Hot Topics for 2015
With the New Year well under way, natural resources companies are beginning to develop a strong idea of how the events of 2014 are influencing the shape of things to come in 2015. Below, we’ve put together a list of our top five “Hot Topics” for companies operating in the natural resources sector to have on their radars as 2015 progresses:
- Price Declines
In 2014, the energy sector experienced a return to commodity price volatility, which analysts don’t expect to abate anytime soon. With supply continuing to outpace demand, several of the industry’s resources saw price declines. Iron ore prices have fallen 50 percent since the start of 2014, putting pressure on all but the lowest cost operators, and oil experienced a similar downtown as the price dipped to its weakest point since 2009, falling below $60/bbl. Excess supply and OPEC’s recent announcement that it would not reduce production are expected to continue to drive down prices for the first half of 2015. Analysts are also seeing a tightening in the gold market. Gold forward offer rates (GOFO rates) slipped to a 14-year low, and the marketplace saw a shift from Western investors to Asian investors. This fluctuation, unlike oil’s, is expected to stabilize, however; Australia & New Zealand Banking Group Ltd. predicts that, as demand in China and India continues to increase, prices will improve in tandem.
- Productivity Constraints
As the sector grapples with falling prices, companies will be forced to look for ways they can improve productivity at lower costs. Organizations will need to overcome the capital dilemma, the tough choice between allocating the available—yet shrinking—cash reserves toward operational project development or investing in projects to protect future reserve replacement. Those companies who find the right path through the dilemma and establish new disciplines for prioritising cash allocations will no doubt see their efforts bear fruit as they shore up business practices in a weaker commodity price environment.
- Resource Reporting
In the midst of battling global fluctuations, companies are also undergoing waves of increased reporting requirements aimed at increasing transparency. For example, the U.K. government introduced legislation requiring companies operating in the extractive industries sector to annually report the payments made to governments of the countries in which they operate (Chapter 10 Accounting Directive 2013/34/EU). Alongside this directive, additional positive steps have been taken by the Extractive Industries Transparency Initiative (EITI) in revisions to its Standard, which requires disclosure of state-owned projects and recommendations for implementing countries to maintain public registers of the beneficial ownership of their natural resources. With further modifications to reporting requirements sure to come, the energy sector will clearly need to concentrate on maintaining compliance in 2015.
- Corporate Social Responsibility
Corporate social responsibility (CSR) initiatives for companies within the natural resources sector have increased dramatically throughout the last decade, a trend only set to continue with increased reporting obligations on the horizon. As the industry continues to adjust, companies must ensure that they are not only treating local communities affected by their operations responsibly, but that they are also meeting proper licence obligations for development/employment of their domestic workforce and delivering on project and infrastructure commitments.
- Environmental Challenges
In the wake of ever-growing pressure from policymakers and the public surrounding operational practices and their associated environmental impact, natural resource companies should be prepared to spend a significant amount of their 2015 financial and managerial resources mitigating these risks. The ongoing and future development of shale and tar sands, coupled with the exploration and technological development of underground coal gasification projects, is sure to have companies busy. Through proactive investigation into techniques that will allow them to continue to reap and prolong the benefits provided by the land while complying with federal and local regulations, organizations will reduce their risk of operational disruptions. While these challenges are among the most pressing we expect to see in 2015, the natural resources sector is constantly evolving, and new risks could emerge at any time. It is difficult to predict what the future will hold, but through careful stakeholder management, continued cost control and capital allocation, natural resource companies can identify opportunities and manage the transition into the New Year. This guest post has been co-authored by Louise Sayers and Ryan Ferguson, Audit Directors with the Natural Resources practice at BDO, LLP in the United Kingdom. They can be reached at email@example.com and firstname.lastname@example.org.