Page 9 - FSUOGMWeek142020

FSUOGM COMMENTARY FSUOGM
At current prices, the return from investing in the oil industry is far less attractive than it was at $60 per barrel. Wood Mackenzie estimates that around 85% of oil and gas projects will gener- ate less than a 15% internal rate of return (IRR). Meanwhile, 75% of projects will not even cover the cost of capital, assumed at 10%.
European majors have got more involved with clean technologies in recent years, plough- ing a combined $10bn into solar, wind and other renewable energy sources. This investment is a mere fraction of what they have spent on oil and gas, however, accounting for only 5% of their total capital expenditure.
At $60 per barrel oil, Wood Mackenzie calcu- latesthatrenewablessuchaswindandsolaronly provide an average IRR of 5-10%, which is less than the double-digit returns of some oil and gas projects, despite the much lower technical and commercial risk of renewables. But following the sharp decline in oil prices the tables have turned and renewables are a more attractive bet.
“Once the dust settles and market forces establish the price of oil, the sector will be better placed to make long-term strategic decisions, including potential diversification into renewa- bles,” Wood Mackenzie predicts. “The fact is that the energy transition is here to stay. If anything,
pressures to commit to net zero carbon will intensify.”
The problem is that oil and gas firms will be contending with weakened balance sheets, making it harder for them to finance merger and acquisition (M&A) moves into renewables.
“As of now, only companies with strong financials will be able to look at the ‘big picture’ and move to capture opportunities in the fast- er-growing zero-carbon energy,” Wood Mac- kenzie says. “The five European majors have committed to spend just over $5bn per year between them on zero carbon technologies in the near term. This represents around 9% of their planned [pre-crisis] upstream development budgetoutto2022.”
While spending cuts may cause the emissions reduction drive to lose momentum in the nearer term, pressure on oil companies from investors, regulators and consumers to keep their green commitments will only grow.
“Diversification into clean energies could ensure the long-term survival of oil and gas com- panies that embrace change,” Wood Mackenzie says. “Meaningful carbon mitigation strategies could help win back increasingly disenfran- chised investors and help retain and recruit much needed new talent.” ™
PIPELINES & TRANSPORT
Nord Stream 2 vessel heads for Spain
GERMANY
The vessel’s arrival time in Las Palmas is April 18.
THE Gazprom-owned Akademik Chers- kiy pipelaying vessel, which Russia said last year would be capable of finishing the sanc- tions-struck Nord Stream 2 gas pipeline to Ger- many, is now heading for Spain.
The ship, which left the Far Eastern port of Nakhodka in mid-February, is currently navi- gating around Africa, near the coast of Angola, ship-tracking data shows. It has set a course for the Spanish port of Las Palmas and should arrive there on April 18.
Since leaving the Far East, Akademik Cher- skiy has travelled across the Asia-Pacific and around Africa.
Russian Energy Minister Alexander Novak said last November that Akademik Cherskiy would be capable of completing the Nord Stream 2 if Western contractors were unable to do so. It is understood to be the only Russian-owned vessel able to work on the pipeline. In December the US slapped sanctions on the project, prompt- ing Swiss contractor Allseas to halt pipelaying activities.
Only 6% of Nord Stream 2’s offshore section is left to complete. The 55bn cubic metre per year pipeline had been due to start flowing gas to Russia’s European customers before the end of last year. But construction was held up, first by Denmark’s delay in issuing necessary permits,
and then by US actions.
Russia had been hoping to use Nord Stream 2
not only to limit gas transit volumes via Ukraine but also boost its market share in Europe. So far, its delay has not cost Gazprom much in terms of lost revenues, given the sharp decline in Euro- pean gas demand since coronavirus (COVID- 19) lockdowns came into force. Prices have also fallen to historic lows, amid a glut in LNG supply and high levels of storage.
Gazprom’s overall exports were down 24.6% year on year in January-February at 32.5 bcm, according to data published by Russia’s Federal Customs Service (FCS), while its revenues from these sales slumped 51.3% to $5.05bn. ™
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