September 11 accelerated energy sector woes, says S&P

The deteriorating credit quality of the energy sector is likely to continue well into next year, the credit rating agency said. Energy traders are seeing “the shrinkage of business”, and some companies may be subject to cash calls if they experience further deterioration, the report warned.

“Although the US economy was already weakening, the tragic events of September 11 gave the economy a final push into a recession and temporarily dampened power demand in the US, particularly in the industrial sector,” said S&P’s New York-based credit analyst Peter Rigby. “Deregulation and industry restructuring had already begun to tarnish the industry’s reputation – although quite unfairly due to unforeseen problems that arose from California’s efforts to introduce competition. The fallout from Enron further complicated matters.”

The terrorist attacks also led to security and insurance concerns for the US energy industry, S&P added. In fact, rising costs of insurance premiums, post-September 11, meant some energy projects were unable to secure insurance. Furthermore, nuclear power reactors were forced to deal with the threat of future terrorist attacks by hiring security personnel and updating security devices – thereby adding to operating costs in an already tough environment.

Terrorist threats against power plants are real, S&P said. Last month, Pakistani police arrested six suspected terrorists alleged to have been planning to attack a thermal power plant owned by US-based AES Corporation.

S&P also said the oil markets, which rebounded from the terrorist attacks, could face tensions in the months ahead if the US, and possibly its allies, invade Iraq.