Oil

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

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

 

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

VENEZUELA-POLITICS-MADURO-MILITIA

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Can a country with an inflation rate of 70 per cent and a shortage of such basic goods as milk and toilet paper really be so dangerous to the US that President Barack Obama is required to declare a national emergency in response to the extraordinary threat to national security that it poses? Apparently so. That is what happened in March and although Mr Obama has now backtracked by saying that Venezuela isn’t really a threat, the executive order has not been rescinded.

More importantly, the damage has been done. The clumsy American approach has reinforced the crumbling authority of the government of President Nicolas Maduro. The US has been designated the national enemy once again and blamed for everything that is going wrong. The Venezuela government opened 200 signing booths and collected a supposed total of 10m signatures for a statement protesting against American imperialism. The result is that the prospect of serious reform in Venezuela has been put back. Reform is much needed, not least in the beleaguered corrupted corporate structure of PDVSA, the state oil company. Read more

BRITAIN-NETHERLANDS-EARNINGS-OIL-BUSINESS

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When I wrote a week ago that the next phase in the energy business would be about restructuring, I hadn’t expected the process to start quite so soon. The question now, after Royal Dutch Shell’s planned purchase of BG Group, is not whether or when that restructuring will take place but rather: who is next?

The bankers must be delighted. After years of touting deals around reluctant boardrooms, a marriage has been arranged and the fees will be enormous. The long dearth of big transactions is over and every company in the sector will now be nervously considering whether they should kill or risk being killed. The process is exciting but fraught with danger — for both hunter and prey. Most mergers are in fact takeovers and most takeovers fail to deliver the anticipated gains in value, often because of cultural differences. It will be fascinating to watch the integration of Shell’s ultra-cautious committee structure with BG’s highly personal buccaneering style.

Beyond that, who? Read more

Downturn In Oil Prices Rattles Texas Oil Economy

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Almost all the major oil and gas companies I know are undertaking substantial reviews of their policies on climate change. That is true in Europe and in the US. Why now, and what will be the outcome ?

First, it is important to stress that the rethinking is not being driven by the recent attacks on the companies. Describing Shell and its chief executive Ben van Beurden as “narcissistic, paranoid and psychopathic” is just childish and reduces what should be a serious debate to playground abuse. The reviews began before the latest media campaigns and are driven by corporate strategic concerns. Read more

 

US-POLITICS-OBAMA

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The provisional agreement to control Iran’s nuclear ambitions led to another fall in oil prices on Friday as the market anticipated the lifting of sanctions and the resumption of full scale Iranian exports. The fall is now overdone and for a series of reasons we are likely to see prices rise — modestly — before the summer.

First, the Iranian agreement is provisional and depends on negotiation of crucial details before the next deadline in June. A number of concerned parties — from the Revolutionary Guards in Tehran, who do not want to see the lucrative business interests they have built on the back of sanctions eliminated, to the Israeli government in Jerusalem, which does not believe that any promises from Iran can be trusted —have no interest in seeing the deal completed. Read more

BRAZIL-ROUSSEFF-CONSTRUCTION-SALONThe corruption investigation initiated by the Brazilian prosecutor, Rodrigo Janot, into 54 individuals including leading politicians is just beginning. The allegations behind the inquiry concern the diversion of huge amounts of money from Petrobras, the state oil company.

No one know how much money is involved, which means that no one knows what the company is now worth.

Petrobras’s share price has fallen by 44 per cent over the last year, with some some $90bn wiped off the value of the company in just six months.

Part of that is due to falling oil prices, but more is the direct result of the company’s internal problems. There are no signs yet of the ambulance-chasing investors who like to pick up undervalued assets for a song piling in. They must think, probably with good reason, that the worst is yet to come.

In the US a class action law suit has begun. The scandal could yet bring down the Brazilian government, not least because for most of the period when the corruption is said to have happened Dilma Rousseff just happened to chair Petrobras. It could also be a deep embarrassment for the audit firms who seemed to have missed what was happening.

The question for the moment is what happens now to Petrobras itself. Read more

The urgent attempts by Europe’s leaders to negotiate a solution to the crisis in Ukraine represent an open acknowledgement that the policy of sanctions has so far failed. Mr Putin continues to destabilise the Government in Kiev and to undermine its authority in the east of the country. They may also reflect a growing realisation that sanctions are in danger of backfiring. Greece faces a serious debt crisis but at least the debate on how to resolve that crisis is now being held in the open. we know the options and the risks. In Russia, however, there is another debt crisis which is going unmanaged and which could easily get out of hand. Read more

News has diminished value if it comes from far away. Just as terrorism gets more coverage if it occurs in Paris, much of the analysis of the consequences of falling oil prices has focused on the US shale industry and the North Sea. But spare a thought for some of the other losers, starting with Nigeria where the fall will not only further damage a fragile state but will pose risks which could affect all of us before too long.

It would be good to be able to be optimistic about Nigeria — a country which in the past has been listed as one of the possible economic powerhouses of the 21st century. Remember MINT (Mexico, Indonesia, Nigeria and Turkey), the successor grouping to the BRICS (Brazil, Russia, India, China and South Africa)? Great acronyms invented by the always imaginative Jim O’Neill, but in both cases the groupings look a little shaky and performance is well short of promise. Nowhere more so than in Nigeria, which provides a sharp reminder that even if Opec is broken, oil is still vulnerable to political upheaval. Read more

Wind turbines in Peitz, Germany.

Wind turbines in Peitz, Germany © Sean Gallup/Getty Images

Forget Opec. If cartels can’t control output, they can’t control prices and in due course they fall apart, usually with a great deal of ill will in the process. The evidence of the last six months is that Opec can’t control the market — ask yourself how many Opec members want to see a price of $60 a barrel for their oil. Some in Saudi Arabia think a low price can squeeze out competing suppliers, but that feels like a justification after the fact of a fall which they can’t control. The question now is how the process of adjustment to the new price level will work. Read more

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There were two contenders for this year’s award. The most obvious, and certainly the man who has won the most coverage in this (and every other) publication, is Vladimir Putin. Mr Putin has certainly been highly visible, but he has actually changed very little in the energy market. Russian gas still flows to Europe and to Ukraine, helped by western payments of outstanding debts. Europe may be rethinking its energy mix and opening new and more diverse sources of supply, but any change will be very gradual. Russia will trade more with China and India, but that was coming anyway and is a natural and logical balancing of supply and demand. Read more

As Martin Wolf has noted in the Financial Times, world oil prices have fallen 38 per cent since the end of June. A Martian listening to George Osborne’s Autumn Statement would have no idea of this. For consumers lower oil prices can have positive effects but for mature producing provinces they are very damaging and could be fatal.

Mr Osborne proposed a cut in the supplementary charge on oil company profits by 2 percentage points from 32 per cent to 30 per cent. There is to be a “cluster” area allowance to help the development of small fields which sit next to each other. The ringfence expenditure supplement is to extended from six years to 10. Wow! That will really keep the investment flowing. Read more

BP oil platform in the North Sea  © Reuters

After 40 years of production that far exceeded original expectations, the North Sea oil and gas industry is in serious jeopardy. At the beginning of the year, there was a degree of optimism following Sir Ian Wood’s report and the establishment of a new, more interventionist regulator considered capable of driving a further wave of activity. But with the fall in oil prices over the past four months, the mood has changed dramatically. Read more

Conspiracy theories abound around the oil price fall. A 25 per cent drop in less than three months is certainly exceptional and the assumption is that in a politically driven market a political decision by someone, somewhere must have forced prices down. The most popular conspiracy theory is that the US and the Saudis have combined to take money away from their major enemies – Russia and Iran. In both cases, [the argument goes], a shortage of revenue could help to bring President Vladimir Putin and the Supreme Leader, the ailing Ayatollah Ali Khamenei, to the negotiating table to sort out a deal on Ukraine and Iran’s nuclear ambitions.

In a complicated world anything could be true. I don’t happen to believe the conspiracy theory but I accept that it is a possibility. To me the interesting thing is what happens next, and that is down to the Saudis. The risk for the whole industry, and for many countries dependent on oil revenues, is that Saudi Arabia’s games have led them to lose control of the market. Prices could go a good deal lower with wide and mostly negative consequences, starting with more regional instability and a cutback in investment which can only feed the next cycle. Read more

A wind turbine complex on the Zhemo Mountain in the outskirts of Dali, in China's southwestern province of Yunnan (LIU JIN/AFP/Getty Images)

A wind turbine complex on the Zhemo Mountain in the outskirts of Dali, in China's southwestern province of Yunnan © LIU JIN/AFP/Getty Images

The starting point for anyone wanting to understand how the world’s energy markets will develop over the next 20 years must be China. Companies, bankers, investors and those of us who try to follow the industry will have to shift our attention away from local circumstances in Europe or the US. What happens in both continents is interesting, but on the world scale it pales into insignificance. Even a very radical change in the European market — a real carbon price or a single common energy policy, or indeed the development of French and German shale gas — would be as nothing compared to the transformation that is coming, as China becomes the dominant force in every part of the energy business. Read more

The Brent oil price has now fallen by 15 per cent in less than three months and is now below the psychologically important figure of $100 a barrel. Last week I wrote about the reaction in the industry. But the fall is beginning to have political consequences as well.

Brent Crude Oil Future three month chart

Across the world oil producing and exporting countries have come to rely on high, and ideally rising prices. Some countries save the revenue for a rainy day, but most, especially those with rising populations, tend to spend. Circumstances vary, as do the realistic options for adjustment, but the current concern is real and will shape political actions well beyond the oil sector itself. Read more

Energy executives returning from their summer holidays face some hard choices. I know of at least three major oil and gas companies that have ordered full scale strategic reviews.

The problem, for the companies and for investors, is that prices are falling. The Brent oil price is down 15 per cent since June and by the time you read this could have slipped below $100 [Update: this morning, Brent fell 87 cents to $99.95 a barrel – a 14-month low.] Natural gas and coal prices are also down. Read more