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The UK’s oil majors are having a tough time of it.
On top of all its other troubles in the US, BP has now been forced to put back production at its Thunder Horse deep-water oil platform in the Gulf of Mexico by 18 months.
Meanwhile, in Russia, Royal Dutch Shell continues to face problems of its own. The Russian Government has revoked environmental approval for phase two of the $20bn gas and oil project, Sakhalin-2. It means Shell cannot continue with plans to develop a liquefied natural gas plant on the site.
So how much of an issue are these problems?
Cracks have been discovered in equipment on the seabed under BP’s Thunder Horse oil platform. It means that production of a quarter of a million barrels per day of oil will now be delayed until the middle of 2008, against hopes that production would start early next year. Analysts reckon the problems will knock 2% off BP’s earnings for 2007.
The platform was originally meant to commence work at the end of last year. But after Hurricane Katrina, the platform developed a list. This was later found to be due to a technical fault, and nothing to do with the hurricane.
It shows just how difficult deep water drilling can be. Thunder Horse will be producing oil from depths of 6,000 feet. It’s a stark reminder of how further discoveries such as Chevron’s recent massive find in the Gulf of Mexico are no easy solution to the energy shortage (for more on why we need to find alternative ways to produce oil, you might want to read this recent cover story: The future of oil – and how to profit from it
And in fact, news of the delay was partly responsible for a rebound in the oil price yesterday. Crude is now trading at nearly $64 a barrel in New York, breaking its recent losing streak.
Meanwhile, the Russians are asserting their dominance over the country’s energy industry again. State-owned Gazprom is in talks with Shell to renegotiate a deal to swap a 25% stake in Sakhalin-2 for a 50% share of a large gasfield in northern Russia. Gazprom pulled out of the deal after the news that the costs for Sakhalin-2 had doubled to $20bn – and it‘s no coincidence that Shell‘s problems with environmental planning started soon after (you can read more on this story in a recent Money Morning: Royal Dutch Shell’s trouble with Russia
To be fair, you can see why Gazprom might be looking to renegotiate – but the methods being used are not likely to fill potential foreign investors with confidence. And it’s not just Shell – according to The Times, the planning permission trick looks set to be used on other projects run by Exxon-Mobil and Total.
Earlier in the month, Exxon-Mobil said that failure to honour the Sakhalin-1 deal would “inevitably undermine the confidence of foreign investors and have a significant impact on the Russian investment climate.”
We’re not sure what the Russian for “tough” is, but we’re pretty sure that’s what President Putin’s response would be. After all, where else are these companies going to find oil? Iraq? Nigeria? Venezeula? The reality is that compared to its rivals, Russia is a positively stable place in which to do business. The Kremlin might be trying to renationalise by stealth, but it still beats setting up shop in the middle of a civil war, or trying to do deals in countries led by wannabe-Castros.
And the reality, as Fiona Maharg-Bravo points out on Breakingviews.com, is that “Russia is hoping to tap investors for $20-$30bn of initial public offerings in the next 18 months, including the privatization of the state electricity company and the railways.” So while negotiations might get heated, the Kremlin does need to show some restraint in its dealings with private companies – or it risks derailing its future fund-raising plans.
So the truth is that while the issues affecting BP and Shell are annoying, they are just part of the everyday life running a large multinational business. The most important factor affecting BP and Shell is the price of the product they sell – oil. And despite recent falls, that’s still well above the levels required for both majors to make a hefty profit.
A lot of wags in the press have recently suggested that BP might stand for ‘Big Problems’. But as our own share-tipper Paul Hill said in last week’s issue, at under £6, BP looks cheap. So maybe BP stands for ‘Bargain Price’.
Turning to the wider markets…
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The FTSE 100 closed at 5,890, a 13 point gain, having fallen back from highs of 5,911 earlier in the day. The gains were led by Partygaming, which bounced back from Friday’s share price plunge. The stabilising gold price also saw the mining sector perform well: Kazakhmys, Vedanta and Xstrata were all higher. For a full market report, see: London market close
In Paris, shares ended the day flat, with the CAC-40 just two points higher at 5,146. However, the automobile sector suffered losses as data showed further sales declines; Peugeot, Renault and tyre-maker Michelin were all lower. In Frankfurt, the DAX-30 closed 11 points lower, at 5,926, with falls led by MAN whose bid for Scania was rejected yesterday.
On Wall Street, US stocks had a mixed session. The Dow Jones fell 5 points to close at 11,555. The Nasdaq gained a fraction of a point to end the day at 2,235. And the S&P 500 closed one point higher, at 1,321. Trading was cautious ahead of the Federal Reserve’s midweek rate-setting meeting.
In Asia, there was little change for the Nikkei which closed just 7 points higher at 15,874 this morning.
The price of crude oil continues to rise, up 17c to 463.97 in New York this morning. Brent spot was last trading at $62.82 a barrel.
The firmer oil price saw spot gold climb 1% yesterday, last trading at $585.50.
And in London this morning, shares in nuclear power producer British Energy fell by as much as 55p after the company said that unplanned repairs would force it to drop electricity output. The share price fall is the biggest drop for British Energy in 20 months.
And our two recommended articles for today…
Why Asian equities are about to take off
– Asia accounts for half the world’s economic growth at present, says Martin Spring in his On Target newsletter. Everyone is familiar with the China story, but which other Asian countries are worth investors’ attention? And how serious an effect will a US slowdown have on Asian growth? For more on which markets to look at – and the simplest way to gain exposure – read: Why Asian equities are about to take off
Are we caught in a globalisation speed trap?
– IT-enabled globalisation is the most powerful force at work in the world economy today, says Morgan Stanley economist Stephen Roach, and the speed of change is unprecedented. But as Western jobs and wages are threatened by cheaper goods – and now, services – from developing economies, the political backlash is beginning. To find out what that will mean for your lifestyle – and investments – see: Are we caught in a globalisation speed trap?