Energy Source is back: BP ditches petrochemicals

Welcome to Energy Source, the FT’s relaunched newsletter about the world’s most important business. Twice a week, starting today, Energy Source will deliver essential news, smart analysis, and insider intelligence, written by the FT’s global energy team. From oil markets to geopolitics, corporate boardrooms to the energy transition, this is your on-the-ground guide to what matters, from shale to solar. 

In today’s newsletter, we explain why BP would ditch its interest in petrochemicals — the segment of the fossil fuel business Big Oil thought would be most resilient in any move away from oil. We also ask whether Texas is about to sink the oil market, note just how gloomy the state’s producers have become and examine the hazy outlook for a natural gas pipeline meant to traverse the densely populated US north-east.

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Is dumping petrochemicals part of BP’s transition?

These days, BP seems to describe its every move as part of chief executive Bernard Looney’s plan to transform the company. Yesterday’s news that it was selling most of its petrochemicals business to Ineos was an example: a “deliberate step”, said Mr Looney, “as we steadily work to reinvent BP”.

It certainly appears as if Big Oil’s self-declared transition leader is ditching another part of the oil business — the one supermajors said was their future: plastics.

But how does the Ineos deal help? The oil BP finds, refines and sells in the rest of its carbon-emitting businesses does more damage to the planet than its non-combusting petrochemicals, which make these plastics. And BP was hardly a big hitter in the segment, from which it had been in slow retreat for more than a decade. Production was modest compared with rivals, and profits — just $65m in the first quarter — even more so. 

Steve Jenkins, head of Wood Mackenzie’s petrochemicals team, said the move made “strategic sense” given petrochemicals’ global production overcapacity and BP’s urgent need for cash. 

The best way to understand BP’s Ineos deal is to focus on its groaning balance sheet, now worsened by the colossal writedowns it owned up to earlier this month. Its gearing of almost 50 per cent is well above rivals’. The $5bn from Ineos will help chip away at the debt pile, while the divestment unburdens BP from the heavy spending needed to make the assets work to their potential and streamline other operations. BP says it has already hit its $15bn divestment targets, with the chemicals assets seen as one of the easier disposals, ringfenced and far apart from other bits of the BP business.

Will this win over those — including executives within BP — sceptical about its latest broad move beyond petroleum? Much will depend on Mr Looney’s big reveal in September, when he promises real detail about the shift. BP’s shares were up 3 per cent after the Ineos announcement. But investors have much preferred BP’s oilier rivals this year. (Derek Brower and Anjli Raval)

Line chart of Share performance since BP's announced transition showing Investors prefer oil majors that like oil

The oil market’s Texas-sized problem

Texas is suddenly the US oil market’s biggest problem. 

The Lone Star state led the rest of the country in both supply and demand in recent weeks — shutting wells to curtail output and driving consumption higher as it loosened its lockdown. Oil rallied to $40 a barrel.

But now the reverse is happening. Higher prices have prompted companies to bring wells back on line at pace and the state has had to stall its plans to reopen as coronavirus cases spike.

Texas accounted for more than 40 per cent of the US’s 12.2m barrels a day of production last year. Now, as wells restart, its supply has already risen 300,000 b/d since its low point in late May, according to Artem Abramov at Rystad.

Meanwhile, petrol pump data show Texas’s consumption falling again — and fast. Demand was down 20 per cent last weekend from the week before, according to pricing app GasBuddy. 

This matters for two reasons.

  1. The bull thesis for prices partly depended on swiftly rebounding oil demand in Texas, which consumes just under 1m b/d of gasoline — second only to California. Any regression will be bearish for prices.

  2. What happens in Texas is likely to happen elsewhere. Red states — the quickest to throw off the lockdown shackles — were the quickest to see a rebound in gasoline demand, according to Tom Kloza, an analyst at Opis. Texas led the pack: petrol consumption roared back to around 85 per cent of pre-lockdown levels. Other Republican states with virus surges will be watching Texas for their cue. 

“[Texas] probably doesn’t move the needle globally. But it does in terms of market perceptions, which have been remorselessly bullish in terms of how quickly demand was coming back,” Paul Horsnell, head of commodities research at Standard Chartered, tells Energy Source.

In simple terms, supply is climbing, even if only temporarily; demand is falling. That is bad news for bulls. All eyes remain firmly fixed on Texas. (Myles McCormick)

© Bloomberg

US Supreme Court extends gas pipeline saga

The US Supreme Court on Monday asked the federal justice department for input in a case pitting a natural gas pipeline developer against the state of New Jersey, prolonging one of countless skirmishes over fossil fuel infrastructure being fought in the absence of a national climate policy. 

The case turns on whether PennEast Pipeline may seize land owned or controlled by the east coast state to lay its 120-mile line from the shale gasfields of Pennsylvania. 

New Jersey had successfully argued in the US third circuit court of appeals that it had sovereign immunity against condemnation lawsuits brought by gas pipeline companies. 

PennEast — backed in friend-of-the-court briefs by the US oil and gas industry — had hoped the Supreme Court would agree to take the case after a conference last week. 

The justices instead sought a brief from the US solicitor general, adding new delays in a presidential election year. If Democratic challenger Joe Biden wins and makes good on pledges of net-zero emissions, “projects such as this one may find themselves in the crosshairs if they are awaiting permits or permit revisions,” said Clearview Energy Partners, a consultancy in Washington. (Gregory Meyer)

Data Drill

Even as production activity bounces back in the US, gloom hangs over the oil sector. As air travel remains weak and fresh spikes in virus numbers put a return to lockdown on the table, there is little-to-no expectation of a full near-term recovery in demand. According to a recent survey by the Federal Reserve of Dallas, the bulk of respondents reckon it will be at least 2022 before consumption regains 2019 levels. Five per cent say it never will. (Myles McCormick)

Column chart of When do you expect global oil consumption to return to pre-Covid 19 levels? showing No one expects a rapid bounceback in crude demand

Power Points

  • Harold Hamm slammed Joe Biden’s energy policy as “not based in reality”, Derek Brower writes. The Biden camp didn’t respond. The Continental Resources chief and Donald Trump ally — seen recently at the president’s Tulsa rally — also laid into Saudi Arabia for its recent price war. 

Harold Hamm, chief executive of Continental Resources Inc., speaks during the Republican National Convention in Cleveland, Ohio, on July 20, 2016. © Bloomberg

  • The Trump administration has slashed US royalty rates during pandemic, Gregory Meyer writes, providing a boost to oil and gas producers drilling on government-owned land. 

  • An unprecedented heatwave in northern Russia has produced the highest temperature ever recorded inside the Arctic Circle, Leslie Hook reports, heightening fears that global warming may be accelerating faster than scientists had thought.

  • Chesapeake Energy’s long-awaited bankruptcy filing landed on Sunday, Derek Brower and Myles McCormick report, completing the fall from grace of a pioneer of the US shale revolution.

  • Indian oil companies have been raising fuel prices over the past three weeks as the Modi government ratchets up taxes to replenish state coffers. Stephanie Findlay has the details

  • In this video, Leslie Hook takes a look at how coronavirus could accelerate plans to cut transport emissions and curb air pollution.

End Note

When US crude prices turned negative in April a meme circulated inverting a scene from Captain Phillips. Its message was clear. No one wanted a commodity you had to pay others to haul away. Crude is now trading for $40 a barrel, but many oil and gas companies are still distancing themselves from the black stuff. After two oil crashes in five years, it’s not surprising. 

Take Energean, a London-listed producer with interests in the Eastern Mediterranean. As it announced yesterday its plans to scale back its deal to buy Edison E&P, its chief executive Mathios Rigas was at pains to emphasise its share price shouldn’t be treated like an oil company’s:

“Around 70 per cent of our production will be sold under long-term gas sales agreements that insulate our future revenues against oil price volatility.”

So much for the thesis of oil’s coming bull run — the executives at companies producing the stuff aren’t even citing it. Fears about peak oil? Resurgent Saudi-Russia price wars? Not us! We’re steady-Eddie gas producers now, is the increasingly common pitch. (David Sheppard)

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval and Leslie Hook in London, and Gregory Meyer in New York.