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    Editorial: Agonising reappraisals [NGW Magazine]


This year’s crisis has forced companies’ hands: big changes are coming

by: NGW

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Natural Gas & LNG News, Top Stories, Insights, Premium, Editorial, NGW Magazine Articles, Volume 5, Issue 15

Editorial: Agonising reappraisals [NGW Magazine]

The French utility Engie has just sent a strong signal to the market: it is taking the opportunities of the European Green Deal and the global demands of the energy transition seriously enough to double the scope of its disposal plans.

Alternatively, the market might read it as a frustrated company reducing its exposure through Client Services to a competitive sector that has been hit hard by Covid-19. It sold its UK residential customers to Octopus earlier this year before the pandemic bit.

The chairman – we will have to wait until September to learn who the new CEO will be – has decided that it needs now to raise $9bn to finance its necessary investments in infrastructure, renewables and decarbonisation generally and so it is stepping up its cash reserves. Decentralised infrastructure assets such as urban district heating and cooling networks and on-site power generation are on its wish-list. Hydrogen will also be a part of that, it says.

The neat dovetailing between unusable power generated at times of low demand on one hand, and electrolysis on the other, has been often cited as a benefit that the expensive new fuel desperately needs to become more acceptable.

Before electrolysis emerged as an elegant solution to the cost problem of clean hydrogen – which for some reason excludes blue hydrogen in all but the shortest time frames – the green industry ignored the propensity of renewable energy to produce negative power prices on mild weekends. Indeed, managing the relationship between gas and power markets, and the fair allocation of costs between the two, has not had the attention it deserves at EC level. This has created all kinds of perverse incentives and subsidy-chasing, and more seriously, it has discouraged investments in gas-fired power plants. This will have to be addressed as part of the energy transition.

The news of the client solutions sale coincidentally comes a week or so after Centrica announced it would sell off its North American business Direct Energy with its 3mn customers for €4bn, a healthy multiple of its pre-tax earnings. That was for much more practical motives: the UK utility needs to strengthen its balance sheet, which has taken a battering for reasons that were not all within its control, but governmental in origin. All the former Big Six UK retailers suffered and defensive mergers between them have resulted, the largest being E.ON and Innogy.

Centrica has put the sale of its stake in upstream Spirit Energy on hold for better times but it has also announced no ambitious claims to get into hydrogen. Its shareholders, starved of dividends again this year, might be relieved by that news, given the massive uncertainty that such investments will ever bear real fruit. The price-tag Centrica achieved is also pretty much what Engie is aiming for.

We are yet to see what new measures the majors – BP next month, and early next year Shell – will take as they restructure. They might decide to follow Eni’s separation of upstream and other carbon intensive activities from “Energy Evolution” which will grow renewable energy and biomethane power generation; co-ordinate the bio and circular evolution of Eni’s refining system and chemical business; and develop Eni’s retail portfolio.

Eni has had a lot of success with the drill-bit, especially offshore Egypt, Mozambique and most recently Vietnam. These low-cost reserves would be useful for developing a downstream business. Shell claims to have the highest-value barrels in the business, although it points out that overall, only half its production comes from its own discoveries. Shell is developing a retail customer base, to derive more value from its LNG business. Engie on the other hand sold off its LNG business to Total and its upstream international stake to Neptune, so it is less involved in the commodity side of the gas business and more interested in the capacity: networks and terminal operations.

Being green though is not just a game for the big players: take the case of producers, particularly those operating in jurisdictions that are paying lip service at least to the green transition. Neptune in the Netherlands is fully involved with the hydrogen business, despite the risks and uncertainties that it involves.

And offshore Ireland, Providence Resources is hoping that its Ballyroe oil and gas field will match the small but perfectly formed Irish market in every respect. As NGW went to press, Providence had just announced the line-up of the consortium that will develop the field: the members are all oilfield service companies and each will take a part of the development.

If it manages to take the project over the line, Providence will have a wealth of opportunities at its disposal. It will be able to generate power using the kind of plant that grids are becoming dependent on to avoid black-outs. It will, if the government is willing to fund it, be able to generate blue hydrogen using steam methane reformation and inject the resultant carbon dioxide into the just-closed Kinsale Head field. The country’s gas import needs will fall – once Corrib is done, there is nothing else indigenous on the horizon – meaning its balance of payments and energy security will go up. That, small though it is, at least seems to be a business model that will stand the test of time.