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Good morning from hot Houston.
Temperatures are expected to top 100 F (38 C) in the coming days as a heat wave sweeps across the state. Texas power grid operator Ercot has warned of record electricity demand as homes and offices switch on air conditioning.
Rising temperatures are becoming the norm in Texas. The state’s energy use surged 11 times last year, setting new records, as climate change hit America’s energy heartland.
I’ll be moving here full-time next month from New York and taking over as the Houston correspondent after Justin leaves. I’m looking for tips on everything from oil patch drama to where to get a good chest. Contact please: myles.mccormick@ft.com.
Speaking of oil, the International Energy Agency said yesterday that world demand will peak before the end of this decade, with transport consumption falling as electric vehicles gain traction in 2026.
In today’s newsletter, Derek and Tom report on Shell’s big day on Wall Street, where the company’s top executives sought to woo investors with an emphasis on “discipline”, returns and a “more balanced” approach to the energy transition.
We also have commentary from veteran energy trader Adi Imsirovic of Surrey Clean Energy, who hits out at Saudi “theatrics” and blames speculators for the drop in oil prices. In Data Drill, Amanda maps the geographically uneven growth of global battery storage.
Thank you for reading. — You think
Shell’s Sawan makes his pitch
Shell held its much-hyped investor day yesterday, with new chief executive Wael Sawan delivering a polished performance designed to generate enthusiasm for the supermajor, which some investors believe has lost its way in recent years.
The location of the event, a gilded room at the New York Stock Exchange, was symbolic: the US remains friendlier to oil producers – one of the reasons why the country’s headquarters change was considered, and remains plausible.
And if Sawan is to close the huge valuation gap with ExxonMobil and Chevron — the elephant in the room on Wall Street yesterday — it needs to win over American investors. Here are some insights:
Shell will keep pumping oil, but this wasn’t the big key
Shell’s goal of cutting oil production by 1-2 percent a year is gone, but only because—thanks to divestments—it has already met the goal. It now intends to maintain its high-margin oil output at around 1.4 million barrels per day until 2030.
It will launch a number of new projects to supply 500,000 barrels of oil equivalent per day — “or more” — in the next two years, Sawan said, but only to offset declines elsewhere. That doesn’t include his big bet on Namibia, which will supply oil later this decade at best.
Gas is by far the bigger growth area and LNG will be the star of the show. Shell will add an additional 11 million tonnes per year of LNG capacity by 2030. That means its own and traded volumes combined are expected to grow by up to 30 percent to nearly 80 million tonnes per year by the end of the decade.
How low-carbon businesses fit into this remains to be seen. Shell says green projects will need to achieve returns of 6-8 per cent to justify investment, and some may achieve 9-10 per cent. But that’s a far cry from the 25 percent offered by some of its oil projects.
Meanwhile, Sawan was adamant that Shell had no “differentiated capabilities” to justify a more aggressive shift to renewables – a stance that will please the kind of US investors who have flocked to ExxonMobil.
Sawan did not keep his words about the energy transition
In the cloud of corporate buzzwords, the terms “ruthless”, “disciplined”, “simplified” and “balanced” appear prominently. “Range 3”, not so much.
The new catchphrase is “more value, less emissions,” which sounds a lot like Chevron’s “lower carbon, higher returns.” And the rosy picture of an easy energy transition that corporate bosses boasted a few years ago, even before Ukraine, was gone.
“It is important that we avoid dismantling the current energy system faster than we can build the clean energy system of the future,” Sawan said.
As for a Dutch court ruling forcing Shell to cut emissions by 45 percent by 2030, “it won’t make any difference to the world,” especially if consumers still need the fuel so another company makes it.
Shell looks like a tasty target for spending money
Sawan aims to turn his company into a “disciplined” cash machine with operating and capital cost cuts that will generate 10% annual free cash flow growth per share by the end of 2025 and allow for at least $5 billion in additional share buybacks in the second half of the year . It’s a robust business — even if, despite a second-quarter dividend increase, the payout remains lower than it was before the pandemic.
But the big takeaway may be that Shell offers a more “balanced” approach to the energy transition – one that emphasizes its LNG, trading and deepwater capabilities – risks making it a juicy target for the US supermajor. That would be one way to fix the valuation gap. (Derek Brower and Tom Wilson)
Opinion: Why Saudi Arabia is struggling in the oil market
Adi Imsirovic is the director of Surrey Clean Energy consultancy
On June 5, Saudi Arabia, the de facto leader of the OPEC cartel, announced a large, unilateral cut in oil output of 1 million barrels per day from July.
Still, oil prices barely budged. The international benchmark of Brent crude oil settled at $73.20 per barrel yesterday, down about 4 percent since before the Saudi intervention.
Why aren’t prices behaving the way Saudi Arabia wanted them to? Because the kingdom does not understand how prices are formed.
Prince Abdulaziz bin Salman, the Saudi energy minister, believes oil prices are being driven by speculators who are taking them away from supply and demand fundamentals.
I agree with Prince. Absolute oil prices are driven by financial market participants, not those who trade physical barrels of oil.
But financial players are not necessarily speculators. Most of these are funds that invest in a broad portfolio of assets in which oil may play a relatively small role, usually as a hedge against inflation. Even if some of these funds were speculating, they would be basing their decisions on expected market fundamentals at some point in the future.
Market drivers
This year, the primary price-determining factor has been the likelihood of a recession, driven mainly by central banks’ determination to keep raising interest rates to cool inflation.
Recent research points to several other financial drivers of oil market volatility: global and US economic policy uncertainty, geopolitical risk, US monetary policy uncertainty and stock market volatility.
In other words, financial players, the key drivers of oil prices, have had every right to be bearish in recent months. Even if they were speculating, it would be wise to keep it short.
In fact, neither the short-term fundamentals generally tracked by physical oil players nor the future expected fundamentals tracked by financial players have been particularly bullish.
In a high interest rate environment, holding oil is expensive and risky. So it is not surprising that many players have forgotten and reduced the demand for oil contracts.
Saudi motivation
So what should we make of Saudi Arabia’s latest decision to cut production?
For a certain period of time, Oven is losing credibility and Opec+ is losing importance. The group’s April decision to cut by 1.66 million b/d failed to stem the fall in oil prices, just as an earlier cut announced last October failed. Despite the continued decline, the only meaningful (but insufficient) production cut that Opec+ managed came from Saudi Arabia. Even that failed to stop prices from falling further.
Russiathe only producer in the “plus” part of the alliance worth noting is fighting a war in Ukraine and is desperate to keep oil revenues flowing – so Moscow is highly unlikely to accept any voluntary cuts.
This lack of control over the market is the reason for so much irritation within the top brass of the cartel.
The only hope for the Saudis is a strong increase in demand later in the year. This may well happen, but spells of blaming speculators are not helpful.
At best, they confirm the difficult position OPEC leaders are in; and at worst they reveal a fundamental misunderstanding of what shapes the price of the world’s most important commodity. (Adi Imsirovic)
Data drill
Annual battery storage installations worldwide will exceed 400 GWh by 2030, a tenfold increase over last year’s capacity additions, according to Rystad Energy.
Falling prices and new policies are contributing to this growth, with US battery capacity expected to grow 27 percent by 2030 thanks to a landmark inflation-reducing law.
China, which will continue to lead in battery storage installations, the U.S. and Europe will together account for 85 percent of annual global installations in 2030, leaving developing markets far behind—an outcome that could slow decarbonization efforts. (Amanda Chu)
Power Points
Source of Power was written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Contact us at energy.source@ft.com and follow us on Twitter at @FTEenergy. Follow past issues of the newsletter here.
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