‘Exceptional’ oil boom on crash course with decarbonisation drive

One thing to start: Oil prices continued their march higher, with West Texas Intermediate yesterday topping $85 a barrel for the first time in seven years.

Welcome back to Energy Source.

The United Nations’ COP26 climate talks in Glasgow kick off in just five days. As emissions soar, it may be one of the last opportunities for genuine, concerted action to avert damaging climate change. And the tidal wave of pledges, platitudes and PR stunts is mounting.

Saudi Arabia joined the global fray of countries making net zero commitments, vowing to reach the milestone by 2060 with the help of carbon capture technology. Notably, however, the world’s biggest exporter of oil has no plans to cut those lucrative crude sales.

In the US, Democrats are engaged in a last ditch scramble to push pared down climate legislation over the line before the conference begins — so that President Joe Biden does not arrive in Glasgow empty handed. 

In Texas, meanwhile, the green deluge is ruffling feathers. UN secretary-general António Guterres suggested the state would need to shift away from oil and gas in order to remain prosperous in the coming decades. This was Governor Greg Abbott’s response:

For those unfamiliar with the Americanism “pound sand”, this is the governor of Texas telling the UN secretary-general to get lost — or other less delicate words to that effect.

In our main item today Justin Jacobs looks at the oilfield services firms’ uncomfortable message in the lead up to COP26: the world is on the cusp of an “exceptional” oil boom.

Across the Atlantic, meanwhile, Europe’s energy crisis rumbles on, with EU energy ministers meeting in Luxembourg yesterday to discuss the way forward.

Our second item is an op-ed from Pierre Noël of Columbia University’s Center on Global Energy Policy, who argues that European governments should not overreact to soaring natural gas prices.

And as the frantic horse-trading to get Biden’s Build Back Better spending bill over the line continues, Data Drill looks at new polling data that show there is moderate support among Americans to pay to cut emissions — as long as they don’t have to pay too much.

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Decarbonisation: Nothing to fear for top oilfield services firms

The world’s big three oilfield services firms are signalling a fresh boom in fossil fuel drilling. That bullish outlook collides with the lead up to COP26 climate talks next week, when world leaders will aim to plot the global economy’s path away from hydrocarbons.

Here is what we learnt from the third-quarter earnings of top oilfield services firms Schlumberger, Halliburton and Baker Hughes:

1. ‘Exceptional’ growth ahead for oil and gas

Executives are feeling buoyant on higher oil and gas prices and clear signs of recovery from last year’s crash.

Olivier Le Peuch, chief executive of Schlumberger, summed up the bullish consensus: “Strengthening in industry fundamentals, combined with the action of Opec+ and continued capital discipline in North America, have firmly established a prospect of an exceptional multi-year growth cycle ahead.”

Le Peuch sees a broad global recovery in fossil fuel production with demand set to eclipse pre-pandemic levels next year. “Growth will impact all basins, every operating environment, short- and long-cycle activity and all customer groups,” he argued. In other words, expect high prices to spur more drilling everywhere from America’s shale patch, to Brazil’s deep waters, to the Middle East’s ageing giant oilfields.

Baker Hughes’s CEO Lorenzo Simonelli, meanwhile, said he expects strong growth in new liquefied natural gas (LNG) projects after this year’s surge in global gas prices has raised fears of shortages, even as many climate advocates argue the fuel should be phased out.

2. Supply chains and inflation weigh on the sector

Yet this growth is running up against acute disruptions in global supply chains, labour shortages and surging inflation, which is delaying projects and threatening profitability.

Baker Hughes blamed these problems, along with Hurricane Ida, for a wide miss on its profits last quarter compared to Wall Street expectations.

The services firms insist they will pass higher costs on to producers instead of taking them on themselves, which is likely to push up the cost of pumping oil and gas in the coming months.

3. One eye is still on the energy transition

With the focus squarely on growth in global oil and gas drilling, there was notably less talk of companies’ green transition strategies than recent quarters.

A quick look at the Schlumberger, Halliburton and Baker Hughes earnings calls shows the word “carbon” was mentioned just 11 times this quarter, fewer than half the 24 times it was mentioned in the first quarter. “Growth”, by contrast, was back in vogue. The word was mentioned 125 times this quarter, up sharply from 77 times in the first quarter.

But decarbonisation is not completely absent from the agenda.

Schlumberger’s Le Peuch said the company’s focus was on decarbonising its oil and gas customers’ operations by tackling “fugitive emissions, flaring and electrification.” Baker Hughes’s Simonelli said he was seeing “significant secular growth opportunities, particularly in the areas like hydrogen and [carbon capture utilisation and storage].” (Justin Jacobs)

Opinion: No need to panic about natural gas

European governments should not overreact to the painful shortages in fossil fuel markets. They reflect a perfect storm at the wrong time in the commodity cycle, not an inherent contradiction between decarbonisation and energy security. Europe has the latter and should press ahead with the former.

But energy price spikes have revived concerns that Europe might be held to ransom by Russia, which supplies more than a third of its natural gas. Moscow — the argument goes — made a point about Europe’s dependence, and the folly of opposing its Nord Stream 2 project, by holding up supply instead of helping cool down the markets.

The crisis, therefore, should prompt Europe to unravel its gas relationship with Russia. Moscow emphasised the other side of the same coin, suggesting that Europe’s energy security interest called for a more accommodating foreign policy.

Russia’s offer-you-can’t-refuse can be ignored and so should the calls for energy independence. Attitudes towards Russian gas reflect a curious inability to understand a situation that is largely the product of Europe’s own policy success.

Europe has built an integrated market for gas, where the commodity is traded across national borders, with arbitrage inducing price convergence. The decisive change happened after the Great Financial Crisis. For a long period of time, spot liquefied natural gas cargoes were much cheaper than long-term contracts from Russia or Norway, while traders could more easily access transmission networks in Belgium, France, Germany or the Czech Republic. A virtuous cycle unfolded between increasing spot market liquidity and the restructuring of long-term contracts. It led to the full commoditisation of European gas.

The benefits are not just economic. Europe has also decoupled gas supply from foreign policy. Gazprom contracts now bring gas to Europe, not national markets. Gazprom ignores where its gas will be consumed and by whom. Deep into central Europe, Russian gas faces competition and can be displaced. Europe’s access to Russian gas has been depoliticised, and Nord Stream does not change that.

The commoditisation of the European natural gas market has changed Gazprom’s behaviour. With its long-term contracts now priced on spot markets, Gazprom optimises its non-contracted shipments to maximise short-term revenues. The current circumstances are extremely favourable to the Russian exporter. Given global LNG and coal shortages, relatively low storage levels and the tightening up of the European carbon cap, high prices do not lead to quick responses from either supply or demand. Gazprom’s interest is to let the price go up. It may hurt, but it is disingenuous to blame Russia for behaving like the short-term profit maximiser that European policies forced it to become. It is a cyclical commodity, the current market conditions will eventually pass.

The current shortages also revived claims that commoditisation has left Europe at a disadvantage vis-à-vis Asian gas buyers. However, spot prices in Asia have converged with European hubs. Increasingly, Europe and Asia will be one and the same market. Once the global gas cycle turns and prices tumble, Asian markets will face intense pressure to commoditise. They are bound to become like Europe, not the other way round.

Europe has solved its natural gas problem. It now rightly focuses on decarbonisation. Cheap natural gas helps, as it lowers the carbon price needed to displace coal. Reciprocally, when gas prices spike, CO2 prices rise to keep coal at bay. To remove a source of tension between energy affordability and decarbonisation, a price ceiling could be introduced in the emission trading system. Additional insurance against price spikes could be bought, for instance via storage obligations.

Strategically, however, European governments must remain laser-focused on the efficient delivery of low-carbon infrastructure and should not be distracted by a painful, yet temporary, spike in fossil-fuel prices.

Pierre Noël is a global research scholar at Columbia University’s Center on Global Energy Policy

Data Drill

As Democratic infighting continues over what climate provisions are included in the president’s “Build Back Better” bill, new polling data suggest most Americans are willing to pay a little to cut emissions — but balk if policies get too expensive.

More than half of Americans are willing to pay $1 for a monthly carbon fee, according to a new survey by the Energy Policy Institute at the University of Chicago (Epic) and AP-NORC Center for Public Affairs Research.

Yet support dwindles as the sum increases: a fee of $100 a month garners support from about a third of Americans (still double the support recorded in a 2018 poll).

“There is meaningful support for carbon pricing among Americans, yet to date we remain the only holdout among the G7 countries,” said Epic director Michael Greenstone. Some states in the US have already enacted carbon-pricing systems. California, for example, has had a cap-and-trade system since 2013.

The survey also found that more than half of Americans support a clean electricity standard similar to the Clean Electricity Performance Program that was rejected by West Virginia senator Joe Manchin. But the issue is polarising: 35 per cent of Republicans supported policies that would increase the electricity generated from clean sources while decreasing electricity from coal and gas, compared with 75 per cent of Democrats.

“As Congress grapples with these issues once again, there is a golden opportunity for leaders to be responsive to the needs of the planet and the views of the American people,” Greenstone said.

(Amanda Chu)

Bar chart of Support for a bill that increases the share of clean electricity while decreasing power from coal and gas showing Over half of Americans support a CEPP-style decarbonisation scheme

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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