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Welcome back to Energy Source. Tom Wilson here, writing to you this week from London while my US colleagues enjoy a day of rest and relaxation because of Presidents’ Day celebrations.
After months of doom and gloom, the mood is improving in Europe with the first early signs of spring and the news that wholesale natural gas prices have fallen to below €50 per megawatt hour for the first time in almost 18 months. Helped by mild weather, ample storage and efforts to source alternative supplies, traders report growing confidence that European countries will avoid shortages this winter and next.
Europe should also now benefit from the return of the Freeport LNG export plant in Texas, which supplied about 10 per cent of European LNG imports before an explosion in June halted operations. See Justin Jacobs’ report from Houston here, and more on the outlook for the LNG market, further down in Data Drill.
But first I want to explore a question that has been on my mind since BP stunned the energy sector this month with a decision to pare back its commitment to cut oil and gas output by 2030: will Shell, its biggest European rival, do the same?
Thanks for reading.
Could Shell follow BP in paring back its commitment to reduce oil production?
To recap, in 2020 BP chief executive Bernard Looney made an industry-leading pledge to reduce its emissions by cutting oil and gas output by 40 per cent by 2030 compared with 2019 levels. On February 7 it scaled that back to a 25 per cent decline, couching the move as a response to government calls for more production as a result of last year’s Russia-provoked energy crisis.
The revised target has raised several questions: does this signal a change in the approach of the European oil and gas majors to the energy transition? Can we expect BP and Shell to start to behave more like Exxon and Chevron? Will Shell make a similar adjustment?
On the first two, after countless conversations, I believe the answer is still no. Both companies remain committed, for now, to developing substantial low-carbon businesses over the next 20 years to help them generate revenues in a low- or zero-emissions world.
BP is increasing its spending on its transition businesses to 50 per cent of total capex by 2030. Shell expects a third of group spending (capex and opex combined) to go on low-carbon in 2023. In comparison, about 14 per cent of Exxon’s investments in the next five years will go on “lower emissions” — and over half of that will be spent on cutting emissions from its own operations and not on developing new low-carbon revenue streams.
Nevertheless, it is clear that both BP and Shell at least want to sound a bit more like Exxon, in large part because the stock market tells us that this is what many investors want, particularly in the US.
Indeed, speaking to analysts following its full-year results, Shell’s recently appointed chief executive Wael Sawan sounded — to me — more like a traditional oil and gas executive than his predecessor Ben van Beurden had towards the end of his tenure.
Sawan, who spent the past 18 months heading Shell’s integrated gas and low-carbon business, gave no indication that Shell was abandoning any part of its energy transition strategy. However, his buzzwords were “returns” (nine times) and “discipline” (seven times), not “emissions” (twice) or “net zero” (once).
As such, in answer to the third question, it seems plausible that Shell could follow BP in paring back its commitment to reduce oil production.
Here is Sawan on that call responding to an analyst question on the topic:
“As we look into the future, longevity of upstream and our upstream resource is a key focus area . . . more on exactly how that looks I think is better discussed at our capital markets day in June 2023 but longevity is a core part of our focus”
Such a move would feel less seismic than BP’s actions. BP had pledged to cut output of both oil and gas by 40 per cent by 2030. Shell, in contrast, has agreed to allow only oil production to decline and only by 1-2 per cent a year from 2019. Furthermore, it is already ahead of that target, with oil production down about 10 per cent since 2019 due to divestments.
Nonetheless, some analysts think an adjustment is still required and, judging by the share price reaction to BP’s announcement, it would be likely to be rewarded in the short term. Here’s Biraj Borkhataria, head of European energy research at RBC Capital Markets.
“I think Shell should revisit its 1-2% oil production decline target. This was put in place when there was a heavy emphasis on a supply side driven energy transition, which makes little sense in the realities of the new world. We think Shell should aim to hold volumes flat over time while decreasing carbon intensity of its operations,” Borkhataria tells me
Nick Stansbury, head of climate solutions at Legal & General Investment Management, a shareholder in both Shell and BP, is less sure the events of the past 12 months warrant any change in approach.
“A three-year cycle in energy pricing does not validate or invalidate anybody’s strategies. It just says that right now we are in a period of time where we’ve got high hydrocarbon pricing and if you’ve set your corporate strategy up to benefit from high pricing then you look like you’re right in the short term but that doesn’t mean you’re right in the long term,” he says
But the past 12 months have also shown that investors expect Sawan and Looney to ensure their companies can still maximise profits while that transition is taking place.
“We don’t engage with businesses to try to get them to transition because we’re willing to trade away certain quantities of financial performance in exchange for better climate performance. It’s about saying, ‘we believe that acting in a certain way will lead you to be a more resilient business to invest in 10 to 20 years’ time than you would otherwise’,” Stansbury tells me.
Officially, Sawan was appointed to implement the energy transition strategy launched by his predecessor, and which Sawan was closely involved in developing.
However, his actions in his first two months — combining responsibility for upstream oil and gas production in one executive committee position and placing the unprofitable European household energy business under review — have shown he is ready to take quick decisions, where he believes changes are required. Further adjustments at Shell’s capital markets day on June 14 could well be on the way. (Tom Wilson)
Data Drill
Now let me apologise for sticking with Shell, but I think it is justified. Late last week, the company released its widely followed annual LNG outlook, which — as we have come to expect from the world’s biggest LNG trader — was full of statistical insights:
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Global LNG trade in 2022 was 396mn tonnes, up about 4 per cent from 2021.
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Europe was by far the biggest importer, receiving 121mn tonnes, up 60 per cent from 2021, as it replaced piped gas from Russia. That was about 50mn tonnes more than second-placed Japan imported.
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France had the biggest year-on-year increase in LNG imports (approximately 12mn tonnes), followed by the UK (approximately 8mn tonnes)
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The growth in European imports was largely met by a fall in imports in China of 15mn tonnes, in Brazil of 5mn tonnes and in India of 4mn tonnes.
What does all this mean? Here are three of our key takeaways:
Booming European LNG demand was not a one-off. The inauguration of more floating storage & regasification units this year in Italy, Germany and elsewhere means more import capacity to feed more demand.
China will become the “balancing market”. Historically, the availability of cheap Russian gas meant Europe could choose to buy LNG only when the price was right. With Europe now dependent on LNG imports, China will play the balancing role going forward. Since 2020 China has increased domestic gas production by 14%, pipeline gas imports by 33%, gas storage by 35% and regasification capacity by 19%, affording it greater flexibility over when it buys LNG and how much it takes.
Long term, more LNG production is needed. Shell estimates global demand to rise to 650mn to more than 700mn tonnes per annum by 2040. But, even under the most optimistic forecast, supply will be fewer than 500mn tonnes in 2040, based on current production capacity and those projects under construction. (Tom Wilson)
Power Points
This article has been changed to reflect that Shell’s capital markets day is on June 14, not June 26 as originally stated.
Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.
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