UK election result's impact on British Energy Inc

By all accounts, result of the UK General Election on May 7 was simply stunning. Pollsters got it horribly wrong, Prime Minister David Cameron’s Conservative Party returned with a majority against all expectations, Scottish National Party bagged 56 out of 59 parliamentary seats in the ‘oil hub’ of Scotland - all the ingredients to excite politically minded scribes and the general public alike. The Oilholic began his experience at Ellwood Atfield’s splendid election night bash in Westminster (photo above left) ushering in news of the first exit poll predicting the Conservatives were going to be the largest party with 316 members of parliament.

As events unfolded into early hours of the morning and late afternoon the next day, Cameron’s Conservatives returned with 331 MPs and a slim majority putting to bed all talk of a hung parliament. This blogger was up when Labour heavyweights Ed Balls, Douglas Alexander, Jim Murphy and Liberal Democrats ministers Vince Cable, Ed Davey, Lynne Featherstone and Danny Alexander all lost their seats.

Resignation of the hapless Labour leader Ed Miliband who managed to deliver his party’s worst election result since 1983 followed, along with that of Nick Clegg, now former deputy prime minister and Liberal Democrat leader. Cameron soon walked back into Downing Street after meeting the Queen and telling her he’d now form a majority Conservative government.

Having enjoyed the drama of election night well into sunrise the next day, it’s worth pondering what the result means for the UK’s energy industry in general and the oil and gas business in particular. Afterall, the Oilholic did fret about the direction of the market in his pre-election column for Forbes.

For starters, Ed Miliband’s barmy energy price freeze isn’t going to happen. A daft idea, daftly presented to maximum populist effect just didn’t work and is now in the dustbin of political history. This blogger expects ratings agencies to ease up both on UK-listed energy utilities Centrica, the owner of British Gas, and SSE, another service provider as well as the sector in general. 

Unsurprisingly, both stocks jumped as the entire London market welcomed the result on May 8 morning with the FTSE 100 momentarily returning back above 7,000 points. Nonetheless, Cameron’s government faces a very serious challenge of planning investment towards creaking energy infrastructure – from nuclear to renewables – ensuring the lights are kept on. By some estimates, the required capital expenditure could be as high as £330 billion by 2030.

Switching to the mainstream oil and gas business, both the Conservative victory in the UK and an SNP landslide in Scotland are broadly positive for various reasons. As this blogger has noted before, Chancellor George Osborne’s taxation policies turned positive for the industry towards the end of the last parliament, as the oil price decline began to bite North Sea players. 

Collective measures put into effect back in March imply that the UK’s total tax levy would fall from 60% to 50%, giving a much needed breather to those prospecting in the North Sea. Any further stimulus measures for the better are unlikely to be disrupted by the SNP, even if they do have a broader agenda of roughing up other government programmes both North and South of the Scottish border.

This is broadly good for the industry, as it goes through a challenging period and grapples with the restructuring in Aberdeen triggered by companies as large as BP and as small as independent operations services providers. 

Finally, turning attention to the new energy minister Amber Rudd, a Conservative MP for Hastings, who has been appointed as the successor to Ed Davey; the choice is a great one. Obviously, her credentials are solid or she wouldn’t be here. Gauging the response of the wider industry, most have welcomed the appointment.

Rudd is seen as conscientious and hard working minister. Even Greenpeace sent out a release welcoming her to the job, hoping that she’d bring the same energy to implementing the Climate Change Act, as she did to fight the corner of fisheries in her last government remit.

With a challenging portfolio, Rudd has her work cut out and we wish her well, especially as she sets about the arduous task of attracting investment to the sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Ellwood Atfield election night party, May 7, 2015 © Gaurav Sharma

Greens deserve inclusion in UK leaders’ debates

A political kerfuffle has broken out in British political circles about inclusion (or exclusion) of the UK’s Green Party in televised leaders’ debate ahead of the 2015 General Election on May 7.

It all kicked-off on Monday when the country’s broadcasting regulator Ofcom opined that the Green Party did not have the clout to be considered a big enough player on the national stage.

Prime Minister and leader of the Conservative Party David Cameron then said he wouldn’t take part in a televised debate that excludes the Green Party, since UKIP a minor right-wing party that’s eating into his political base had been invited to participate but not the Greens. 

As exposure for the Greens is likely to hurt the opposition Labour party and the Liberal Democrats, Cameron’s desire to have the Greens included might well be driven by his own interests. Labour, Liberal Democrats and UKIP all cried foul at Cameron’s announcement, while he in turn accused opponents of running scared. 

Whatever his reasons might be, the Oilholic feels Cameron is right to demand inclusion of the Greens. Those asking why the Greens should be included must actually ask “Why not?” instead. The Oilholic profoundly disagrees with a lot of what the Greens say and the policies they propose. However, that does mean this blogger should frown upon giving them a voice on a national stage at one of the most important general elections in a generation.

The British Green movement should now be considered sufficiently mature and in sync with some of its counterparts in the wider European Union. In fact, at the recent European elections both the Greens and UKIP got more votes than the Liberal Democrats.

The Greens had their first MP in 2010 as Caroline Lucas entered parliament on her own merit and credentials having fought against mainstream parties with deeper pockets. While UKIP might well have two MPs in parliament at the moment; both are defectors from the Conservative Party who re-entered parliament having been elected on their established political reputations while piggybacking on a populist bandwagon provided by a protest party.

Yet UKIP gets a voice, but the Greens don’t despite being level pegging with the Liberal Democrats in many opinion polls? Some say giving the Greens a nationally televised platform would invite legal challenges from Scottish and Welsh nationalists, and other minor parties. If so, then so be it – let them prove the credentials as a national party.

That the Greens are a national force is beyond dispute. They might well be a fringe party, but unlike Scottish and Welsh nationalists, the Greens are fighting UK-wide not just in pockets of the still United Kingdom. Perhaps we should look to Germany and how its multiparty system has incorporated the Green movement. There are other such examples within the EU.

We should give the Greens a wider platform and leave their electoral performance to the court of public opinion. By that argument, allowing them to participate in a national leaders’ debate would be a good starting point. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Big Ben and the UK parliament, London © Gaurav Sharma

Crude prices, rouble’s rumble & EU politics

Both crude oil benchmarks are more or less staying within their ranges seen in recent weeks. That would be US$80-85 per barrel for Brent and $76-80 per barrel for WTI. ‘Short’ is still the call. 

While Russia is coping with the current oil price decline, the country’s treasury is clearly not enjoying it. However, given the wider scenario in wake of Western sanctions, the Russian rouble’s decline actually provides momentary respite on the ‘crude’ front and its subsequent free float some much needed positivity.

The currency’s fall this year against the US dollar exasperated as sanctions began to bite. While that increases the bill for imports, Russian oil producers (and exporters) actually benefit from it. There is a very important domestic factor in the oil exporters’ favour – the effective tax rate paid by them as oil prices decline falls in line with the price itself, and vice versa. While a declining rouble hurts other parts of the economy reliant on imports, it partially helps offset weaker oil prices for producers.

According to calculations by Fitch Ratings, if the rouble stabilises near about its current level and the oil prices hold steady around $85 per barrel next year, an average Russian producer should report 2015 rouble operating profits broadly in line with 2013, when oil prices averaged $109. 

“In this scenario Russian oil companies' financial leverage may edge up, especially for those producers that relied most heavily on international finance, because their hard currency-denominated debts will rise in value. Given that Fitch-rated oil companies, such as LUKOIL, GazpromNeft and Tatneft, all have relatively low leverage for their current ratings, this should not trigger rating actions,” says Dmitry Marinchenko, an Associate Director at the ratings agency.

The primary worry for Russia at the moment would be a decline in prices below $85 (as is the case at the moment) which would certainly hurt profits, as would a sudden recovery for the rouble while oil prices continue to tumble. Fitch reckons most Russian oil companies have solid liquidity and would comfortably survive without new borrowing for at least the next couple of years.

“However, they may need to reconsider their financing model should access to international debt markets remain blocked for a long time, because of sanctions and overall uncertainty over the Ukrainian crisis. Nevertheless, their fundamentals remain strong, and we expect them to maintain flat oil production and generate stable cash flows for at least the next three to four years, even with lower oil prices,” Marinchenko adds.

There is one caveat though. All market commentary in this regard, including Fitch’s aforementioned calculation, is based on the assumption that the Kremlin won’t alter the existing tax framework in an attempt to increase oil revenue takings. Anecdotal evidence the Oilholic has doesn’t point to anything of the sort. In fact, most Russian analysts this blogger knows expect broader taxation parameters to remain the same.

If deliberations over the summer at the 21st World Petroleum Congress in Moscow were anything to go by, the country was actually attempting to make its tax regime even more competitive. A lot has happened since then, not just in terms of the oil price decline but also with relation to the intensification of sanctions. Perhaps with near coincidental symmetry, both the rouble and oil prices have plummeted by 30% since the first quarter of this year, though the free float attempt has helped the currency.

The Oilholic feels the Kremlin is inclined to leave more cash with oil companies in a bid to prop up production. With none of the major producers blinking (as one noted in a recent Forbes column), the Russians didn’t either pumping over 10 million barrels per day in September. That’s their highest production level since the collapse of the Soviet Union.

For the moment, the Central Bank of Russia has moved to widen the rouble's exchange-rate corridor and limit its daily interventions to a maximum of $350 million. This followed last week's 150 basis points increase in its benchmark interest rate to 9.5%. The central bank’s idea is to ease short-term pressure on dollar reserves and counteract the negative fiscal impact of lower oil prices. Given the situation is pretty fluid and there are other factors to be taken into account, let’s see how all of this plays over the first quarter of 2015.

Meanwhile, the Russians aren’t the only ones grappling with geopolitics and domestic political impediments. We’re in the season of silly politics in wider Europe as well. The European Union’s efforts to wean itself of Russian gas remain more about bravado than any actual achievement in this regard. As one blogged earlier, getting a real-terms cut in Russian imports to the EU over the next decade is not going to be easy.

Furthermore, energy policy in several jurisdictions is all over the place from nuclear energy bans to shale exploration moratoriums, or in the UK’s case a daft proposal for an energy price freeze by the leader of the opposition Labour party Ed Miliband to counter his unpopularity. All of this at a time when Europe will need to invest US$2.2 trillion in electricity infrastructure alone by 2035, according to Colette Lewiner, an industry veteran and energy sector advisor to the Chairman of Capgemini.

“Short of nationalisation where the state would bear the brunt of gas market volatility, a price freeze would not work. In order to mitigate effects of the freeze, companies could cut infrastructural investment which the UK can ill afford or they’ll raise revenue by other means including above average prices rises ahead of a freeze,” she told this blogger in a Forbes interview.

No wonder UK Prime Minister David Cameron is concerned as Miliband's proposal has the potential to derail much needed investment. In a speech to the 2014 CBI annual conference (see right) that was heavy on infrastructure investment and the country’s ongoing tussle with EU rules, Cameron did take time out to remind the audience about keeping the climate conducive for inward investment, especially foreign direct investment, in the UK’s energy sector.

“To keep encouraging inward investment, you need consistency and predictability. That is particularly important in energy,” he said to an audience that seemed to agree.

Investment towards infrastructure and promoting a better investment climate usually goes down well with the business lobby group. However, in the current confusing climate with barely six months to go before the Brits go to the polls, keeping the wider market calm when an opponent with barmy policies, could potentially unseat you is not easy.

The Oilholic feels the PM’s pain, but is resigned to acceptance of the country’s silly election season, and yet sillier policy ideas. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Red Square, Moscow, Russia. Photo 2: UK Prime Minister David Cameron addresses the 2014 CBI Annual Conference, November 2014 © Gaurav Sharma.