Enterprise Risk Management: From Incentives to Controls, 2nd Edition

CHAPTER 17

Energy Firms

The energy industry is one of the largest in the world. Energy sources are crucial to the functioning of modern economies, and global demand increased steadily during the twentieth century. The trend shows no sign of stopping: world energy consumption is forecast to grow by around 60 percent between 1997 and 2020, with most of that growth coming from the emerging markets.

Additionally, the United States, which imports about 20 percent of its energy needs at present, is projected to become close to self-sufficient by 2035 due to the rising domestic production of oil, shale gas, and bioenergy, as well as the improved efficiency of fuel transportation.1 For example, oil production in the United States has so greatly accelerated that the United States is expected to overtake Saudi Arabia to become the largest global oil producer by the mid 2020s; U.S. production of natural gas is also set to increase substantially in this time period, which will help to contribute to self-sufficiency.2 Simultaneously, the renewable energy market will continue to grow, increasing its market share for electricity generation from 20 percent in 2010 to 31 percent by 2035. This is an unprecedented growth track that is largely possible because of the many advancements in energy technology—for example, shale gas fracking—which we will discuss later in the chapter.

Such growth makes it even more important that energy companies manage their risks effectively, as we will see in the next ...