Success always brings its own burdens. The Chinese economy has grown in real terms by around 8 or 9 per cent a year since 1980. Some 800 million people have been lifted out of subsistence. Dozens of new cities have been built. The country is now one of the world’s great economic powers even if it is still not allowed to join the G8. And growth continues. China is the world’s biggest building site.
One of the burdens which has come with economic success is the need to import oil. China has found very little oil, despite extensive exploration efforts – especially in the South China sea. Net imports have therefore risen steadily from zero twenty years ago to 5.6m barrels a day last month. Read more
The departure of Peter Voser from Shell may be entirely voluntary and personal but the consequential change of leadership raises some very big issues for Shell’s board and the company’s investors.
Those who don’t know the big energy companies from the inside can all too easily imagine that life at the top is soft and easy. Corporate jets, lavish offices, great salaries and even greater bonuses. All true. But corporate life at that level is still a 24:7 existence made up of endless travel, hard negotiations with unpleasant people and unrelenting pressure from investors who are never satisfied. Within the company there are barons to be managed.
Externally there are always, even in the best of companies, running sores, often dating back decades and inherently insoluble. In Shell’s case the running sore is Nigeria. Then there are the mistakes, also inevitable in any company which takes risks. Shell’s mistake in recent years has been its ill fated adventure in Canada and the Arctic. Some put the total cost at $10bn and the ability to write off that amount without blinking is further evidence of just how strong the majors still are. The reality was that Shell was not Arctic-ready. Local managers were allowed too much freedom. The mistakes will make it difficult for the Shell board to appoint Marvin Odum – the man directly responsible for the US operations – as the next chief executive.
None of these problems was caused by Peter Voser. But as CEO you are responsible for everything. I can understand why even at the early age of 54 he is ready for a change of lifestyle, and I wish him well. The issue for Shell is whether it should now change its strategy as well as its leader. There is a very good case for doing so. Read more
A report from the Grantham Institute and the Carbon Tracker initiative, titled “Unburnable Carbon”, has produced a studied silence from the energy industry. The study, published last week, is privately being dismissed as the predictable conclusions of people who don’t understand business. But investors should take it more seriously because it opens up some very interesting questions about what energy companies are doing with their money.
In summary, the report says the investment of more capital to find hydrocarbons is a waste of money. More than enough has been already identified to fulfill the world’s needs if we are to meet the carbon limits implied by international agreements on climate change. Under those agreements, carbon use will be reduced over the next four decades, leaving substantial supplies stranded. On this basis, some companies – and therefore the funds which hold them – are carrying dangerous levels of risk, based on the false assumption that the international agreement will never be implemented. The companies are overvalued because some of their assets will never be used.
I have two points of doubt about this thesis. Read more
The Brent oil price has fallen by more than $10 – which means 10 per cent – in less than two weeks and now stands below $ 100. The precise number matters less than the trend. Now the question is how much further prices will fall.
Saudi Arabia is the only country in the world with the ability to cut production and to keep prices up. Some feel the Saudis are using the fall to discourage investment in high-cost projects including tight oil and some deep water ventures. I am not convinced. The Saudi oil minister, Dr Al Naimi looks tired and unsuited to such a high-stakes game. I expect the Saudis to pursue the tactic of making small incremental cuts in output in the hope that the market will stabilise. I doubt if this will work. Only a cut of 1.5m to 2m b/d will suffice to maintain prices and that would squeeze Saudi revenues too much. With growing domestic demand Saudi Arabia has little room for manoeuvre. As noted last week, the Saudis seem to be in process of losing control of the oil price. Read more
The news of another excellent year for investment in the North Sea will come as a surprise only to those who do not understand the dynamic relationship between economics and technology.
The original predictions were that North Sea oil and gas – certainly in the UK sector – would be exhausted by 1990. A strict depletion policy in Norway might keep production running for a few more years. That was the received wisdom of the 1970s.
Now, 56 years after the first gas was produced at the West Sole field, the prospect for the whole province is for at least two more decades of production. Total output is down but there is a long tail. Resources which were once thought inaccessible are now being brought onstream thanks to advances in drilling and reservoir management technology. Read more