Editorial: Survival of the fittest [NGW Magazine]
The flow of bad news seems as endless as it did in 2014: redundancies, impairments and divestments abound.
Two big UK energy companies, BP and Centrica, both announced plans to cut their workforce substantially to stem losses. More expensive management is first in the firing-line but no doubt a fair number of geologists will also be contemplating a bleak short-term future.
BP also warned it would write down up to $17.5bn, reflecting the fact that some of its finds will never see the light of day – at least, not with its money fuelling the rigs. Shareholders will now be asking themselves if it will follow Shell and cut the dividend.
Other majors are likely to restructure or to report similar write-downs, as all have the same problem ahead of them: nobody wants to be left holding the most expensive barrel or therm when the music stops. And they all need to invest in zero-carbon energy, whichever of its forms – some yet to be invented, no doubt – they decide to pursue.
The other lever that companies can pull is asset sales and these are likely to attract interest from the kind of new entrants that have been lured to the North Sea ever since it passed its peak production. BP has already agreed to a major price reduction in its deal with Premier Oil, although that particular company has been around for some time; Centrica is still casting about for a buyer for its stake in Spirit Energy, once valued at $1bn.
ExxonMobil is seeking to offload its UK North Sea business, comprising shares in around 40 fields, as part of a staged withdrawal from Europe’s upstream sector. Meanwhile, Shell is reportedly looking for a buyer for two past-their-peak deposits off Norway. These will fetch much less now than they would have even six months ago. But go they must, to cover dividends, debts and finance more attractive projects.
Private equity-backed producers active in the North Sea since 2014 might have hoped to be rubbing their hands by now as they reached their projected flipping point: fat chance of that, in today’s market. Among them is Neptune, chaired by a former Centrica boss. Still, they can keep producing, secure in the knowledge that the world will need plastics and internal combustion engines, be they gas or oil powered, for decades to come. Hydrogen too will also be needed, and methane is a good source for that, if it can be produced cheaply enough.
But it would be a mistake to see it only as a question of small companies filling the vacuum as the majors leave: they need the cash and the expertise that big companies bring, and Shell, for example, still sees value even in smallish gas fields if they are close to major markets and on and offshore infrastructure allowing them the flexibility to cash in on peak demand.
As in the past, the geologists still in the market will be looking for work once the assets are redistributed from the large to the small companies. And the signs are still encouraging, despite the continuing lockdown in many countries: Opec+ is complying better with output limits and the tide of LNG washing up in Europe is now ebbing slightly, even as gas demand in UK and German power revives. Low prices will eventually send signals to the wellhead and the clouds will inevitably part once more, albeit above a different landscape.
For the minnows, the obstacles placed in their path by the energy transition are going to be a troublesome fact of business life, but one that seems confined mainly to relatively affluent societies such as Europe as it experiments with the net-zero carbon goal.
If the UK example is anything to go by, a sense of proportion will be an early casualty of these efforts, just as coal-fired generation takes off again in India, China and elsewhere. The Covid-19 lockdown may have cleared the air sufficiently for a rare glimpse of the Himalayas, but energy self-sufficiency appears as important a goal as health. Nevertheless, one suspects that the exploration and production sectors in other parts of the globe, even in Asia, still have a bright future ahead of them, especially outside the power sector. Transport and industry need gas.
And even while Europe views upstream development with increasing antipathy, its citizens continue to consume the oil and gas those projects provide. Germany’s RWE aims to finalise an LNG import contract by the end of this year that will underpin the construction of what is expected to be the country’s first regasification project.
Several more ventures like this are in the works. At the same time, Germany’s government has excluded gas-derived blue hydrogen from its hydrogen strategy, causing much angst within its gas industry. It would be a shame for all this new gas import infrastructure to go to waste though and maybe Uniper, represented on the hydrogen council, can sway the other members.
Meanwhile Croatia has managed to secure reservations for all the capacity at its Krk LNG project for the first few years after its launch in 2021. This has cast away some of doubt about whether the project would find enough demand to turn a profit. Qatar for one is confident about gas’ long-term prospects, as it looks to bring an extra 50mn mt/yr of LNG onto the market within the next decade.
Given that, and other pipeline developments in the Balkans, it is hard to see gas demand justifying the upstream developments to feed the Southern Gas Corridor expansion, let alone the EastMed gasline, for many years to come.