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André Dorsman · Wim Westerman John L. Simpson Editors Energy Technology and Valuation Issues Energy Technology and Valuation Issues ThiSisaFMBlankPage Andre´ Dorsman (cid:129) Wim Westerman (cid:129) John L. Simpson Editors Energy Technology and Valuation Issues Editors Andre´ Dorsman WimWesterman DepartmentofFinance DepartmentofFinance VUUniversityAmsterdam UniversityofGroningen FacultyofEconomicsand FacultyofEconomicsandBusiness BusinessAdministration Groningen Amsterdam TheNetherlands TheNetherlands JohnL.Simpson SchoolofEconomicsandFinance CurtinBusinessSchool CurtinUniversity Perth WestAustralia Australia ISBN978-3-319-13745-2 ISBN978-3-319-13746-9(eBook) DOI10.1007/978-3-319-13746-9 SpringerChamHeidelbergNewYorkDordrechtLondon LibraryofCongressControlNumber:2015931249 #SpringerInternationalPublishingSwitzerland2015 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped.Exemptedfromthislegalreservationarebriefexcerpts inconnectionwithreviewsorscholarlyanalysisormaterialsuppliedspecificallyforthepurposeofbeing enteredandexecutedonacomputersystem,forexclusiveusebythepurchaserofthework.Duplication ofthispublicationorpartsthereofispermittedonlyundertheprovisionsoftheCopyrightLawofthe Publisher’s location, in its current version, and permission for use must always be obtained from Springer.PermissionsforusemaybeobtainedthroughRightsLinkattheCopyrightClearanceCenter. 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Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Foreword Variouspartieshavelong beeninterestedintheefficient useofscareresourcesin thegenerationandprovisionofproducerandconsumergoods.Overtime,thelistof resources has been extended by some from land, labor, and capital to include materials,energy,andtalent(entrepreneurialandmanagerial). Policy makers and academics are interested in the effect of resources (like energy)thataresubjecttolarge(un)expectedshocksinbothavailabilities,techno- logical innovation and costs whose macro-economic (e.g., on Gross National Product, foreign exchange, and inflation) and wealth generation effects differ markedlybothacrossandwithincountriesandindustries.Toillustrate,NorthSea discoveries consisting of liquid oil and natural gas have greatly benefited the economies of, particularly, the UK and Norway, and contributed to the desire among asizeable minorityfor independence inScotland. Energy developmentin CanadahasshiftedtherelativegrowthfromtheprovincesofOntarioandQuebecto fossil-fuel-producingprovincessuchasAlberta,Saskatchewan,andNewfoundland (aprevious“have-not”province). Practitioners, policy makers, regulators, capital suppliers, and academics are interestedintheefficientdeterminationofpricesinover-the-counterandorganized markets and the information that they reveal about future expectations, and about the effectiveness of using derivative products for managing various risks. Market pricesforfossil-basedfeedstockandenergyoutputcanchangequicklyduenotonly to changes in the fundamentals but also to investor sentiment (e.g., fear) and speculative activity. To illustrate, the spot price FOB per barrel of Cushing, OK WTI through the major portion of the Global Financial Crisis went from 138.91 USDonJune26,2008to43.69USDonDecember8,2008to68.14USDonJune 24,2009.Itssubsequentrecoveryhasbeenhamperedbycontinuingweakdemand and a rapid growth in new production. While the sustainability of the recent increased (resumed) production in Libya is highly uncertain due to political considerations, the more certain increased US production is due primarily to the rapidincreaseinlight,tightoilproductionfromhorizontaldrilling,andmulti-stage hydraulicfracturinginshaleformations. v vi Foreword Practitioners, capital suppliers, rating agencies, and academics in corporate finance and real investments are interested in the merits and managerial aspects (e.g.,organizationaldesignandboundaries,andcommitmentproblems)ofenergy development. Energy firms and projects provide a rich laboratory for a study of theseissues.Manyenergyprojects(particularly,exploration,development,production,andtransportation)havelonglives,mayrequirelargecapitalinvestmentsand considerablefinancings,andmaybe“longshots.”Sincesomeenergyfirmsreport informationthatallowsonetocalculatetheproportionofafirm’stotalreservesthat remainundeveloped,thisallowsforempiricaltestsoftheeffectsonvalueandrisk of assets-in-place versus growth opportunities. Depending on the nature of their activities,someenergyfirmscanrespondtomarketconditionsbydeferringinvest- ment; or shutting down, contracting, restarting, or expanding operations. Further- more, many of these projects are undertaken by various combinations of private and/or public entities (e.g., joint-ventures) so that the parties can combine their capabilitiestocreatesynergies,reallocatedecisionrights,oralterthenatureoftheir agencyrelationships. The returns from energy exploration, development, and transportation projects aresubjecttoconsiderableuncertainty.Onesuchuncertaintyisthenationalization or confiscation of energy feedstock or the risk thereof, where an oil-producing countrygainscontrolofprivateproperty,ofteninviolationofexistingagreed-upon legalcontractsthatthegovernmentoftheoil-producingcountryhasdeemedexpost asbeingoverlyfavorabletotheprivate-sectorparty.Thiscanbeachievedcountry- wideoronaproject-by-projectbasisbyoutrighttransferofownershiptoapublic entitythatmaybepartofacartelorthroughlimitationsonproductionandexport prices or through royalty payments that may be onerous. While many countries extractroyaltypaymentsfromfossil-energyproducers,outrightstransferofowner- ship for fossil-fuel activities to generally state-owned entities has occurred in various countries such as Argentina, Bolivia, Brazil, Burma, Egypt, Indonesia, Iran, Iraq, Peru, Saudi Arabia (including a pipeline as compensation for Iraqi debts), SovietUnion, and Venezuela; for the land for hydro-electricity generation in countries such as China; and for the hydro-electric generator itself in countries such as Austria, Bolivia, Britain, Canada (Ontario, Quebec, etc.), and France. In some cases, this was followed by total or partial privatization, and in some cases once again followed by renewed nationalization. A more mild form of such uncertainties is that energy production, transportation, and distribution are gener- allysubjecttoconsiderableregulatoryoversightandregulatoryuncertaintydueto their importance or their monopolistic or oligopolistic nature. In Canada, various regulatory bodies regulate international, inter- and intra-provincial aspects of oil, gas,andelectricutilitiesbyestablishingrevenuerequirements. Concernswithenergyprovisionincludeitsinterrelationshipwithpoliticalactiv- ityanditsrelationwithcorporatesocialresponsibility(CSR)performance.Sincea country’s economy, natural security, standard of living, and the quality and sustainability of its environment are highly linked to its access to energy, energy supply has served as a basis for either political co-operation or conflict between countries.TheUS-ledIraqWarhasbeencriticizedasa“warforoil.”Amorerecent Foreword vii exampleincludesEurope’s(arguably)more-mutedreactioncomparedtoCanadato the territorial expansions of Russia. Casual observation would suggest that the difference is due to Canada’s nondependence and Europe’s large dependence on naturalgasimportsfromthecountrywiththeworld’slargestnaturalgasreserves. Energy’snegativecontributiontoclimatechangeandtheuncertaintyofitslong-run sustainability has increased the importance of using natural gas and developing alternativeenergysources,including“clean”coal,andwindandsolarpower. Evenmoretroublingfromasocietalperspectivearecatastrophicevents,partic- ularlywithnuclearpowergeneration.Theseinclude threemajorreactor accidents (i.e., Chernobyl, Three Mile Island, and Fukushima No. 1). At least 33 serious incidentsandaccidentsatnuclearpowerstationscanbeidentifiedsincethefirstwas recorded at Chalk River in Canada (source: http://www.theguardian.com/news/ datablog/2011/mar/14/nuclear-power-plant-accidents-list-rank). Likeitsthreepredecessors,thisbookisamustreadsinceitaddressesmanyof theissuesidentifiedaboveinacarefulandrigorousfashion.Topicscoveredbegin withinnovationsandshocksinenergymarketsinChap.2,continuewiththeimpact ofoilpriceshocksonindustriesdifferentiatedbytheiroilsensitivitiesinChap.3, theeffectofproductiondecisionsbyproducercartels(OPEC)onthemarketvalues of publicly traded European firms and the Brent crude oil price in Chap. 4, the impactofCSRperformance(bothstrengthsandweaknesses)onaccountingperfor- manceinChap.5,therelationshipbetweenrenewableandnon-renewableelectric- ityconsumptionandeconomicgrowthforcountriesdifferentiatedbytheirlevelof income in Chap. 6, a case study dealing with the possibility of implementing renewableelectricityintheformofmobilebiodieselusingsocialcapitalandsocial franchisingtoconnectpeopleandcapitalinIndonesiainChap.7,developmentsin the early stages of the liberation process of the Turkish domestic gas market in Chap. 8, the function and effectiveness of the Turkish Energy Market Regulatory Authoritythatdeterminestherevenuerequirementsusingthepricecapmethodin Chap. 9, an examination of the impact on electricity of government (political) involvement in various countries in Chap. 10, and end with an examination of whether gas and oil futures prices are good predictors of future gas prices in Chap.11. 17October2014 LawrenceKryzanowski Montreal, QC, Canada DepartmentofFinance JohnMolsonSchoolofBusiness ConcordiaUniversity ThiSisaFMBlankPage Contents 1 EnergyTechnology,PolicyandValuation. . . . .. . . . . . .. . . . . . .. 1 Andre´ B.Dorsman,JohnL.Simpson,andWimWesterman PartI InnovationandShocks 2 EnergyInnovationsandtheEconomy:AnHistorical Overview.. . . . . . .. . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. 11 BertScholtens 3 EnergyPrices,SectoralIndicesandRegulation. . . . . . . . . . . . . . . 25 DavidBroadstockandGeorgeFilis 4 OPEC’sInfluenceonEuropeanOilStockReturns. . . . . . . . . . . . . 57 MaartenCroeseandWimWesterman PartII EnvironmentandRenewables 5 TheImpactofEnvironmentalStrengthsandConcernsonthe AccountingPerformanceofFirmsintheEnergySector. . . . . . . . . 83 O¨zgu¨rArslan-AyaydinandJamesThewissen 6 ElectricityConsumption,GDPandRenewables. . . . . . . . . . . . . . . 109 M.ErdincTelatar 7 RenewableEnergyinIndonesia:IntegratingHumanCapital andMoneyFlows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 NiekVerkruijsse,BartjanPennink,andWimWesterman PartIII FossilFuelRegulation 8 LiberalizationProcessandLegalAspectsoftheTurkishNatural GasMarket. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 CaferEminog˘lu 9 EfficiencyandServiceQualityAnalysesoftheNaturalGas DistributionCompanies:ACaseStudyofTurkey. . . . . . . . . . . . . 165 OkanYardımcıandMehmetBahaKaran ix