonstrated, the country faces a whopping question: Where is the future supply of oil and gas coming from? The emergence of new national oil companies and the growing strength of existing national oil companies pose new challenges, particularly to the "super-major" oil companies in the U.S. who have felt their leverage with these entities decrease due to growing competition for oil from China and elsewhere. "The dynamic with the national oil companies is becoming more important," Fornari notes. "The interplay [with these entities] from business and exploration and production standpoints represents huge challenges." The growing need for energy security, along with environmental drivers, has helped spark a nuclear renaissance at home and abroad. "Nuclear generation is critical to the future of energy independence," notes Filsinger. There are currently 104 nuclear reactors in the U.S., with 12 planned for construction and another 20 proposed. Russia currently has proposals for 25 more nuclear power plants while China has proposals for 76 new plants.

• Environmental Issues

"Environmentally based issues are probably the number one challenge facing the overall energy industry right now," says Filsinger. "Carbon dioxide issues and greenhouse gas emissions are affecting everyone, from oil and gas producers and electricity producers to energy consumers. And we're seeing a huge impact in customer behavior." The demand for alternative, more climate-friendly fuels and energy sources is soaring. Oil and gas companies (along with agricultural businesses and even some bio-technology companies) are exploring, and hoping to exploit, bio-mass, corn-based ethanol and cellulosic ethanol among other alternatives to gasoline. Wind has emerged as a promising alternative to coal and natural gas, despite serious challenges in harnessing and transmitting wind power.