Weekly Overview: Low Oil Price, UK Energy and OMV

The end of the summer holidays looms, and with it comes the grinding of gears as brainpower is redirected from pleasant distractions back towards stubbornly difficult problems: the oil price remains low, despite talking up the prospects of an Opec-led production squeeze when ministers meet in Algeria next week; the UK must decide soon what is to be done with Hinkley Point C; and Gazprom’s foreign partners must decide how to replace the planned Nord Stream 2 AG joint venture with something else that brings in useful revenues over a long period.

The low oil price is behind the woeful economic outlook for Scotland, as shown in a new government report. The owner of perhaps 85% of the oil and gas reserves on the basis of the likeliest angles of the median line, Scotland, which earned notionally £1.8bn in 2014-15, earned about 97% less in 2015-16, thanks to decommissioning charges. Shell for example earned back earlier taxes to offset the costs of dismantling Brent. The UK is trying to maximise the economic recovery of the reserves, but absent a sharp uptick in the price, it will be an uphill struggle keeping the essential infrastructure ticking over until the reserves further upstream have been safely brought ashore. 

Again in the UK, the formality of Theresa May’s new government’s decision to reread the terms of the Anglo-Franco-Chinese Hinkley Point C (HPC) nuclear plant contract now looks more substantial. There has been more analysis of the size of the subsidy it would receive from UK customers, and news that in the US, the FBI has been investigating some employees at the Chinese firm involved, Chinese General Nuclear, for suspected industrial espionage activities carried out in the US. If the plant goes ahead China would go on to build more plants with greater ownership than its one-third stake in HPC, under an agreement China reached with David Cameron's government.

Adding further fuel to the flames was a report this week by the Energy and Climate Intelligence Unit in the UK, which asked if “Hinkley C does not happen, for whatever reason, does it matter?”

It concluded that HPC was “not essential. Alternatives include four big offshore wind farms (additional to those the UK will build anyway), or three additional interconnecting cables. Using electricity more efficiently and productively would remove the need for 40% of HPC and of course there is the possibility of gas-fired plants and demand-side response (DSR).

It said one solution for meeting peak demand without HPC would be to split the 3.2 GW roughly equally between DSR, gas plants and interconnection. To provide the same de-rated capacity, this system would require around 3.7 GW of DSR, 1.6 GW of interconnection and 1.2 GW of peaking gas capacity, at a cost of £3.2bn, around one-sixth the cost of Hinkley, with these savings feeding through into consumer bills.

Hinkley Point C (credit: EDF)

Other, conventional nuclear plants are jockeying for position: Hitachi, the Sunday Times reported August 28, has appointed a new CEO for its nuclear subsidiary Horizon Nuclear Power. Duncan Hawthorne is to secure a commitment from the government to guarantee a price for three decades or more. That will be a very different contract because as a private investor it can take less risk than the EDF-led HPC. Also unlike EDF, its technology is mature. “It’s not a paper reactor, it’s a real reactor,” he told the paper.

Gas-fired power too is on the agenda: EPH, the Czech owner of the UK Eggborough power plant, built to run on the Selby coalfields, is converting to gas, demolishing the structure to build a 2-GW combined-cycle gas turbine. That too will most likely require financial underpinning, secured perhaps by a capacity mechanism so that it is paid enough no matter how low its actual output.

Thanks to a combination of the carbon price floor – a UK invention to tilt the playing field against coal in the absence of a high emissions trading scheme price – and low gas prices, over half of UK power production in 2Q 2016 came from gas. According to latest national statistics, gas provided 50.9% of 2Q electricity generation by major power producers, with nuclear at 24.2%, renewables 18.1% and coal only 6.8% – its lowest ever percentage. 

On the continent, there was another meeting between the CEO of Austrian OMV Rainer Seele and his counterpart at Gazprom, Alexei Miller. They discussed Gazprom’s importance in Europe and the need for Nord Stream 2 without mentioning the Polish decision to ban the joint venture that would operate it.

OMV, as prospective partner in the planned Nord Stream 2 AG, might have been expected to comment on how the companies involved planned to circumvent the fatal blow that the Polish competition agency struck late in mid-August. However, whatever was discussed behind closed doors, there was no mention of it in the release. They did however discuss the asset swap. This involves upstream assets in Russia in exchange for upstream assets in Norway. Seele was not keen to comment on progress at the company's Q2 2016 results conference. He said the Norwegian regulator would be notified of the deal when OMV and Gazprom had agreed its terms.

Back on its home turf, OMV is nearing a solution with utility Verbund over a gas contract that governed supplies to an Austrian power plant. While nothing has been revealed over the details of this privately disputed agreement, Verbund stands to record a one-off gain, suggesting that the seller has recognised that power prices were too low to justify the gas price and is making a rebate which Verbund seems likely to accept.

The two parties are also planning to co-operate in greener energy and research into hydrogen cells.Thus OMV joins other European incumbents such as E.ON, Engie and RWE in adapting to the energy transition, while still focusing on oil production and other old-school activities.

William Powell