It is easy to say ‘be a vegan’ while you yourself tuck into a bacon sandwich, says Nick Butler Read more
© The Financial Times Ltd 2016 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
It is easy to say ‘be a vegan’ while you yourself tuck into a bacon sandwich, says Nick Butler Read more
The kingdom’s not for turning. There will be no production cuts. Oil will continue to be produced at unwanted levels until other suppliers are forced out of the market.
That was the unequivocal message delivered at the IHS Cera conference in Houston two weeks ago by the Saudi oil minister, the 81-year-old Ali al-Naimi. Mr al-Naimi tried to claim that the US shale industry was not his particular target but that did not seem to convince those involved in a sector which is beginning to feel the real pain of $30 oil.
For the Saudis such pain, along with the even greater suffering being felt by their former allies such as Algeria and Venezuela, may appear to be a necessary cost in securing the kingdom’s goal — a secure oil market share for itself whatever happens to anyone else. On this view, all the others just have to learn the harsh realities of life. Think of it as the application of sharia law to the oil industry. Read more
The Saudis blinked. The latest deal — an agreement with Russia to freeze oil output at January levels if they are joined by other large producers — won’t rebalance the oil market immediately and the early surge in prices last week was rather premature. But they blinked and that is all important. The myth of Saudi power is broken.
The real steps necessary to rebalance the market have yet to come. Saudi production must come down. Others may join in the process but an overall cut of 3m barrels a day is now necessary and most of that will have to come from Saudi Arabia. Stocks must be run off. That will take time. Iran must be welcomed back into the market. That process will be slow and even estimates of another 400,000 barrels a day during 2016 now look high. But they will come back and have to be accommodated. The interests of other Opec member states — such as Venezuela and Algeria — must be taken into account. The Saudi’s lack of respect for their fellow producers over the last year has shaken many traditional alliances. The kingdom does not have that many allies. Read more
A supply that is plentiful demands some fresh ideas from the industry Read more
Markets are inherently prone to volatility. Prices and valuations do not proceed in an orderly and linear fashion. Most important of all, they do not proceed in one direction for very long. The aim of any serious investment strategy should be to call the turning points and buy or sell accordingly. The energy market is at such a turning point and it will be fascinating to see who has the nerve and confidence to invest.
To say that this is a time to buy may sound odd following the criticism of Shell’s purchase of BG Group, which was reluctantly nodded through by fund managers last week. The issue is that the BG deal was based on prices roughly two and a half times above the current level and depends on an incredible forecast of future price trends. The result: a pyrrhic victory for Shell. That mistake, however, does not mean that other potential buyers of energy assets should be put off. At current prices, the time to buy is now. That applies to oil and gas but in different ways the same conclusion can be drawn for almost every part of the energy sector. Read more
Of all those damaged by the oil price collapse, few are in a more difficult position than Russia. High prices have sustained the Russian economy since Vladimir Putin came to power in 1999. Hydrocarbons provide the overwhelming proportion of export revenue. Now something radical may be needed to avert economic collapse and political dissent.
Privatisation is back on the agenda of the international oil industry. Although the prospect of the Saudis selling a share in Aramco has been tantalisingly floated by the Saudi deputy crown prince Mohammed bin Salman in his interview with the Economist two weeks ago, there are other potential sales that are likely to be completed sooner. The most intriguing is the possibility that the Russian government will sell off another slice of its 69.5 per cent holding in Rosneft. Read more
Oil is now $30 a barrel. For investors and those dependent on investment income the question is whether the pain being suffered by the oil and gas producers is about to spread to the wider economy. Over the next month most of the companies involved in the sector will produce their annual results and announce their dividends. Investors will be watching anxiously for cuts. But the stark and rather shocking truth is that most companies in the oil and gas business are being forced to borrow to meet their payout commitments and that is a dangerous thing to do.
After a fall in prices of 70 per cent over the last 18 months there is a strong prima facie case for dividends to be reduced. That would painful for investors — not least the institutions that are relying on big oil for more than 23 per cent of total market yield. (Another 8.9 per cent of yield should have come from the mining sector if Glencore and Anglo hadn’t already cut their dividends.) But will it actually happen? Read more
It has always been hard to accept the argument that the series of wars in the Middle East since 2001 have been about oil. Afghanistan is not an oil state and most of the oil which will be produced from Iraq will end up in China and the Far East rather than in the US or Europe. On the other hand what is happening now in Syria and Northern Iraq shows that oil and power are inseparably linked. Read more
Of course the answer is obvious. How could anyone be so foolish as to think that a company with earnings of $19bn in 2014, with reserves of 13bn barrels of oil and gas and with daily production of 3m barrels of oil and gas could possibly fail ? How could anyone think of bracketing Royal Dutch Shell with GEC, or ICI or Lehman Brothers — each in their time great companies but now reduced to dust. Perhaps it is impertinent to even ask the question. Surely Shell has survived for a century and more getting through wars, expropriation, an entanglement with Nazi Germany, the horrors of Nigeria and numerous other “crises”?
All true. Shell is undoubtedly one of the world’s great companies — decent, honest, civilised and a world leader in energy technology. But even those attributes do not provide complete protection in a world where the past is no guarantee of the future. Companies can have too much history and too great a sense of their own institutional importance. In a very competitive world no one is ever totally safe. Read more
There are two divergent views of what is happening to the oil price within the industry and among serious investors. 2016 may help us to see which is correct.
The first view is that the price is inherently cyclical. What has come down must go back up again and the deeper the trough the higher the next mountain.
The alternative analysis is that the shift we have seen over the past three years is the beginning of a long-term structural shift which will see energy prices materially lower in real terms in the next half century than in the last. Those who take this view believe, to put it very simply, that the likely growth in supply is stronger than the growth in demand.
Russia is coming in from the cold. A full-scale reset of the relationship with the international community is well underway. A country that was a pariah state a few weeks ago, isolated by sanctions, is rapidly becoming an essential ally. What does this sudden turn of events mean for the energy business?
The reason for the reset is clear: the enemy of my enemy is my friend. The common enemy is the Islamist militant group Isis. For the Germans and for Chancellor Angela Merkel the destabilisation of Syria has opened up a flood tide of refugees. The warm welcome offered initially in Germany, Sweden and a few other parts of Europe has chilled. Something must be done to stop the flow at source.
For the French and many others across Europe, terrified by last week’s awful events in Paris, the identity of the enemy in Syria and the Middle East has also come into sharp focus. The same is true in Moscow where the downing of a Russian airliner over the Sinai desert has made those in the Kremlin realise that they, too, face a ruthless enemy. When set against the challenge of Isis nothing else matters much. Ukraine and all the other disputes can be assigned to a distant back burner — not solved but not allowed to get worse. It is time to work together. Read more
Oil prices are now 50 per cent lower than they were a year ago, and less than 40 per cent of their peak in 2012. Worldwide, there is a continuing surplus of supply over demand of around 2.5m to 3m barrels a day. This is despite the loss of exports from Libya and two bloody wars – the first against the Islamic State of Iraq and the Levant (Isis) in Syria and Iraq, the another against the Houthi rebels in Yemen. Those two wars, which do not directly affect any significant oil producing areas, are proxy conflicts for the rivalry between Saudi Arabia and Iran. Now, however, there is a growing risk of open war between Riyadh and Tehran. Oil facilities and exports would inevitably be primary targets and in those circumstances a price spike would be unavoidable. The question is whether such an escalation can be prevented.
Relations between the Kingdom of Saudi Arabia and the Islamic Republic of Iran have never been close. The conflict is partly religious, partly economic and territorial. Both want to be the clear regional leader. In recent months relations have deteriorated. The latest trigger is the death of 767 Islamic pilgrims at the annual hajj in Mecca. The dead included an estimated 169 Iranians. Since the tragedy – caused by a stampede at a bottleneck as about 2m took part in the journey – Iran’s leaders have used the event as a stick to beat the Saudi authorities in general and the royal family in Riyadh in particular. The failure of the Saudis to return the dead Iranians to their own country has provoked an unspecific commitment of “retaliation” from Iran’s supreme leader Ayatollah Khamenei.
The heightened language indicates the tension that pervades the region. The situation is comparable to Europe in the months before the first world war, and equally dangerous. Read more
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
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
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
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
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
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
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
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 bets. Read more
|About this blog||About Nick||Commenting|