One of the most exhilarating aspects of working in the energy business – at least for a humble economist such as me – is that companies think and act on a timescale measured in decades. Projects are built to last for 30-40 years, and often longer still. This is in sharp contrast to the government where timescales are measured in hours and where long-term means the not-too-distant horizon of the next election. It is also in contrast to sectors such as telecommuications where the pace of change is so fast that thinking more than five years ahead makes no sense. But, as the current slide in oil, gas and coal prices demonstrates, a long-term perspective does not make investment judgments easier.
Most oil and gas fields, coal mines, nuclear power plants, wind farms and other energy sources are designed to last for decades. The construction time can be long: a liquefied natural gas plant can take six or eight years; a new nuclear power station a decade or more especially if the technology is unproven or excruciatingly complex. Payback only comes when the plants have been on stream for several years. Beyond that, however, the operating costs are usually low and the cash flow is strong and secure. Or, at least it should be. Read more