Oil Rig Support Vessels And Port Operations At Aberdeen Harbor...An ASCO Group Ltd. logo sits on a fuel storage silo beyond residential properties near Aberdeen Harbour, operated by the Aberdeen Harbour Board, in Aberdeen, U.K., on Friday, Aug. 8, 2014. The oil and gas industry remains central to the debate on Scotland's independence ahead of the forthcoming Sept. 18 referendum. Photographer: Simon Dawson/Bloomberg
Oil services groups predominate at this week's SPE Offshore Europe Conference in Aberdeen © Bloomberg

Dear readers,

Fictional critter-whisperer Doctor Dolittle included a pushmi-pullyu in his menagerie. The oil and gas industry resembles this odd, two-headed beast, which wants to go in opposing directions simultaneously. Energy companies are attempting to promote decarbonisation while defending themselves from climate activists who want them to go faster. Lex, visiting Scottish oil city Aberdeen for a conference, watched in wonder as industry figures struggled with this tug of war. 

Christiana Figueres, executive secretary of the UN's Framework Convention on Climate Change, pointed a finger at the oil and gas producers. She sees a shelf life of just 30 years for their businesses. That sounds unrealistic unless one writes off the demand from billions living in developing economies such as India.

There is no doubt pressure is mounting. Global warming is inducing cold feet in investors. They are haunted by the spectre of “stranded assets” — hydrocarbon reserves whose value may be impaired by its high carbon cost. 

The best role model for this pushmi-pullyu industry is therefore the animal described in Dr Dolittle books, which resembled a cross between an agile gazelle and an awe-inspiring unicorn. It was shown on celluloid as a kind of llama, an animal whose rudeness endears it to few.

Oil services groups predominate at the SPE Offshore Europe Conference in the “Granite City”. These are the companies which provide anything from drilling kits to the engineering and construction required for oil and gas extraction. Their skills will not all transfer to the new era of renewable energy. 

Here, businesses must promise to magically eliminate the same quantity of carbon they bring out of the ground. Oil and gas production, according to researchers at the Carbon Disclosure Project, accounts for half of all greenhouse gas emissions. Burning hydrocarbons for fuel accounts for more than three-quarters of these gases in the US, according to its Energy Information Administration. 

As investors become less tolerant of dirty energy, forcing up the cost of capital of producers, the industry’s suppliers will see their profits wither away. Service company executives from TechnipFMC and Schlumberger spoke of reducing their “carbon footprints”. One senses this is all part of a larger cost-slashing exercise. Less person power, less carbon expended.

Big oil companies have cut overheads for years by tearing costs out of the hides of suppliers. For that reason, while crude prices have held up reasonably well over the past few years, equity investors have avoided the do-little oil service industry. This group’s earnings have trailed the recovery of their largest customers such as Royal Dutch Shell and BP, as Lex noted recently.

Once a late-cycle, “high beta” wager on oil prices, the suppliers to the oil industry have struggled. In the US, any production growth from onshore shale oil drilling, and thus rising demand for equipment and manpower, no longer happens willy-nilly. Portfolio managers will not finance lossmaking activity by the explorers. The share price of the world's largest oilfield service group Schlumberger is approaching 15-year lows.

To the general malaise may be added the particular problems of some European oil service groups. London-listed Petrofac is in the middle of defending itself in a bribery case that has reduced its order flow from former strongholds such as Saudi Arabia and Iraq. John Wood Group has struggled to integrate its 2017 £2.2bn acquisition of peer Amec Foster Wheeler. On the other hand, Saipem of Italy has put its own bribery scandals behind it and has recently begun to win big orders. Their stock prices reflect the indifference of portfolio managers. 

That contrasts with the vigour of the debate in Aberdeen. The oil industry should be conscious that even as it talks, the world may be moving on.

Here’s hoping you have plenty of energy to finish off the week.

Alan Livsey
Lex research editor

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