Power Play or Shell Game?

Eyebrows should be raised as Shell moves into the power market.  Why?  Because oil companies have been proven to be crap at electricity.  That includes Shell itself first time around when they – and BP, and Total, and Statoil, and Conoco, and Amerada Hess … – tried, and screwed it up (this was in the ’90s and early 00′s).

It looked so logical, so easy.  They were (and are) big, big companies – energy specialists, no less, who had done OK in the gas markets when they got started around the globe in the 80′s and 90′s; they knew about trading and risk-management and marketing; they had ultra-credible brand names for the sector.

At least, that’s what they thought.   But, to make a long story short, similarities notwithstanding it turns out trading electricity is an order of magnitude more difficult than gas.   There have only been two non-electricity companies to make a serious fist of the power market via organic development: Centrica / British Gas and the mighty Enron, both originally gas players.  (If someone points to Gaz de France – now ‘Engie’ – or Gazprom’s European trading vehicle GM&T, the response is that neither of these moves into power were organic.  GdF simply bought Electrabel; and GM&T hired big teams of existing power specialists (and in any event haven’t made waves in the power sector).)

So now Shell are trying again.  They are sticking to the easy segment of the market – sales to industrial customers – and can probably make a go of it if they hire enough of the right people (including at the top: will they make the mistake of assuming one of the old senior oil hands can manage this electricity stuff?).  They have certainly let fly with the PR: see that mighty FT puff-piece linked above, and this gullible nonsense:

“Shell becomes latest energy disruptor: the UK’s energy industry is braced for change as the world’s second-largest oil and gas company is to supply electricity”

The FT piece (Nick Butler, natch: they obviously gave him one of those really nice lunches) is just as sycophantic: 

“Shell’s decision to sell electricity direct to industrial customers is an intelligent and creative one … Shell has been developing an extensive range of gas assets, with more to come. In what has become a buyer’s market it is logical to get closer to the customer — establishing long-term deals that can soak up the supply … Shell is likely to be a supplier of choice for industrial and commercial consumers and potentially capable of shaping prices”

Ho hum, let’s see how they do.  “Soaking up supply” is a crass business concept in a commodity market.  “Supplier of choice“?  In yer dreams, Shell.  “Shaping prices“?  Nope, just selling on price to buy market share, like any other new entrant in a commodity sector.  When Gazprom entered the industrial market they needed to take a massive haircut as buyers simply laughed and pocketed the windfall while it lasted – which in their case was several years.  Butler actually admits as much: “prices presumably set at a discount to the market“. 

Yup. A short-lived price war.  Not so much a disruption as a harmless diversion.   

ND