REAL ECONOMY BLOG | May 17, 2023

In this week’s energy industry roundup, we examine a new federal rule that allows certain electric utilities to recover cybersecurity investment costs, the bearish oil market and the impact of wildfires in Canada.

New FERC rule for rate-based recovery of cybersecurity investments

The Federal Energy Regulatory Commission earlier in May issued a final rule, effective July 3, that will allow certain electric utilities to recover the cost of cybersecurity investments through rate incentives.

Electric utilities have long been subject to cybersecurity requirements known as the North American Electric Reliability Corporation (NERC) Critical Infrastructure Protection (CIP) standards. The objective of these requirements is to reduce the risk from cyberattacks on critical U.S. electric infrastructure, but their scope and approach so far has been to prioritize higher levels of security on higher-risk assets (e.g., generation plants, transmission lines, substations). This approach makes sense, but recent physical attacks on smaller-scale facilities such as the one on two substations in Moore County, North Carolina highlight that a successful cyberattack on these comparatively lower-risk facilities could have significant impacts to the public.

The new FERC rule incentivizes investments in cybersecurity for facilities and technologies that are not covered by existing regulations such as NERC CIP. It can be difficult for many electric utilities to recover investments in cybersecurity, so where there is no regulation requiring certain cybersecurity tools, assessments or processes, it can be a hard business case to make. The new rule hopes to make that business case stronger and easier for executives.

Here are some of the highlights of the rule:

• Utilities can defer cost recovery of cybersecurity investments for up to five years.
• Eligible investments include technologies (including hardware and software), operational capabilities, or services that enhance the security posture of public utilities (referred to as “advanced cybersecurity technology”).
• Given the broad definition of advanced cybersecurity technology, FERC will maintain a list of pre-qualified investments that will not require justification (except to prove that their adoption is voluntary). Items on the initial list include:
  • Participation in the Cybersecurity Risk Information Sharing Program (CRISP) or other voluntary cybersecurity threat information sharing program.
  • Expenditures associated with internal network security monitoring within the utility’s cyber systems, which could include IT cyber systems and/or operational technology cyber systems.
• Items not pre-qualified may also be submitted for approval on a case-by-case basis, considering whether the investment is voluntary and implements at least one security control from industry security frameworks or guidelines.

Public programs such as these will be especially important for small to medium-sized utilities who often lag larger, more regulated utilities in their cybersecurity posture. Although this rule will result in increased electricity costs to consumers, a grid that is more reliable and resilient against cyberattacks will be a net benefit to consumers in the long run.

Oil bearish, at least for now

While last month’s OPEC production cuts lifted oil prices, that spike was short lived; prices have since fallen back to where they were before the cut. At the start of this week, oil prices were trading in the low 70s, with Brent crude at $74.79 per barrel and West Texas Intermediate at $70.65. While this 1.5% increase since close on Friday May 12 was mostly related to the impact of Canada wildfires on production, it is still a 13% decrease since the start of the year, according to Bloomberg.

There are many factors, short term and long term, affecting prices. Recession fears are one major driver behind the price drop. In the United States, Wall Street is bracing for fallout amid debt ceiling uncertainty as the government grapples with a potential debt default. A default scenario will likely cause an increase in borrowing costs (interest rates) and spark a lack of confidence in the economy, which translates into bearish sentiment around oil demand. Another key factor is China, a significant driver in worldwide oil demand. Swings in the economy and oil demand outlook in China heavily affect oil prices globally. China’s April consumer price index missed expectations, according to Reuters, and reopening efforts have been less successful than expected, adding to bearish sentiment.

While demand uncertainty together with a strong dollar have equated to a price dip for oil, we expect market conditions to tighten in the latter part of the year. While China’s reopening has been slower than expected, slower does not mean stalled forever; we expect demand out of China will eventually return to pre-pandemic levels. Another situation that could impact prices is speculation that G7 countries plan to further tighten sanctions on Russia (broadening the list of banned products) which would take more oil off the market and reduce supply.

In addition to these factors, we are entering the summer air travel and driving season which typically increases demand for oil. The International Energy Agency recently raised its forecast for global oil demand this year by 200,000 bpd to 102 million bpd, according to Reuters. With so many wildcards in play, it will be important to watch these key market indicators through the summer to gauge where the market will end up in the latter half of 2023.

Canada wildfires and oil production

Raging wildfires in Canada’s Alberta province have forced some oil producers in the region to curtail or halt production. In addition to leading to the evacuation of thousands of people, the fires have “primarily affected light oil and natural gas producers, who shut in operations as a precaution,” Reuters reported.

The production pause by numerous companies in Canada’s top oil-producing region comes at a time when oil prices have fallen since the start of the year. Depending on how long the fires stymie operations, we could see a spike in prices.

But the impact on supply is just one result; Alberta’s wildfires also underscore the importance of resilient infrastructure and disaster recovery planning for oil and gas producers. From hurricanes to fires, natural disasters can have a devastating impact on oil and gas production, making it crucial to have a plan in place for resuming operations. While the fires’ impact on production may cause a temporary spike in prices, companies should first and foremost focus on the safety of people in the region, which includes a clear evacuation plan for oil and gas workers.

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