The winds of change threatening an end to oil’s dominance
Are the recent misfortunes of Tullow and Providence a sign of deep-rooted problems in the wider industry,
ON DECEMBER 6, Providence Resources announced the resignation of long-standing chief executive Tony O’Reilly Jnr. Then, last Monday, Tullow Oil announced that its CEO Paul McDade was also leaving “with immediate effect”. While the announcement from Providence was not entirely unexpected, the news from Tullow came like a bolt out of the blue, with the share price tumbling 70pc. Providence has, in one guise or another, been drilling for oil and gas in offshore Irish waters for almost 40 years.
In 2008, it seemed as if these efforts would finally be rewarded when oil was discovered in its Barryroe field off the coast of Co Cork. These hopes were strengthened four years later when, after further drilling, Providence said Barryroe could contain up to 1.8 billion barrels of oil.
After more than three decades of trying, it appeared the search for oil in Irish waters was finally about to be crowned with success. What could possibly go wrong? Quite a lot actually. Despite it apparently containing as much oil as a significant North Sea field, Providence has so far found it impossible to secure a partner to help it develop Barryroe. The latest attempt collapsed ignominiously in October, when Providence scrapped a deal with Chinese firm APEC.
The Providence share price, which peaked at £6.65 (€7.95) in September 2012, was trading at just 3.3p last week, while its market value has shrunk to just £22m from £425m.
Tullow’s fall from grace has been even more spectacular. Under former CEO Aidan Heavey, it grew to be one of the largest independent oil companies in Europe, with operations in Ghana and Uganda. Unlike most Irish oil companies, it successfully made the transition from exploration to production, with daily production levels hitting almost 90,000 barrels a day.
Its share price peaked at over £13 in February 2012, valuing the whole of Tullow at almost £12bn. Since then, it’s been downhill. Even before last week’s news, the Tullow share price had fallen by almost 90pc to £1.40. It now stands at just 60p, valuing the entire company at a mere £640m.
Tullow’s latest difficulties stem from problems from its Jubilee field in Ghana, which will result in production falling to between 70,000 and 80,000 barrels a day next year, and to 70,000 barrels from 2021 onwards. However, as the fall in the share price since 2012 demonstrates, Tullow’s problems go much deeper than those revealed in last week’s announcement.
Are the problems at Providence and Tullow company-specific events, or are we witnessing something more significant, as investors become more wary of oil and gas companies amid increased concerns about climate change?
There are certainly straws in the wind, if one will pardon the pun. In the third quarter of this year, renewable energy, mainly wind, contributed a record 40pc of UK electricity. The National Grid is now forecasting that non-carbon electricity, wind and nuclear, will overtake gas and coal-fired electricity for the first time ever in 2019.
Globally, the tide has already turned against coal. Wind power is now cheaper than coal-fired power in many markets, including the US, where an estimated 74pc of coal-fired plants are more expensive than wind or solar.
In this country, the ESB has announced that its two peat-fired generating stations will be closing by the middle of next year while, last month, the European Investment Bank revealed that it would no longer provide funding for new fossil-fuelled projects after the end of 2021.
However, while coal and peat look set to rapidly die out, other hydrocarbons, particularly gas, may prove more resilient. The Government made great play of apparently banning new exploration for oil in Irish waters last September.
However, on closer examination, there was less to the ban than met the eye. Not only was natural gas excluded from the ban, with Taoiseach Leo Varadkar justifying the exclusion on the grounds that gas was a “transitional” fuel on the road to decarbonisation, but the entire Celtic Sea was excluded.
Despite these exclusions, even a partial exploration ban in Irish waters will have a major impact. The Government’s ban was at least partially triggered by the Climate Emergency Bill, which would have banned the issue of new oil and gas exploration licences, introduced by People Before Profit TD Brid Smith. Although the Government slapped a money message on the bill earlier this year, the Dáil support it had already gathered meant last September’s ban was probably the least it could get away with doing.
Although the exploration ban doesn’t apply to gas, in practice oil and gas co-exist in many discoveries. This means that even an oil exploration ban will deter many companies from drilling in Irish waters. “Globally, oil and gas is a challenged business,” says one Dublin analyst. “The type of investment in the sector will change. In the absence of a really high oil price, the public markets are struggling with the concept of oil and gas.”
There is no sign of that happening any time soon. Crude oil prices have yet to recover from their 2014 collapse, with shale oil effectively capping prices at $60 (€54) to $70 a barrel.
Meanwhile, the FTSE 350 index of London-quoted oil and shares has fallen by 9pc over the past year, while the Environmental and Renewables index rose by 25pc.
Regardless of what governments and their electorates might wish for, getting rid of oil and gas completely will prove easier said than done. This will be particularly true of developing countries. “Saying you are going to stop taking energy from the carbon compound is one thing. Actually doing it is another. By 2050, half of all energy will still come from oil and gas. We don’t have the replacement systems in place yet,” says the analyst. “Oil and gas may be a sunset industry, but it’s going to be a very long sunset.”