Hill+Knowlton Strategies

Bliss was it in that dawn to be alive,
But to be young was very heaven!–Oh! times,
In which the meagre, stale, forbidding ways
Of custom, law, and statute, took at once
The attraction of a country in romance!

Revolutions and political upheaval inspire a great deal of confidence, optimism and positive sentiment. William Wordsworth, Ludwig van Beethoven and Robert Burns all felt this spirit in 1789 as the French people swept away an outdated autocratic regime and raised the tri-colour over the city of Paris.

The current turmoil in the Middle East has been similarly inspiring. Only the most cynical seem to be predicting doom. Yet, as with 1789, initially positive reforms driven by liberal sentiments can descend into chaos and violence. Wordsworth himself turned against the French Revolution as hope turned to despair and the terror of the guillotine.

The fate, then, of the ‘Arabian Spring’ is by no means clear; toppling dictators does not de facto lead to universal liberty, fraternity and equality. History seems to back up the reaction of the markets which have pushed oil futures to a 2½ year peak of around $120 a barrel. The brutal repression meted out by Muammer Gaddafi has highlighted the potential for a wintery end to the protests.

Gaddafi’s regime has made a remarkable transition from international pariah to partner of the West in the war against terror, and back, once again, to the status of a ‘mad dog’. While once considered a ‘safe’ investment, due to its quality of oil and proximity to Europe, oil companies are currently fleeing the tumult of the North African state.

Yet the ‘effect’ of higher oil prices is not easily attached to the recent ‘cause’ of a collapse in Libyan production; wider issues are at play. Libya, since the lifting of sanctions in 2004, is still only the world’s 12^th largest exporter of oil.

Other extractors, such as the international oil cartel OPEC, suggest they can easily meet supply. It is unlikely that this is a risk free bet, however; part of the rise in oil prices is linked to concerns about Saudi supply lines. These routes pass through three potential flashpoints. The Suez Canal, which has recently seen Iranian naval vessels pass through it, is one. The other two are the Straits of Hormuz and the Bab el-Mandab, which share coast lines with Iran and Yemen respectively.

Finally, it seems unlikely that Saudi Arabia will be completely insulated against civil and political grievances. Today, running on the front page of the Financial Times, King Abdullah announced ‘financial support measures’ worth an estimated $36bn, in an attempt to avert the kind of unrest seen in Egypt and Libya. The package contains pay rises for public employees as well as reprieves for debtors and financial assistance for students and the unemployed.

The Kingdom has made one potentially fatal error here, repeated by regimes from 1789 – 1989: it assumes that revolutions are primarily products of economics. There is clear evidence that protesters in Libya, who continue to defy the bullets of Gaddafi’s militia, are standing against more than the price of bread or the lack of jobs.

Expanding unrest in the Middle East has jolted the oil market, sending crude to $119 a barrel since Egyptians first took to the streets in January. The oil market doesn’t like uncertainty, and nothing could be more uncertain than the volatility spreading to Libya, Africa’s third-largest oil supplier, and Tunisia. Some analysts are even concerned about Saudi Arabia.
Rising oil prices mean rising gasoline prices, which have surged to an average of about $3.13 a gallon at the pump in the U.S. This comes on the cusp of the summer driving season, when prices usually peak as Americans hit the roads.
Some analysts say oil could reach $220 a barrel if Libya and Algeria halt exports. The U.S. Energy Information Administration said Feb. 8 that the monthly average retail price for regular gasoline could exceed $3.50 a gallon during summer 2011. And that was before the Libyan situation developed.
What typically follows these price upticks is a round of Congressional hearings as indignant constituents’ wallets are squeezed.
Surging oil prices usually bring a fresh look at renewables too, so green energy companies should be prepared to seize the moment. Companies involved in alternative fuels such solar and wind can use this time of high oil prices to once again showcase their offerings.
This would also be an opportune time for oil companies to press for Gulf of Mexico drilling permits, long stymied by the ghost of Macondo.
Times of unrest often call for times of new beginnings.

Forgot to mention on our January energy round-up that we have welcomed a new colleague to our office in Houston, none other than former Bloomberg Bureau Chief Kimberley Jordan.

Kimberley joins as a Vice-President in our energy practice after more than 17 years in journalism and said:

“I am delighted that my energy knowledge and journalism background can provide clients with valuable insights that will keep them informed and prepared regarding policy decisions and industry shifts.”

Here’s hoping we can have her come and guest blog for the Energy & Industry blog very soon.

Speaking of which we will try to have Glen Hodgson’s view on the Heads of State Summit in Brussels tomorrow. The agenda was set to focus on energy, although Egypt is bound to come up.

What a busy start to the New Year it has been, so much so that my attempts to blog have been thwarted by a desire to see my wife for a little more than a handful of waking hours during the week.

With so much having happened, we thought it worthwhile taking a little review of January in the world of energy.

To The Moon

First off we had President Obama’s ‘Sputnik moment’ . His suggestion that America needed to seize the moment and take the lead in the technological race for dominance in renewable energy and sustainable technologies. His state of the union address was widely regarded as being well delivered, though his policies and narrative  have been called into question. Ultimately though I’m not sure the Sputnik analogy is an accurate one. Sure there is a long way to go for renewable energy technologies to become competitive with traditional sources, but in many ways the technology is available, it is the infrastructure and subsidy that needs to be set in order for renewables to ‘take off’. China moved ahead of the U.S. by adding a larger installed based during 2010 than anywhere else, by providing long term policies. The control economy will provide the sort of certainty that investors in the U.S. sadly lack, particularly as Congress missed the opportunity to provide long-term certainty and rolled over subsidy levels for just one year.

Like Rabbits

It was the Chinese and other ‘BRIC’ based investors who took the lions share of deal-making since the start of the year. Of course there was the BP Rosneft tie-up, though more on that later. As well we saw Petrochina take a stake in the Grangemouth assets of Ineos and Sinopec looks to extend its relationship with Repsol YPF in Brazil and CNOOC increase its interests in U.S. shale gas assets. 2011 is almost certain to witness a surge in merger and acquisition activity as the war chests are further swollen by rising oil prices and if the start of the year is anything to go by the BRIC players will be at the deal table as much as the traditional majors. The 3rd of February marks the start of the Chinese new year – the year of the rabbit – which if the year bears any resemblance to the well-known attributes of our furry friends could bode well for the M&A advisory community.

Creative Energy

So far at least it appears to be an excellent first quarter for many of the oil majors despite BP’s first loss in 20 years. Although the FT’s Lex column  was quick to criticise the lack of ‘creativity’ shown by the majors is addressing the longer term threats to their business model simply summarised as declining reserves.

It was this threat that was well in evidence in the results of PFC Energy’s annual Top 50 energy company ‘league table’, which was perhaps notable most for the state owned companies not on the list. This list is compiled based upon market capitalisation of listed organisations, but the many NOCs missed off the list are the power brokers of the industry and it seems somewhat incomplete without them.

The Tip of the Iceberg

This is especially true in light of BP’s recently inked deal with Rosneft. Of course the AAR consortium will do all it can to ensure that this deal never sees the light of dayas it seeks to protect its investment in TNK-BP, however, assuming this does go through this will provide an example of one of the more creative ways that IOCs will be directing their strategies in moving forward (remembering my earlier reference to Lex). Unfortunately though this sort of investment represents a communications challenge on the same sort of scale as the Gulf of Mexico spill that BP struggled through last year. Exploring the Russian arctic is certain to redraw battle lines with environmental activists and a wide range of stakeholders that believe this represents an unacceptable risk. I saw Bruce Parry’s programme last night about the impact of the Alberta Oil Sands on the lives indigenous people of that region. I expect there to be many similar programmes in the future and BP will no doubt be making preparations for reputational fallout, or so we hope.

Wakey, Wakey!

BP also took the limelight with its recent release of its 20 year outlook , an annual event, which has been closely watched by the industry for years. The results as you may expect are not wholly surprising, but I did find Bob Dudley’s frank response to projections on the reduction of carbon emissions refreshing. “Overall, for me personally, it is a wake-up call”, is how he referred to the less optimistic view of political commitment to reducing emissions. What this means for BP’s policies remains to be seen.

In light of the EU carbon trading debacle and the reported €30 million plus theft that is alleged to have taken place, BP’s pessimistic projections are looking fairly accurate. The system for trading credits remains down, with no immediate end in sight. For a trading platform to work traders need liquidity and trust. Both have been killed off and will take a long time and a lot of cost to rebuild. Industry calls to speed up the process of creating a single platform for Europe have so far not generated any concessions. Based on the performance of the UK trading platform, which appears to have far better standards of governance and compliance than some of its European peers, London may prove a popular home for the EU system.  

Pumped Up Prices

The retail sector in the UK has also been the subject of many headlines since the start of the year as prices at the fuel pump and retail electricity and gas prices have also risen. It will be interesting to see whether an OFGEM price review will yield any results (unlike previous inquiries) and if the Chancellor will capitulate and halt plans to raise fuel duty. The Coalition government has since Q4 GDP figures were released (and to some extent beforehand) been challenged to unveil plans to support economic growth and this duty may well have to be conceded if there are no specific policies in the pipeline.

Egypt

Finally would like to sign off this post by wishing that our friends, colleagues and clients in Egypt stay safe in these troubled times.