Oil giant Shell on revving cars up with hydrogen

After getting a glimpse of a rather splendid hydrogen fuelled train, the Oilholic next had the pleasure of being driven in a hydrogen powered electric fuel cell Toyota model - The Mirai - overnight from Salzgitter to Hamburg, Germany.

Of course, much of the drive had to do with a demonstration of the fuel medium's prowess, the car's performance (come rain or shine of which we had plenty of), and more. We'll touch on that in the next post.

But for now one question well worth asking is – for such vehicles to reach critical mass and wider public acceptance, retail points for filling up them up and keeping them running would be needed; so how is that problem going to be addressed? 

Afterall Toyota has an ambition of putting 1 million emissions free vehicles on the road per year between 2020 and 2030, and rivals such as Hyundai and Audi have plans of their own. Enter oil giant Royal Dutch Shell - which says the fuel retail industry has the answers. 

Speaking to this blogger at Shell Germany's Hamburg hub, regional Chairman Stijn van Els opined that the new "Hydrogen Economy" will indeed require a rethinking of the retail infrastructure but that's "well within the industry's scope" given that major oil and gas companies are already well on their way to exploring the alternative fuels market.

"There is no competition with fossil fuels, there is co-existence as we move to a low carbon economy and Shell is committed to expanding its hydrogen fuel sales points. Furthermore, its not a shift we are attempting on our own." 

Survey data compiled at the end of 2017 suggests Toyota's home turf – Japan – has the largest number of hydrogen fuelling stations worldwide at 91, followed by the US (61), Germany (37) and the UK (18). The German figure is already above 40, at the time of writing this post, according to van Els, and the industry veteran hopes that at a pan-European level they'll be 400 sales points by 2019. 

Fuel retailers are expected to step up to the challenge for both retail and commercial clients over the coming decade, according to Toyota, with the automaker claiming "a hydrogen facility can be integrated into an existing refuelling station as an additional fuel offering."

There is certainly evidence of that. For instance, Shell's FTSE 100 rival BP is already attempting this with electric vehicle charge points, at conventional gas stations, the most recent example being its downstream venture in Mexico. The Oilholic was given a demonstration of a fuel point setting with the Mirai en route to Hamburg via a refuelling stop at a station in Wolfsburg (See below right, click to enlarge). 

Filling up a hydrogen car was not any different from a petrol or diesel car, nor did the "pump" look all that different, even if it was pumping in compressed hydrogen instead of a petroleum product.

Of course, when the hydrogen flows into the tank there's a chilling effect on the pump handle, unlike petrol or diesel refuelling where, well, you simply hear the liquid gurgling.

It's all done in a matter of minutes, and instead of paying per litre or gallon, you pay per kilogram which is on average €9.50 in Germany, €11.50 in France, and around a same-ish post-Brexit £10 in the UK. Roughly around 5kg would constitute a tank-full equating to around 60 litres, according to a Toyota spokesperson. You do the math, but the Oilholic would leave the fuel economy firmly parked for now, and touch on it in a blog post to follow. 

So going back to van Els, Shell reckons hydrogen would "certainly" play its part in the alternative fuels market and so do the oil major's fuel retail rivals. And much of the industry, including world's top 20 fuel retailers have also said they are not averse to establishing hydrogen refuelling stations as greenfield sites as well. So it all depends on consumer take-up, but the "commitment is there", according to both Toyota and Shell. Only time will tell how it all plays out. 

But for now, that's all for the moment folks! Time to load up on hydrogen and conclude the Mirai adventure. Keep reading, keep it 'crude' even if - as one said - the next few posts are going to be about hydrogen! 

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© Gaurav Sharma 2018. Photo 1: A Toyota Mirai in Shell signage. Toyota Mirai being fuelled with hydrogen at a facility in Wolfsburg, Northern Germany, with fuel pump and close-up of car inset. © Gaurav Sharma, May 2018.

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

BG Group’s been ‘Shell-ed’

In case you have been away from this ‘crude' planet and haven’t heard, oil major Royal Dutch Shell has successfully bid for its smaller FTSE 100 rival BG Group in a cash and shares deal valuing the latter at around £47 billion (US$70 billion).

While it’s early days into the current calendar year, the deal, subject to approval by shareholders, could be one of the biggest of 2015 producing a company with a combined value of over £200 billion.

For the Anglo-Dutch oil major, BG Group's acquisition would also add 25% to its proven oil and gas reserves and 20% to production capacity, along with improved access to Australian and Brazilian prospects. BG Group shareholders will own around 19% of the combined group following the deal.

BG Group's new chief executive Helge Lund, who only took up the post last month, will remain with the company while the deal is being worked on. However, he is expected to leave once it is completed walking away with what many in the City reckon to be a £25 million golden goodbye. The Oilholic thinks that’s not too bad a deal for what would come to little over three months of service.

BG Group shareholders, who’ve had to contend with a lacklustre share price for the last 12 months given the company’s poor performance, can also expect a decent windfall should they choose to sell. The bid values BG at around 1,350p per share; a near 50% premium to its closing price of 910.4p on Tuesday. If they decide to hold on to their shares, they’d be likely to receive an improved "Shell of a dividend" from a company that has never failed to pay one since 1945.

Shell chief executive Ben van Beurden said, "Bold, strategic moves shape our industry. BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us."

The market gave the news a firm thumbs up. Investec analyst Neill Morton said BG’s long-suffering shareholders have finally received a compelling, NAV-based offer while Shell’s bid was arguably “20 years” in the making.

“We agree that BG’s asset base is better suited to a larger company, but the economics require something approaching Shell’s $90/bl assumption. Consequently, we do not expect a rival bid and are wary of this catalysing a flurry of copycat deals. But we are also mindful that investment bankers can be very persuasive! We suspect Shell aims to re-balance dividends versus buybacks over the long-term. This could imply lower dividend growth,” he added.

As for the ratings agencies, given that the deal completion is scheduled for H1 2016, and quite possibly earlier given limited regulatory hurdles, Fitch Ratings placed Shell's ratings on Rating Watch Negative (RWN) and BG Group's ratings on Rating Watch Positive (RWP).

The agency aims to resolve the Rating Watches on both companies pending the successful completion of the potential transaction and “once there is greater clarity with regard to Shell's post-acquisition strategy and potential synergy effects.” We’re all waiting to hear that, although of course, as Fitch notes – Shell's leverage will increase.

“Our current forecasts suggest that the company's funds from operations (FFO) adjusted net leverage will increase from 1.5x at end-2014 to around 2x in 2015-2017 based on conservative assumptions around the announced $30 billion divestment programme and execution of the announced share buybacks from 2017.”

Moody’s has also affirmed its Aa1 rating for Shell, but quite like its peers changed the company’s outlook to negative in the interim period pending the completion of the takeover. Meanwhile, some City commentators have speculated that Shell's move might trigger a wave of M&A activity in the oil and gas sector.

However, the Oilholic remains sceptical about such a rise in M&A. In fact, one is rather relieved that the Shell and BG Group saga would cool nonsensical chatter about a possible BP and Shell merger (oh well...there's always ExxonMobil).

They’d be the odd buyout or two of smaller AiM-quoted independents, but bulk of the activity is likely to remain limited to asset and acreage purchases. Of course, consolidation within the sector remains a possibility, but we are too early into a cyclical downturn in the oil market for there to be aggressive overtures or panic buying. However, 2016 could be a different matter if, as expected, the oil price stays low.

Moving away from the Shell and BG show, here is one’s take via a Forbes column on how oil markets should price in the Iran factor, following the conclusion of pre-Easter nuclear talks between the Iranians and five permanent members of UN Security Council plus Germany.

Additionally, here’s another one of the Oilholic’s Forbes posts on why a decline in US shale activity is not clear cut. As it transpires, many shale producers are just as adept at coping with a lower oil price as any in the conventional industry. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Vintage Shell petrol pump, San Francisco, USA © Gaurav Sharma

That $60-floor, refining & FTSE100 oil majors

The US$60 per barrel floor was well and truly breached on Friday as the WTI dropped to $57.48 at one point. The slump is continuing into the current week as Brent lurks around $60 in early Asian trading. 

The scenario that most said would set alarm bells ringing within the industry is here. Since no one is predicting the current supply glut to ease anytime soon, not least the Oilholic, that the readers should expect further drops is a no brainer. Odds have shortened considerably on OPEC meeting well before June as was announced last month.

Nonetheless, speaking in Dubai, OPEC Secretary General Abdalla Salem El-Badri said, “The decision [not to cut production] has been made. Things will be left as is. We are assessing the situation to determine what the real reasons behind the decrease in oil prices are.” So is perhaps half the world!

In the Oilholic’s humble opinion Brent could even dip below $50 fairly soon. However, supply constriction will eventually kick-in to support prices over the second half of 2015. In the interim, we’ll see a few interesting twists and turns.

As for oil and gas companies, Fitch Ratings reckons the much beleaguered European refining sector is likely to end the year in much better shape than 2013. In the first edition of its European Refining Dashboard, the ratings agency noted that refining margins in the third quarter rose to their highest level since at least the start of 2013 as “product prices fell more slowly than crude oil prices.”

The Oilholic feels it’s prudent not to ignore the emphasis on the words “more slowly”. Fitch says overcapacity and intense competition from overseas refineries still plague European refining.

“Further capacity reductions may be needed to restore the long-term supply and demand balance in Europe, while competition from Middle Eastern, Russian and US refineries, which generally have access to cheaper feedstock and lower energy costs, remains strong,” it added.

More generally speaking, in the Oilholic’s assessment of the impact of lower oil prices on the FTSE 100 trio of Shell, BP and BG Group; both Shell and BP outperformed in the last quarter by 6% and 11% respectively, according to published data, while BG Group’s underwhelming performance had much to with other operational problems and not the price of the crude stuff. 

While published financial data is backward looking, and the slump in prices had not become as pronounced at the time of quarterly results as it currently is, it's not all gloomy. However, the jury is still out on BG Group. The company is responding with incoming CEO Helge Lund waiting to take charge in March. Last week, BG Group agreed to sell its wholly-owned subsidiary QCLNG Pipeline Company to APA Group, Australia’s largest gas infrastructure business, for approximately $5 billion.

QCLNG Pipeline company owns a 543 km underground pipeline network linking BG Group’s natural gas fields in southern Queensland to a two-train LNG export facility at Gladstone on Australia’s east coast. 

The pipeline was constructed between 2011 and 2014 and has a current book value of US$1.6 billion. “The sale of this non-core infrastructure is consistent with BG Group’s strategy of actively managing its global asset portfolio,” it said in a statement.

While largely welcoming the move, most analysts have reserved judgement for the moment. “The sale is broadly supportive to the company's credit profile. However, we will need to be comfortable with the use of proceeds and progress with BG's planned output expansion before we change the current negative outlook,” as analysts at Fitch wrote in a note to clients.

Reverting back to Shell and BP, the former has quietly moved ahead of the latter and narrowed the gap to market leader ExxonMobil. Strong downstream results helped all three, but Shell’s earnings recovery over the year, was the most impressive according to Neill Morton, analyst at Investec.

“Despite its modest valuation premium, we would favour Shell’s more defensive qualities over BP in the current uncertain industry environment,” he added. Let's not forget the Gulf of Mexico oil spill fallout that BP is still getting to grips with.

Moving away from FTSE 100 oil majors and refiners, UN Climate Change talks in Peru ended on a familiar underwhelming note. Delegates largely cheered at the conclusion (which came two days late) because some semblance of something was achieved, i.e. a framework for setting national pledges to be submitted at a summit next year.

The final communiqué which can’t be described as anything other than weak is available for download here should it interest you. Problem here is that developed markets like lecturing emerging markets on CO2 emissions, something which the former ignored for most of 20th century. It won't work. Expect more acrimony, but hope that there is light at the end of a very long tunnel. 

On a closing note, here’s the Oilholic’s latest Forbes column on the Saudis not showing any signs of backing down in the ongoing tussle for oil market share.

Also over past few weeks, this blogger reviewed a few ‘crude’ books, namely – Energy Trading and Risk Management by Iris Marie Mack, Marketing Big Oil by Mark Robinson, Putin and the Oligarch by Richard Sakwa and Ownership and Control of Oil by Bianca Sarbu. Here’s hoping you find the reviews useful in deciding whether (or not) the titles are for you. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo:  Refinery, Quebec, Canada © Michael Melford / National Geographic