by Russell Bruce
Oil has got interesting again. The dramatic collapse in oil prices started in late 2014 lasting until January 2016 when Brent oil dropped below $30 a barrel. That made everyone very nervous in the investment world. For the consumer it was a bonus, heating oil dropped in price and the cost of filling the car tank began to look affordable.
Now the oil price has recovered substantially and after a strong spurt since the beginning of 2018, Brent has this week, been pushing against $80 a barrel. At the close of business on Wednesday Brent closed at $78.16 a barrel. That is good news for petroleum tax revenues and company cash flow but not such good news for consumers with the rise feeding back into inflation as anyone watching the pump prices is all too aware.
The bottom in January 2016 was short and sharp. Oil has risen steadily since with short retrenchment periods and the recovery period is now into the first quarter of its third year. Bank of America is suggesting oil will hit $100 a barrel next year. I can’t tell you if it will but do suggest that might not be such a good deal for the industry or consumer.
The rise in price is all to do with supply and demand. The glut in storage has been cleared. OPEC and Russia are cutting supplies to keep the market in balance. The US is pumping shale for all it is worth as the shale industry has learned to cope with lower prices due to: engineering and technology improvements; low interest rates; strong home demand and a growing export market.
Demand has risen but higher prices could cut consumption back in the States as interest rates rise and income levels barely shift for the majority of wage earners. Trump walking out of the Iran deal probably had as much to do with oil as concern for their disruptive activities in other middle-eastern countries.
Why hit on Iran? Every other country in the region is meddling beyond its borders. Iran has oil. Sanctions cut off supplies, potentially taking Iran’s 5% of global oil output off the market.
The North Sea is looking good
Way back in 2014 we were told oil prices were volatile. True. We were told we needed the broad shoulders of the UK to even out these fluctuations. Absolute nonsense. Northern neighbour Norway, more dependent on harvesting their oil gains than Scotland, has needed nobody else’s shoulders to lean on. They have built their own broad shoulders by investing the tax gains for the future, and a nice little nest egg it is, to provide for the post oil world in a country that wants to make sure they can pay a decent pension to a population that has worked hard and deserves financial security in retirement.
I analysed the downward trends in January 2015 Sheikhs in shakedown mode, a year before oil hit bottom. Markets push until the pips squeak then rescue the seeds and force prices back up, seeking a new heady top. That is where we are today.
The oil majors have taken out costs and the industry has cooperated to bring down extraction costs. BP is working to an assumption of oil in the $50 range and continues to invest in the North Sea. Anglo/Dutch major, Shell heads the largest investment programme in the North Sea since the 2014 crash – committing earlier this year to their Penguins field north–east of Shetland.
The FT reports that up to 16 oil and gas developments are expected to get the go-ahead this year. Industry body, Oil & Gas UK estimates £5bn of investment is in the pipeline for 2018, showing opportunity and confidence in a future with years to flow.
Jersey Oil and Gas holds the licence for the Verbier field discovered in the outer Moray Firth last October. It is committing £9m to further drilling this year and plans to develop Verbier with partners Statoil and exploration and production company, CIECO. Statoil have a 60% stake with Jersey and CIECO holding around 20% each.
The majors are looking beyond oil and gas. Both BP and Shell are investing in renewables. Shell plans for 20% of future capital investment in renewables. It recently bought First Utility and is investing in charging stations for electric vehicles.
Oil majors are in transition to ‘energy majors’ following a path the Scottish government has pioneered.
It’s a gas
The assets of the North Sea are always talked about as oil, yet 50 – 60% of gas from the UK continental shelf is extracted from Scottish waters. Gas is how most people heat their homes and has a long-term future. The UK increasingly needs to import gas and the fact such a large share comes from Scottish waters will not have gone unnoticed in London.
The significance of Scottish gas assets is not the end of the story as offshore wind becomes ever more important to our energy mix with the World’s first floating wind farm having performed better than expected in 100mph winds, according to operators Statoil. Operating at about 65 percent of total design capacity, Statoil said Hywind performed better than its anchored counterparts. Add tidal and wave renewable energy projects to Scotland’s renewable energy basket and Scotland has build an impressive energy industry and export market for our surplus energy.
In the last instalment of my previous energy analysis in January 2015 the summary stressed the need to see Scotland as an energy powerhouse, ready to move on when oil’s share of the energy market eventually declines.
Oil and gas production is essential to our long-term ambitions in renewable energy because the earnings, technology overlap and skills base must be supported and further developed in order to achieve what is a long-range transition.
It is also time to shift the focus. For too long, there has been too much emphasis on Scotland’s economic ‘dependence’ on oil, when in fact we have a broad energy mix that demands a holistic understanding of Scotland’s strength as a player in the energy market.
This summary, from three years ago, remains valid today.
Scotland has energy. It has power. To maximise the returns we need to engage with the most important power in the land – our people. An energised people can achieve great things. Our time is coming. We have shoulders enough and only need to believe in ourselves to utilise our wealth of energy to create a society free of endless austerity.
It is apparently not fashionable to look to Norway, to mention oil – even as a passport to a future in renewables. Whatever finally emerges from the long awaited, ever promised Growth Commission Report we cannot avoid lessons from our northern neighbour or the oil inheritance they have created for future generations. So ‘Oil be dammed’ – I will do a follow up article on lessons from Norway next week.
Until next time dear reader, get those shoulders into fine shape.