Jeremy Warner’s Road to Damascus

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By Paul Homewood

Only a few years ago, Jeremy Warner was writing:

“As a commodity product, oil has to date been quite unusual in that it accommodates both low and high-cost producers. This is largely because supply is deliberately constrained by OPEC and others with an interest in eking out the resource’s income stream for as long as possible. A barrel of oil, it has long been thought, is worth more left in the ground than extracted.

The now exponential growth of renewables threatens to challenge this established orthodoxy. Indeed, BP admits in its analysis that quite a bit of today’s known reserves will end up never extracted – music to the ears of the green lobby. The implications are clear: oil producers should make hay while they still can, even at the cost of a resulting glut that depresses prices. In any case, there may be little point in developing new sources of supply, particularly at high cost.

Rather, oil companies should be slashing their investment to virtually zero and handing the cash back to shareholders – either that or using their superior credit ratings to invest in renewables.”

Now he has seen the light!

For lessons on how to make a bad situation even worse, ask Ed Davey, leader of the Liberal Democrats. He’s just proposed a £5bn “Robin Hood” windfall profits tax on the “robber barons” of the oil and gas industry so as to help pay for fuel bill rebates and ease Britain’s cost of living squeeze.

The trigger for his proposal seems to have been the boss of BP, Bernard Looney. Announcing bumper third-quarter profits a little while back, he rather ill advisedly said his company had become a “cash machine” as a result of soaring oil and gas prices. Sir Ed has quickly given notice of a big withdrawal.

But hold on a moment. Is this the same Ed Davey who as energy secretary from 2012-15 under David Cameron’s coalition government helped lay the ground for the disaster zone, with its myriad market and regulatory failures, that UK energy policy has become? Why yes it is. Politicians seemingly find it easy to forget their past.

I don’t wish to dwell unduly on the Lib Dem leader’s special contribution to today’s shambolic state of affairs; suffice it to say that loading the cost of the Government’s green agenda on to fuel bills, rather than having the guts to do it progressively and upfront through the tax system – which would have been the more logical and equitable approach to incentivising the desired energy transition – is a large part of the mess we are in.

Still, we are where we are, and not content with his part in getting us there, Sir Ed now seems determined to foul things up even more….

If further taxing the North Sea is likely to prove counterproductive, that effectively leaves only UK domiciled oil and gas companies there for the fleecing. Just two of them – BP and Shell – are big enough to make a significant difference. Perhaps Sir Ed hadn’t noticed, but far from being the bad boys of the sector, both of them have got with the programme by leaning over backwards to join the green energy transition stampede. The business case for this transformation is that green energy will take a long time to deliver meaningful returns, if indeed it ever does, but that it can be funded in the meantime from the abundant returns of hydrocarbon runoff.

Whether these strategies make sense from a shareholder value perspective looks rather more questionable. One of those who has come to the view that it does not is Lord Browne of Madingley, BP’s former boss. In an article for Time magazine, he’s joined the growing throng of activist investors calling for a breakup. Browne always was more of a deal maker than an oil man, and having built BP via mergers and acquisitions into the giant it is today, he now presumably hopes to capitalise on the potentially rich pickings of tearing it apart.

Any such take down will be excellent news for private equiteers and other vulture capitalists on the lookout for oil industry roadkill, but it is very unlikely to further the cause of the energy transition so beloved of the likes of Sir Ed. For it is not just prospects for a carbon free future that squeezing BP and Shell dry would harm.

The fact is that for now the world is still overwhelmingly dependent on hydrocarbons for its energy needs. We are going to need the gas and oil these companies produce for a long time to come. Drive the industry offshore if you must, but by reducing Britain to an investment desert, it only makes us even more dependent on outside forces that care little or nothing about the demands of climate change.


January 9, 2022