Unbelievable Showdown: Shell Shatters Supermajor Competition!

Good morning from a hot Houston.

Temperatures here are expected to top 100F (38C) over the next few days as a heat wave sweeps across the state. Texas power grid operator Ercot warned of record electricity demand as homes and offices ramp up air conditioning.

Rising temperatures are becoming the norm in Texas. Energy demand in the state hit new 11-fold records last year as climate change bites into the heart of American energy.

I’m moving here from New York full-time next month, taking on the role of Houston correspondent following Justin’s departure. I’m looking for advice on everything from oil patch drama to where to get a good brisket. Please get in touch: myles.mccormick@ft.com.

Speaking of oil, the International Energy Agency said yesterday that the world will reach peak demand before the end of the decade, with consumption in transport declining as soon as 2026 as electric vehicles gain traction.

In today’s newsletter, Derek and Tom talk about Shell’s big day on Wall Street, where the company’s top management tried to woo investors in a tone that emphasized “discipline”, returns and a more “balanced” approach to energy transition.

We also have an op-ed by veteran energy trader Adi Imsirovic of Surrey Clean Energy, bashing the Saudi ‘theatre’ by blaming speculators for the drop in oil prices. In Data Drill, Amanda charts the geographically uneven increase in global battery storage.

Thanks for reading. “Miles

Shell’s Sawan takes his step

Shell held its much-anticipated investor day yesterday, with the new chief executive, Wael Sawan, delivering a polished performance designed to spark excitement for a supermajor that some investors believe has lost its way in recent years.

The venue, a gilded hall of the New York Stock Exchange, was symbolic: The United States remains friendlier to oil producers, one reason a move of domicile to the country has been considered, and remains plausible .

And if Sawan is to close the huge valuation gap with ExxonMobil and Chevron – the elephant in Wall Street’s room yesterday – he has to win over American investors. Here are some tips:

Shell will continue to pump oil, but that hasn’t been a big pivot

Shell’s target of cutting oil production by 1-2% per year has been exceeded, but only because, thanks to divestments, it has already met the target. It now intends to keep its high-margin oil production steady at around 1.4 million barrels per day through 2030.

It would launch a series of new projects to deliver 500,000 barrels of oil equivalent per day — “or more” — Sawan said, over the next two years, but only to offset declines elsewhere. That doesn’t include his big bet on Namibia, which will only supply oil later in the decade at best.

Gas is a much larger 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. This means its combined owned and traded volumes are expected to increase by up to 30% by the end of the decade to nearly 80 million tonnes per year .

How low-carbon businesses fit in remains to be seen. Shell says green projects will need to achieve returns of 6-8% to justify the investment, and some could reach 9-10%. But that’s a far cry from the 25% offered by some of its oil projects.

Meanwhile, Sawan was adamant that Shell lacks any “differentiated capabilities” that would justify a more aggressive move into renewable generation, a position that will please the kind of U.S. investors who have flocked to ExxonMobil.

Sawan didn’t mince words on the energy transition

In a cloud of corporate buzzwords, the characteristics “ruthless”, “disciplined”, “simplified” and “balanced” feature prominently. “Scope 3”, not so much.

The new tagline, meanwhile, is “more value, with fewer 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 about a few years ago, before Ukraine, was gone.

“It is critical 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 requiring Shell to cut emissions by 45% by 2030, “it won’t make a difference to the world”, especially if consumers still need the fuel, leaving it to another company to produce them.

Shell looks like a tasty cash disbursement target

Sawan’s vision is to make his company a “disciplined” ATM, with cuts in capital and operating costs that will generate free cash flow growth of 10% per share per year through the end of 2025 and enable a another share repurchase of at least $5 billion in the second half of the year. That’s big stuff, although even with a second-quarter dividend hike, the payout remains lower than it was before the pandemic.

The big upside, however, could be that as Shell pushes a more “balanced” approach to the energy transition – one that emphasizes its LNG, trading and deep-sea prowess – it risks becoming a juicy target for a US supermajor. . This would be one way to close the rating gap. (Derek Brower and Tom Wilson)

Opinion: Why Saudi Arabia is grappling with the oil market

Adi Imsirovic is director of consultancy Surrey Clean Energy

On June 5, Saudi Arabia, the de facto leader of the OPEC cartel, announced a large unilateral cut in oil production by 1 million barrels a day starting in July.

Yet crude oil prices barely budged. Yesterday Brent, the international benchmark, stood at 73.20 dollars a barrel, below about 4 percent since before the Saudi intervention.

Why didn’t prices behave the way Saudi Arabia wanted? Because the kingdom is misunderstanding how prices are formed.

Prince Abdulaziz bin Salman, the Saudi energy minister, believes oil prices are being driven by speculators, who steer them away from supply and demand fundamentals.

I agree with the Prince. Absolute oil prices are driven by financial market participants and not those physically trading barrels of oil.

But traders are not necessarily speculators. Most of them are funds that invest in a large portfolio of assets in which oil can play a relatively minor role, usually as a hedge against inflation. Even if some of these funds were speculating, at some point in the future they would base their decisions on expected market fundamentals.

Market drivers

This year, the main factor driving the price has been the likelihood of a recession, driven primarily by the determination of central banks to keep raising interest rates to cool inflation.

Recent research points to a few other financial drivers of oil market volatility: US and global economic policy uncertainty, geopolitical risk, US monetary policy uncertainty, and stock market volatility.

In other words, financial players, key drivers of oil prices, have had every right to be bearish in recent months. Even if they were speculating, it would have been rational to stay low.

Indeed, neither the short-term fundamentals generally followed by oil traders, nor the expected future fundamentals followed by financial traders have been particularly bullish.

In an environment of high interest rates, holding oil is expensive and risky. Therefore, it is not surprising that many traders have gone short, reducing demand for oil contracts.

Saudi motivation

So what should we do with Saudi Arabia’s latest decision to cut production?

For some time, Opec it is losing credibility and OPEC+ is losing relevance. The group’s decision in April to cut 1.66 million barrels a day failed to halt the decline in oil prices, just as an earlier cut announced last October failed. However, despite the continued decline, the only significant (but insufficient) production cut OPEC+ managed to muster came from Saudi Arabia. It too failed to stop further declines in prices.

Russiathe only producer in the “plus” side of the alliance worth mentioning, it has fought a war in Ukraine and is desperate to keep oil revenues flowing, making it very unlikely that Moscow will accept voluntary cuts.

This lack of control over the market is causing much irritation within the cartel leadership.

The only hope for the Saudis is a strong recovery in demand later in the year. This may very well happen, but the theatrics of blaming speculators won’t help.

At best, they confirm the difficult position in which OPEC leaders find themselves; and at worst, they expose a fundamental lack of understanding of what is shaping the price of the world’s most important commodity. (Adi Imsirovic)

Data tutorial

Annual battery storage installations will exceed 400 GWh globally by 2030, a tenfold increase over last year’s capacity additions, according to Rystad Energy.

Falling prices and new policies are driving this growth, with US battery capacity expected to increase 27% by 2030 thanks to the historic Inflation Reduction Act.

China, which will continue to lead in battery storage installations, the US and Europe together will account for 85% of annual global installations in 2030, leaving developing markets far behind, an achievement that could slow decarbonization efforts. (Amanda Chu)

Strengths

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Energy Source is written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Stay updated on past editions of the newsletter Here.