Comment

Charles Zimmermann

I fully agree with all of the comments on commercial mediation (pros and cons), published here and I would like to add a brief comment from an economist's perspective. It is not uncommon to find that energy infrastructure investments require long-term financing which in turn requires long-term contracts that characterize the stream of future cash flows intended to cover debt service and provide the equity investor with a return on investment. For an example of long-term energy forecasting, see the IEA's global forecast at http://www.worldenergyoutlook.org/weo/pubs/weo2002/weo2002.asp. It is well known that commodity markets generally do not offer futures products in which the delivery date is more than three years into the future. Hedges against price risk are sometimes needed for years four through x.

Unfortunately the experience of the last 40 years demonstrates that long-term forecasts of demand, supply, and price for energy commodities are often wrong - not simply wrong in the sense that in retrospect, the numbers have been shown to be too low or to high, but wrong in a more profound sense that the identity of the leading market players, the importers and exporters and transportation providers, was misunderstood. Wrong, in a geopolitical sense. Wrong, for example, because market liberalization was not anticipated. While this experience has bred a certain scepticism regarding price forecasting, it has serious implications for the viability of long-term agreements in the energy sector.

A situation can arise in which both parties to an agreement find that long-term agreements signed only five to ten years ago are no longer suited to the market structure and market conditions prevailing and expected to prevail in the future. The result may be called 'stranded agreements'. The problem is not simply an issue of 'stranded cost' eg adjustment for the difference between contract prices and spot or short-term market prices. Stranded agreements have to be rewritten because both parties have recognized a need substantially to revise or restructure the business relationship. Commercial mediation offers a mechanism to deal with stranded agreements.

The fact that some geopolitical changes can be anticipated by people who are later proven to be 'correct' does not appear to have a very great effect on the thinking of businesspeople who sign long-term (20-year or 30-year) agreements. This is something to do with human nature.