IRAQ-OIL

Oil sprays from a well at Tuba oil field in Iraq  © Getty Images

Oil is now clearly a cyclical commodity that is in a period of over-supply. According to recent commentaries from the International Energy Agency, the excess of production over consumption was as much as 3m barrels a day in the second quarter of this year, which is why prices have fallen. The question for producers, consumers and investors is: how long will it be before the cycle turns back up?

The initial caveat, of course, is that the “normal” oil market could be overturned by political decisions at any time. The Saudis, instead of greedily trying to maximise their market share and imposing huge losses on others, could decide that the stability of the region, and of their own kingdom, would be better served by cutting production and settling for a new equilibrium. There is a chance of that, as I wrote a couple of weeks ago, and the Saudis are under huge pressure from other Opec members but there is a mood of rigid arrogance in Riyadh which suggests that the necessary climb down will not come easily. What follows assumes that King Salman bin Abdulaziz al-Saud and his son the deputy crown prince stick to their current policy.

What then drives the cycle ? Read more

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For investors who thought the situation in the oil sector could not get worse, the last few weeks have come as a bad surprise. In the US, West Texas Intermediate prices have slipped below $40 a barrel and on Monday Brent crude fell below $44. There is no obvious sign yet that the bottom of the cycle has been reached and the latest negative data from China adds further downward pressure. The next casualty of the falling price will be corporate dividends.

Much attention has been paid to the implications of lower oil prices on countries such as Russia, Venezuela and Nigeria which depend for the bulk of their national income on oil. For them, the economic and political implications are serious. As we saw at the end of the 1980s, not just in the former Soviet Union but also in Opec states such as Algeria, a heavy fall in prices undermines the social contract between governing elites and the wider population. Both those countries look vulnerable now, as do a range of others including Angola, Brazil and Nigeria. In all those cases the impact of a price fall compounds existing problems. It is hard to avoid the conclusion that one or more of these nations will see a regime change before the end of the year. Read more

Scottish Windfarm Starts Producing Electricity

The Braes of Doune windfarm, Scotland   © Getty Images

Organisations, especially those that are doing well, can easily get stuck on narrow views of the future and their own role within it. It can be useful and creative in those circumstances to give people the opportunity to think more widely. One method that I have seen used to great effect is to ask people to imagine the world in 10 years’ time and suggest what might have changed, particularly against the expectations of the conventional wisdom. The process can provide a useful counterweight to long-term forecasts, which tend to do no more than roll forward recent history.

In that spirit, and for the holidays, here are a few stories on the energy sector from the FT in 2025. These are not forecasts — just possibilities. Readers would be welcome to suggest additions to the list.

1. In Moscow, ShellGaz — the world’s largest energy company as measured by its listing on the FTNikkei 250 — announces that it is proceeding with Eaststream3, the latest in a series of export projects from eastern Siberia. Eaststream3 will take gas by pipeline to the rapidly growing cities of northern India. ShellGaz was formed in 2017 through the merger of Royal Dutch Shell and Gazprom and represented the first fruit of the reset of European-Russian relations after the agreed federalisation of Ukraine. Read more

Deputy Crown Prince Mohammed bin Salman Of Saudi Arabia Visits Jordan

Deputy Crown Prince Mohammed bin Salman visiting Jordan this month  © Getty Images

With the latest analysis from the International Energy Agency showing that oil production capacity continues to rise despite the sharp fall in prices, is Saudi Arabia ready to admit that its strategy of over-production designed to force other producers out of the market has failed?

Over the last year, Saudi Arabia has been pursuing what Frank Gardner, the BBC’s security correspondent, described last week as a policy of flexing its muscles – both in the region and in the oil market. The policy is obviously failing. The question now is whether the kingdom will keep going, doubling down on its current approach, or will step back and change course. The second option would involve a significant loss of face for the new king and his favourite son. The costs of simply ploughing on, however, could be much worse. The outcome will shape the future of the region and of the international oil market. Read more

RUSSIA-PUTIN-POLITICS-CIVIC-CHAMBER

President Vladimir Putin  © Getty Images

With oil prices back down to $50 a barrel for Brent crude, a falling gas price and its share of the European energy market declining, the Russian economy is in real trouble. The situation is dangerous because the problems cannot easily be corrected. The risk is that the economic problems could lead to political instability both within Russia and around its borders.

Anyone wanting to understand the historical context for what is happening in Russia should read Restless Empire a newly published book written around a series of maps which take go back to the emergence of the Slavs some 5000 years BC. The book, edited by the late Ian Barnes who sadly died before publication, is beautifully presented and free of the biased commentary so often associated with histories of Russia. The maps in particular are fine examples of immaculate design applied to the presentation of complex data. I only wish there were more maps, and in particular more on the production and trade in energy that dominates the modern Russian economy. Read more

CHINA-ECONOMY-GROWTH

Loading coal at a port in Yichang, in central China's Hubei province  © Getty Images

Casual readers of the media coverage of the energy business could be forgiven for getting the impression that the coal industry is on its last legs. “Coal is dying and it’s never coming back”; “King Coal’s stages of grief”; “The noose tightening on the coal industry”. Those are typical headlines from the past few weeks. The coal industry, it would seem, is being rapidly destroyed by the combination of public policies on climate change and carbon emissions and by the development of a range of alternative energy supplies – from shale gas to solar. This sense of an industry in decline is reinforced by the rhetoric of the campaigns advocating disinvestment from fossil fuels in general and coal in particular. If you have Oxford University, Michael Bloomberg and the Norwegian Sovereign Wealth Fund against you what hope can there be? The impression of an industry in terminal decline does not, however, quite reflect the reality. Reports of the death of coal owe more to wishful thinking than to any analysis of what is actually happening. Read more

CHINA-STOCKS

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The Chinese economy is clearly going through its most serious downturn in more than 30 years. After three decades of continuous growth averaging more than 8 per cent per annum, the problems of industrial over capacity and excessive debt are starting to take their toll. The stock market volatility of the last few weeks is a symptom of the bubble that has been allowed to develope in recent years and of the doubts that are now setting in about the sustainability of high growth. The more serious problem, as the published data is now showing, lies in the real economy and in the accumulated and now unfundable debts that have financed booms in sectors such as housing construction and urban property development. Read more

Shell's Polar Pioneer arrives in Seattle

Shell's Polar Pioneer arrives in Seattle

Great companies become and stay great by taking big bets. The art of betting is, of course, about understanding the odds and being prepared and able to lose if it comes to it. Every big company in the world has been through that process — the only difference in the oil and gas industry is that the numbers are bigger. The general rule of betting in the corporate world is not to put at risk more than 10 per cent of the total business. For the biggest, that leaves plenty of scope.

So there is nothing wrong in principle with taking big bets. What is, puzzling, though is when a company with a record of deep caution stretching back to the second world war makes a series of bets that all run contrary to the conventional wisdom. The company concerned is Shell, which in the past few months has placed three huge betsRead more

UKRAINE-RUSSIA-CRISIS-MILITARY

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Politicians and policy makers can only focus on one problem at a time. With all attention concentrated on Greece for the past month there is a real danger that an even greater problem is developing, almost unnoticed, in Ukraine. The economy there is in deep trouble. A further collapse, perhaps triggered by a debt default, could lead to an outflow of refugees that would make the problem of migrants crossing the Mediterranean look trivial. Energy is at the heart of the crisis but could just possibly be part of the solution.

The basic story is well known. Since the Maidan demonstrations in November 2013, the Ukrainian economy has shrunk. A 5 per cent fall last year is variously forecast to be followed by a contraction of between 5 and 10 per cent in 2015. Investment has ground to a halt and in the energy sector big potential projects such as the shale gas developments planned by Shell and Chevron have been halted. The fighting in the east has cut off coal supplies to the rest of the country from the 300 mines in the Donbass region. The Russian annexation of Crimea has cut off gas supplies from the developments managed by Chernomorneftegaz in the Black Sea. Ukraine, as a result, has become even more dependent on imports of coal and gas from South Africa, Australia, other parts of Europe and even ironically from Russia. These supplies do not come cheap and in many cases suppliers will only do business if they are paid in advance and in hard currency. Read more

Political Leaders Meet As Greece Crisis Intensifies

Sigmar Gabriel and Angela Merkel  © Getty Images

Last week’s decision on the future of the German energy policy by Sigmar Gabriel — the economics minister and Angela Merkel’s number two and would-be successor — was complicated and multifaceted. The net result, however, is simple. The German coal industry will survive and coal will remain a major, and probably the largest, fuel source for power generation for another decade and perhaps longer. Read more

Power Station For Both Fishing And Solar Energy Built In Jiaxing

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According to the International Energy Agency in their most recent World Outlook the amount of money required to meet energy needs over the next twenty five years is $51tn. That is in real terms measured in 2013 dollars and amounts to approximately 14 times current German gross domestic product.

Energy investment as defined by the IEA includes the exploration, production, distribution, transportation and processing of all forms of energy. It includes new ventures and replacement of the existing capital stock. Some $30tn of the total is expected to be devoted to fossil fuel extraction, transportation and oil refining, while most of the remainder goes to the power sector including $7.4tn to renewables and $1.5tn to nuclear; $8.7tn goes to the development of transmission and distribution systems. This is, of course, an indicative forecast built around the IEA’s assumptions of some progress towards emissions reduction. The detail is less important than the total. Read more

JAPAN-PROTEST-NUCLEAR

Protests against the reopening of the Sendai nuclear plant  © Getty Images

Within the next few weeks the Japanese utility Kyushu Electric Power will restart its two nuclear power reactors at Sandei in the Kagoshima prefecture in the far south of the country. Fuel loading is set to begin July and the plants should be onstream again in August. After four years of crisis and much legal and political debate, the Japanese nuclear industry is finally on the way back. The implications for the rest of the energy sector in Asia and across the world are significant.

The two reactors at Sandei have been closed since 2011. From a nuclear fleet of 50 reactors capable of producing some 47 GW of electricity and supplying over 30 per cent of Japan’s daily electricity needs at the beginning of 2011, the sector’s output shrank to zero in the months following the Fukushima disaster. At Fukushima itself six reactors have been closed and are being decommissioned. The rest of Japan’s nuclear fleet stands cold and unused. Gradually, however, the negative mood of 2011 has abated. Now the operators of 24 different reactors across the country have applied for permission to reopen with the full and very active co-operation of the Japanese state and the powerful industrial lobbies such as the Kaidanren and the Keizai DoyukaiRead more

VATICAN-POPE-AUDIENCE

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The shocking thing about the papal encyclical Laudate Si is not that it was leaked in advance nor even that it embraces the idea that most emissions of greenhouse gases are the result of human activity. The thing that should shock readers is its attack on science and technology — the very tools, indeed the only tools, which offer a solution to climate change.

I am not a student of theology and therefore do not claim to understand the subtleties of the Catholic Church’s teaching on science. But since the Pope has moved outside his own natural territory and into energy policy, some response seems appropriate.

From a distance, Pope Francis seems to embody decency. He is modest, frugal, concerned for the poor and hostile to the creepier side of the church hierarchy in Rome and beyond. That makes him stand out in a world of shallow and cynical “leaders”. He commands millions of followers and his words deserve to be taken seriously whether one is a Catholic or not. Read more

 

An employee poses with a pipe used to ca

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Carbon capture and storage is one of the key elements in the various plans for keeping total emissions within safe limits. Different projections give slightly different numbers but the broad consensus is that the process of sequestration — taking the carbon out of hydrocarbons before they are burnt and then burying it — should account for between a sixth and a fifth of the net reduction needed by 2050 if we are to keep global warming to 2C or less. If CCS doesn’t happen on the scale required, either the level of emissions and the risks of climate change will be higher or some other solution must be found. Sir David King, the former UK government chief scientist, puts it more dramatically: “CCS is the only hope for mankind

Keeping global warming to 2C means that the amount of CO2 captured and stored must rise steadily to well over 7,000 Mt per annum by the year 2050. Is CCS on this scale likely to happen? As Simon Evans and Rosamund Pearce point out in an excellent article for Carbon Brief, the industrial scale of the operation required to capture and store that amount of CO2 is far greater than the scale of the current international oil industry. Looking objectively at the current state of play the answer must be that it is very, very unlikely. Why? And what can do done about it? Read more

Last week’s Opec meeting in Vienna confirmed that power has drifted away from the cartel that shaped the oil market for so long. The organisation was unable, as some wanted, to cut production which across Opec is running at about 1.4m barrels a day in excess of the official target. Equally, it was unable to increase production, as others favoured, in order to drive US producers of so-called “tight oil” – that is oil from shale rocks extracted through fracking – out of the market. The conclusion of the meeting was to do nothing. This means that prices will continue to be set by supply and demand. Over the last few weeks prices which had sunk in the spring appeared to be stabilising at around $ 65 a barrel for Brent with WTI five or 6 dollars lower. But such prices were not secure and now, short of a very dramatic development such as an attack by Islamic State of Iraq and the Levant on Saudi Arabia, all the odds are that prices will now fall back again.

Brent Crude Oil Future twelve month chart Read more

FRANCE-ENERGY-NUCLEAR-COMPANY-EDF-ELECTRICITY

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“I am convinced that the nuclear industry has a future, that it is a strength of our country.” The fact that Manuel Valls, the prime minister, had to make such a statement in the National Assembly in Paris two weeks ago is a dramatic indication of the depths of the problems the nuclear sector in France is facing. Read more

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The conflict at the heart of Germany’s energy policy is finally coming to a head. Can Germany claim to be an environmental leader while continuing to burn more coal than any other developed country apart from the US?

The issue is easier to describe than to resolve. Germany has led the EU in adopting “green” policies, including the promotion and subsidy of renewables. Energy consumers, including industry, have tolerated ever-rising energy costs. Electricity in Germany costs over 90 per cent more than in the US. The country has begun the process of closing its nuclear power stations — the last will be closed in 2022, although a vexed question remains over how the decommissioning will be paid for. Energy policy enjoys support across the political spectrum. The Green party won just 7.3 per cent of the vote in the last federal election but green ideas permeate the thinking of all the other parties. The grand coalition between the Christian Democrats and the Social Democrats is committed to reducing emissions by 40 per cent by 2020, 70 per cent by 2040 and 80 to 95 per cent by 2050. The whole plan is explained in a post by Mat Hope on the CarbonBrief website. The German approach is now being exported to Brussels with a determined effort under the new European Commission to shape an EU energy policy along the same lines. Read more

BRITAIN-POLITICS-GOVERNMENT

Amber Rudd  © Getty Images

Last week’s decision by the UK’s new energy secretary, Amber Rudd, to approve Centrica’s plans for a dramatic increase in gas imports from Gazprom has cast a cloud of uncertainty over Britain’s policy on sanctions against Russia. In recent months the UK, along with the US, has been one of the strongest advocates of tough sanctions. In Europe, opinion has been more equivocal and divided. The German Chancellor, Angela Merkel, called the Russian occupation of Ukraine “a criminal act” when she was in Moscow last weekend. Many in Germany and France, however, see sanctions as pointless. To them, Russia is a neighbour, difficult at times certainly, but a presence to be lived with. Ukraine on this view is of no strategic importance and its multiple problems stem from its own corruption. Now it seems that the UK has switched sides in this debate.

The first thing to be made clear is that Centrica has done nothing wrong. The company’s intention of doing business with Russia was signalled at the AGM three weeks ago when its chairman said that Russia would be a major supplier of gas to Europe for a long time to come. I don’t doubt that Centrica has got a very good deal. Having won approval so easily I wouldn’t be surprised if they do more business with Gazprom. Read more

British Government Signs A Deal For New Nuclear Power Plant

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The election is over and against all expectations we have a clear result. When it comes to energy policy, however, the agenda will be set not by what the Conservative party has promised in its manifesto but by external events. A number of looming issues are already obvious and the government will have no control over most of them.

The first is the further postponement of the plans for nuclear development starting at Hinkley Point in Somerset. Two new reactors capable of supplying some 7 per cent of total UK electricity demand are planned. The first was originally supposed to be on stream in time to cook Christmas dinner in 2017. But despite the prospect of a lavish price — index linked for 35 years regardless of what happens to global energy prices – and £10bn of even more generous financial guarantees, funding for the investment required is not in place. The reluctance of investors to commit will not be helped by the technical problems in the reactor vessels, which are now under investigation by the French nuclear regulator. This problem has widespread implications for the companies involved (Areva and EDF) and for nuclear development in many countries across the world, starting with France itself. Read more

View of the Grangemouth oil refinery nea

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Keeping the lights on is one of the core responsibilities of any government. If the lights go out, the government soon follows. Concern about energy security has grown in the UK over recent years with repeated suggestions that demand is pushing dangerously close to the capacity of the power grid. That is why the commitment from Ed Balls, shadow chancellor, to create an Energy Security Board is more interesting than most of the announcements made during the election campaign.

Energy policy has been largely absent from the election debate, which is probably a relief to the industry. The issues at stake are too complicated and detailed to lend themselves to sound bites and instant solutions. The complexity of the challenge is why a security board is potentially a good idea as part of a much needed renewal of energy policy. Read more