Oil = the New Tobacco

I have never followed the tobacco industry: the sum total of my knowledge is:

• that it features as a no-no on various "ethical" investment lists
• it's accused of pushing fags to third-world kids
• they smoke a lot in the Far East
  
• Kenneth Clarke has, or had, some sort of non-exec involvement 

Just recently I read that tobacco consumption has hit an all time high!

So what do we make of this hypocritical charade?  I'm guessing that by dint of the first bullet above, the industry has to get along with a slightly higher cost of capital than might otherwise be the case (or maybe it's done with cheap Chinese money).  Well, provided all tobacco companies face the same situation, no competitive disadvantage follows.

Secondly, all the action is presumably out of sight to western eyes, so probably nobody much cares any more: the shareholder activists have won that particular battle and have all moved on to something else.

Summing up: there must be several companies - some of them 'western' - quietly making a great deal of money from this all-time record tobacco consumption.  Meanwhile, the woke caravan has moved on - it seems everyone's happy.

Given the rash of "adverse" headlines in the traditional oil sector, I think we may anticipate oil going the way of tobacco.

• the activist shareholder lobby is all over it: indeed, it's where that self-same woke caravan has fetched up
  
• there is no way on earth that global demand for oil will slump any time soon (though it's cyclical, like anything else) - the chances of EV production meeting overall motor demand in the next decade are nil: but even Greta would presumably like to get an ambulance ride if she should need one. etc etc
• unlike coal, oil is essentially a western-dominated industry, with a vast amount of capital deployed that will not go down without a determined fight
  

In my day job I don't do a lot of oil stuff: it's too easy a commodity to deal with commercially (compared to gas and electricity) to need much specialist consultancy.  But I can tell you that in gas and electricity, the stuff that greens don't like (e.g. coal-fired and gas-fired power stations) has for several years now been quietly passing into the hands of private equity, asset by asset, SPV by SPV**.  The traditional players are hoping to run their businesses as green-approved specialists in future - made all the easier by the 2018-19 decisions that enshrine "climate-change adaptation" & "resilience" etc as Green.  

RWE is a superb and quite extreme case study (because they've got perhaps the biggest coal-&-lignite challenge), but Statoil (Equinor), Shell, BP, Total and several others are almost as striking - and are well on the way.  Ørsted (formerly DONG++) has pretty much worked the oracle already.  Most of them stumble a bit, because they ain't so hot on the ultra-high-tech that's often involved (I've watched Shell making an arse of itself at close hand) - but they are big and capable and determined, and many of them will probably learn the new ropes.  (They made a much worse hash of it in the 1990s when they all piled into the electricity sector, stupidly thinking it couldn't be much different from gas.)

So watch out for the oil industry going the same way, headed for thick-skinned ownership that will seek to profit from strong, unending global demand while the woke-west averts its eyes (and still takes holidays abroad, uses mobile phones, plays online games etc etc etc).  If this doesn't work (and I think it will), well, China will clean up.  We offshore the world's manufacturing CO2 emissions to them, and maybe we'll outsource that nasty oil production as well.  (Russia stands a decent chance of muscling in on this one, too.)

As noted here before, Exxon is the standout progress-resister, desperately wondering if it can carve out a viable "last remaining dinosaur" niche.  It ain't gonna get away with that unnoticed.  But I'm not sure it knows anything else.  The elephant never did learn how to dance.  And the Darwinian race is to the adaptable.

 ND

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** Incidentally, some of them are royally ballsing it up.  But there's so much $$$ out there!

++ How we miss dealing with a company called DONG !

Centrica's Woes and What They Betoken

From time to time we pass comment on Centrica - partly because energy is one of our themes; and partly because from inception as an Enron-wannabe spin-off out of the old monopoly British Gas, it's been an interesting company on an interesting 'journey' (as we're obliged to say these days).  

You can click on the link below to see our sporadic past comments.  Not all of them have been favourable, because Centrica went through a misguided phase of loud special-pleading for subsidies, which didn't endear them to us - or indeed to the government.  They've taken a few outright false steps over the years, notable among which were the move into "we-can-do-everything" banking & telecomms; and the big stake they took in British Energy nukes alongside EDF.  But they've done clever stuff too: intelligent re-calibration of commercial policy when things weren't working out as intended (these days we must call this 'pivoting'); and a series of adroit asset acquisitions (most notably gas-fired power stations and long-term electricity supply contracts) when prices were rock-bottom.  Their technical skills in the marketplace have always been pretty fair.

All in all, to have stayed independent for nearly 25 years is no mean achievement.

But today they have serious problems to address.  Mrs May's inane price cap has weakened the entire industry, as was widely foreseen; and for a couple of years now insider commentary has not been kind about Centrica's strategic decsion-making, once so laudable.  Share price has reflected these things. They are 're-basing the dividend' and the top man is quitting. 

There doesn't need to be any sentiment in this: but I feel uneasy when good companies can't find a way through.  The residential gas & electricity supply business is of course going through a shocking phase.  May's cap; the plethora of minnows that should never have been given licences (Ofgem's grievous fault) and have been going under at a rate; big players like RWE (Innogy/NPower) and SSE trying to exit ... this is a mess.  And against a backdrop for the entire energy sector of trying to get to grips with whatever the 'decarbonised' future will bring.

Civilisation is energy-intensive, as the great James Lovelock reminds us (he's just turned 100) - and society needs capable energy companies.  In civilised countries, energy should be like water and food: so well managed that the miracle of abundance goes almost unnoticed.  Darwinian processes are fine: but there's no pleasure in seeing a big healthy beast fall sick.  Yes; things can go very wrong if the energy market isn't working well.

ND  

When the Big 6 becomes Big 5

Over the years we've often suggested that the way government and regulators cheerfully beat up on the big 6 energy suppliers isn't terribly clever.  It's very handy for them to have big corporates to do their daft bidding in energy and climate-change policy; but simultaneously allowing them to be popular whipping-boys, and loading them up with onerous social and policy-delivery obligations, is inviting them ultimately to jack their hands in and step away from the table altogether.

It has also been clear that not all of the Big 6 necessarily have the financial stamina for the long haul, never mind the stomach for it.  Margins in the residential sector are lousy, and the risks are great.  Hanging on in there as a 'last-man-standing' strategy isn't a work of commercial genius.  (Though, since most of the suppliers are still engineer-heavy at the top, and with truly dreadful track-records on both customer service and, perhaps counterintuitively, IT - trust me on that latter, I've dealt with all of them - commercial genius isn't necessarily to be expected.)

Three years ago we noted that RWE / NPower / Innogy (pick you prefered brand-name) was occupying the bed closest to the door, and so it has proved.  They and SSE have had enough, and intend to merge their portfolios of residential energy customers and float them off.

Having reduced the competition at the big end of the sector by one sixth, will the government be inclined to think again, and cut them some slack?  I doubt it.  May seems determined on some kind of price cap.  Ofgem is ecstatic abut how many tiny new entrants there are in the residential sector, notwithstanding their very patchy performance, inherent financal weakness, and parasitic dependence on the Big 6 keeping the main show on the road.  (One of the canniest decisions Sadiq Khan has made was stepping back from a manifesto promise to set up a publicly-owned, fully-fledged London energy supplier.)

In all this mess, then, it's little surprise to see NPower and SSE look for an exit strategy.  Of the rest:  Centrica is, after all these years, still a remarkable survivor as a UK inde.  It had shrewd and genuinely commercial management from the day it de-merged from the old BG 20 years ago.  We've had issues with them over the years (check the Centrica thread from the tags below) but they're OK.  EDF's continuing to play the game is of course 100% strategic for the French based on making sure nothing prejudices Hinkley.   Right up until they decide that game's not worth the candle, either.  On paper, EDF is bust already if you factor in all their nuclear liabilities.  But the French government won't let them go under.  (Check the EDF tag too, for various C@W stories over the years - starting with this pivotal one from 10 years ago which explains plenty.)

That leaves E.on and Iberdrola (Scottish Power).  Neither are as strong corporately as they were when the turned up in the UK; and I can't see the UK being strategic for the Spanish.  E.on are corporately sharp, mostly clear-sighted, and can be quite decisive when it comes to restructuring.   But, EDF's special circumstances apart, they are the strongest of the lot.

Newby tiddlers notwithstanding, the landscape hasn't changed much for a decade, i.e. since EDF came to town in a big way.  I couldn't begin to guess what it will look like in 5 years.  But I can tell you electricity prices will be higher.

ND 

Russia: the Bear-Baiting Continues ...

... unabated, as one might say.  I have just returned from an outing across France and Germany to report that while all eyes are on Greece, something else very interesting is afoot.  Until a year ago the biggest civil actions the world has ever seen were (a) that being pursued against the German government by the three German nuclear power operators (E.on, RWE + Vattenfall), for damages in respect of Merkel's precipitate post-Fukushima closure of their plants.  That one weighs in at around EUR 12 billion, and is perhaps a story for another day.   (b) The BP oil spill ($18 billion, as we now know).

However, these were relegated to the second division by the extraordinary award against the Russian government of $50 billion last July, in favour of Yukos shareholders claiming that Russia destroyed their oil company illegally.

I don't recall this making monster headlines at the time (CU covered it here), but that might change.  Because all across Europe, law firms are diligently working up practical plans to seize Russian state assets - and last month the tip of this iceberg was sighted.  In all the Greek excitement, I certainly didn't spot it.

Apparently this is all very real and maybe even imminent.  There may be trouble ahead ...  oh, and that EC investigation on Gazprom rumbles on.    The countries of the Orthodox faiths must think us western europeans have got it in for them.

A good job the Chinese have problems of their own.  More nervous days in Mariupol though, I'd suggest.

ND

Gazprom, Spinning

As oil prices tank ($67 today!), heads must be spinning at our old friend Gazprom, where they still insist on indexing their prices to that of oil.  But they still aren't quite there with the spin management yet.  Here's an amusing presentation for energy & geo-politics buffs, entitled Gazprom for European Market: Reliable Supply in a Changing Environment.

Naturally enough in a presentation on Europe the first slide is about new sales of gas to China, with the claim that these 'are not going to compete with LNG import on Chinese market'.  Well of course not.  A major new source of supply isn't going to have any effect on the international wholesale market, and certainly not on prices.  No Sir.

And so it goes on, a Kremlinologist's delight.  'Major suppliers to Europe have similar contracts' (a subtle one, this, attacking the new federast notion that Europe should buy its gas centrally - and they are right, Europe shouldn't).   'The price of Russian gas are fully competitive and are subject renegotiate' (sic) - well yes, but oil indexation + 'subject renegotiate' is a ludicrously inefficient way of doing things.  'European customers are perfectly protected by long-term oil-indexed contracts against any form on monopoly abuse of power' - an attack on the ongoing EC investigation into Gazrom's behaviour, plus a slide making cryptic, tangled (and wrong-headed) critique of pricing via gas indexation.  Tell that to Eastern European buyers.

And the rather sinister 'After midstream business is dead, nobody is taking responsibility for supplies structuring'.  Midstream dead !  This is a bit harsh - whoever do they mean ?  Would that be, errr, Eon and RWE ?

ND

"UK Blocks Russian Deal" - Interesting

The issue of sanctions against Russia over Ukraine has gone a bit quiet of late:  they don't play at all well in Germany (I wonder how they are being circumvented ?) - and then there are those assault ships sitting in a French dockyard ...

Anyhow, in a rather passive manner the UK seems to have played the game with a straight bat by denying Mikhail Fridman a 'comfort letter' re: his planned acquisition of RWE's North Sea assets - something else that may not sit well with our German friends.

RWE, it will be recalled (click on label), along with its fellow German mega-utilities is right up a gum-tree, courtesy of Berlin's demented energy policies - wildly, infeasibly green + anti nuke.  They will all be making big asset sales in an attempt to steady the balance sheets: and RWE is in the bed nearest the door.  They need the dosh, and now we've stopped it.

This is the thanks Germany gets for letting the Hinkley Point nonsense go through the EC?!

EDF Radioactive Turd

But on that front, there is someone else with a mighty beef: the French have let EDF's CEO go !  Just hours after his Hinkley triumph.  Not green enough, they say.  Of course he's not:  FFS, he's the bright orange, glow-in-the-dark head of EDF !  Le Turd Radioactif lui-même !

Couldn't happen to a nicer chap:  I laughed until I stopped.  In this country he would have been given a peerage.  Perhaps Cameron will.

ND

Russo-German Relations Getting Touchy

An amusing straw in the wind.  Like everyone else I get sent heaps of conference brochures, and one on my desk is this, entitled Long Term Gas Supply Contracts, to be held in Berlin in July.  You can't make it out from the thumb-nail pic of the brochure on the website, but I can tell you that the star attraction featured on the front cover is a "revealing session ... insider insight from the RWE v Gazprom Arbitration Panel", with three leading German lawyers: Messrs Erhard Boehm, Bernhard Meyer and Siegfried Elsing.

Now that would be interesting.  The RWE v Gazprom case (which we've mentioned before) was a protracted affair that, unlike most gas contract re-negotiations, was not settled in the smoke-filled room or even on the courtroom steps: it went all the way, and Gazprom lost.  They've always declined to comment.

So one might imagine the 'insider insight' session would be in big demand.  But what's this?  An urgent update from the conference organisers:  there will be no insider-insight session, and the case of RWE v Gazprom will not be discussed at all !

So Gazprom's normally reliable sense of humour (see here, here and especially here) has failed.  If anyone can be arsed to turn up in Berlin, it would be fun to raise the matter continually from the floor ...  how will the Thought Police deal with that?  Perhaps I should go anyway.

ND

Meanwhile, at the German end of Gazprom's Pipelines

We have noted here several times that RWE of Germany, one of the 'Big 6' UK power and gas players (in its local guises as NPower and Innogy) is a prime candidate for the bed closest to the door.  Iberdrola of Spain (= Scottish Power) is the other, but seems to have stabilised itself of late.

News from the bedside is not encouraging. 

A surge in [German] solar and wind capacity undercut the profitability of its power plants and triggered nearly 5 billion euros in write-downs. The company said on Tuesday it had swung to a net loss of 2.76 billion euros from a profit of 1.31 billion a year earlier, its first net loss since 1949.

This is one of the companies the UK government is increasingly beating up on for supposed overpricing, while simultaneously passing round the hat for vast investments towards its demented dirigiste energy plans.  Perhaps someone in Whitehall will realise that the three components in this puzzle - pressure on revenues, expectations of huge capital investments, and a sickly balance sheet - do not readily snap together into a neat jig-saw. 

It won't just be HMG's plans that feel the draught as the door opens for RWE to be wheeled away to intensive care.  As with its German sibling Eon, RWE's share register is dominated by Stadtwerke, who rely on the hitherto healthy dividends for provision of municipal services.  In mighty Essen for example (home to both RWE and Eon-Ruhrgas) the city elders are being forced to contemplate savings such as closing large chunks of the tram network as dividend income falls.

'Utility death spiral' is one of the more dramatic descriptions of what's going on.  This, Ed Davey and Ed Miliband, is the real world.  You can probably persist with your delusional energy policies for a little while longer.  Maybe till after the Election.  

Probably.

ND

RWE Shuffles Closer To The Exit

By way of exemplifying our recent comments that RWE might be occupying the bed nearest the door (click on the RWE link in the labels below), they've followed their sale of a portfolio of 770,000 customer accounts by withdrawing from the much vaunted Atlantic Array offshore wind project.  The feathered inhabitants of Lundy Island will be much relieved by this non-development.

At 1.2 GW capacity* from 240 turbines, this leaves a serious gap in DECC's hoped-for renewables fleet.  I suppose they can try passing round the hat in the far east again.  I'm sure they'll find that headlines like 'Miliband declares 20-month energy price freeze'** are helpful in this cause.

ND

UPDATE:  RWE in UK to axe 1,500 jobs.  

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* Recall, however, that Teesside Power alone (gas-fired, of course) was rated at 1.875 GW, and was built in just 2 years.  By way of an update to my earlier post that it was due to close shortly, I can report (with a tear in my eye) that the bulldozers came on site this week.  The plant has been sold for scrap (sic).  It is gone.

** Yesterday I attended a learned seminar on energy policy with an expert panel of all sorts: greens, investors, financiers, climate scientists.  Gratifyingly, every single one declared that Miliband was off his head, and deeply dishonest to boot.  It may yet be the policy screw-up I immediately assumed it would be

'Big 6' Fragmenting? HMG Beware

For some time now I have been suggesting that if the government continues to beat up on the hated 'Big 6' energy suppliers, it may wake up to find only 5, with RWE and Scottish Power (Iberdrola of Spain) probably the weakest hands.  E.on has its problems too: and while the others (Centrica, SSE and EDF) all probably have sufficient UK energy market ballast to stick around and play 'last man standing', even Centrica has been known to make dark hints.

The beating these guys take isn't just non-stop public floggings in front of fatuous parliamentary committee hearings or in the media.  Nor is it even the fines that Ofgem periodically boxes their ears with (they probably deserve them).  It's also the extraordinary burden of social obligations and 'green' policy objectives they must comply with, because under current and future energy policy they are the vehicle through which government raises billions, soon to be tens of billions for its inane interventions in the energy markets.  No wonder the barriers to entry in the sector are considered well-nigh insurmountable.  General taxation would be the honest (and progressive) way of doing this but they find levies on unavoidable energy bills a more expedient approach.

And now RWE has sold off a large chunk of its UK supply portfolio.  Of course this is being spun as creating a 'Big 7', hence better for competition: but this shouldn't fool anyone.  RWE is a sickly beast, having taken even worse beatings at the hands of German energy policy, and desperately hanging on (like E.on) for massive compo they are suing the German government for in respect of the half-baked, summary closures of their nukes.

Companies have sold chunks of portfolio before, but earlier sales were part of of the baleful consolidation process which, coupled with the restoration of vertical-integration-via-acquisition that we've slated here before, is how we got to the 'Big 6' stasis everyone seems to despise.

In many respects we already had a Big 7 because GdF of France has quietly assembled a UK portfolio of power generation assets and industrial customers making it bigger than Scottish Power in most aspects other than residential customers (of which it doesn't have any).  And Gazprom (yes, Gazprom) already takes the #8 position.  But there ain't much scope for small players in this market (and why should there be?), notwithstanding that gas retailing (to industrial customers) is a relatively straightforward proposition (not electricity, though - nor residential sales).  From time to time a fresh new hopeful joins the fray, for example Co-op Energy (!).  Good luck to them all.

So - let's see how Utility Warehouse, the proud new owners of 770,000 of RWE's best UK customers, make out in this bracing environment.

And watch out for further retrenchment, by RWE and others.  That's a warning for HMG as well as a comment for investors:  how much investment towards their mad, hundred-billion-pound energy schemes can they expect from these guys when their balance sheets are under such pressure ?

ND

Political Attacks on the Big 6: Have A Care

It takes a brave man to defend the unlovely Big 6 energy suppliers these days - or a Telegraph comment-writer mindful of advertising revenues.  We don't see that kind of dosh at C@W, but there's still a case to be stated.

Particularly when we read crap like this from Ed Davey, trying to elbow out Milibean from the driver's seat on the bandwagon.

"[people] look at the big suppliers and they see a reflection of the greed that consumed the banks. So this is a 'Fred the Shred' moment for the industry. You deliver an essential public service, so your industry must serve the public"

Where to start ?  Firstly, yes, the ability to buy reliable and safe gas and electricity supplies in the home is essential.  The 'natural monopoly' aspects of this have long since been analysed out to be just the pipes and wires, the costing and pricing of which are heavily regulated and always have been.  The supply and commodity aspects (along with ancillary services such as meter-reading) are not natural monopolies, and have been 'contested' - i.e. subject to competition - in the residential sector in this country since around 1995 (gas) and 1998 (electricity).  The last Labour government finally dropped all price controls around the turn of the century.

They also regulated every other aspect of residential supply very closely, imposing no end of social obligations (such as not disconnecting elderly non-payers).  Indeed, they and their Coalition successors have been layering on ever more social obligations and 'green' surcharges with every passing year, culminating in the 'electricity market reforms' and the Heath-Robinson Energy Bill now inching its disreputable way through Parliament.  Is this 'good' regulation?  No, generally speaking it is not - but it is a far cry from the 'hands-off', light-touch, non-regulation (or at least non-enforcement) that was the Blair / Brown / Balls policy for the banks in the run-up to the 2007 crisis.

Undermining the operation of a proper market in residential supplies still further was the shocking failure to prevent the revival of vertical integration by acquisition, again on Brown's watch.  We've discussed this at huge length in comments here before.  Suffice for now to say that permitting Powergen (latterly E.on) to become the vertically integrated behemoth it became, followed by RWE and most recently EDF**, was a capital error - and I do mean capital: lots of it. 

(The scotties - SSE and Scottish Power - were of course privatised as verticals, and have jealously maintained their integrated structures. I exempt Centrica from all this because they achieved their 75% integration organically, not by acquisition - a very different thing - and it was done defensively, against the declining wholesale market liquidity engendered by the others.)    

No shortage of very pro-active regulation, then, albeit frequently crass.  Actually, rather a shortage of intelligent intervention, which should have been initiated by Ofgem to promote wholesale liquidity.  Their efforts have been protracted and pitifully lame,

The Big 6 must of course play the game under the ever more complex and often self-defeating rules they are faced with: and now to be turned upon by politicians of all parties is pretty rich.  I've no doubt that in many ways they haven't helped their own cause.  But, politicians beware! - because somewhere out on this uneven field of play is a cliff-edge.  Anyone who reads the papers will know that the UK is hoping for hundreds of billions of pounds of investment from these companies (and the National Grid, which raises almost all its revenues from them), to finance the comprehensive programme of power-plant replacement and grid upgrading required (a) to prevent the lights going out and (b) to deliver the monstrous 'decarbonisation' agenda.

It's well worth reading this piece from the Economist, which points out that as a consequence of the impositions and changes foisted upon them the market cap of the European power companies has fallen more than that of the banks (!!)  These are fast becoming companies whose balance sheets just will not support what is desired of them.  "Existential threat" is the phrase used by the Economist, and indeed RWE is arguably in a bed quite close to the door, with Iberdrola (Scottish Power) none to healthy either.  Imagine the reaction if Big 6 were to become Big 5 one fine morning: who'd be investing their billions the day after that ?

Meanwhile, back at the populist soap-box we have Ed Davey stirring things up instead of calming them down.  Ironically, on the same day we also have Cameron spouting this: 

Growth depends not just on Government policy but one wider social attitudes towards commercial success, he said. “We need a bigger and more prosperous private sector to generate wealth and pay for the public services we need. That means we need to support, reward and celebrate enterprise,” he said. “That requires a fundamental culture change in our country. A culture that’s on the side of those who work hard, that values that typically British, entrepreneurial, buccaneering spirit, and that rewards people with the ambition to make things, sell things and create jobs for others up and down the country.”

And that's the perverse political climate of double-think in which the Big 6 must go about their business.  Let's not imagine they won't one day, one way or another, respond quite badly to the kicking they get.

ND
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** remind me - was EDF's vertical integration in the UK achieved by acquiring British Energy ?   Oh yes indeed.  And was EDF advised by Gordon Brown's brother ?  Well, now you mention it ...

Small Electricity Suppliers Have No Right To An Easy Life

Ofgem, whose uselessness over the past decade is a disgrace to the excellent work done by its predecessors Ofgas and Offer in the 1990's, is at it again. 

Britain's big six energy companies will face fines unless they open up the electricity market to competition from smaller rivals, under proposals by the regulator designed to "break the stranglehold" of the biggest suppliers.  (DTel)

The details of this are less dramatic than one might imagine: they intend to 'force' the biggest 8 generators (not just the 'Big 6') to become market makers in the forward market out to 2 years.  Since liquidity in the 2-year energy forwards is pretty unsatisfactory - and since that, in turn, is pretty damaging - no one can be happy with the status quo.  Ofgem have been farting around worrying aimlessly about energy liquidity for 8 years now and the only positive development has been the advent of hedge fund and PE money since around 2006 - mostly in the gas sector because electricity trading is fiendishly difficult.  On the downside, banks have been progressively scaling back their commodities trading altogether.

Of course, the real issue is that in the '00s, Ofgem and the competition authorities (against their better judgement but under instruction from Gordon Brown) allowed dumb vertical integration to take hold once more in the electricity market, after the successful efforts of 15 years to break it up.  EDF being allowed to buy BE was the final straw in the structural undermining of liquidity, a point we made at the time. The European authorities, who ought to be a back-stop against this kind of thing, were equally supine.

What I don't understand is why anyone thinks small, under-capitalised electricity suppliers have a God-given right to thrive.  This is the most capital-intensive of industries - whether or not a player intends to back ts energy positions with physical assets (power plants, gas production or storage facilities etc).  Even if they intend to operate on a 'merchant' model - just buying wholesale to meet retail demand - huge quantities of risk capital are required to back the big, long-term deals that are required for that business model.  That is the lesson of 'asset-lite' Enron:  it's a game for big boys with a credit rating of at least A, preferably higher.

What's needed is real competition between ten or so properly-capitalised players. Boutique energy marketing outfits with no credit won't be able to transact 2-year hedges anyway - unless the new 'rules' force the Big 8 to take the credit risk, the merest featherbedding.  Along with the free ride that is currently given to windfarms in terms of not being charged the full cost of their intermittency, plus a heap of social obligations as regards 'poor' retail customers, and even more nonsense contained in the Energy Bill, the burdens being heaped on the big players will one day make some of them decide it's not worth the candle.  Obvious candidates for giving up in disgust are cash-strapped RWE of Germany (nPower) and Spanish Ibderdrola (Scottish Power).  It's not too much of a stretch to see E.ON having second thoughts as well.

See how we like it when Big 6 becomes Big 3, eh?  No amount of flaky, subsidised suppliers called 'Nice Clean Energy' or 'Friendly Power' will help us then.

ND

Ganging up on Gazprom

Here's an amusing turn of events.  At the end of last month, Russia - after 18 years of trying - was admitted to the WTO.

Welcome to the world of free trade !  Within days, the EC announced proceedings against Gazprom under Competition law, on three counts, focusing on Gazprom's activities in Eastern Europe:

• hindering the free flow of gas by use of 'no-resale' clauses in contracts;
• preventing diversification of supply by frustrating third-party access to, and development of, gas infrastructure;
• insisting on pricing gas using oil-indexed pricing formulae.

One hopes the EC doesn't waste too much of our money on their investigation and I can assist them in this regard.  On count 1, a cursory examination of the relevant contracts will do the trick: guilty as charged.  (And while you are at it, check the big gas sales contracts made by Algerian state company Sonatrach to France, Spain and Italy - you'll find the same there, too.)

On the second you may have a bit more trouble because there will be less of a paper-trail, and some of the European companies who could spill the beans are strongly inclined not to.  Nil desperandum, because to establish charge no.3 you need only read the collected public works of Gazprom speakers at energy conferences over the past 5 years.

Putin seems to be sweating a little over this (wonder why ?) and has rushed to hinder the process.  As well he might because there is no telling where this could eventually lead.  (Hint to EC: broaden your scope to Italy ...)

What has triggered this action ?  You may recall that, of the two big German energy companies that have been bleeding white from importing oil-indexed Russian gas, E.on - always much closer to Gazprom - settled earlier this year but RWE was hanging in for much bigger concessions, and they gave fair warning.  This is RWE's ace: they have made several large acquisitions in the Eastern European energy sector, thorough which they obtained all the paperwork necessary to prove the case.

ND

RWE, EDF and The Curse of the Ratings Agencies

Anyone notice that RWE has been downgraded ?  BBB+ is not a healthy place to be for a big energy utility laden with physical assets - it's only just over Investment Grade.  Even Enron was BBB+, for pity's sake !  It's no joke and RWE will need to reorient their strategy significantly.  Getting a better deal from Gazprom on their long-term contracts will only be a start.

They've been buffeted, of course, by the vagaries of Germany's energy policy - or complete absence of policy as my German friends aver; and are just that bit less able to take the punishment than fellow-sufferer E.on. Both pulled out of the fatuous game of 'new nukes for UK' earlier this year, for the very reason of trying to preserve their ratings.  E.on's time in the rating agencies' sights may come (again).

So what of EDF and its resolute programme for a few new UK nukes of its own ?  Dream on, Ed Davey - they know they'll be hit too if they stick their balance-sheet on the line for this lost cause, generous subsidies or no.  Their would-be 20% partner Centrica will be heading for the hills soon, and EDF are already casting around for replacements.  Rumbling on in the background is a dispute with Areva over who takes the hit on the monstrous EPR over-run costs; and if DECC gets a single new nuke out of them (at Hinkley in Somerset) it will be a miracle of the first order.  

Interestingly enough it's not nukes that EDF press releases emphasise !

Yeah, funny, that.

ND