Is Big Oil heading for extinction?
“If you take away supply but demand does not change, the only thing that happens is prices go up.” This is surely so obvious that it does not need stating, but it seems that Bernard Looney feels he still has some educating to do. The boss of BP could hardly complain about high oil and gas prices, which have turned the company into a “cash machine” in the last few months, but then he invited the climate activists to consider the effect of stopping hydrocarbon extraction from the North Sea.
The world is going to need oil and gas for many decades yet, however fast other energy sources grow, and each barrel that is not pulled out from beneath Britannia’s waves must be replaced by one from somewhere overseas. We are already seeing how Russia can play global politics with the supply of gas, as prices soar and small energy supply companies fail. Less output from the North Sea spells more dependency on the likes of Saudi Arabia, Iran and Venezuela, shifting jobs and wealth to regimes not known for their tolerance of activists, climate or otherwise.
There is another, more subtle effect of forcing the big companies to scale back their e&p. The buyers of the businesses they are selling are frequently privately owned, essentially unknown, entities. Those buyers are unlikely to operate to the pollution standards we expect from Big Oil, and they are almost impervious to the pressure that BP and Royal Dutch Shell face daily. Larry Fink, the boss of Blackrock, managers of £7tn of other people’s money, spelt this out at COP26 this week, arguing against oil companies getting rid of their assets, as this shifts production into ”opaque” private markets. He added: “Hydrocarbon companies are part of the solution, not the problem.’’
Their underlying problem is that they have no more idea of a solution than anyone else. Oil and gas is what they know; their expertise in wind, wave, solar and electricity is being learned or expensively acquired at the shareholders’ expense. Getting out of what you know can mean serious value destruction, as Anglo American has just demonstrated. In June the mining giant sloughed off its coal business, Thugela. The move won green plaudits, but has hardly been value-adding. Since then Anglo shares have fallen by a tenth, while Thugela has almost trebled.
Meanwhile, as the hot air was blowing at COP26, it has been failing to blow in the North Sea. The market’s two favourite green energy businesses, Orsted and Vestas Wind, both disappointed this week. Orsted, which makes the monster windmills, cut its margin forecast for the second time this year, and warned of an “increasingly challenging global business environment for renewables”. Vestas, which runs them, has taken a nasty hit from settled conditions, once described by CEO Mads Nipper as like managing a farm when it doesn’t rain. The shares have fallen by a fifth this week.
Even more unsettling than settled weather, it seems that the cost of the turbines is not falling anything like as fast as the prime minister claims. Low bids have tended to be “contracts for difference”, which are effectively options to supply, rather than an estimate of construction costs. A study culled from the published accounts shows that getting that price below £100 per megawatt hour of capacity – even before the cost of back-up or storage – is going to be hard, especially on the farther reaches of the Dogger Bank.
A price of £100/MWH is more than twice today’s market, and there may be worse to come.The electricity grid balances supply and demand, and reports each source of juice throughout the day. On Monday, the record shows that the windmills hardly turned during the peak period for electricity demand. That the lights stayed on (how embarrassing would that have been in Glasgow?) was thanks to the fuel the world’s leaders were so busy demonising, burned in the last remaining coal-fired furnaces of Drax’s power station.
So far, so awkward, but the real extent of the little crisis on Monday afternoon is reflected in the price the network had to pay; £4000/MWH (that’s £4 per kilowatt hour, compared to the current national household average of 14.4p) or nearly 100 times what might be regarded as the market norm. Sadly for the shareholders in Drax, this bonanza did not last long, and the managers are unlikely to crow about it, since they are keen to present their company as a leader in the green revolution, thanks to their burning of imported wood pellets.
As for Shell and BP, increasing numbers of investors regard the shares as wasting assets, headed for extinction or irrelevance, and are dumping them for what they can fetch. On Monday eight million Shell shares changed hands, or around £130m-worth. The pressure to “do more green” and increasingly abandon the companies’ core competences is only going to grow. It’s reflected in the Shell board’s incompetence when it comes to setting a dividend policy which lasts more than a few months. It’s reflected in Mr Looney’s cry of despair about the law of supply and demand. Both companies are returning capital to their shareholders as fast as they decently can, given the likely volatility of the oil price. In the circumstances, it may be the least worst thing they can do.
It’s the way he tells them
Wirecard is the gift that keeps on giving, at least to readers of the FT, the paper that exposed Germany’s biggest (known) fraud. A cracking article this week revealed that “one of Austria’s most senior military officials has been removed from a sensitive government position amid concerns over his links to Jan Marsalek, the former chief operating officer” of the company. Mr Marsalek was last seen en route to Minsk, and the official, Gustav Gustenau, was until recently head of the office of security policy within the Austrian ministry of defence.
As the FT discovered when it first broke the story, the locals have an idiosyncratic way of dealing with embarrassing stories – they try and shoot the whistleblower. The German securities authority, rather than investigate the Wirecard scandal, launched legal proceedings against the paper, suggesting that it had exploited inside information. Mr Gustenau’s response to enquiries? “It would be gratifying if the completely unfounded public debate about my person could cease.”