BG bouyed by LNG

A BG LNG cargoResilient” is how BG Group’s CEO Frank Chapman described the company’s second quarter performance. BG reported a 37% fall in profit to £507m (US$830m) the result was hit, like BG’s peers, by lower oil and gas prices but buoyed by the decline in the pound against the dollar – removing exchange rate gains BG’s profits fell 48% in the second quarter. With this in mind Mr. Chapman’s description is apt (bordering on sanguine).

BG’s made much of its success in Brazil, as it should with the Tupi field expected onstream by 2010, but the crux of the issue for BG is how its liquefied natural gas (LNG) business stands-up to falling energy demand. The answer appears, thus far, to be quite well actually.  

BG said in January that it expected operating profit from its LNG business to fall in 2009. Its LNG business reported second profits of £311m, down 15% – not bad when you consider that Henry Hub gas prices fell 66% year on year over the quarter. More impressively over the first six months of the year profits were up 17%.

BG has built a reputation as a savvy LNG operator. Last year, as demand for LNG soared, it positioned itself as the LNG supplier of last resort. By not to tying its cargoes down to fulfil long-term supply contracts BG was able to maximise its exposure to the spot LNG market, a profitable strategy with its LNG business earning £1.59bn in 2008.

The flipside is that when LNG demand (and prices) fall, profitability suffers. Ever flexible, BG moved away from this model, signing forward contracts in an effort to protect revenues.

In July, BG sent its first contracted LNG cargo to Chile and first commissioning cargo to the Dragon LNG terminal in the UK. BG has signed agreements to supply 8.3m tonnes of LNG per year (t/y) to Chile, Singapore and, notably, China a deal which underpins the development of its LNG project in Queensland, Australia.     

Mr. Chapman said that BG’s view on LNG was “unchanged” over the short term. The business unit is expected to earn a pre-tax profit of £1.4-1.5bn in 2009, easing down slightly to £1.2-1.3bn in 2010. BG remains confident that LNG demand will pick-up over the longer term.  

However, like its peers, BG faces the challenge of maintaining expenditure as revenues fall – over the first half of 2009 the company’s borrowing more than doubled to £2.06bn. A key fillip for BG has been its ability to grow production, up 7% year on year in the second quarter to 643,000 barrels of oil equivalent per day (boe/d). It expects to grow output by 6-8% a year but pushed back its end-2009 production target of 680,000boe/d to the first quarter of 2010.

BG appears will placed to ride out the storm but much will depend on its LNG business. BG’s cost-competitive Atlantic Basin portfolio provides it with a strong platform and its venture to develop US gas shale reserves with Exco Resources shows that it is not resting on it laurels. But a prolonged dip in gas prices and demand in key markets will test BG.

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Oil: The end?

Athabasca oilsands project, Shell

Greenpeace, an environmental activist group, this week has been promoting its report which argues that the economic rationale for developing Alberta’s oilsands – indeed, for developing most of the world’s higher-cost oil provinces – has changed for good since the oil price crash last year.

The report was issued, no doubt, to steal some of thunder from the quarterly earnings updates coming from the largest oil companies, starting with BP on Tuesday and followed later in the week by Exxon and Shell, etc.

The Greenpeace report was prepared with Platform London and Oil Change International, two organisations that also lobby for “clean energy” – the latter, according to its website, “campaigns to expose the true costs of oil and facilitate the coming transition towards clean energy.” The environmentalist lobbying point of view is, of course, not in doubt. But what of the merits of their argument?

Well, the report leans heavily on recent reports from others, including the International Energy Agency (IEA) and OPEC, that have pointed to delays to projects around the world following last year’s oil price slump.

Greenpeace goes on to examine the “demand suppression vs. demand destruction” discourse that was aired by the IEA and others, and it marshals most of the arguments that have been made in support of the demand destruction case, which holds that the developed world has reached the point where a permanent long-term shift away from oil is likely.

Among reports cited was one from Arthur D. Little, a consultancy, earlier this year entitled “The Beginning of the End for Oil?”, which concluded that the triple-whammy of volatile energy prices and worries over both supply security and climate change may mean that oil and gas companies “need to give renewed thought to the longer-term sustainability of their business models.”

The arguments are, in their way, compelling. But as the Arthur D. Little report says in its opening, theirs is “an alternative scenario” that makes a case against a possibly “misplaced consensus”. The idea behind conventional projections for the energy mix is that there will be only very slow penetration into the dominant share of world energy that oil and other fossil fuels hold because of the enormous amount of capital investment and political will — not to mention the emergence of a functional world carbon price — required to engineer that shift.

There are many variables along the way and it is likely to be a delicate balancing act for the major players involved. Despite last year’s oil price crash (which has been followed by a bounce that doubled the oil price since December), most big oil companies have been shifting their business models in favour of oil and away from renewable energy this year. The authors of the Greenpeace report discuss industry costs, but generally they don’t allow for one of the main reasons that Royal Dutch Shell and others cited for delaying some of their Canadian oilsands projects: they were waiting for industry labour and infrastructure costs to move down with the oil price.

It doesn’t help the Greenpeace argument that a number of those Canadian projects recently have been put back on track (See “Revving up, a little”). The future of oil, the future of energy maybe just too complicated to generate grabby headlines.

The UK’s green belief

Ed Miliband, Secretary of State, Department of Climate Change

So, to review the reviews of Ed Miliband,  Secretary of State — Department of Climate Change (DECC) — and his “road map” to achieve (revised) carbon emission targets by the (revised) key target-year, 2020.  The UK’s new map was unveiled on Wednesday, mostly in a 228-page Transition Plan document, though accompanying materials stretched the reading matter to three times that length.

Though nobody will have had the time to read and digest it all, cynics and doubters abound.

Taking a somewhat tabloid-esque angle, the Financial Times blares ‘UK industry energy bills to soar’, picking up on the point that industry energy bills are set to increase as a result of the plans outlined. According to DECC, industry will pay 17% extra, more than twice the increase to be borne by retail energy consumers. However, given the subsidies, carbon costs and other tax-related details, not to mention the multifarious volatile costs in the energy industry, it is unlikely DECC, the FT or anyone else has a clue what the net cost to various elements of industry or retail consumers will be over the next decade.

In any case, The Guardian knows the green revolution was never going to be cheap, especially as the UK is coming from behind many other European countries. Nor is the plan in any way simple.  The goals rely on whole array of assumptions about the effectiveness of the European Emissions Trading System (or Scheme), as well as the government’s domestic incentive schemes, such as renewable obligation certificates (ROCs).

There is a leap of faith also in the assumption that the share of power generation from renewable energy sources, particularly wind, will increase seven-fold in the next decade given past performance, as Geoffrey Lean points out in The Daily Telegraph.

A belief system also is required to accept the government’s expectations of job creation (500,000) as part of the its ‘green dream’, The Guardian’s leader page points out.

To have even a chance of success will require rapid progress on a number of unproven or as-yet-uneconomic technologies — carbon capture storage, offshore wind farms and tidal power, to name a few. Mr. Miliband referred to renewables, nuclear and clean fossil fuels as the ‘trinity’ of the UK’s low carbon future energy supply and has promised that the government will press ahead with its new planning framework, to speed new nuclear plants and wind farms. Laudable as they are, reaching the government’s goals in a decade may require a push from the Father, Son and the Holy Ghost.

We didn’t see it in the plan, but  The Daily Mash also spotted a government scheme for tiny head-based windfarms, offering the following helpful illustration:headfarm1[1]

CBI blows cold

4498_RichardLambert11

The Confederation of British Industry (CBI), the largest UK business lobby group, is worried about the direction of Britain’s energy policy.

In a report out Monday, (‘Decision Time’) the CBI argues that current British government policy, which favours wind power, is making energy security and climate change targets harder to achieve because it crowds-out investment in other forms of low-carbon electricity generation. Also, it laments the UK’s over-dependence on imported natural gas for electricity generation.

The CBI’s timing is pretty obvious, just ahead of Wednesday’s publication of the government’s “white paper” laying out its renewable energy strategy. The CBI report’s conclusions also were fairly obvious in calling for more investment in nuclear power and “clean coal” plants, and less in wind and natural gas, to meet its emissions-reduction targets.

The CBI commissioned McKinsey, an American consultancy, to write the report, which calculates that the UK will be importing some 90bn cubic metres (bcm) of natural gas a year by 2030, mostly in the form of liquefied natural gas (LNG).

The report goes on to say that, with only 64% of its energy generated by low-carbon methods, the UK will be “struggling to stay on course” to meet its 2050 carbon targets. The preferred scenario offered by CBI/McKinsey report (“Balanced Pathway”) would limit natural gas generation to 16% in 2030, compared with 36% under current government policies. The largest electricity-generating sector would be nuclear (36%), with coal-fired plants fitted with carbon capture and storage (CCS) technology supplying 14%. The CBI said its plan would lead to 83% of Britain’s energy being produced by low carbon sources.

Under this scenario, most electricity would come from nuclear (34%) instead of gas, with coal-fired plants fitted with CCS, funding for which must be in place by June 2010, the CBI argues.

On a European level, wind power remains a popular option, Denmark, for example, wants to double its wind power capacity by 2025 to account for 50% of electricity demand, while the official German objective is for wind power to meet 20% of electricity demand by 2020.

Like the UK, both Germany and Denmark will have to construct expensive offshore wind farms in the North Sea if they are to meet their current targets. Under the CBI’s proposed route, targeted wind-generated power would fall from the current target of 32% by 2020 to 25%.

It remains to be seen how the government will respond. Britain’s Energy and Climate Change Secretary Ed Miliband, who has been on the PR war path promoting the government’s upcoming plan, described the renewable energy strategy as a “route map” setting out the changes that the government will need to make to achieve its legally binding targets of reducing carbon emissions by 34% by 2020 and by 80% by 2050.

Whatever path is outlined on Wednesday, their will be a price to pay. Weaning the UK off the cheap North Sea oil and gas remains the greatest challenge of all.

Blame it on Goldman

They are coming thick and fast now.

The Securities and Exchange Commission said on Tuesday that it has moved on a Dallas, Texas based ponzi scheme which, it alleges, bunked thousands of investors out of hundreds of millions of dollars. With the clank of the cell door still echoing behind Bernie Madoff, the SEC outlined a classic ponzi scheme case against Paul R. Melbye, Brendan Coughlin and Henry Harrison in which it alleges they sold the same assets 21 times over, using proceeds from later investors to pay expenses and promised returns to earlier investors.

This latest comes on the heels of another rogue trader operation, which came to light last week, whereby PVM Oil in the UK was able to catch the exposure of their market-crazed man before it reached Nick Leeson proportions.

The oil markets have been jittery all year after the giant price swings of last year — indeed the volatility has been sharper in the first half of the year, as prices doubled from their December trough to recent peaks. The euphoria about an early economic recovery has waned and the recent price fall is approching 20%. If Rolling Stone magazine is to be believed, a few powerful guys at Goldman Sachs are engineering the whole thing.

G8: Laughs, but no deal

The Berlusconi G8 summit was getting bad reviews — indeed, ridiculed — even before it got started, and it looks as though one of the key planks of the confab — to get a deal on firm climate change goals for the richest 17 countries that account for 80% of carbon dioxide emissions — will not be achieved.
In Thursday’s session, US President Obama will chair a meeting of the Major Economies Forum on Climate Change (MEF), though diplomats were briefing that there is little chance of a deal on anything more than another statement of intent to curb emissions to not allow temperatures to rise more than 2 degrees centigrade above pre-industrial levels by 2050.

That’ll be a bad sign as the clock ticks down to the Copenhagen summit on a post-Kyoto climate treaty, to be held in December; especially after so much was made of the effort at the inception of the MEF in April, when Secretary of State Hilary Clinton kicked it off saying, “No issue we face today has broader long-term consequences or greater potential to alter the world for future generations.”

In the short term, clearly, the economic crisis has taken precedence over making costly climate-related commitments, whatever the potential consequences.

At a micro level, the sudden onset of financial reality is illustrated by developments such as the deflation of grand plans by T. Boone Pickens, the quintessential Texas oilman-turned-renewable energy proselytizer, who has had to dramatically scale back a scheme for a giant wind operation in the southern Great Plains.

Aside from President Obama, several of the rich countries’ leaders are politically vulnerable so it is not surprising that many would balk at the scale of the financial commitment that is required for energy transformation. Ahead of the summit, the Climate Change Group, published a report setting out some of the numbers involved. For example, the following: “The total required annual average investment to scale technology up to the required level is approximately US$1 trillion between now and 2050.” Furthermore, about a third of the abatement needed through 2030 must come from India, China and other developing countries, which will needs US$100bn-to-US$160bn annually between 2010 and 2020 from rich countries.

Better perhaps, at least for now, to contemplate the lighter side of President Berlusconi’s rule than the hard bargaining that the above implies.

In from the cold?

sakhalin

US President Barack Obama met Russian Prime Minister Vladimir Putin on July 7, with the US president issuing a call “to forge a lasting partnership” in a formulaic set-piece speech. No doubt nodding in agreement was an accompanying delegation of US executives, including representative from the big US oil companies: ExxonMobil, Chevron and ConocoPhillips.

The big US oil players, like their European peers, crave access to Russia’s vast – but politically fraught — hydrocarbon reserves (80bn barrels of oil, 43.3trn cubic metres of natural gas, according to BP’s Statistical Review). They’ve fallen victim, however, to Russia’s weak rule of law and rampant corruption and the legal framework continues to pose a significant obstacle to foreign investment, with Russia’s subsoil law, which limits foreigners’ access to strategic fields, cited by Exxon’s delegation as a major hurdle. A lingering fear is that Moscow will always find some guise to arbitrarily relieve foreign oil companies of their assets.

Royal Dutch Shell was, of course, the most prominent victim, having to cede control of the Sakhalin-II project to Gazprom in 2006 under intense government pressure. Since then Shell has maintained a 27.5% stake in Sakhalin-II, which began exporting liquefied natural gas (LNG) in March of this year. BP’s Anglo-Russian joint venture TNK-BP also has been a perennial victim of Russian manoeuvrings.

Recently, however, Russia has made some significant concessions to foreign oil companies, notably extending an invitation to Shell to participate in Sakhalin-III and IV projects. France’s Total also received the blessing of Putin to form a joint venture with Russian independent gas producer Novatek.

While some cited these examples as a reversal of Russian policy, big oil companies will be only cautiously optimistic. With lower oil prices, Russia needs to attract investment in exploration and welcoming foreign capital is a logical solution. With Moscow strapped for cash, state-owned companies are struggling to meet investment requirements. Sceptics will point out that all that has really changed is Moscow’s ability to finance its companies but the softer tone is welcome for now.