29 September 2016
Week In Brief: BUSINESS AND THE CITY
STORM BREWING: So much of what we value has come from the North Sea – kippers, Cromer crabs, oil and gas. Trouble is, they are all running short – and the ones that might soon have the biggest effect on our lifestyles are diminishing oil and gas. Early projections were that oil would run out by the year 2000, so the fact that we are still pumping over 50 million tons of oil per year means that it is going better than we might have hoped. Indeed, production, after a long slow decline since 1999 has picked up in the last couple of years, and in spite of low oil prices, continues to rise. Partly that is because production costs – extraction costs – have fallen. Ironically some of that is due to falling energy prices but more is due to big advances in technology, extraction cost per barrel in the North Sea field has fallen from US$29 three years ago to US$16 now. That means that it continues to be economic to pump oil onshore – but those costs do not allow for pumping machinery rapidly wearing out; before long, big new investment will be needed. Three years ago – at the end of the era of US$100 a barrel oil prices – investment peaked at nearly US$15bn, but now it is down to (forecast) US$9bn this year. That may sound still a big sum, but the oil is getting more and more difficult to get out, lying as it does in deeper and less accessible fields
Oil and Gas UK, which represents the North Sea producers – the OPEC of the Dogger Bank if you like – is calling on the Government and the new Chancellor, Philip Hammond to encourage fresh investment into the oilfields. It points out that the fall in expenditure has badly hurt east coast towns dependent on the industry, especially Aberdeen which is a world centre for technology in the oil and gas business. Time, says OGUK, for encouraging investment, especially with oil prices slowly rising. It has produced some interesting figures – the UK has had about 43bn barrels of oil out of the cold water to its east; but the remaining reserves could be another 20bn barrels, and with improved technology cutting production costs, now is the time to start thinking about getting it out.
MEANWHILE: ON LAND…: The Labour Party Conference has decided that all attempts to extract shale oil and gas should be banned. This was proposed by the party leadership and endorsed by conference. The main interest at the moment seems to be in shale gas and it is mostly found in two large rural areas, Ryedale in North Yorkshire, and the Forest of Bowland over the border in Lancashire. It is not entirely clear why the Labour Party has taken this line – the trade unions at the conference have said that they generally back fracking as being a cheap source of energy that will assist job creation. Barry Gardiner, the shadow energy secretary, says that Britain should do more to develop sustainable technologies and use energy more efficiently. The ban was supported by Greenpeace, but strongly opposed by the GMB Union. The GMB, which was founded as the Gas Workers Union, is a major contributor to the Labour Party, criticised the proposed ban as “madness”, and meant that “we will be buying gas [instead] from hangmen, henchmen, and head-choppers”. (Neither Yorkshiremen nor Lancastrians could quite be described thus). The Ryedale field is now moving towards production capability and, although local planners have rejected applications to begin drilling in the Forest of Bowland, that is likely to be overturned on appeal so that the field there may open in late 2017.
DOORS SHUT: The surprise result of the Referendum in June caused big problems for several major property investment funds. Reading the vote as likely to lead to a flight of capital from the UK and property being a notoriously illiquid asset, several of the major funds closed their doors to withdrawals, some also hurriedly selling property assets, word has it, at considerable discounts, so as to improve their liquidity positions. This has not gone down well with investors nor with the Financial Conduct Authority, the regulator for the industry, which has now begun an enquiry into the asset management industry and as to how it might better handle sudden demands for redemptions and investors desire for liquidity. In the meantime, most of the funds have quietly reopened to investors – with no great rush to take money out. Three of the biggest are yet to reopen – Standard Life which has a £2.5bn fund, but has said it will reopen in mid-October, M&G, which has funds totalling around £4bn and has not yet given guidance as to when it will once again permit withdrawals, and Aviva, a smaller fund, which has indicated that it will not welcome investors wanting to get their money out until 2017.
DOORS ALWAYS OPEN: During opening time anyway. A property fund without liquidity problems is a surprising thing – but not when it is a pub operator. Mitchell and Butler, which has its roots in two Victorian era Midlands breweries and chains of pubs, has long eschewed the former and concentrated on the latter. And it has evolved successfully with the times, disposing of many under-performing pubs and getting into wine bars and food led operations – its best known brands now are the Browns restaurants and the All-Bar-One wine bars. It likes to own its own premises if it can – though that is not so easy when it also wants to trade in strong locations where property yields are very low. The company has under-performed for several years – blaming the need to invest in keeping its operation up to date and fighting off purchasers after the owned estate, but now sales are rising and margins improving. The shareholders will be pleased – the share have fallen over the last three years, unlike most of the rest of the sector which has showed a steady performance.
A RUN: (A)WAY SUCCESS? If you are the government of a remote island, unspoilt, with beautiful beaches and a romantic history, but with a failing economy and a need to create jobs and income to keep young people there, what are you going to do? Get into the tourism business, of course. Western and increasingly, Eastern, urges to find unknown places, safe surroundings, and enjoy semi-solitude in luxury accommodations have created strong demands for new destinations. The government of St Helena in the South Atlantic began their inward investment campaign for a tourist industry by persuading the British government (St Helena is a Crown dependency) to build a new airport. Experts were hired, an airport designed, projections of 30,000 and more tourists agreed. In April the airport was finished and a formal opening flight went out to inaugurate the facilities. But things did not go well – the plane was only able to land at its third attempt – the experts had somehow overlooked that the western side of the island is beset by strong Atlantic gales. Nearly £300m worth of airport is effectively unusable at the moment, and the new tourist industry is on hold until somebody thinks of a solution…
KEY MARKET INDICES: (as at 27h September 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.38% (steady); 5 year 0.33% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.30% (steady); 5 year -0.31% (rising)
US$: 1 mth 0.52% (falling); 3 mth 0.86% (steady); 5 year 1.14% (falling)
Currency Exchanges:
£/Euro: 1.16, £ steady
£/$: 1.30, £ steady
Euro/$: 1.12, € steady
Gold, oz: $1,337 rising
Aluminium, tonne: $1,647, steady
Copper, tonne: $4,773, rising
Oil, Brent Crude barrel: $45.29, slight fall
Wheat, tonne: £126, steady
London Stock Exchange: FTSE 100: 6,807 (slight fall). FTSE Allshare: 3,607 (falling)
Briefly: Those who specialise in metals have been forecasting for some time that key metal prices were about to increase. This week may be starting to see the beginning of that – but they are still below level of this time last year. Otherwise, a very steady week with little movement in markets, exchange rates, or interest rates.
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