Updated: Dec 27, 2021
2021 was a year of disruption and upheaval but with every crisis, there is a lesson. The events that happened below provide lessons on strategy, risk, and business sustainability. They describe how global issues such as climate change, cybersecurity, and supply chain resilience are impacting businesses. These are the highlights….
1. USA reenters Paris Agreement – January 2021
Climate Change is a global problem that requires global collaboration and commitment to solve.
For this reason, nearly 200 nations have signed on to the landmark accord and committed to limit their greenhouse gas emissions in an attempt to keep global warming below 2 degrees Celsius - preferably below 1.5 degrees Celsius - compared to pre-industrial temperatures. There is an international consensus that developed countries have contributed the most to climate change.
This is on account of their concentration of industry and wealth. In fact, according to the Centre for Global Development, these territories historically contributed to 79% of historical carbon emissions. There is therefore an expectation of leadership from those countries in the fight to reduce carbon emissions. The United States has emitted more CO2 than any other country to date, (ourworldindata.com) which is roughly 400 billion tonnes since the year 1751, 25% of historical emissions.
The global climate agenda was therefore dealt a blow when Former President Donald Trump announced his intent to withdraw from the Paris Agreement Treaty in 2017 with a formal withdrawal in 2019. Given the USA’s global influence, many experts felt that the withdrawal would create an avalanche of countries leaving the agreement thereby slowing international climate action. A lifeline quickly followed however on January 20, 2021 when President Biden on his first day in office, signed the instrument to bring the United States back into the Paris Agreement. clean energies in transportation, electricity, and building sectors, while rapidly moving away from coal, oil and gas.
The world is experiencing extreme weather and it comes with a hefty bill (global weather disasters cost $101 billion in 2021, scientificamerican.com). Global solidarity and collective action from student to business is needed to form a new sustainable energy landscape.
2. Cold Snap in Houston, Storm Uri – February 2021
In February 2021, extreme weather caused massive power outages in Texas. It was recorded as one of the coldest days in more than a century. Besides leaving nearly 5 million customers without electricity, at least 210 people died during the blackouts, of causes including hypothermia and carbon monoxide poisoning.
The event underscored the general unpreparedness of Texas’ energy systems for extreme cold temperatures. It was so significant that it prompted legislators to introduce bills that would require power companies to prepare plants for extreme weather. It offers a much-needed lesson to other territories. It is an opportunity to question, whether your country’s energy systems are engineered for the climate of the future?
The investigation conducted by the Federal Energy Regulation Commission (FERC) cited the root cause as a massive failure of gas-fired generation, caused by a combination of freezing problems in critical components and a shortfall in gas supply. They calculated that gas-fired plants accounted for 55% of the capacity that experienced unplanned outages and reductions in output with another 22% being wind power and 18% coal.
Wind energy was unable to be leveraged as a backup supply, turbine inability to spin due to icing up. Coal and nuclear power systems had a similar fate. This event had several consequences. Spot electricity prices in Texas’ West hub surpassed the grid’s cap of $9,000 per megawatt-hour, a 3,466% increase from the previous week, according to data compiled by Bloomberg.
LNG exports from the U.S. also plummeted after the freeze shut ports and wells. Oil production was also impacted. Permian oil production plunged by as much as one million barrels a day. This reduction impacted the availability of crude production byproducts such as cooking gas and heating fuels creating a rush for firewood. West Texas Intermediate (WTI)futures prices also increased above $60 a barrel for the first time in more than a year.
Notwithstanding the risk drivers, there were limited recovery barriers. The design of the power sector was a weakness. The situation was exacerbated by Texas having limited electrical connectivity to other states. It is the only state with an isolated grid making it unable to access regional emergency supplies from other grids. Regulations also had a part to play. Texas is the only state that does not pay operators to have standby generation for severe weather events. They pay only for available capacity with lean reserve buffers. This incentivizes the maximization of profits during high price peak seasons but doesn’t incentivize market participants to invest in business recovery mechanisms.
Severe weather is no longer unpredictable. Organizations, therefore, have to design weatherproof systems. Governments must foster investment and innovation in energy markets design. A holistic approach must be taken for the energy transition. Sole reliance on renewable energy systems can serve as a point of failure. Systems must therefore be risk-designed for resiliency where they can function in different types of weather.
3. Overturned Boat in Suez Canal – March 2021
On March 23, 2021, a grounded container ship blocked marine traffic for a week in the Suez Canal. One of the fastest shipping routes between Europe and Asia that, transports about 12% of global trade. The event disrupted supply chains and delayed the delivery of raw materials to production sites and finished goods to market. The Ever Given, registered in Panama was sailing to the Netherlands and was passing northwards through the canal on its way to the Mediterranean. The ship blocked the path of other vessels which were trapped in lines in both directions. This event lasted 6 days.
The Suez canal is a transit point for 5% to 10% of the world’s seaborne oil at approximately 3 million barrels of oil per day (marketwatch.com). As such, the blockage sent oil prices climbing on international markets. Fears that the blockage restricted shipments of crude oil caused prices to rise by 6% on international markets according to Reuters. Notwithstanding, those cases, Lloyd’s List estimated that the blockage held up more than $9.6 billion worth of traded goods every day it was stuck in place. The repercussions lasted for months as the resulting backlog for shipping companies and container ports led to product shortages for retailers and supply chain delays for manufacturers.
Whether you are an exporter or importer, distribution and trade vulnerability matters. Besides the pandemic (and there are correlations), “Supplychain risk” can easily be the most significant risk for 2020/2021 faced by the business sector with delays in shipments that have spanned multiple sectors. It comes down to creating multiple options that can be deployed when a crisis hits. Besides redesigning trade routes and sources of supply, detective and predictive analytics can assist in maneuvering supply chain disruptions more cost-effectively.
4. Cyberattack on Colonial Pipeline April 2021
When Colonial shut down its entirety gasoline pipeline system in all of its 57-year history, it came down to a single password! On April 29th, a hack took down the largest fuel pipeline in the U.S. and led to shortages across the East Coast. The company’s system transports roughly 2.5 million barrels of fuel daily from the Gulf Coast to the Eastern Seaboard. The outage led to long lines at gas stations, and higher fuel prices. The disruption was due to a single password. Hackers gained entry into the networks of Colonial Pipeline Co. through a virtual private network account, which allowed employees to remotely access the company’s computer network. The account was no longer in use at the time of the attack but could still be used to access Colonial’s network.
The incident prompted the Biden Administration to mandate new cybersecurity regulations for pipeline companies, requiring them to report any cyber incident to the federal government and make preparations for future attacks, among other measures to strengthen the country’s energy sector. President Biden also issued a broad executive order to improve the cybersecurity of federal networks and develop standards to protect the software supply chain.
Energy systems are very vulnerable to cyberattacks as it relies heavily on digital systems. Automation, control, and security systems used in the oil and gas sector are largely digitalized and dependent on digital technology. In the past, such systems were isolated, company-owned, and proprietary. Today they are based on commercially available operating systems and internet technology which makes product weaknesses transparent to the market and easily accessed. Cybersecurity risk management is therefore paramount.
5. Netherlands court orders Shell to cut emissions-May 2021
In May 2021, the District Court in the Hague ruled that Shell must reduce its global net carbon emissions by 45 percent by 2030 compared to 2019 levels. This legal campaign was funded and led by the Dutch wing of Friends of the Earth. The court sided with them and ruled that Shell was responsible for emissions from customers (scope 3) and suppliers.
It stated that the company’s climate strategy was not strong enough and that the company owed a duty of care to Dutch citizens creating a human rights obligation to take further action.
This case is just another example of the rise in stakeholder activism exerting pressure on the way that companies do business. Given the global backing of the Paris Agreement, this ruling is a warning to other organizations that their approach to environmental management can create litigation risk. In the past companies were sued for past wrongs and where compensation was due. Now, companies are being sued by pressure groups or forced by shareholders to change their business model. Decarbonization and overall sustainability plans should therefore be embedded into corporate strategy.
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