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Hold the champagne

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screen-shot-2016-11-03-at-14-50-16By Ed Crooks, November 4, 2016

If you are looking forward to the oil industry recovery, you shouldn’t break out the champagne just yet.

Over the past eight days, the world’s largest listed oil companies have released third quarter earnings reports. From all of them, the message was that while the worst might be over, they were still facing a long hard road ahead.

The snap reactions from the stock market were mixed: positive for  ChevronRoyal Dutch ShellTotal and ConocoPhillips; negative for ExxonMobilBPEniStatoilPetrochina and Cnooc.

But whatever their short-term position, they are all under the same pressure from weak oil and gas prices, and are all responding in similar ways: with curbs on spending and programmes to cut costs and increase efficiency. 

Shell outperformed many of its peers in the third quarter, helped by cost savings from integrating BG Group, which it bought in February. But it still plans to cut capital spending again next year to $25bn, from $29bn in 2016.

The pressure on budgets at oil production companies is driving consolidation in the oilfield services industry. General Electric agreed to merge its oil and gas division with Baker Hughes, which will retain its name and an independent listing, and the two companies made clear that the principal benefits they expected were from lower costs, not higher revenues.

As the oil industry downturn drags on, it has been prompting companies to reassess their longer-term futures, too. Exxon warned that it might have to “de-book” about 19 per cent its reported proved reserves at the end of the year, and could take non-cash charges for writing down the values of some of its assets. In a small but telling adjustment to its corporate governance, Exxon changed its bylaws to make it easier for shareholders to nominate directors to its board. Investors who are concerned about environmental issues have argued that having a different set of views on the board could help avoid the need for that type of writedown.

Meanwhile Simon Henry, Shell’s CFO, made the eye-catching suggestion that oil demand might peak in the next five to 15 years, and said the group was preparing with its investments in gas and renewable energy to be “the energy major of the 2050s”. The FT’s Nick Butler said Mr Henry was right, and the signs of a demand peak in the 2020s were “already evident in the data”.

Despite all the talk about a changing energy industry, the vast majority of investment by oil and gas companies goes into – you guessed it – oil and gas. A group of ten large oil companies including Saudi Aramco, BP, Shell, Statoil and Pemex, called the Oil and Gas Climate Initiative, on Friday announced a $1bn investment over ten years to develop and accelerate low emissions technologies.

That amount, for nine companies over ten years, is what Shell alone plans to spend on investment in two weeks. Bob Dudley of BP accepted that the amount on its own was not enough, but added: “I believe it is going to have an impact and let’s remember this is only part of a much bigger picture” in terms of other investments made by OGCI members.

If Shell is right about oil demand peaking in the 2020s, it is bad news for Opec, which is still struggling with the implementation of the plan to cut production that ministers agreed in Algiers in September. The oil price has now given up all the gains it made following that announcement. Opec’s monthly bulletin said the group remained “deeply optimistic” about the possibility that the Algiers agreement will be complemented by precise, decisive action among all producers”.

Oil producing countries’ urgent need for higher prices was underlined by the deepening crisis in Venezuela, where the Vatican has been playing a key role in promoting dialogue over conflict.

Another oil producer concerned about the price is Kazakhstan, where even a rebound to $50-$55 implies GDP growth of only about 1 per cent.

The Paris agreement on climate change came into force on Friday. (Here’s an explanation of what that means.) Patricia Espinosa, executive secretary of the UN Framework Convention on Climate Change, wrote that it was “a moment to celebrate [but] also a moment to look ahead with sober assessment and renewed will over the task ahead.” The world was “not nearly” on track to meet the Paris accord’s primary goal of keeping global warming well below 2 degrees C, she added.

Martin Wolf in the FT described the Paris agreement as “toothless”, and argued “a global effort of appropriate scale and urgency” was needed. He added that he remained “pessimistic” that the world would collectively recognise the reality of climate change and act to tackle it.

The actor Leonardo DiCaprio is the latest celebrity to try to raise awareness and provoke action on climate change, fronting a new documentary called Before the Flood. Reviews so far have been mixed.

Quote of the week

“We’ve long been of the opinion that [oil] demand will peak before supply. And that peak may be somewhere between five and fifteen years hence, and it will driven by efficiency and substitution, more than offsetting the new demand for transport” – Simon Henry, chief financial officer of Royal Dutch Shell on the company’s long-term view, in which the long term could be only five years away.

Other views

Nick Butler: Will oil peak within 5 years?

Climate solutions

Ahead of the Cop 22 climate change conference in Morocco starting next week, Solutions & Co has produced an ebook of articles from global media partners including the FT, and identified innovative ideas to tackle global warming: from an air quality detector in Russia and shared refrigerators to preserve tomatoes in Nigeria, to a system to reduce food waste in France and more sustainable porous pavements to tackle potholes and flooding in Mexico. (FT)

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