Henk Krijnen

Consultant decision, uncertainty and risk analysis
Last Updated: July 31, 2017
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When developing a strategy or making investment decisions, there will be many uncertainties that need assessment. These can range from cost and timing issues to broader questions at the macro level, for example political, regulatory or social developments. A way to get to grips with the latter category is by using ‘scenario analysis’, sometimes called ‘scenario thinking’ or ‘scenario planning’.

A scenario in this context is an alternative future: a coherent narrative of a set of developments, trends and events that could unfold within some defined environment space. Examples of such spaces are: a country, a group of countries, a sector, a city, the world. This is the environment space within which an entity (company, organization) anticipates operating over a predefined time frame, usually somewhere between 10 and 40 years. By articulating multiple such scenarios, each internally consistent but distinctly different, the entity is able to fathom various significant external (contextual) uncertainties that might have an impact on its future well-being or existence.

The purposes of scenarios can be multiple. They are a framework for discussion and strategy development. The entity can use them to engage with external parties. They can be a means to bridge gaps between different interests. A famous example of that are the Mont Fleur scenarios in South Africa, composed in 1991. In this article I however focus on the use of scenarios for decisions.

The question is how, once the scenarios are available and digested, the entity can use these in decision making. The common basis for investment or strategic decisions is some quantification of opportunity attractiveness coupled to various forms of risk analysis. Descriptions of alternative futures, however interesting they may be, do not easily find a place within the decision processes. For example, in most cases it is not (credibly) possible to assign probabilities to scenarios to sharpen the outlook (in another article I will discuss situations when this may nevertheless be an option). There is not a most likely future that can be used as a basis for landing the decision. The fuzziness around the scenario concept makes it difficult to appreciate its use for concrete decisions. This is the reason for the skepticism that the scenario approach encounters in many organizations. It should, however, be accepted that scenario analysis, like any quantitative modelling for that matter, does not eliminate the uncertainties. It justs helps to map them out, frame them, categorize them, discuss them. But we will see that meaningful operationalization of scenarios is certainly possible.

I distinguish three ways of incorporating scenario analysis in the decision making process.

Firstly there is the pervasive impact of the influence on senior leaders and decision makers within the organization of the insights that are brought about by the scenario analysis process. When a significant decision is taken, the underpinning data and analysis, of course, play a crucial role. However, the experience, background and intuition of decision makers is also important. In decision boards they will bring their own perceptions and judgements to the table, calibrating these against the analysis results and information presented to them. The insights from scenarios will assist shaping the perceptions of decision makers of the future contextual environment. At that level, they will have clear views of their own about themes such as the market, (geo)politics, technology and societal developments. Scenarios will enrich these perspectives and allow decision makers to adapt and adjust their thinking as appropriate. A well known characterization is that scenarios act like ‘memories of the future’. Of course it is then a great benefit if senior leaders within an organization are involved themselves in devising the scenarios to the extent practical.

Secondly there is the option of qualitatively stress testing investment decisions, but in particular strategies, against the different scenarios developed. This is what Kees van der Heijden, in his book Scenarios, The art of strategic conversation, called ‘wind tunneling’. This is about creating a matrix with the scenarios on one axis and the various strategy options on the other axis. Each box triggers a discussion of how attractive a specific strategy option will be under a particular scenario. This could result in qualitative attractiveness scoring in some form. Also here, the discussion associated with this process is more important than the resulting overview.

Thirdly, a quantitative approach is possible. The starting point is the key decision variable, for example the (aggregate) NPV of the investment or strategy. This variable is decomposed in its components (revenues, costs, tax) and the chain of influences on these components is mapped out. This is best done with an influence diagram so as to also visualize the interrelationships. In the contexts of the various scenarios, reasonings and quantitative assumptions are developed for the key influences. This is worked through to the level of the NPV: different NPVs under different scenarios (even better: NPV ranges under different scenarios). For the quantitative analysis techniques from the econometrics discipline can be useful (e.g. regressions). Sometimes a system dynamics model can be of assistance. But it does not need to be very complicated. Developing rounded estimates of some key external drivers whilst considering the interrelationships can be good enough. This is in fact what oil companies do (to some extent) when they annually consider a scenario based outlook for the oil price, link this to an assumption about cost escalation, exchange rates and a future price for carbon emissions.

There is no scheme that will allow collapsing all considerations into one number of attractiveness of an investment opportunity or strategy for the benefit of decision makers (except perhaps by judgementally assigning a ‘score’). But the earth is not flat and projecting its surface on a plane leads to substantial geometric distortions. Likewise, the richness of a scenario based analysis should not be kept away from decision makers, be it that the insights need to be adequately presented. Vice versa, decision makers should be prepared to digest the perspectives offered by the scenario approach and contrast that with their own perceptions, even though in the end the decision itself may be quantifiable by a single bit: 0 or 1.

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Bioethanol Market to reach 68.95 Billion USD by 2022, Growing at a CAGR of 5.3%

The global bioethanol market is estimated at USD 53.19 Billion in 2017 and is projected to reach USD 68.95 Billion by 2022, at a CAGR of 5.3% from 2017 to 2022. The market is driven by the increased demand for bioethanol from various end-use industry segments, such as transportation, pharmaceuticals, cosmetics, alcoholic beverages, and others. The transportation end-use industry segment led the global bioethanol market, in terms of volume, in 2016. 

Download PDF Brochure @ https://www.marketsandmarkets.com/pdfdownloadNew.asp?id=131222570

Major Growth Drivers: 
  • Government policies and mandates
    • Agricultural policies
    • Blending mandates
    • Subsidies and support
    • Tariffs & tax incentives
  • Volatile petroleum prices
  • Increase in awareness of climate change and green-house gas emission
  • Higher octane rating at a lower price than unleaded/pure gasoline

Starch-based feedstock is estimated to be the largest feedstock type in the global bioethanol market.

The starch-based segment is estimated to be the largest feedstock segment of the global bioethanol market. This feedstock type uses corn, barley, wheat, and other starch raw materials as feedstocks to produce bioethanol. Corn has the highest percentage of starch, about 70-72%. The growth in this segment is attributed to the rising demand from Asia Pacific and South America and the wide variety of feedstocks that can be used to produce starch-based bioethanol. The feedstocks used are available in almost all over the world.

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Alcoholic beverages segment is estimated to be the fastest growing end-use industry segment of the global bioethanol market.

Among end-use industries, the alcoholic beverages segment is estimated to be the fastest growing end-use segment of the global bioethanol market. The growth of this segment is attributed to the increasing purchasing power in developing countries and the growing acceptance of drinking alcoholic beverages in some cultures.

North America contributes as the largest market of bioethanol

In 2016, North America accounted for largest share of the bioethanol market. Currently, the US is the largest market for bioethanol in North America, and is expected to continue to be the largest market till 2022. In the US, the demand for bioethanol is expected to increase due to the increasing government and environment regulations in the country. Regulations such as the Federal Reformulated Gasoline (RFG) and E15 regulations contribute to the growing use of bioethanol in fuels. The other driving factor for the bioethanol market is the low price of corn, which is a prime feedstock used in the production of bioethanol in the country. Many bioethanol manufacturers are based in this region.

Key companies profiled in the global bioethanol market research report include Archer Daniels Midland Company (US), POET LLC (US), Green Plains (US), Valero Energy Corporation (US), Flint Hills Resource (US), Abengoa Bioenergy SA (Spain), Royal Dutch Shell plc (Netherlands), Pacific Ethanol, Inc. (US), Petrobras (Brazil), and The Andersons (US).

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December, 11 2019
SHORT-TERM ENERGY OUTLOOK
Forecast HighlightsGlobal liquid fuels
  • Brent crude oil spot prices averaged $63 per barrel (b) in November, up $3/b from October. EIA forecasts Brent spot prices will average $61/b in 2020, down from a 2019 average of $64/b. EIA forecasts that West Texas Intermediate (WTI) prices will average $5.50/b less than Brent prices in 2020. EIA expects crude oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of next year.
  • On December 6, the Organization of the Petroleum Exporting Countries (OPEC) and a group of other oil producers announced they were deepening production cuts originally announced in December 2018. The group is now targeting production that is 1.7 million barrels per day (b/d) lower than in October 2018, compared with the former target reduction of 1.2 million b/d. OPEC announced that the cuts would be in effect through the end of March 2020. However, EIA assumes that OPEC will limit production through all of 2020, amid a forecast of rising oil inventories. EIA forecasts OPEC crude oil production will average 29.3 million b/d in 2020, down by 0.5 million b/d from 2019.
  • Beginning on January 1, 2020, the International Maritime Organization (IMO) is set to enact Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), which lowers the maximum sulfur content of marine fuel oil used in ocean-going vessels from 3.5% of weight to 0.5%. EIA expects that starting in the fourth quarter of 2019, this regulation will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel to create compliant bunker fuels. EIA forecasts that U.S. refinery runs will rise by 3% from 2019 to a record level of 17.5 million b/d in 2020, resulting in refinery utilization rates that average 93% in 2020. EIA expects one of the most significant effects of the regulation to be on diesel wholesale margins, which rise from an average of 45 cents per gallon (gal) in 2019 to a forecasted peak of 61 cents/gal in the first quarter of 2020 and an average of 57 cents/gal in 2020.
  • EIA data show that the United States exported 90,000 b/d more total crude oil and petroleum products in September than it imported. This is the first month recorded in U.S. data that the United States exported more crude oil and petroleum products than it imported. U.S. imports and exports records of crude oil and petroleum products started on an annual basis in 1949 and on a monthly basis in 1973. EIA expects total crude oil and petroleum net exports to average 570,000 b/d in 2020 compared with average net imports of 490,000 b/d in 2019.
  • EIA expects U.S. crude oil production to average 13.2 million b/d in 2020, an increase of 0.9 million b/d from the 2019 level. Expected 2020 growth is slower than 2018 growth of 1.6 million b/d and 2019 growth of 1.3 million b/d. Slowing crude oil production growth results from a decline in drilling rigs over the past year that EIA expects to continue into 2020. Despite the decline in rigs, EIA forecasts production will continue to grow as rig efficiency and well-level productivity rises, offsetting the decline in the number of rigs.
  • EIA estimates that propane inventories in the Midwest—Petroleum Administration for Defense District (PADD) 2—were 22.0 million barrels at the end of November, 17% lower than the five-year (2014–18) average for the end of November. Colder-than-normal temperatures and strong grain drying demand in November contributed to large draws on Midwest propane inventories. Also, Western Canadian rail shipments of propane to the Midwest have declined since the opening of a new propane export terminal in Western Canada in May. EIA forecasts Midwest inventories at the end of March will be 32% lower than the five-year (2015–19) average and the lowest for that time of year since 2014.

West Texas Intermediate (WTI) crude oil price

Natural gas
  • EIA estimates that the U.S. total working gas inventories were 3,616 billion cubic feet (Bcf) at the end of November. This level was about equal to the five-year (2014–18) average and 19% higher than a year ago. EIA expects storage withdrawals to total 1.9 trillion cubic feet (Tcf) from the end of October to the end of March, which is less than the five-year average winter withdrawal. A withdrawal of this amount would leave the end-of-March inventories at almost 1.9 Tcf, which would be 8% higher than the five-year (2015–19) average.
  • The U.S. benchmark Henry Hub natural gas spot price averaged $2.64 per million British thermal units (MMBtu) in November, up 31 cents/MMBtu from October. Prices increased as a result of November temperatures that were colder than the 10-year (2009–18) average. EIA forecasts the Henry Hub spot price to average $2.45/MMBtu in 2020, down 14 cents/MMBtu from the 2019 average.
  • EIA forecasts that annual U.S. dry natural gas production will average 92.1 billion cubic feet per day (Bcf/d) in 2019, up 10% from 2018. EIA expects that natural gas production will grow much less in 2020 because of the lag between changes in price and changes in future drilling activity. Low prices in the third quarter of 2019 will reduce natural gas-directed drilling in the first half of 2020. EIA forecasts natural gas production in 2020 will average 95.1 Bcf/d.

World liquid fuels production and consumption balance

Electricity, coal, renewables, and emissions
  • EIA expects the share of U.S. total utility-scale electricity generation from natural gas-fired power plants will rise from 34% in 2018 to 37% in 2019 and to 39% in 2020. EIA forecasts the share of U.S. electric generation from coal to average 25% in 2019 and 22% in 2020, down from 28% in 2018. EIA’s forecast nuclear share of U.S. generation remains at about 20% in 2019 and in 2020. Hydropower averages a 7% share of total U.S. generation in the forecast for 2019 and 2020, similar to 2018. Wind, solar, and other nonhydropower renewables provided 9% of U.S. total utility-scale generation in 2018. EIA expects they will provide 10% in 2019 and 12% in 2020.
  • EIA expects U.S. coal production in 2019 to total 697 million short tons (MMst), which would be an 8% decline from the 2018 level. In 2020, EIA expects a further decrease in total U.S. coal production of 14%, to an annual total of 601 MMst, reflecting continued idling and closures of mines as a result of declining domestic demand.
  • EIA expects U.S. coal exports to total 93 MMst in 2019, and then decline by 8 MMst to 85 MMst in 2020. U.S. coking coal currently faces challenges from a global oversupply of steel, particularly in the fourth quarter of 2019. Steam coal exports have been dampened by high stockpiles in Europe and India, a top destination for U.S. shipments.
  • EIA expects U.S. electric power sector generation from renewables other than hydropower—principally wind and solar—to grow from 411 billion kilowatthours (kWh) in 2019 to 471 billion kWh in 2020. In EIA’s forecast, Texas accounts for 20% of the U.S. nonhydropower renewables generation in 2019 and 22% in 2020. California’s forecast share of nonhydropower renewables generation falls from 15% in 2019 to 14% in 2020. EIA expects that the Midwest and Central power regions will see shares in the 16% to 18% range for 2019 and 2020.
  • EIA forecasts that, after rising by 2.9% in 2018, U.S. energy-related carbon dioxide (CO2) emissions will decline by 1.4% in 2019 and by 2.2% in 2020, partly as a result of lower forecast energy consumption. For 2019, EIA estimates there was less demand for space cooling because of cooler summer months, with an estimated 5% decline in U.S. cooling degree days from 2018, when temperatures were significantly higher than the previous 10-year (2008–17) average. In addition, EIA also expects U.S. CO2 emissions in 2019 to decline because the forecast share of electricity generated from natural gas and renewables will increase, and the share generated from coal, which is a more carbon-intensive energy source, will decrease.

U.S. natural gas prices

U.S. residential electricity price

December, 11 2019
INDONESIA’S DECOMMISSIONING CHALLENGE REPORT

A report by Nicholas Newman

Many of Indonesia’s oil and gas fields, both on and offshore, are coming to the end of their commercially viable operational lifespan. More than 60% of Indonesia’s oil and more than 30% of gas production comes from late-life-cycle resources spread across the world's largest island country. Despite investment and use of enhanced oil field recovery measures, as well as increasing automation to extend the economic lifespan of these assets, decommissioning will soon become necessary.

However Indonesia, like many countries new to the prospect of decommissioning energy infrastructure, face many key technological, fiscal, environmental, regulatory and industrial capacity issues, which need to be addressed by both government and industry decision makers.

This report, commissioned by the consulting and advisory arm of London and Aberdeen based Precision Media & Communications, aims to take a look at many of the issues Indonesia and other South East Asian oil producing nations are likely to face with the prospect of decommissioning the region's oil and gas aging energy infrastructure both onshore and offshore... To find out more Click here

December, 09 2019