A Nuclear Lesson For Big Oil (And Vice Versa)
It is a reasonable bet that the $24 billion Hinkley Point C nuclear power project in the U.K., due online in 2025, will neither be ready by 2025 nor cost just $24 billion. Indeed, it’s so reasonable that, as fellow Gadfly Chris Bryant lays out here, the stock market appears to be making that very same bet.
Leave aside the also reasonable conspiracy theories about London buttering up Paris and Beijing by approving the project and focus on the ostensible reason for doing it: maintaining security of energy supply.
That’s been a big theme this week. On Wednesday, the International Energy Agency released a hefty tome concluding, among other things, that “the scale and speed of cuts” in upstream oil and gas investment mean we could be caught out by price spikes again, despite $583 billion in spending last year. As I’ve discussed here and here, it’s curious that, despite this apparent need for investment, oil majors continue to pull back.
Hinkley Point actually helps explain why. Added bonus: The oil and gas industry’s experience reveals one more insidious risk facing the nuclear project.
There’s a reason EDF demanded the U.K. government guarantee an electricity price for Hinkley Point’s output at double the current wholesale price. Financing a $24 billion project that won’t produce a cent of revenue for a decade is really tough — especially in an industry carrying as much historical baggage on busted budgets and timescales as nuclear power does. Subsidies and guarantees help bridge the risk gap.
Nuclear power isn’t alone in this regard. Big Oil is undergoing a similarly painful lesson with liquefied natural gas, or LNG. On the whole, the oil majors have been completely wrong-footed when it comes to gas. They started out expecting the U.S. to run short of the fuel and joined a race to build terminals on the coast to import LNG from the Middle East. In the process, they missed the fracking boom that rendered such investments mostly moribund.Exxon Mobil’s case is illustrative. It was part of a project, Golden Pass, to build one of those import terminals, and then compounded the mistake by buying into the fracking boom just before gas prices collapsed entirely:
Let’s Talk Timing
Exxon’s major steps in U.S. LNG and shale gas have been repeatedly undercut by the market
This isn’t to pick on Exxon; the energy business, with its inherent cycles and penchant for geopolitical drama, is replete with such examples. Chevron and Royal Dutch Shell have also been burned in LNG. The point is that the initial assumptions underpinning these endeavors can prove wrong — and pretty quickly.