When does fracking sidle back onto the UK agenda?

It's kinda noteworthy that, the ruckus over the Cambo field notwithstanding, several more North Sea licences are under consideration.   And the Climate Change Committee (under silly "Lord Deben") has correctly opined that, while they'd prefer new licences not be granted, it's a purely political matter having nothing to do with objective reckoning of whether it would increase global CO2 emissions (which it wouldn't).  Ah, COP26 seems so long ago now ...

Of course the greenie-left is trying to get its retaliation in first, having spotted (again, correctly) what they take to be a great argument, namely that increased UK production would have no impact on the world price of oil or gas - so we wouldn't pay any less for our domestic energy.  AND - shock, horror - we might even export the stuff!  True, as far as it goes - but it misses two critical details that in my book invalidate the objection entirely.  (a) they are wrong about the price impact as regards local prices which would indeed fall (by a small amount), that being the transportation cost differential between home-grown and imports; (b) the Exchequer would gain mightily from the tax they would levy on the profits arising, there being clear daylight between production costs and today's high oil & gas prices.  All this atop the jobs created etc etc.

So:  perhaps some new offshore O&G licences first, & then see how the land lies?  Before getting back to the really interesting topic of fracking.  Incidentally, I am the last one to minimise the practical difficulties involved in fracking in the UK (we had many a thread on this several years ago); but the amounts of gas are so immense, and the value so high, we could afford to do the job really well and avoid, minimise, or handsomely compensate for any downsides.  There's no getting away from the political price that would be paid just now ...  but give it time: that shale gas ain't going anywhere.  And Germany seems to have changed its energy policy (as well as its military policy) quite significantly in the past few days.  The Ukraine factor might yet have transformative effects here, too.

ND  

Carbon floor price suggestion from...Germany

 So this is very interesting. 

It shows why COP26 will be successful in the long-term. Other countries in Europe have tried a floor price, but it never worked when heavy industry Germany with its coal power was not playing ball. 

For Germany to get in the game and set a floor, is...err...game-changing. 

It means carbon traders can be sure there will be no big drop and indeed many will now expect the price to go 2x to 3x from here  - nice for trading. 

More widely it shows there is lots of money to be made from the carbon transition - more than say pouring money into arms or oil. Which is why even China and Russia are relatively keen, they can sense there is a lot of industrial kit to sell to Europe and the US - all whilst creaming it on selling coal and gas at massive margins for another 20 years or so. 

COP26 Finance mandate - another free cop out for Finance titans

 If you work in any large organisation in the UK or the West over the last few years, you will be well aware of the cultural capture by left-leaning values that has engulfed CEO's and Human Resources teams. 

Aware that trying to engineer upwards growth for their business all the time is hard work, Chief Exec's have rushed to discover the need to promote diversity and inclusivity and set these cultural targets that are rather easier to achieve - but achieving them allows the same bonus to be earned. 

The new wave of course is climate change and the impact on companies of this. In some ways a big positive, flying junior staff around the world for various not so important meetings has been ended by the pandemic - at no loss the the staff or companies really in the Zoom enabled ear. Lower carbon miles must be a good thing in the round, but this has been a side benefit of the pandemic, not the result of firm action by companies. 

Reducing investments in oil and gas, like tobacco and arms before, has proved easier and also allows for some wiggle room when finding somewhere to blame for poor investor returns. As does overly investing in green energy and infrastructure projects where lower returns can be promised in return for some feelings of moral superiority. 

In fact, many centuries ago the protestant reformation was started by Martin Luther, angry at indulgences sold by the Pope's to absolve people of their misdeeds. The new found obsession with Sustainability seems to have many similarities - look at the rich and famous flying into Glasgow to espouse their morality and direct everyone else's behaviours, much like the Papacy of the Middle Ages. Pontificating in Glasgow has a nice ring to it, eh?

Returning to avarice driven CEO's, the new Net Zero mandate is manana from heaven for them. They will be able to run their large companies with a view to reducing emissions, lets not worry about profits and market share, all very difficult in a competitive market. Instead we can have lots of internal meetings about vision and strategy, employ consultants and come to some obvious conclusions, like abandoning offices and commuting in due course. All the while getting paid the full whack of pay and with ready made excuses for any economic downside "its for the good of the planet."

Their personal jets, houses, jacuzzi's and mistresses jewellery will I predict remain untouched - as much as those of Prince Charles.  Whether the world gets any benefits; maybe, maybe not. 

Good COP, bad COP ... and other awful jokes

I feel the obvious need to pen something about COP but really, there's little point to attempting anything analytic.  The outright contradictions are so many and so stark, it's just rats in a barrel.  If, that is, the rats can actually get to Glasgow with all the transport problems, lack of accommodation, Covid rules, etc etc etc.  As Lil said BTL a few days ago, what can go wrong?

It's all a curious mash-up between virtue-signalling and outright desperation.  The Chinese and Russian no-show (OK, their sherpas will be there but we all get the Big Message) means it'll be null anyhow.  And with the 'leaders' departing after Tuesday of this week, the format is clear: Big Empty Statements up front, followed by days of detailed and ultimately fruitless wrangling.  At least in Paris '15 (COP21) it was the other way around so that (in theory) the 'leaders' could knock heads together at the end and contrive a 'breakthrough' (on paper).

Transitioning, therefore, to a vaguely pertinent business story on the matter of 'leaders' doing 'deals' that must then be transacted by their hapless underlings.  We were a big player in the North Sea (oil & gas) and one day Pete the commercial director convened a small team: an excellent lawyer, a licensing specialist, an analyst and myself (negotiator).  Joe, our fairly dynamic Chairman (American, relatively new in the job, not strong on details) had lunched with his opposite number in another North Sea player (not at all new in the job, ought to have known better) and on their napkins they'd agreed a massive asset swap.  "All we had to do" was draw up the contracts.  So, Pete, what is the deal?  He suppressed all hint of sarcasm and faithfully recounted what had been agreed:  a mishmash of part-shares of producing assets, undeveloped discoveries, exploration acreage both prospective and fallow.

Stunned silence.  It was obvious to everyone in the room that the 'deal' couldn't be done: for one thing, it would breach our licence terms (itself an absolute killer) and for another, we'd need the approval of various joint venture partners, some of whom had pre-emption rights ...   Ladies and gents, we just have to get on with it.

Mercifully, we knew our working-level opposite numbers well, and of course they were in exactly the same bind.  With near 100% good will & cooperation, about two months later we came up with something that satisfied honour: the nearest approximation to the napkin-deal we could jointly muster.  In the meantime, I'd even taken up smoking again.  (To be fair, Joe - there you go, I knew it could be done! - and Pete were deeply appreciative of our efforts.)  

The differences between that set-up and COP are pretty clear.  Yup, a total lack of good will and cooperation!   Not much COP, then (sorry!).  Good luck to those sherpas ...

Your related business stories BTL, if you fancy.

ND

When Do The Bread Riots Start?

A more than usually speculative post ...

Last week, the price of petrol went up noticeably (~3%), but for me even more significant were increases in the prices of milk at Tesco (5.5%), and - highly symbolic - the brown bread we favour (12.5%). 

Historically, British bread riots were when the price of a loaf went up from, like, 4d to 5d.  So we're halfway to that kind of increase.  In France, received wisdom is that Les Gilets Jaunes kicked off as fuel-price rioters.  There's nothing I can see that will do anything to reverse the current inflationary trend - in fact, quite the opposite.

When does modern British man/woman hit the streets over the cost-of-living?  And - will it be before or after the 'personal' costs of Net Zero Carbon hit home in a really visible way?

I put it that way because this week saw the launch of the fat government document purporting to be its Net Zero Strategy (alongside a distinctly, nay frostily skeptical Treasury document on the same theme).  Ordinarily, as part of our service to readers I undertake to review these things systematically; but this time there's no point.  The main strategy doc is so full of numerical nonsense and indeed internally contradictory numbers, it's an outright embarrassment - are there any Civil Servants left with an ounce of pride? - and can only be taken as something for Boris to wave at COP26.  (He'd have done better to stay with the highly complimentary assessment of the UK in a review from "Climate Transparency"  [one of those proliferating green NGOs] which has us as by far the best performer of the G20 nations - out on our own in a category of one.)  However, one thing is really clear: big costs are on their way.

In one very obvious scenario, COP26 could be a PR disaster.  It took a lot of effort to prevent the same outcome at Paris '21, when host-nation France was putting in 120% diplomatic effort and had a lot of other big nations onside anyway.  Doesn't look particularly auspicious for Boris right now, although Kerry, the EC (if not all euro-nations) and the UN apparatus will be more than a little helpful to his cause.  Crazy promises of cash might be forthcoming to work the trick.  On the other hand, stay-away Xi might put in a dramatic appearance and engineer himself into the position of being 100% pivotal: "either acknowledge me as the saviour of the world, or I pull the plug".  Who could be surprised if COP26 ends in fiasco, with the 'developing' nations stomping out due to their pockets not being adequately lined with gold; then Xi summons the developing world leaders to Beijing for an early Xmas present?

Anyhow, unless Boris engineers a half-triumph for himself, I reckon he's gone before Easter.  Then Rishi can announce the resumption of fracking, etc etc ...  Oh, and deal with those bread riots.  What a good job there's currently no Leader of the Opposition.

Have a great weekend!

ND

Energy Crisis Rumbles On

This could get interesting.  Thus far, nothing fundamental has happened that should cause deep alarm, and the (UK) government has actually responded quite intelligently.  But there's an obvious risk that nerves are lost and mad policies get enacted in a hurry, which later become hard to unravel (see several of Sunak's little wheezes over Covid).

First of all, what does anyone expect when the whole world (a) is trying to stop using coal (yes, even China and India, though not trying very hard); (b) has installed epic quantities of wind power; and (c) is recovering strongly from the pandemic, including running big schemes for massive infrastructure development?  Oh, and the world's biggest producer (little Volodya, this means you) is willfully holding back supplies for political reasons?  

Commodity price spikes, that's what.

Although every country will have its special circumstances, the basic phenomenon is hitting everyone.  So - the market (and it's only relatively recently that the gas market has become global, thanks to LNG and the gradual cessation of mad oil-linked pricing in the Far East) is functioning correctly!    

One of the first things that will happen is that US shale producers (those still standing, that is) will be dusting off their drilling plans, having experienced an awful 18 months of rock-bottom gas prices.  That'll help.  (Wonder whether Boris will take another look at fracking, too ... but not this side of COP26!)   And not just gas production: the economics of a whole range of energy-related items will change, too: grid-scale batteries - the major beneficiaries of electricity price volatility, which is what we're seeing - are making absolute fortunes right now.  Some will benefit hugely, some will not:  the list is endless.

But what might policy makers stumble into at a time like this?  Actually, Kwasi Kwarteng gave a very good defence of the free market when he spoke over the weekend (as did Boris in his incoherent bumbling fashion): hopefully this means they aren't inclined to intervene in stupid ways.  The principles they've given for NOT bailing out the tiny suppliers (who shouldn't even exist - a real indictment of Ofgem that they ever got supply licences: many of them are outright scammers), but ensuring the smooth functioning of the "supplier of last resort" mechanism, seem prudent enough.  But the need to intervene in the chemicals industry (which I think is fair, given we are in uncharted territory) might result in mission-creep on other fronts.  The special-pleaders are forming a long queue ...    

What else?

Russia:  the Euro-wallahs are pretty angry with Putin's naked ransom-holding over Nord Stream 2.  What will they do?  Germany has an election coming up ...

Europe:  expect plans to shut down coal & lignite plants to be thrown into reverse (but not this side of COP26 ..!)  Even the Graun has noticed that Europe is fundamentally hooked on natural gas, whatever the greens might like to wish for.

Nukes:  EDF will be salivating at the prospect of a large-scale failure of nerve by HMG on a new public finance mechanism for more new nukes.  Rolls Royce won't be far behind with their odd "mini-nukes" plans (they aren't so "mini" at all).

Lefty-greens:  these types never miss an opportunity to set up their demented wails ("if only we had gone over to 100% wind five years ago, none of this would have happened ... oh, wait a minute ...";  "this shows the need for 100% nationalisation and a New Green Deal which involves everything we've ever wished for including Trans Rights, all bundled up together in green string") etc etc.  I think we may safely ignore them, just as Kier Starmer wisely does.

COP26:  The entertaining prospect emerges that November's COP26 might take place against a background of power cuts, if not to the conference hall then to industry.  (Actually I think that's more likely in Feb-March, but we'll see).  In any event, the whole thing has become more problematic for Boris and his longed-for global "king of the world" PR triumph, because even though most countries will politely defer big "retrograde" measures until after November, few of them will nowadays have quite as much stomach for "wind power solves all problems", or "you rich nations can easily afford $100bn p.a. for us developing nations" - in private, anyway. 

There are loads of other potential ramifications but I'll stop there for now.

Will the lights go out?  Regular readers will know I endlessly back National Grid to prevent this.  But this year, the cost of doing so will be very high indeed.  And you know what?  If we get a serious cold spell, they might actually fail this time.

ND