The Government says it is trying to protect the North Sea - it needs to start proving it
The Department of Energy's attempt to block LetterOne's purchase of North Sea assets demonstrates a logical inconsistency
The Rhum gas field lies 250 miles off the north-east coast of Scotland and, until 2010, produced nearly 5pc of the UK’s gas output. But that year it was shut down because of American and European Union sanctions against Iran.
Why did a diplomatic rift between the UK and the Islamic republic hit North Sea gas production? Because the site is jointly owned by BP and the National Iranian Oil Company.
When relations between Iran and the West started to defrost in 2013, a waiver was agreed for the field. But, because of production issues, it took another year for the gas to start flowing again. By that stage one of the UK’s most important energy sources had lain idle for nearly four years.
Was the Rhum gas field central to the thinking of those civil servants at the Department of Energy and Climate Change (DECC) who advised Ed Davey, the Energy Secretary, to block Mr Mikhail Fridman’s bid to buy other gas fields in the North Sea? And, if so, is it a fair comparison?
On Monday, LetterOne, the Russian billionaire’s investment vehicle, bought RWE Dea, the oil and gas arm of the German energy company RWE, for $5.7bn (£3.7bn). This was despite the fact that Mr Davey had said over the weekend that he would prevent Mr Fridman from taking control of RWE’s UK assets. The DECC is concerned that British oil and gas production might again be hit by sanctions – this time against Russia.
Mr Fridman has since struck back at the UK government, branding the decision irrational and threatening to challenge it in court. LetterOne is playing up Mr Fridman’s Ukrainian roots and playing down any connections to the Kremlin.
One thing is for certain: any sanctions against him, his partners or his business interests are, at this stage, purely hypothetical.
LetterOne claims that the DECC has known about the deal since early December but waited until 48 hours before the deal was completed before raising concerns.
The Russian tycoon argues that the UK government’s concerns are misplaced. He says that the deal has been structured in a way that will insulate it from sanctions.
RWE Dea’s British assets will be held by a trust based in the Netherlands. The assets will be transferred back to RWE (which can then sell them on the open market) if sanctions are imposed against Mr Fridman within a year of the deal closing. If sanctions are imposed after that, the assets will be sold and the proceeds will remain in the trust until such time as the sanctions are lifted.
The Rhum operations had no such protection.
Energy security is a troublesome subject and this one definitely cuts both ways.
The DECC is, of course, right to be concerned about fate of such strategic assets. The trust structure may be sound at the moment, but circumstances change. Who is to know how the sanctions against Russia and the negotiations between the various parties might evolve?
But there’s also a logical inconsistency to the UK government’s position.
The DECC has said that it is worried that sanctions might pose a threat to the continued and safe production of the UK’s petroleum resources. But it has also raised concerns that the deal structure will circumvent potential sanctions. Which is it?
The Rhum example also swings both ways. A compromise was reached while Iranian sanctions remained in place.
And it’s not like there’s a crowd of companies clamouring to invest in the North Sea. In fact, many are pulling back. BP, Sinopec-Talisman, Tullow Oil and Premier Oil have all announced job cuts and impairments on their operations in the region.
The price of oil is languishing at around $60 a barrel. At that level, many marginal fields on the UK continental shelf are simply uneconomic.
George Osborne, the Chancellor, promised a tiny tax cut for the industry in the Autumn Statement. The hope is that he will go further in the Budget this month.
If he doesn’t, then the DECC’s decision to try and put the kibosh on the LetterOne deal will start to look a little hypocritical.
There’s more than one way to damage energy security. Russian sanctions might disrupt UK oil and gas supply. But underinvestment definitely will.
Warren Buffett gives Tesco both barrels
Warren Buffett has been very rude about the supermarket giant Tesco. He’s earned that right.
Well, really he’s earned the right twice over: firstly, by building an unrivalled investment track record; and, secondly, by suffering one of his biggest ever losses on a stake in the UK supermarket group.
Over the weekend Berkshire Hathaway shareholders received their golden anniversary letter from the Sage of Omaha. The missive, like the 49 that preceded it, was wide-ranging and interesting.
But the section on Berkshire Hathaway’s investment in Tesco was particularly noteworthy.
Buffett started off by pointing out that Tesco no longer featured in the list of Berkshire Hathaway’s biggest investments.
At the end of 2012, Buffett owned 415m of Tesco’s shares. In 2013, having “soured somewhat on the company’s then-management”, he sold 114m shares. He concedes now that he should have sold more.
“My leisurely pace in making sales would prove expensive,” he said.
Indeed it would. 2014 was a dreadful year for Tesco. Sales fell, margins were squeezed, the chief executive left and an accounting scandal was uncovered.
Over the course of the year the company’s shares fell 43.5pc. Berkshire Hathaway lost $444m on its investment. It has now sold out of its position.
Even after 50 years at the helm of Berkshire Hathaway, Buffett is trying to learn from his mistakes and pass those lessons on to his investors.
What did he learn from the Tesco fiasco?
“In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives.”
- The Telegraph
- Published on:
- March 4, 2015
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