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 / Autumn 2008 / Issue 52(originally published by Booz & Company)


Fulvio Conti: The Thought Leader Interview

The ways that energy is used will also change as demand grows. Electric power in the future will be finely tailored for individual consumers. The consumer of the Western industrialized world has more sophisticated energy needs than the first-time energy user living in, say, an underdeveloped country in Africa. But you have to serve both. You need innovation for serving the former, and efficiency and size for serving the latter; and for both, you need prices that adjust to reflect the real market costs and type of service.

The second pressure is the evolution of the oil-producing countries. You might remember the days, years ago, when the “seven sister” oil companies — the past versions of Exxon, Royal Dutch Shell, BP, Mobil, Chevron, Gulf, and Texaco — dominated energy supply. These companies grew out of the colonial activities of the previous century. In 2007, the Financial Times identified the “new seven sisters”: Saudi Aramco, Gazprom (in Russia), China National Petroleum Corporation (CNPC), the National Iranian Oil Company (NIOC), Petróleos de Venezuela (PDVSA), Petrobras (in Brazil), and Petronas (in Malaysia). These are all state-owned or state-created natural gas and oil companies from energy-producing countries, emerging markets rich with natural resources. These companies are all looking to move into the consumer energy market and get a portion of the full value chain.

The pressure from these companies is so heavy that the regulatory walls are crumbling. It is absolutely normal in Europe or North America to go to a service station and fill your car with gasoline that bears the marketing brand of a Libyan, Saudi, or Venezuelan company. You’ll find the product is as good as oil from a traditional multinational producer. The same will happen with other energy commodities. And for regulators or protected utilities that resist, the only impact will be incrementally higher pricing.

Some power companies from energy-consuming countries are reacting to this by going upstream: trying to control more sources of supply. These two waves of expansion are colliding with each other.

S+B: And the third pressure?
CONTI: That is climate change. You’d better believe that this is going to be a major issue, because it may be too late to resolve the problem later on. And environmental sustainability also happens to be a good business proposition. If you’re an energy company, you have to work with this reality. You want to have the most diverse sourcing of your raw materials possible to effectively combat climate change.

The combination of these three elements brings a new level of pressure to local energy markets. Large operators are already changing their behavior — they’re entering new markets as rapidly as they can — and in the process, they’re consolidating the industry. They see consolidation as one way of gaining scale, diversifying, and establishing the purchasing power they need to negotiate with large exporting countries. That’s how they expect to de­liver value over time to shareholders.

Companies that don’t appreciate these pressures may be wiped out. But some “in-between” midsized energy companies are trying to develop an integrated way to serve the needs of the emerging markets along with the more mature energy markets that they already know well. Our own company, Enel, is one of these in-between producers trying to find a way through this new reality.

S+B: How rapidly has this geopolitical shift taken place? Is this a sudden or a slow transition?
CONTI: It has always been present, to some extent. It has been hidden in the shadows of governments that were protecting their local, “small garden” economies. But the new realities became evident, in my view, around 2003, when the oil price reached $30 a barrel. From that moment on, diversity of fuels be­came paramount, and scale became important to the power sector. And this is now driving the industry to an accelerated program of in­vestments in the next wave of power generation.

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