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Welcome back to Source of Energy. This is Tom Wilson, writing to you this week from London while my American colleagues are enjoying a day of rest and relaxation for Presidents Day celebrations.
After months of doom and gloom, the mood in Europe is improving with the first early signs of spring and news that wholesale natural gas prices have fallen to below EUR 50 per megawatt hour for the first time in almost 18 months. With the help of mild weather, ample storage space and a push for alternative sources, traders report growing confidence that European countries will avoid shortages this winter and next.
Europe should also now benefit from the return of an LNG export plant in Freeport, Texas, which supplied about 10 percent of Europe’s LNG imports before an explosion halted operations in June. See Houston’s Justin Jacobs reporting hereand more information on the outlook for the LNG market, further in the Data Drill.
But first I want to explore a question that has been on my mind since BP stunned the energy sector this month by deciding to scale back its commitment to cut oil and gas production by 2030: will Shell, its biggest European rival, do the same? ?
Thank you for reading.
Could Shell follow BP and reduce its commitment to cut oil production?
To recap, in 2020 BP CEO Bernard Looney made an industry-leading commitment to reduce its emissions by cutting oil and gas production by 40 percent by 2030 compared to 2019 levels. On February 7, it scaled back to a 25 percent reduction , citing the move as a response to government calls for more production in the wake of last year’s Russia-instigated energy crisis.
The revised target raised several questions: does it signal a change in the approach of Europe’s major oil and gas companies to the energy transformation? Can we expect BP and Shell to start behaving more like Exxon and Chevron? Will Shell make a similar adjustment?
For the first two, after countless conversations, I believe the answer is still no. For now, both companies are committed to developing significant low-carbon businesses over the next 20 years to help them generate revenue in a low- or zero-emissions world.
BP is increasing its spending on its transition businesses to 50 percent of total investment by 2030. Shell expects a third of group spending (capex and opex combined) to go to low-carbon by 2023. In comparison, about 14 percent of investment over the next five years will go into “lower emissions” – and more than half of that will be spent on reducing emissions from own operations rather than developing new low-carbon income.
However, it’s clear that both BP and Shell at least want to sound a little more like Exxon, in large part because the stock market tells us that’s what many investors, especially in the US, want.
In fact, when I spoke to analysts after my full-year results, recently appointed Shell CEO Wael Sawan sounded – to me – more like a traditional oil and gas executive than his predecessor Ben van Beurden towards the end of his tenure.
Sawan, who has spent the past 18 months leading Shell’s integrated gas and low-carbon business, did not suggest Shell was abandoning any part of its energy transition strategy. However, his catchphrases 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 likely that Shell could follow BP and limit its commitment to cut oil production.
Here’s Sawan on that call, answering an analyst’s question on the subject:
“As we look to the future, a key area of concern is the longevity of upstream and our upstream resources. . . more on exactly what that looks like I think is better discussed at our Capital Markets Day in June 2023, but longevity is a major part of our focus”
Such a move would be less seismic than the BP action. BP has pledged to reduce oil and gas production by 40 percent by 2030. Shell, on the other hand, has agreed to allow only oil production to fall, and only by 1-2 percent a year from 2019. ahead of that target, with oil production down about 10 percent from 2019 due to divestments.
However, some analysts believe that an adjustment is still necessary and, judging by the share price reaction to BP’s announcement, would likely be rewarded in the short term. Here is Biraj Borkhataria, Head of European Energy Research at RBC Capital Markets.
“I think Shell should reconsider its target of reducing oil production by 1-2%. This was introduced when there was a strong emphasis on supply-side driven energy transformation, which does not make sense in the reality of the new world. We think Shell should try to keep volumes flat over time while reducing the 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 convinced that the events of the past 12 months warrant any change in approach.
“The three-year energy price cycle does not validate or invalidate anyone’s strategy. It’s just saying that right now we’re in a period where we have high hydrocarbon prices, and if you’ve set up your corporate strategy to benefit from high prices, then you look like you’re right in the short term, but that doesn’t mean you’re right in the long term the truth,” he says
But the past 12 months have also shown that investors expect Sawan and Looney to ensure their companies can continue to maximize profits while this transition takes place.
“We do not engage with businesses to get them to switch because we are willing to trade a certain amount of financial results in exchange for a better climate. It’s about saying, ‘We believe that behaving in a certain way in 10 to 20 years will make you more resilient to investing than you would be otherwise,'” Stansbury tells me.
Officially, Sawan was tasked with implementing the energy transition strategy initiated by his predecessor and in the development of which Sawan was closely involved.
But his actions in the first two months – combining oil and gas responsibilities in one executive committee position and a review of Europe’s unprofitable household energy business – have shown he is prepared to take quick decisions where he believes change is needed. . More adjustments at Shell’s capital markets day on June 26 could be on the way. (Tom Wilson)
Now let me apologize for sticking with Shell, but I think it’s justified. Late last week, the company released its widely watched LNG annual outlookwhich – as we expected from the world’s largest LNG trader – was full of statistical insights:
Global LNG trade in 2022 was 396 million tonnes, up 4 percent from 2021.
Europe was by far the largest importer, receiving 121 million tonnes, up 60 percent from 2021, as it replaced gas from Russia. This was about 50 million tons more than second place Japan imported.
The largest year-on-year increase in LNG imports was recorded by France (approximately 12 million tonnes), followed by the United Kingdom (approximately 8 million tonnes)
The growth in European imports was largely offset by declines in imports in China by 15 million tonnes, in Brazil by 5 million tonnes and in India by 4 million tonnes.
What does it all mean? Here are three of our key takeaways:
The growing European demand for LNG was not a one-off. The commissioning of more floating storage and regasification units this year in Italy, Germany and elsewhere means more import capacity to meet more demand.
China will become a “balancing market”. Historically, the availability of cheap Russian gas meant that Europe could only decide to buy LNG when the price was right. As Europe is now dependent on LNG imports, China will play a balancing role in the future. As of 2020, China has increased domestic gas production by 14%, pipeline gas imports by 33%, gas storage by 35% and regasification capacity by 19%, allowing it greater flexibility in purchasing and consuming LNG.
More LNG production is needed in the long term. Shell estimates that global demand will increase to 650 million to more than 700 million tons per year by 2040. But even under the most optimistic forecasts, supply in 2040 will be less than 500 million tons based on current production capacity and projects under construction. (Tom Wilson)
Energy Source is a bi-weekly energy newsletter from the Financial Times. Writes and edits Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.
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