The only straightforward part of Shell’s announcement of its intention “to withdraw from its involvement in all Russian hydrocarbons” was the grovelling apology for buying a shipload of Russian oil in the rapid-delivery “spot” market last week.
And an apology from chief executive Ben van Beurden was obviously necessary: the company’s huge Rotterdam refinery may have been running low on supplies, but the obligation was to pay through the nose to secure alternative barrels from west Africa or somewhere. Shell will now cease spot purchases from Russia immediately. Good.
The rest of the carefully worded statement, however, was a reminder that Europe’s effort to wean itself off Russian oil and gas is an exercise in how much disruption European governments and consumers are prepared to bear, and how soon.
Shell’s disentanglement plan came with two important qualifications. It will be conducted “in a phased manner” and will be “aligned with new government guidance”.
In other words, in the absence of formal EU sanctions, it’s up to European governments to tell Shell, and by implication, all oil majors how quickly to disentangle.
The company’s timetable imagines “weeks” to remove Russian oil from the European system and “much longer” to withdraw petroleum products (meaning petrol, diesel, heating oil and so on) plus gas in both pipeline and liquefied form.
It’s vague on detail, but so is the EU’s own hugely ambitious plan to reduce Russian gas imports by two-thirds before the end of the year. Nothing concentrates minds like a crisis, but the EU is attempting to do in 10 months what would previously have been assumed to take a decade or more.
Renewables will be accelerated “at lightning speed”; new sources of liquefied gas will be secured; hydrogen production will be ramped up; state-aid rules will be rewritten.
Aside from the extra use of dirty coal, one can only applaud the EU’s determination. By comparison, the UK’s parallel effort to phase out the import of Russian oil and oil products by the end of this year (and liquefied gas at some point) looks straightforward given our starting point of much lower direct dependency on Russia.
But it is only realistic to warn that consumers cannot expect a smooth ride. An entire European energy framework that has developed over the past 50 years is being redesigned at breakneck speed.
Disruption seems inevitable. There was a hint of what’s to come in Shell’s reference to likely “reduced throughput at some of our refineries”, which translates as a warning of possible shortages on forecourts.
At the moment, the messaging to western European consumers has barely risen above the level of gentle hints to please turn down the thermostat. We’re surely going to have to go further on the demand side.
In the oil shock of the 1970s, speed limits on roads were lowered to reduce consumption. It may not come to that this time, but, one way or another, a chunk of demand has to be removed.
Voluntary measures when oil is at $126 a barrel are easier than enforced ones at $200. Betting everything on the EU’s rapid reinvention of its supply infrastructure is quite a gamble.
Wild goings-on in the metal markets
Mind you, the gyrations in energy markets have nothing on the wild goings-on with metals. Nickel doubled in price on Tuesday to a record $100,000 a tonne, forcing the London Metal Exchange to halt trading on “orderly market grounds”.
It’s an old-fashioned tale of a savage squeeze on short-sellers, given extra impetus on this occasion by big trading houses’ self-sanctioning stances towards Russian purchases.
China Construction Bank was allowed more time to put up extra collateral on behalf of a Chinese stainless steel billionaire who was caught on the wrong side of the action.
Both the state-owned bank and the client will cope, one suspects, but one moral of that story is that some enormous profits and losses will have been made in the past fortnight of turmoil in everything commodity-related.
Aside from operating companies hedging their input costs, hedge funds also fish in these waters. On past form, there will be casualties.
