Policy

Workers on a fracking rig in the Permian Baisin, Texas

Workers on a fracking rig in the Permian Baisin, Texas  © Getty Images

The oil price is falling again, with the latest drop taking the price in the US below $50 a barrel. Behind the fall is a remarkable story of technical progress which is once again driving up the volume of oil produced from American shale rocks.

It is now almost a decade since the US shale revolution began. From almost nothing production of gas from shale rocks in the country has risen to almost 50bn cubic ft/day at the beginning of this year, according to data from the US Energy Administration. Low-cost convenient gas pushed coal out of the power sector. Instead of importing gas, as many had expected, the US became self-sufficient before becoming an exporter first of coal and then of gas, in both cases weakening already fragile global markets. Read more

Saudi oil minister Khalid al Falih

Saudi oil minister Khalid al Falih  © Getty Images

The new Opec quota has been in force for six weeks, which is sufficient time to judge what is happening on the basis of facts rather than speculation. The key questions are, first, whether the restraints on production agreed last November are working or not and, second, whether the regime that came into force at the beginning of January can be sustained until June, as planned.

The oil price has been remarkably stable at around $54/$56 a barrel for Brent crude. That is about 15 per cent higher than before the November agreement but still barely half that seen three years ago. So will prices rise further or does the current level represent a ceiling? Let’s start with the facts. Read more

China is restructuring its domestic coal industry

China is restructuring its domestic coal industry  © Getty Images

What are the implications of China’s announcement last week that it will be spending $360m over the next four years to build up its renewable energy sector? There are many reasons behind the move, from Beijing’s growing concern about the impact of climate change to the political imperative of reducing low level pollution in the smog-ridden cities. The scale of the investment, however, suggests that two closely related policy objectives are driving energy strategy: an effort to create a modernised economy that can provide employment for the Chinese workforce and a determination to limit dependence on imported supplies.

Two weeks ago, in looking ahead to the potential stories of 2017, I suggested that Beijing might set a target of energy independence by 2025. This provoked a range of responses. Some people told me that such a policy was unnecessary since the country can afford to pay whatever is necessary. Others did not believe anything close to self-sufficiency was attainable. Read more

The Mosul Dam on the Tigris

The Mosul Dam on the Tigris  © Getty Images

The understandable focus on Syria, in particular on the horrific situation that has unfolded in Aleppo over the last few weeks, has distracted attention from the potentially more dangerous developments in Iraq.

Ten years after the execution of Saddam Hussein and five years after the official exit of American troops that was supposed to mark the end of a conflict which began with the US invasion in 2003, Iraq remains a war zone. The unrelenting bomb attacks on both military and civilian targets demonstrate the defiance of Islamist militants. As the battle to retake the strategic northern Iraqi city of Mosul – held by Islamic State forces since 2014 – comes to a head the risks are very high, with implications that will shape not only the future of Iraq itself but also the international oil market. Read more

 

For most of those involved in the energy sector 2016 has been a year to forget. Oil prices have risen a little but despite the Opec deal are still almost 50 per cent down on where they were 2 years ago. Gas and coal prices are also down. Some US coal companies are in a desperate financial position – as are some of the smaller oil and gas businesses who do not have the deep pockets necessary to survive a downturn which is both cyclical and structural. Read more

When will oil demand peak ? The very fact that the question focuses on demand rather than supply is in itself remarkable, given where conventional wisdom on the subject stood only a decade ago. Now there is a consensus that demand will peak first but there is no agreement on when that peak will come. Shell speculated a few weeks ago that it would be within five to 15 years. The Opec producers’ cartel suggested recently that the peak could come in about 2029. But the International Energy Agency in its latest World Energy Outlook predicts that oil demand will be rising up to 2040. Read more

Khalid A Al-Falih, Saudi energy minister

Khalid A Al-Falih, Saudi energy minister  © Getty Images

With less than 10 days to go until the next Opec meeting the gamesmanship goes on. Saudi Arabia has maintained its production at around 10.7m barrels a day while Iran has continued to increase output – opening three new fields which should together produce 220,000b/d. Iran’s public position is that it will continue to increase production from the 3.85mbd achieved in September to 4.2mbd, which it argues represents a fair share of the cartel’s total output.

Neither party seems ready to blink and there is little sign that the promised deal to make a co-ordinated cut in production, which was just about reached at the last Opec gathering in September, will be delivered when the cartel meets again on November 30. The optimism from then has evaporated. Perhaps an agreement will be reached in the next few days but there is little evidence that it would do more than dent the current surplus of supply over demand. Unsurprisingly, prices are falling – down from $52 a barrel in mid-October to below $45 last week. Read more

President Vladimir Putin

President Vladimir Putin  © Getty Images

Twenty years ago, a small group of Russian businessmen saved the country from a return to communism. Boris Yeltsin, physically and politically weak, was close to being beaten in the presidential election by Gennady Zyuganov. In the first ballot, Yeltsin led by just 3 per cent. The money and organisation the oligarchs brought to the party put him more than 13 points ahead in the second and decisive vote. Now, in very different circumstances, the oligarchs may need to intervene again.

Russia is in a parlous state. Real incomes have fallen by 10 per cent in just a year. The rouble depreciated 37 per cent and in real terms gross domestic product fell 3.7 per cent, according to World Bank figures. Household incomes and investment fell sharply. The trends have persisted into 2016. Forget the bluster of President Vladimir Putin and the military activities in Ukraine and Syria. What was once a superpower is now a country in decline. Read more

 

How the proposed Hinkley reactor could look, according to an EDF computer-generated image  © AFP Photo / EDF Energy

The Downing Street review of the Hinkley Point nuclear power project is coming to an end – and a decision will soon have to be made, probably before the end of September. The latest wave of public relations activity from EDF, the company that hopes to build the plant, shows how nervous the company is about the outcome. Given the range of doubts about the costs, the construction risks, the reactor technology and the involvement of the Chinese, that nervousness is well justified. Can EDF come up with an offer that deals with the doubts? If it focuses on substance rather than spin, it is just possible. The choice will be made in Paris. Read more

Energy demand in China appears to have decoupled from GDP

Energy demand in China appears to have decoupled from GDP  © Getty Images

The changes taking place in the world energy market are not just a matter of oversupply or the unwillingness of Saudi Arabia to rein in production. Demand has stagnated and in some areas is falling. The fall is unexpected — all the standard projections still cheerfully predict ever rising demand driven by population growth and the spread of prosperity in emerging economies. That assumption, however, begins to look too simplistic. The reality is more complex and, for producers, much more challenging. Forget the old debate about peak oil. Now it seems we are approaching peak energy. Read more

Oil rigs left in the Cromarty Firth, Scotland  © Getty Images

Is the North Sea doomed to enter a period of terminal decline once the current set of field developments is completed? Or can strong leadership from the UK’s new Oil and Gas Authority and radical thinking take it into a successful fifth decade? The answer is unclear but should be a matter of real concern to the UK Treasury and the Scottish government as well as to the companies directly involved and their staff.

Most of the facts are clear and undisputed.

For the moment production volumes are being sustained by virtue of projects sanctioned before oil prices started to fall in 2014. That should continue through to 2017. But the pipeline of activity beyond that is drying up. New exploration, in particular, has dwindled to minimal levels. It would be surprising if more than half a dozen exploration wells are drilled this year. Read more

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Saudi oil minister Ali al-Naimi holds a press conference in Doha after meeting energy ministers from Russia, Qatar and Venezuela  © Getty Images

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

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Climate change demonstrators during the Paris conference  © Getty Images

Two papers published in the last few weeks provide a sobering reality check after the rhetorical success of the Paris climate change conference in December. Getting any agreement was a diplomatic triumph but producing real change on the scale necessary will be much more difficult. The two documents are very different but both excellent pieces of work. Their calculations and assumptions are detailed, transparent and, most important of all, evidence based. Both, however, reflect a degree of unjustified optimism. Read more

Oil pumps in operation at an oilfield ne

  © Getty Images

We are about to enter the period when companies announce their annual results, declare dividends and reveal strategy updates. Across the energy sector from the major oil companies to the utilities to the smallest renewables businesses a huge amount of high-paid time is being devoted to the preparation of slide packs and press briefing notes. After a year of spectacular underperformance, many chief executives will rightly be nervous about the questions they could be asked.

Every individual company has its own particular problems but here are some generic questions that should be addressed to all those leading the main energy businesses across the world. Investors should be very wary of putting their money into any company whose leaders cannot provide straightforward and convincing answers. Read more

IRAQ-OIL

  © Getty Images

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

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A tunnel at the LNG terminal under construction at Dunkirk, France  © Getty Images

If you think the fall in the oil price is dramatic and disruptive, take a moment to consider the natural gas market. The world’s three main gas markets — in Europe, the US and Asia – may be distinct but the growth of trade in liquefied natural gas which can take it across the world has linked them. The impact of a swing in one market soon spreads across the globe.

According to the excellent analysis from Energy Aspects, prices for LNG in the key north-east Asian market – the supply into Japan and Korea – are down this year by more than 50 per cent to between $7 and 8 per million British thermal units (Btu), even allowing for a slight seasonal ramp up in the fourth quarter. That is almost 70 per cent down from the peak in 2013.

Unfortunately, at the time of that peak many companies got carried away and set in train dozens of new LNG projects worldwide. The complex technology of liquefaction means that each project is expensive – costing at least $5bn and often much more. Of the projects planned dozens have been cancelled, often forcing investors to write off substantial sums. But the bad news is that many are still under construction. Once work has begun, it is very hard for companies to go back on a major investment decision. Read more

National Tribute to The Victims of The Paris Terrorist Attacks At Les Invalides In Paris

Laurent Fabius  © Getty Images

The agreement on climate change in Paris will satisfy no one. The complaints are predictable and have already begun.

The commitments made are not legally binding and political decisions could be altered by future elections or regime changes. The funds available for adjustment are too limited and, of course, there is no carbon price.

All true, but politics is the art of the possible and what has been agreed is a triumph for French diplomacy and for the French Foreign Minister Laurent Fabius personally. Many deserve credit but success depends on leadership. He is the Energy Personality of the Year because he has played a crucial role in changing how the sector will evolve worldwide for decades to come. Read more

George Osborne’s concept of a “Northern Powerhouse” is a good and timely idea. The UK economy is disproportionately skewed to London and the South East. Other regions need development and jobs. The cities of the North – from Liverpool and Manchester to Leeds and Sheffield provide a strong base with great potential. What they can achieve could provide a model for other neglected areas. But good ideas need to be translated into tangible actions. So here is one possibility – Northern Power – a municipal energy business for the North of England. Read more

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Chancellor Angela Merkel and President Vladimir Putin talk at the G20 summit in Antalya,Turkey, on November 16  © Getty Images

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

Optimism, however essential for human progress, can be very dangerous if misapplied or allowed to run to excess. There can be few better examples of this than the new review of India’s energy future published last week by the International Energy Agency. As you would expect, the paper is fascinating in its detailed description of India’s energy economy. But the forecasts are seriously over optimistic. They gloss over the challenges that even a radical modernising government in Delhi is not managing to overcome and they ignore the very real risks of a much less happy outcome. Read more