© Getty Images
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
The Braes of Doune windfarm, Scotland © Getty Images
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
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 bets. Read more
© Getty Images
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
© Getty Images
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
© Matt Cardy/Getty Images
One of the many lessons to be learnt from the dramatic developments in the world energy market over the past six months is that outcomes are driven primarily by economics – often at the micro level. Another is the extent to which the market, in its rough and ready way, is linked globally and across the range of fuels. In the oil market, for example, a mild downturn in China upset expectations and started to pull down oil prices across the world because China has been the main engine of demand growth. Once the fall began, it turned out that no one had the power to call a halt. The result has been a fall beyond all expectations, with consequences across the world – from Libya to Angola, from Russia to Mexico and Venezuela. In the coal market, prices fell globally because shale gas was pushing coal out of the US power sector and because of Chinese import tariffs. Politicians in one country or another can try to cut themselves off from the underlying economics, but they rarely succeed for long. The economic impacts are not limited to the oil and coal markets. A set of changes beginning in the US is set to transform the global petrochemical business. A surplus of ethane, driven by shale gas development, is undermining the status quo. Read more
Flames from a gas well 40km north of the Qatari capital Doha (KARIM SAHIB/AFP/Getty Images)
Global trade in liquefied natural gas has doubled over the last decade and looks set to overtake pipeline gas trade before 2020. LNG is the only viable way of supplying most of the growing requirements of China and India, and the most obvious way of diversifying European supplies away from dependence on Russia. The growth in trade, however, also puts the spotlight on the sources of supply. Central to everything is the tiny Middle Eastern emirate of Qatar. Read 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
It seems bizarre to say that a company which will generate cash this year of between $40bn and $45bn has a fundamental structural problem. But the latest results from Royal Dutch Shell show just how weak the correlation between size and performance has proved to be. Capital expenditure is so high that even cash at that level may be insufficient to cover spending and dividends. The company looks lost – a lumbering dinosaur in a world where the prizes go to the quick and nimble. Read more
Congratulations to Ben van Beurden, the new chief executive of Shell. We are moving into a period when gas is the dominant fuel and Mr van Beurden has great experience in that area, particularly in liquefied natural gas. He is also Dutch which is a good reminder that despite everything Shell has not lost its nationality, after all. The candidates who lost will all soon find alternative jobs. Shell is now the great training ground and there is a shortage of talent at the top level in the international energy business. Mr van Beurden meantime will have to focus on Shell’s big problems, of which I will focus on three. 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
Ukraine deal confirms Shell's commitment to shale gas. Getty Images.
Shell’s decision to invest $10bn in the development of shale gas in Ukraine is certainly a significant move.
First, it confirms Shell’s commitment to shale and the company’s determination to override environmental objections to the technology of fracking. Shell believes shale can be developed safely and cleanly enough to avoid damaging either the environment or the company’s reputation. This move will help to confirm shale’s arrival in the mainstream of the energy market. Read more
Shell's drilling barge the Kulluk. Getty Images
There are two important lessons from the mounting problems facing Shell as a result of the series of accidents that have afflicted its drilling programme in the Arctic.
The first is that major companies must have the capacity to call a halt and to break the inexorable internal momentum that so often makes it impossible to stop projects once they have started. The ability to reconsider is a great sign of strength not weakness.
The second is that a company such as Shell which prides itself (rightly) on its environmental performance is only as good as its weakest contractor. Read more
The abandonment by Shell of this years drilling plans in the Arctic is hardly a surprise. The project is complex and has run into one technical problem after another. Shell is rightly prudent when it comes to the risks involved in an area which is both environmentally sensitive and under the intense scrutiny of the world’s media not to mention a set of lobby groups energised by the prospect of taking on one of the world biggest companies.
There will now be another delay adding to the five years and several billions of dollars the company has already devoted to the project.
Shell has decided to take on the environmental lobby and to prove that the Arctic can be drilled and developed safely. That is a big bold move in itself, but the real problem for the Shell board and it’s shareholders – which include most pension funds in the UK and the US – is that the economics of development make sense only if one assumes ever higher oil prices.
Shell has never published a detailed analysis of the economics of Arctic development. The commonly quoted numbers for the resources which could be found – 26bn barrels of oil and 130tn cubic feet of gas – suggest a big prize. But what is the cost of development? And what oil or gas price in the US or the world market is necessary to make the project profitmaking?