Shell steps up in supermajor showdown

Good morning from a baking hot Houston.

Temperatures here are expected to break 100F (38C) in the coming days as a heatwave sweeps across the state. Texas’s power grid operator Ercot has warned of record electricity demand as homes and offices crank up the air conditioning.

Soaring temperatures are becoming the norm in Texas. Power demand in the state scaled new records 11 times last year as climate change bites in America’s energy heartlands.

I will be relocating here from New York full-time next month, taking over as Houston correspondent following Justin’s departure. I’m hunting for tips on everything from oil patch drama to where to get good brisket. Please get in touch: myles.mccormick@ft.com.

Speaking of oil, the International Energy Agency said yesterday that the world would hit peak demand before the decade is out, with consumption in transport sliding as soon as 2026 as electric vehicles gain traction.

In today’s newsletter Derek and Tom report from Shell’s big day on Wall Street, where the company’s top brass sought to woo investors with a pitch stressing “discipline”, returns and a more “balanced” energy transition approach.

We also have an op-ed from veteran energy trader Adi Imsirovic of Surrey Clean Energy, who hits out at Saudi “theatrics” in blaming speculators for oil price falls. In Data Drill, Amanda charts the geographically uneven surge in global battery storage.

Thanks for reading. — Myles

Shell’s Sawan makes his pitch

Shell held its much-hyped investor day yesterday, with new chief executive, Wael Sawan, delivering a polished performance designed to spark enthusiasm for a supermajor that some investors feel has lost its way in recent years.

The event’s location, a gilded room in the New York Stock Exchange, was symbolic: the US remains friendlier to oil producers — one reason why a switch of domicile to the country was considered, and remains plausible.

And if Sawan is to close the huge valuation gap with ExxonMobil and Chevron — the elephant in the room on Wall Street yesterday — he needs to win over American investors. Here are some takeaways:

Shell will keep pumping oil, but this was not a big pivot

Shell’s target to cut oil output by 1-2 per cent per year is gone, but only because — thanks to divestments — it has already met the target. Now it intends to hold its high-margin oil output steady at about 1.4mn barrels a day until 2030.

It would launch a bunch of new projects to deliver 500,000 barrels of oil equivalent a day — “or more” — said Sawan, in the next two years, but only to offset declines elsewhere. This doesn’t include its big bet on Namibia, which will only deliver oil later in the decade at best.

Gas is a far bigger growth area and LNG will be the star of the show. Shell will add an additional 11mn tonnes per annum of LNG capacity by 2030. That means its owned and traded volumes combined are expected to rise by as much as 30 per cent by the end of the decade to almost 80mn tonnes per annum.

How low-carbon businesses fit in remains to be seen. Shell says green projects will need to achieve returns of 6-8 per cent to justify investment, and some may achieve 9-10 per cent. But that’s a far cry from the 25 per cent on offer from some of its oil projects.

Meanwhile, Sawan was adamant that Shell did not enjoy any “differentiated capabilities” that would justify a more aggressive move into renewable generation — a stance that will please the kind of US investors that have flocked to ExxonMobil.

Sawan did not mince his words about the energy transition

In a word-cloud of corporate buzzwords, “ruthless”, “disciplined”, “simplified” and “balanced” features prominently. “Scope 3”, not so much.

The new catchphrase, meanwhile, is “more value, with less emissions”, which sounds a lot like Chevron’s “lower carbon, higher returns”. And the rosy picture of an easy energy transition that corporate bosses boasted of a few years ago, before Ukraine, was gone.

“It is critical that we avoid dismantling the current energy system faster than we are able to build the clean energy system of the future,” Sawan said.

As for the ruling from a Dutch court compelling Shell to cut emissions by 45 per cent by 2030, “it will not make a difference to the world” especially if consumers still needed the fuels, leaving another company to produce them.

Shell looks like a tasty cash-dispensing target

Sawan’s pitch is to make his company a “disciplined” cash dispenser, with cuts to operating and capital costs that will generate 10 per cent free cash flow growth per share per year through to the end of 2025 and allow for another share buyback of at least $5bn in the second half of the year. It’s chunky stuff — although even with a bump up in the dividend in the second quarter, the payout remains lower than before the pandemic.

The big takeaway, however, may be that as Shell touts a more “balanced” approach to the energy transition — one that emphasises its LNG, trading and deepwater prowess — it risks becoming a juicy target for an American supermajor. That would be one way to fix the valuation gap. (Derek Brower and Tom Wilson)

Opinion: Why Saudi Arabia is struggling with the oil market

Adi Imsirovic is a director of consultancy Surrey Clean Energy

On June 5, Saudi Arabia, the de facto leader of the Opec cartel, announced a large, unilateral cut in oil production of 1mn barrels a day from July. 

Yet crude prices barely budged. Yesterday, Brent crude, the international benchmark, settled at $73.20 a barrel, down about 4 per cent since before the Saudi intervention.

Why haven’t prices behaved like Saudi Arabia wanted? Because the kingdom is misunderstanding how prices are formed.

Prince Abdulaziz bin Salman, the Saudi energy minister, believes oil prices are driven by speculators, who drive them away from the fundamentals of supply and demand.

I agree with the prince. Absolute oil prices are driven by financial market participants, and not those who are trading physical barrels of oil.

But financial players are not necessarily speculators. Most of them are funds, investing in a wide portfolio of assets in which oil may play a relatively minor role, usually as a hedge against inflation. Even if some of these funds were speculating, they would be basing their decisions on expected market fundamentals at some point in the future.

Market drivers

This year, the primary factor determining price has been the likelihood of a recession, driven chiefly by central banks’ determination to keep raising interest rates to cool inflation.

Recent research points to a few other financial drivers of the oil market volatility: global and US economic policy uncertainty, geopolitical risk, US monetary policy uncertainty and equity market volatility.

In other words, financial players, key drivers of oil prices, have had every right to be bearish in recent months. Even if they were speculating, they would have been rational to stay short.

Indeed, neither the near-term fundamentals that are generally followed by the physical oil players, nor the future expected fundamentals followed by the financial players have been particularly bullish.

In an environment of high interest rates, holding oil is expensive and risky. So, it is not surprising that many players went short, reducing demand for oil contracts.

Saudi motivation

What then should we make of Saudi Arabia’s latest decision to cut output?

For some time, Opec has been losing credibility and Opec+ has been losing relevance. The group’s decision in April to cut 1.66mn b/d failed to halt the slide in oil prices, just as an earlier cut announced last October had failed. Yet despite the continued drift lower, the only meaningful (but insufficient) production cut Opec+ could muster came from Saudi Arabia. It too failed to stop further price falls.

Russia, the only producer in the “plus” part of the alliance worth mentioning, has been fighting a war in Ukraine, and is desperate to keep the oil revenues flowing — making Moscow very unlikely to take on any voluntary cuts.

This lack of control over the market is a reason for so much irritation within the top brass of the cartel.

The only hope for the Saudis is a strong pick-up in demand later in the year. This may well happen, but the theatrics of blaming the speculators are not helpful.

At best, they confirm the difficult position that Opec leaders are in; and at worst, they expose a fundamental lack of understanding of what is shaping the price of the world’s most important commodity. (Adi Imsirovic)

Data Drill

Annual battery storage installations will surpass 400GWh globally by 2030, a tenfold increase from last year’s capacity additions, according to Rystad Energy.

Falling prices and new policies are driving this growth, with US battery capacity expected to rise 27 per cent by 2030 thanks to the landmark Inflation Reduction Act.

China, which will continue to lead in battery storage installations, the US and Europe will together account for 85 per cent of annual global installations in 2030, leaving developing markets far behind — an outcome that could slow decarbonisation efforts. (Amanda Chu)

Power Points

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Energy Source is written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.