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Energy is a business where success and failure are determined by technical skills and deep commercial expertise. That is true – up to a point. But consider the range of issues facing the world’s largest energy companies in 2014:

  • how to handle the deterioration of relations between Russia and the west;
  • how to build businesses in the world’s growth markets such as China and India;
  • how to manage the complexities of working in areas such as north Africa where physical security is being compromised by the presence of terrorists groups and the absence of effective governments;
  • how to manage the very different attitudes to energy in different markets such as the German opposition to nuclear or the French opposition to oil and gas which happens to come from shale rocks.

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George Osborne in his Budget speech on Wednesday talked, correctly, about US industrial energy costs being half those of the UK. The situation has deteriorated rapidly over the past five years. His proposed response is worth quoting directly:

“We need to cut our energy costs. We’re going to do this by investing in new sources of energy: new nuclear power, renewables, and a shale gas revolution.”

This must be a speechwriter’s joke. A line written in where the content bears absolutely no relationship to reality. New nuclear at £92.50 a megawatt hour will double the current wholesale price of electricity. New offshore wind on the Department of Energy & Climate Change’s own figures, which many feel are too low, will cost more than £120/Mwhr. These are not secret figures. They are well known in the Treasury, as is the risk of generating capacity failing to meet demand. There was no mention of that little problem. Read more

This week’s meeting of the European Council in Brussels will be a significant test of the EU’s relevance and unity in dealing with the consequences of what is happening in Ukraine. Over the years as indigenous production, especially of gas, has declined Europe has allowed itself to become more and more dependent on Russian supplies. Last year Europe imported 160bn cubic metres of gas – a quarter of its total requirements. Even if Russia were a normal country that level of dependency would look high. Now, with Russia ignoring the strong messages from the German and American governments urging restraint in Ukraine, and massing troops on the border, reducing that degree of dependence is a matter of urgency. Read more

Putin at the launch of the Russian section of a Russia-China oil pipeline in 2010. (Alexey Druzhinin/AFP/Getty)

As well as demonstrating the courage of Ukraine’s people, the one thing that the country’s political crisis of the past few weeks has made clear is the weakness of Russia. President Vladimir Putin likes to present his country as a reviving world power but it is trapped by its own dependence on oil and gas.

The threats and sabre-rattling will no doubt continue. Russia may be able, and should perhaps be allowed, to keep control of the Crimea and its black sea naval base at Sevastapol – though history does suggests that current events are simply sowing the seeds of another long-running conflict there, not least with the Tatars.

Beyond that, however, Moscow is in no position to confront Europe or even the new government in Kiev. The Ukrainians must not allow themselves to be provoked by an Emperor who has no clothes. Read more

The energy business is unstable. Investors and consumers are unhappy. Returns are too low and slow to arrive. Prices seem too high, especially in Europe. Market structures are under political scrutiny. A sector which has been producer led for as long as anyone can remember is ripe for change. One element of that will be forced by the geography of energy demand – most of the growth is now in Asia. But there will be other significant changes – not least when someone harnesses new technology to produce a completely new offer for consumers. Read more

On Wednesday the cabinets of the France and Germany will hold a joint meeting in Paris. The occasion is highly symbolic – both in the way in which normal state-to-state relationships have replaced war in Europe, and in the continued commitment of the neighbours to maintain their alliance whatever their short-term political and personal differences. But the discussion this week could also produce substantive results.

President François Hollande, to the surprise of French business as well as his German visitors, has proposed that the two countries should work to achieve deep co-operation on energy policy. He compares this to the Airbus project which in his words “saved us from becoming a branch plant of the US economy”. The initial reaction to the idea in Berlin has been lukewarm. There is a general fear that Mr Hollande will do everything possible to get Germany to fund French debts. One German told me last week that Mr Hollande should “get on his scooter and stick to what he does best”.

That is a very shortsighted view. Energy policy is going wrong because we are accustomed to thinking within narrow national lines. Each individual country has to achieve whatever is the target of the moment – a 30 per cent cut in emissions; a 20 per cent share for renewables and so on. This is a suboptimal approach. Individual countries can achieve their targets but the costs of working in an atomistic way can be enormous. One of the greatest advances of a complex society is that different people do different things. We do not all grow or kill our own food every day. The case is best spelt out in Robert Wright’s brilliant book NonzeroRead more

The package of announcements from Shell will send a shiver through the oil and gas industry. After years of resisting investor pressure for more immediate gratification, the company which more than any other regards itself as a social institution dedicated to the long term, has blinked. Capex is to be radically reduced. Costs are to be cut with a sharp knife. $15bn of assets are to be sold – enough in themselves to form a medium sized company. And the dividend is to be increased. There is a touch of theatricality in combining a profits warning with a dividend increase but the show satisfied the immediate audience. The shares rose. For the rest of the sector, Shell’s ability to deliver in this way poses a dangerous challenge.

Underperformance is endemic across the industry. Investment always needs to be increased, the rewards are always promised for tomorrow. Among investors are innumerable funds whose need for cash returns is urgent. Since the downturn of 2008 the market has clearly become more short term and less tolerant of those who live on promises of a golden future which is always just over the horizon. Under pressure Shell has been able to make the adjustment, demonstrating that it can quickly cut enough to deliver a material and sustainable dividend increase even when oil and gas prices are flat to falling. That is a real measure of strength, as is BP’s ability to absorb a loss of $50bn to pay the bill for Macondo. Very few companies in the world have that capacity. Read more

Later this week the management of Royal Dutch Shell will finally explain why it has issued a profits warning only 12 weeks after its last formal statement to the market. Investors are waiting for a full and detailed presentation on Thursday. Anything less will reinforce the impression that there is a governance problem which has left top management and directors out of touch with the operations of the business.

Profit warnings are serious things, which means this is quite different from the normal public relations tactic of shovelling all the problems on to the back of an outgoing chief executive, and giving his successor a low baseline from which performance can only improve. Surely a company as serious as Shell is not playing that game? Read more

In a provocative paper published by the Institute of Economic Affairs just before Christmas Professor Colin Robinson, one of Britain’s most senior energy economists, says that the energy sector in the UK has been “effectively renationalised”. The language is strong and the case overstated. The claim is not true in any literal sense. Companies are not being taken over or expropriated by any Government agency. There has been no transfer of ownership. But behind the rhetoric is a real trend. There has been a transfer of effective control, the consequences of which are pushing large parts of the sector back under Government authority.

Professor Robinson’s paper focuses on the UK. But the trend is not restricted to Britain. In different ways a similar shift is taking place in Germany, Japan, and even to a limited extent in the US.

In what has always been a hybrid sector built on a mixture of public policy and private capital the balance of power is shifting year by year. In each of these countries and many others Government is now determining outcomes to a degree unseen since the wave of privatisation in the 1980s. Read more

Is energy policy made in Brussels ? The obvious answer would be no. The EU may have an energy commissioner but he has little real authority. Energy policy is still under the control of individual national governments and as a result there are 28 very different approaches and outcomes. France is supplied by nuclear power. Germany by contrast is phasing out nuclear in favour of renewables. Much of Eastern Europe still depends on coal. There is cross border trade, of course, but most countries have their own distinct energy market.

A series of announcements over the last few weeks, however, suggests that the European Commission which is in its last year in office wants to assert its authority over energy issues by indirect means, using environmental and competition policy to create a de facto Common Energy Policy. A Commission policy statement on energy will be published before the end of January. The issue promises to become more visible and part of the continuing debate about the balance of power between Brussels and the member states. Read more

Vladimir Putin has finished the year in style, consolidating Russian control in Ukraine and winning easy brownie points for the release of controversial prisoners including the oil oligarch Mikhail Khodorkovsky and two female members of the punk band Pussy Riot. The Russian president has also, in a move easily missed in the middle of Christmas, extended Russia’s position in one of the world’s most interesting new oil and gas regions – the Levant basin in the eastern Mediterranean. Read more

You don’t have to believe that freezing consumer energy prices is good public policy to see that just three sentences in Ed Miliband’s speech to the Labour party conference in September transformed the energy scene in the UK. The opposition leader’s comments sent a chill through the market, reducing the value of utility stocks and has left the coalition government struggling to respond to a completely unexpected outbreak of populism. The consequences of the speech, intended and unintended, run on and could yet force a change in energy policy across the EU. Read more

We all spend so much time looking at the dramatic changes on the supply side of the energy business that we risk overlooking the more gradual but equally important shifts on the demand side. To correct that its worth looking at some new work from the Transportation Research Institute picked up in the excellent Energy Collective blog.

The research shows that in the US – by far the world’s largest consumer of oil – transport sector demand is falling. This is not a temporary phenomenon driven by the economic downturn. This is a structural shift reflecting changes in life style and work patterns as well as gains in fuel efficiency. Read more

Two years and one month after the death Muammar Gaddafi, the continuing power struggle in Libya is beginning to affect the oil market. So far the impact is slight, indicating the extent of OPEC’s spare capacity. The bigger risk will come if the instability spreads from Libya across North Africa or to other parts of the region. For investors, events in Libya are a reminder that any investments in the Middle East carry a large political risk. Read more

Nowhere is the failure of the talks between the international community and Iran over Tehran’s nuclear programme more welcome than in Riyadh. A fudged deal would have given legitimacy to the government in Tehran and confirmed the weakness of the strategic alliance between Saudi Arabia and the US.

More important still, it would have raised the prospect of the Saudis having to make serious cuts in oil production and exports to support the price of the output from Opec, the oil producers’ cartel. These are cuts the kingdom can ill afford. But, sooner or later, Iran will be on its way back into the oil market. Read more

The fate of proposals to reform the Mexican oil and gas industry, now being considered by the country’s lawmakers, matters well beyond Mexico itself. The outcome could reshape the energy sector in a number of important countries. Read more

Energy policy is a serious problem which won’t be solved by gimmicks or slogans. Most of the debate in the UK over the last few weeks has focused on the prices being paid by domestic consumers. Now, though, the focus is set to shift to the competitive burden on businesses and jobs not just in the UK but across Europe. With yet more price increases to come, the need for a new and serious policy covering both supply and demand is becoming urgent. Read more

Do renewables represent the future of the energy business or a minor contributor in a sector which will continue to be dominated by hydrocarbons? That will the underlying question at the FT Renewables conference this week. The answer looks to be the latter but financial engineering or a major technical breakthrough could yet change things. Read more

Any new graduate wanting to learn about how companies should handle tough public policy questions should study how the energy companies have responded to Ed Miliband’s proposal to freeze utility prices in his party conference speech three weeks ago. Their actions and comments have been a masterclass in how to make a difficult situation worse.

We have had a mixture of denial (“they’ll never get elected”, “he didn’t really mean it”, “the lawyers will stop him”), mindless abuse (“I don’t think people want to live under Stalinism”) and fear tactics which usually mention the prospect of the lights going out. No one in the industry has bothered to think about why Mr Miliband’s comments have proven so popularRead more

Carl Icahn’s purchase of a 5 per cent stake in the Canadian company Talisman Energy marks the entry of activist shareholders into the energy business. Could it indicate the beginning of a revolution?

Activist shareholders have a bad reputation, particularly in Europe where they are seen as asset strippers who pull apart good businesses for a short-term gain. That can happen but they can also be very productive in forcing companies to examine very hard what they are doing with their shareholders’ money. Read more