COLUMN | Pointless? BP, Equinor and Net Zero; Vestas and a huge loss; Capricorn and NewMed split; Isabel dos Santos enjoys luxurious impunity; Yemen’s rial rises, even as Safer corrodes! [Offshore Accounts]

Last month, Scottish singer Lewis Capaldi topped the UK charts with his excellent ballad Pointless. “Everything is pointless without you,” the Brit-award winning artist croons. BP’s record breaking US$28 billion of profits for 2022 also topped the charts, and environmentalists have accused the company’s net zero pledges of being of being equally pointless, after the company announced that it would be reneging its previous promises to reduce oil and gas output by 40 per cent by 2030.

This month, BP has now raised its production target to back to two million barrels oil equivalent per day (boepd) in 2030, up from the 1.5 million boepd that chief executive Bernard Looney had previously said it would target as part of its transition to zero-carbon emissions. However, the CEO reiterated that BP’s target was to achieve net zero emissions across operations, production, and sales by 2050. Obviously, keeping oil production higher for longer makes that 2050 goal harder to achieve, but since Mr Looney will have retired then, it won’t be his problem.

The BP CEO had announced grand plans to reduce the company’s carbon emissions and pivot to renewables in 2020, when the oil price touched historic lows and markets were keen to reward energy producers for investing in new wind farms and solar projects. However, since February 2020, BP has underperformed both the S&P 500 index of major stocks, and its major international competitors.

Now, BP says that “energy security” concerns mean that it would be irresponsible to reduce its oil and gas production so drastically. Strange that this change of heart should come at a time when BP and its four big international supermajor peers (Shell, ExxonMobil, Chevron and Total) are enjoying record cashflows…

283 billion reasons the five supermajors love oil and gas

In 2013, the five supermajors generated operating cashflow of US$171 billion, when oil prices were last above US$100 per barrel. Keith Myers of Westwood Insight points out that last year, the five together generated a total of US$283 billion of operational cashflow, even though their combined production fell by around 900,000 boepd, “mainly due to a combination of the forced exit from Russia and divestments of higher cost production” and even though the average oil price was seven per cent lower in 2022 than it was in 2013. The relentless squeeze on suppliers, rig owners, and vessel operators in the downturn has enabled the five majors (and ENI and Equinor, and the Gulf state oil companies) to deliver massive profits now that prices have rebounded.

The reasons for BP’s U-turn are blindingly obvious. BP’s return on capital for its oil and gas assets now stands at over 25 per cent, Mr Myers believes, whilst BP’s wind and renewables projects typically generate returns of only six to eight per cent. The market breathed a sigh of relief that Mr Looney would permit BP to produce more oil and gas for longer. BP shares rose eight per cent on the day the announcement of the increased production target in 2030 was made, taking the shares back up to 2019 levels, Reuters reported.

The company still says that it will increase its renewables and low carbon investment to around US$7 billion to US$9 billion a year by 2030, equivalent to more than half the group’s expected capital expenditure at the end of the decade. Mr Looney said he hoped that renewables and low carbon projects would account for about 20 per cent of BP’s earning in 2030.

But once a promise is broken, breaking other promises may prove easier as well (as Miley Cyrus discovered with her cheating ex-boyfriend, whom we will cover later in this same piece). That is especially true if oil and gas prices remain elevated for some years. In the last cycle, they remained above US$100 for most of the period from 2008 to 2014.

Equinor in the same boat as BP

Norwegian state oil company Equinor is following roughly the same trajectory as BP, forecasting its oil and gas production will peak in the middle of this decade and then gradually decline to around two million barrels a day in 2030. Like BP, Equinor faces similar problems of its fossil fuel production being massively more remunerative than its efforts to break into renewables. Like BP, Equinor also made a bumper profit last year, reporting a net income of US$28.7 billion, but its renewables business division registered another loss of US$184 million, following on from a US$136 million loss in 2021.

Equinor has a target of investing 30 per cent of its capital spending in renewables and low-carbon projects in 2025, and says that it expects to increase those projects to half its capital spending in 2030. Again, like BP (I keep saying that), Equinor estimates that its renewables division will earn much lower returns than its hydrocarbon production, forecasting only four to eight per cent returns.

Vestas plunges to a huge loss

With the supermajors awash with cash and desperate to spend it on renewables, you would have thought that the fortunes of the European wind turbine producers might finally have changed. You’d be wrong.

Almost exactly a year ago, we reported Vestas had issued a profit warning that had shocked the stock market (and the same article neatly covered our scepticism on BP’s Net Zero pledges…).

For 2021, the Danish wind turbine producer eventually reported a profit of around US$150 million, and net free cashflow just above break even. At the time in January 2022, Vestas said that it expected its margin for 2022 would be between zero and four per cent.

Vestas was wrong. In 2022 Vestas lost eight cents for every dollar of revenue it generated. It reported a loss of close to US$1.5 billion for last year, and it burned through approximately US$900 million of cash, even losing around US$200 million in its operations. CEO Henrik Andersen was quick to take personal responsibility for the problems:

“Vestas and the wind industry were ready to provide solutions to address the energy crisis,” said Mr Andersen, “but were constrained by cost increases, logistical challenges, outdated market designs and permitting processes. The industry’s operational and commercial immaturity was also accentuated, which further hampered results.”

Oh wait… it’s not his fault. There was one piece of good news: the company discovered a new technology to recycle all existing and new epoxy-based wind turbine blades, removing the embarrassing need for these icons of green energy to end up in landfill sites around the world.

Tough times ahead in 2023 and 2024 as well

Unfortunately, the company now expects 2023 and 2024 to be equally rocky, as “the demand for onshore wind power globally is expected to decline in 2023.”

“The projections for the offshore business continue to build,” Vestas added, “and the long-term potential for the market remains very attractive. [However] based on the order backlog, Vestas expects to see a decline in activity towards 2025, while necessitating to invest heavily both in the organisation, supply chain, and technology…”

Whilst BP, Equinor, and the oil majors generate billions in cash, the makers of wind turbines face a few more years of large investments, break-even margins, and possible losses. The Financial Times reported that Vestas’ rival turbine manufacturer Siemens Gamesa suffered a US$760 million net loss in its preliminary results for the first quarter of 2023.

Cost inflation is hurting the wind sector

The oil and gas industry’s high margins and bumper cashflows mean that the majors can easily cope with a doubling of rig rates and vessel charter costs. On the other hand, inflation is strangling the fixed cost wind business, both for the turbine manufacturers and for wind farm owners. Danish wind farm developer Ørsted announced a US$365 million impairment on a major US offshore project in January, due to “unprecedented cost inflation”.

This isn’t how the green transformation was supposed to look. Europe’s move away from fossil fuels depends on a strong manufacturing base in wind equipment, and Mr Andersen is right to highlight that without a healthy profitability, Vestas will not be able to compete with his Chinese state-owned rivals, which are not constrained by the pressures of the public markets.

Whilst the boom in service operations vessels (SOVs) continues, it is hard to see how these contracts can be profitable for vessel owners if the underlying end users are not making any money. We’ve said it before, and we will say it again: time to build functional, fit-for-purpose SOVs with realistic specifications and the flexibility to be deployed in oil and gas. Surging subsea vessel rates mean that the cheap walk-to-work vessels upon which the wind industry has relied in Northern Europe from 2020 to 2022 simply will not be available in 2023 or 2024. Vestas and Ørsted can factor in higher vessel costs as another inflationary item to watch out for.

Final thought: who makes the move?

BP’s market capitalisation is now three times that of Ørsted. Rather than building a portfolio of expensive wind farms on narrow margins, bidding against the Danish player, perhaps Mr Looney could just buy it?

And if he doesn’t, perhaps Total, ENI, Shell or Equinor just might…

Miley Cyrus, Capricorn and NewMed

Ousting Lewis Capaldi from the top of the charts was Miley Cyrus, with her poignant song about her breakup with Aussie actor Liam Hemsworth, Flowers.

One imagines that the song is being widely hummed in Edinburgh. Last week, to nobody’s surprise, the Scottish explorer Capricorn Energy announced the termination of its proposed merger with Israel’s NewMed Energy:

“The board believes this action is necessary to enable the consideration of all potential strategic options for the company, including the material return of capital to shareholders and potential engagement with respect to alternative options.”

Less poetic than Ms Cyrus’s lyrics of “We were good, we were gold, kind of dream that can’t be sold. We were right ’til we weren’t, built a home and watched it burn.”

But the sentiments are the same.

As we warned recently, however, Capricorn’s activist shareholders may have blocked the merger with NewMed, and they may be able to wring a larger dividend out of the rudderless company. But that is not the same as building a long-term strategy.

Isabel’s impunity as the Bulgari Residence’s fugitive resident

Last November, Interpol issued a red notice for Isabel dos Santos, the billionaire daughter of Angola’s former president (our obituary here). No surprises there. The international police agency requested global law enforcement authorities to locate and provisionally arrest her to face charges of alleged embezzlement, fraud, influence peddling, and money laundering in her homeland, as we reported.

Despite claims that pure hard work and entrepreneurialism had led to Isabel’s acquisition of millions of dollars of assets under her father’s rule – including shares in Portuguese energy group Galp, European banks, an Angolan mobile phone company, supermarkets in Luanda, and even part of a loss-making Swiss jewellery business – the taint of corruption has long hung over her.

Where do you go, my lovely?

How hard could it be to find and arrest the fugitive African heiress? Isabel posts regular updates of her lavish lifestyle on social media, where she has over 400,000 Instagram followers, and she was even interviewed online by the German television channel DW Africa last year.

Ms dos Santos is not exactly Carlos the Jackal, hiding incognito in remote locations for decades. When the German interviewer asked where she was, she was quick to maintain she was “at home” and refused to name the actual place from where she was speaking. Cunning! Note that she is known to have properties in Lisbon, London, and Dubai.

So, of Lisbon, London and Dubai, which might be the keenest not to arrest this dubious influencer, who is accused of stealing hundreds of millions? Hmmm…

Could it be the same place where the billionaire ruler was found by a court to have abducted two of his own adult daughters from overseas, and conducted a campaign of intimidation against his ex-wife? Could it be the home of the company that fired hundreds of British seafarers on cross-channel ferries using a pre-recorded video? Could it be the country from which the current president of Interpol, Ahmed Naser Al-Raisi, hails?

United Angolan Embezzlement (UAE)?

Why, yes to all three! She’s in Dubai in the United Arab Emirates.

No surprise at that news – Dubai is after all home to several members of the Gupta family, wanted for embezzlement and money laundering in South Africa under crooked former president Jacob Zuma, and to the British hedge fund trader Sanjay Shah, who is charged in Denmark with running an (allegedly) fraudulent scheme to make double tax reclaims worth US$1.7 billion. Dubai is also where the US$156 million Cayman Islands-registered superyacht Madame Gu has been moored since March last year (The yacht is owned by the sanctioned Russian steel magnate and lawmaker Andrei Skoch.).

Birds of a feather flock together, as the proverb goes. Now, investigative journalists at Bellingcat have tracked Isabel down even more specifically. Wanted by Interpol, accused of the theft of millions of Angola’s oil revenues, Ms dos Santos has been found to be living at… the Bulgari Resort and Residences on Jumeira Bay Island in Dubai.

Bulgari luxury for a wanted woman

You would have thought that the Bulgari brand and its parent LVMH might not want to be associated with a customer on the Interpol Red List. Especially when the company states that “Bulgari is committed to conducting its business in a socially responsible manner, a commitment that also extends beyond the confines of the company as well as to the promotion of ethical standards.”

But money talks, and there ain’t no hypocrisy like the hypocrisy of designer brands when forced to choose between money and integrity. For Isabel, choosing the Bulgari Resort and Residences in Dubai was easy. For the UAE, choosing not to arrest her under the Interpol Red Notice was easy, as there is no extradition treaty with Angola. And for Bulgari, accepting Ms dos Santos’s cash, “no questions asked” was a cinch. After all, the ethos of Bulgari Resorts is “to convey the excitement of the Bulgari brand, its timeless glamour, and its heritage of magnificent Roman jeweller.”

It is, however, a luxury heritage that clearly turns a blind eye to accusations of money laundering and embezzlement and asks no questions of the sources of funding of its customers. Nice!

One late surprise: Yemen’s currency strength

Finally, there is one story that did surprise me. Yemen, one of the poorest Arab countries – ravaged by civil war, Saudi military intervention, and starvation – has one of the strongest currencies in the world.

You would have been better holding Yemeni rials in 2022, rather than British pounds, Euros, Aussie dollars, or even the mighty greenback. Here’s why: Moneyness: Weak nations with strong currencies (jpkoning.blogspot.com)

It turns out that the civil war has split the Yemeni rial into two different currencies. The Houthi rebels in the North control one branch of the central bank, in Sanaa, the capital, and have adopted rial banknotes printed before 2016 as their region’s official currency. They refuse to recognise any Yemeni banknotes printed after 2016. So, the money supply in Houthi territory is completely fixed and is shrinking as the old rial notes are destroyed or lost.

Thus, the value of the rial rises against the US dollar and other global currencies, as does Afghanistan’s Afghani for the same reasons.

Make Safer safer

All the while, the United Nations attempts to prevent a massive oil spill from the Floating Storage and Offloading (FSO) vessel Safer, which is moored approximately five nautical miles off the coast of Yemen at an abandoned export terminal northeast of the port of Hodeida. Constructed in 1976 as the oil tanker Esso Japan and converted in 1987 into a floating storage facility for Hunt Oil, the vessel is single-hulled, 362 metres in length, and is believed to contain over 1.1 million barrels of light crude oil, which has been sitting there for the better part of a decade.

Production and offloading operations were suspended when Yemen’s civil war broke out, and the UN says that no maintenance has been performed on the vessel for seven years. The FSO’s structural integrity is now potentially compromised, posing a substantial threat of a huge oil spill. This could be the next Trinity Spirit disaster, but with much more devastating consequences.

So far, the UN has raised over US$75 million to attempt a salvage operation. Of course, the Saudi Arabian government, busy bombing Yemen and spending billions on its own new fantasy city of Neom on the Red Sea, could and should have written that cheque years ago.

If Safer does break apart, Saudi Arabia would unlikely be unscathed, and its desalination plants on the Red Sea coast could be closed, threatening Jeddah’s water supply. But after the country having broken Yemen itself, I doubt Saudi Crown Prince Mohammed Bin Sultan especially cares.

How pointless.

Background Reading

BP’s full year 2022 results announcement is here.

See The Luanda Leaks reporting by ICIJ on “How Africa’s richest woman exploited family ties, shell companies and inside deals to build an empire.”

The Organised Crime and Corruption Reporting Project has an excellent report from 2020 titled How Angolan Elites Built a Private Banking Network to Move Their Riches Into the European Union.

The United Nations update on the FSO Safer salvage effort is here. A salvage consultant has been appointed and a shipbroker is scouring the globe for suitable vessels to offload the crude and remove the FSO, which may have also been mined. New Yorker magazine coverage of The Ship that Became a Bomb is here.