Energy: An evolving and volatile industry

However the sector is a somewhat volatile industry, with both traditional and new energies being cost and labour intensive, sometimes with years of lead times, while disasters such as the BP Deepwater Horizon disaster in 2010 can have a dramatic effect on reputation as well as the balance sheet.

The returns of the 12 funds identified in a quick search of the IMA sectors for energy funds demonstrate the wide range of performance.

For the three years to 20 June 2014 the best performing fund of the 11 with a three-year track record – Guinness Global Energy - delivered a return of 19.52 per cent.

In contrast at the other end of the scale, the Schroder ISF Global Small Cap Energy recorded a loss of 25.17 per cent, according to FE Analytics.

This range of returns shows not only the diversity of energy funds in terms of their returns, but also in the underlying investments.

For example for the 12 months to 20 June, the Guinness Global Energy remains in the top two of the 12 energy funds with a return of 30.15 per cent, while the previously poorly performing Schroder ISF Global Small Cap Energy fund soars up to third place with a positive return of 29.89 per cent.

Meanwhile the energy industry is constantly evolving, whether it is the issue of stranded assets and how energy and mining companies will deal with these, or the growing area of shale gas and oil and the controversial ‘fracking’ process, the risks and the opportunities abound.

The latest BP Statistical Review of World Energy 2014 states that 2013 saw an acceleration in the growth of global energy consumption, in spite of a stagnant global economy.

It notes: “Emerging economies nonetheless continue to dominate global energy demand, accounting for 80 per cent of growth last year and nearly 100 per cent of growth over the past decade.

“Regionally, energy consumption growth was below average everywhere except North America. Energy production continued to be impacted by geopolitical events.

“Oil production in Libya suffered the world’s largest decline in the face of renewed civil unrest and the production of oil and gas was disrupted in a number of other countries as well.

“In the face of these disruptions and heightened risks to supply, average oil prices exceeded $100 per barrel for a third consecutive year, despite massive supply growth in the US.

“Driven by massive investment in shale and other ‘tight’ formations, the US saw the world’s largest increase in oil production last year, offsetting the numerous disruptions seen elsewhere and keeping prices stable.

“Indeed, the US increase in 2013 was one of the biggest oil production increases the world has ever seen.”

But while the report paints a relatively positive picture of the global energy sector, Frances Hudson, investment director and global thematic strategist at Standard Life Investments, warns “if you look at the numbers rather than the words it doesn’t perhaps look as good”.

She points out the report notes wind consumption growing at roughly 20.4 per cent and solar rising at 32 per cent, but these energy sources are still relatively small in the overall energy mix.

“The wind consumption is equivalent to roughly 2.86m barrels of oil. World oil production was 86.8m barrels a day, so wind has grown to 2.86m barrels, it is roughly 1.1 per cent of primary energy consumption and solar is 566,000 barrels of oil equivalent which is 0.22 per cent,” says Ms Hudson.

“Ten years ago the argument was that once they were up and running [these alternative energy sources] they would start gaining momentum and they’d turn out to be viable, but a lot of the problems with renewable energy sources haven’t gone away.

“Wind power is intermittent, and there are storage problems with various others, such as the sun not shining at night when you might want to use the energy.”

She adds that in October 2013 hydroelectricity counted for roughly 6 per cent of primary energy, nuclear was another 5 per cent and other renewables together such as solar and wind accounted for roughly 2 per cent.

“So they’ve got a way to go before they challenge the big ones,” she adds.

As mentioned in the BP report, the discovery and extraction of shale gas and oil has revolutionised the US energy industry to some extent and there are both concerns and hope that the same could happen in the UK.

In May the British Geological Survey, in association with the UK Department of Energy and Climate Change published an estimate of the amount of shale gas and oil that could potentially be present in the ‘Weald Basin’ in the south east of England.

The survey suggests there could be between 2.2 and 8.57 billion barrels of shale oil in the area, while “no significant gas resource is recognised using the current geological model”.

Meanwhile the published estimate notes that while the figure represents the total amount of oil present in the rocks “it is not known what percentage of the oil present in the shale could be commercially extracted”.

To help determine the potential reserves, the government announced a consultation in May, at the same time as the estimate, on ‘simplified’ rules on shale gas and oil and geothermal underground drilling access, which includes ‘voluntary community payments’ of £20,000 for each well.

Michael Fallon, business and energy minister, argues that shale development will provide both jobs and business opportunities.

“These proposals allow shale and geothermal development while offering a fair deal for communities in return for underground access at depths so deep they will have no negative impact on landowners,” he adds.

But while shale gas and oil has been a success in the US, Ms Hudson points out the system will not necessarily transfer across the Atlantic.

“In the UK I think the bigger issue is they just don’t know [what there is] because the geological make-up of the UK is somewhat different to the US.

“If it is down there you don’t know if the rock formations will give it up easily and the US is a lot less populated than the UK so you’re not fracking under somebody’s house.”

While the government is clearly still pushing for fracking and other alternative forms of energy to reduce reliance on outside sources, particularly given the instability in major energy producing regions of late, there remain some clear risks for investors as well as the potential opportunities.