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Energy Outlook

Oil prices are rocketing, global energy consumption is on the increase, and oil and gas reserves are being depleted at a rate which exceeds the new reserves that are being brought on stream, says David Sneddon of Scottish Equity Partners. However SEP believes that, despite the uncertain outlook, our future energy needs will be met and that technology innovation has a major role to play in delivering that goal.

Oil prices are rocketing, global energy consumption is on the increase, and oil and gas reserves are being depleted at a rate which exceeds the new reserves that are being brought on stream. Adding high geopolitical uncertainty to that, one could conclude there is cause for concern about how much longer our energy needs can be met at prices we can afford.

However SEP believes that, despite the uncertain outlook, our future energy needs will be met and that technology innovation has a major role to play in delivering that goal.

Estimates of the world’s hydrocarbon reserves that are recoverable using current techniques have consistently risen over the last 50 years and now stand at more than 1 trillion barrels. The increase in reserves is a direct result of advances in technology which have helped to find more oil and gas, and in other technologies used to develop reserves in ever more challenging areas and to recover more oil and gas from reservoirs. Examples of this are the new drilling and production technologies which enable drilling in ultradeep water depths of up to 2km and improvement in recovery factors to as much as 35% from just over 20% 20 years ago.

However, it is estimated that the world’s total remaining reserves could be as high as 3 trillion barrels. Significant scope remains in the industry in unexplored and difficult areas which will require new exploration techniques - such as those being developed by ARKeX, the most recent addition to the SEP Energy portfolio, profiled in this issue - and further reductions in the capital costs of new field developments and ongoing operating expenditure to make them viable.

There is no doubt, though, that hydrocarbons are a finite resource and therefore we must be responsible and efficient in their use. Alternative and renewable energy has a key role to play in reducing our consumption of hydrocarbons for energy production and in reducing harmful emissions of CO2 and NOx.

In accordance with the Kyoto protocol the UK Government has set targets of 10% of energy produced to come from renewable sources by 2010, with an aspirational target of 20% by 2020. Various tax incentives and penalties are in place to promote the achievement of these targets and more are likely.

We are all aware of the emergence of windfarms, now a common sight in the UK. There are also many emerging UK wave and tide companies actively engaged in developing new technology to tap in to the Gigawatts of clean renewable power which lies just off our shoreline. Wind has a major role to play in meeting these targets but a shortage of suitable sites and the intermittent nature of the resource means that a balanced approach is required to developing a dependable portfolio of renewable energy generation capacity.

The UK also has many strong prospects in fuel cell technology and over the next few years we can expect to see products for distributed power generation coming on to the market. It will be some years before we drive fuel cell powered cars but battery and hybrid cars are now available and there are many alternative fuels being developed as petrol and diesel replacements.

Today the renewables industry is reliant on subsidies to be competitive but the industry is today where the computer industry was 20 years ago. Judging by the pace of development, it hopefully won’t be long before the industry will stand on its own merits.

David Sneddon
Director of Energy Related Technologies, SEP

Scottish Equity Partners (SEP) is one of the largest independent private equity groups in the UK, and is currently investing from a venture capital fund in excess of £100 million, which is backed by leading UK and European institutional investors.

With offices in Glasgow and London, SEP is one of the most active venture capital investors in the UK and has a strong investment track record. Typically, we invest between £500,000 and £5 million or more, in financings of up to £30 million, in early stage and growing companies in the information technology, healthcare & life sciences and energy related technology sectors. For more details visit www.sep.co.uk