Energy investors are spooked by political uncertainty

Investing in energy has always been a tricky business, but the added uncertainty created by political upheaval further damages investor confidence.

The ongoing shenanigans in politics are not just fodder for pub talk and showers of media speculation, they are exacting a price where it really matters for Australians: in the confidence of investors.

Robert Pritchard, who is executive director of the Energy Policy Institute of Australia, sums up what I have been observing myself in recent weeks.

“Almost everyone I speak to among energy investors remains spooked by the fear of policy reversals,” Pritchard tells me as we discuss his plans for EPIA’s “Energy State of the Nation” forum in Sydney on March 20.

“We have been banging on about the need of investors for greater policy certainty ever since the global financial crisis,” he says, “but policy directions are now harder to fathom than ever.”

Both he and I are literally daily running in to business people who are frustrated by the inability of mainstream politics to throw up a long-term, bipartisan approach to electricity and domestic natural gas policies. Current events -- whether in Queensland, Victoria, the Northern Territory (which matters to resource investors) or in the federal arena -- seem to dictate that their hopes will continue to be burned on the low altar of politics.

One of the hopes of the energy investment fraternity since at least 2009 has been that an energy white paper will cut through Labor/Coalition politicking and, even as the current game of thrones takes place federally, there are bureaucrats in Canberra beavering away on the latest version -- which they have been told to have ready by the end of next month.

Pritchard reckons there are three main reasons why policy certainty won’t be provided by the white paper now under construction. He calls them the ‘three deep energy mysteries’.

The first, he says, is where global energy prices are heading over the short, medium and long term, a puzzle that some of the best brains in the business struggle to unpick.

Thus we see Fitch Ratings opining that $US80 per barrel is the long-term equilibrium price for crude oil and suggesting a recovery could be possible in the second half of 2015, while the boss of BP tells the Davos conference he is planning for low prices for several years.

Pritchard’s second ‘deep mystery’ is the direction of global climate change negotiations, supposedly all to become clear at the UN summit in Paris in December, but who seriously believes this is likely?

His third mystery is domestic: Who is going to be governing the country, the states and the territories over the next five to 10 years and how are they going to govern the energy industry?

Pritchard, a lawyer, and I share more than a half century’s aggregate engagement in the Australian energy sector and we agree that longevity in domestic political office is probably a greater challenge today than at any time in memory.

“The fear of short-lived governments is a turn-off for energy investors because of the sudden changes it brings in policies,” says Pritchard, a view everyone focused on energy asset privatisation will share after the Queensland poll boil over.

Of course, the governance problem is not confined to Australia, and whether understanding what is happening in this regard overseas will help us come to terms with the goings on here, is an interesting question.

Pritchard thinks it may and his Energy Policy Institute has invited a quartet of overseas experts to speak at the “Energy State of the Nation” forum next month.

One of these experts knows about the chaos of governing first hand: Tim Stone, now a professor at University College London, was KPMG’s leading UK energy consultant and an adviser to Tony Blair when he was prime minister. Stone supports the view that traditional systems of energy regulation need to be over turned to cope with new market conditions.

Another is Barry Worthington, from the American version of EPIA, who will lead a discussion, which will include Stone, on the need for integration of energy and carbon abatement policies. This is something we have largely failed to achieve in Australia over the past seven years.

The third is Ron Loveland, energy advisor to the Welsh government, who will also talk about the need for policymakers to have an explicit strategy to guide energy technology to a low-carbon future.

The fourth is an expert on the biggest energy and carbon laboratory on the planet: China. 

Yang Yufeng is director of China’s Energy Research Institute and co-author of a 700-page review of China’s energy strategy.

Their contributions will all be highly interesting and I am looking forward to listening to them, but the hard point is nothing they are going to say will change the reality of Australian investment today: the people with the money and the project ideas are, as Pritchard says, really, thoroughly spooked.

One of the things I learned from 11 years managing the national upstream petroleum lobbying organisation is that investors, especially in oil and gas, are very resilient.

On my watch, they came through the fireworks of Whitlam, Fraser, Hawke and Keating, Joh-for-Canberra, a global oil price crisis and much else besides and built the start of a world-leading gas export industry.

But today’s investing environment, especially for domestic gas and electricity, is a lot different and a lost decade (which is what we face in energy policy terms) will hurt not just project developers but the community at large.