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Pioneering Energy Flow Transformation in Emerging Markets

by David Aldred, Treasury and Trade Solutions (TTS) Sales Head for Middle East, North Africa, Turkey and Pakistan and EMEA Energy, Power & Chemicals Sales Head; Amit Agarwal, EMEA Head Liquidity Management Services, TTS, Citi; and Dimitrios Raptis, EMEA Head of Market Management, Liquidity Management Services, TTS, Citi

World markets for energy have entered a period of dynamic change in both supply and demand. Demand for oil and gas in the emerging economies of China, India, south East Asia and the Middle East continues to grow, fuelled by urbanisation and industrialisation. This is motivating energy companies to explore new territories and invest in production and logistics facilities on one hand, and find efficient means of selling and collecting cash in high-demand regions on the other. The challenge is that emerging supply and demand economies are often amongst the world’s most complex markets, typically with considerable market and regulatory restrictions. The dilemma for CFOs and treasurers of energy companies is therefore how best to manage local idiosyncrasies in key supply and demand countries whilst fulfilling wider corporate objectives. The deployment of a sophisticated cash management strategy that will enable the optimisation of working capital and improve the efficiency of liquidity flows is critical.

Investment challenges for energy companies

According to the International Energy Agency’s World Energy Investment Outlook 2013, published in November 2013, more than $1.6tr was invested in 2013 to provide the world’s consumers with energy, a figure that has more than doubled in real terms since 2000. Much of this cost is to offset declining production from declining oil and gas fields and to replace power plants and other assets that are reaching the end of their productive life, leading to high capital requirements not only upfront but on an ongoing basis. The challenge for multinational energy corporations is not only the level, but also the geographies in which this investment needs to be directed to, many of which are restricted markets with limited currency convertibility and liquidity constraints. While the markets in which energy companies are increasing their investment are diverse, from Kazakhstan to Nigeria, Russia to Iraq, there are common characteristics in the cash, risk and liquidity challenges in these high-growth, high-supply markets.

Similarity of risks across diverse markets

Corporate investment in complex emerging markets is a long-term, dynamic undertaking, with long project lifecycles and diverse cash flow models that entail frequent and sizable cross-border movements of funds in local and foreign currency. Very often, such projects involve dealing with unfamiliar counterparties and joint ownership structures, typically with state-owned enterprises, leading to further liquidity and risk complexities. These are exacerbated by political risks in certain markets, challenging regulatory environments and market restrictions on currency convertibility and cross-border liquidity which in turn leads to fragmented balance positions frequently known as ‘trapped’ cash. Furthermore, volatility on interest and exchange rates of these currencies add direct and indirect costs to the cash management structure and subsequently to company’s balance sheet