Martin Flanagan: Big Oil may have been hit by BP debacle but Shell is on winners' podium

Published on Wednesday 27 October 2010 22:02

STRICKEN oil giant BP still has its own public relations and balance sheet challenges to address following the Gulf of Mexico disaster, but the rest of "Big Oil" has shown it is profit-gushing business as usual in an era of higher oil and gas prices and rosier refining margins.

Against the abiding benign backdrop for the industry, yesterday's third-quarter underlying profits at Shell, Exxon and Eni all leapt - by 88 per cent, 55 per cent and 47 per cent respectively.

China's Sinopec was a comparative sloth. It only managed a 15 per cent earnings advance. A fountainhead of the better sector performance was a 12 per cent rise in crude prices. That compared with the much more difficult third quarter of 2009 when the western world was mired in recession.

Inevitably, the Chinese economic locomotive continues to be pivotal in the oil and gas industry's profitability, not to mention that of the mining and minerals sector.

Strong Chinese demand in Q3 confounded some expectations that its industrial growth was petering out. China became the world's biggest energy user this year.

And to show heavy industry's momentum is not limited to oil, gas and minerals, Scottish group Aggreko, the world's biggest provider of temporary power, yesterday raised its full-year outlook again after unveiling three-month revenues up 30 per cent.

Aggreko had previously raised its profits guidance in August after benefiting from events such as the Vancouver winter Olympics and the football World Cup in South Africa. But the Scottish company revealed its strong performance had continued and it now expected full-year profits of 300 million.

Back with oil, higher natural gas prices clearly helped, a point made by Britain's Centrica recently with its strong performance. Q3 gas prices were double what they were a year ago in the UK, and up 29 per cent in the US.

A rising energy tide is clearly lifting all boats. ConocoPhillips, the third-biggest US oil company, disclosed on Wednesday that its profit had doubled.

Oil majors are in positions of differing vitality concerning areas such as production, proven reserves, recovering downstream profit margins and cost efficiencies.

But they all have a strong tailwind from the global economy gradually recovering its feet after the prolonged downturn.Shell, for instance, also benefited from the acceleration of its costcutting programme, and a 5 per cent rise in oil and gas production to 3.1 million barrels a day.

The production increase will be particularly welcome to management, as the UK-Dutch oil giant's output had slumped in recent years against the backdrop of major structural change at the organisation following the over-statement of reserves that blew apart the boardroom earlier in the decade.

It will not console arch-rival BP that Shell looks to have turned the corner. If BP continues to repair its badly damaged relationship with the US - and the group's planned $30 billion of asset sales helps to repair a balance sheet weakened by compensation payments in the Gulf - then it can also expect to capitalise on the good sector trading conditions.

But, in the short term, rivals must feel they have stolen a march on the listing British group, which has had senior management focus diverted since last spring's fatal explosion killed 11 men and caused a major environmental disaster.

Ironically, Shell and Eni's performance would have been even better if they had not been hit by the American deep water drilling moratorium imposed because of the BP spill.

That ban only ended earlier this month, and Shell said its own idle rigs in the Gulf has cost the company $115m so far in 2010.

In the interests of perspective, it is not a given that the welcome rebound in earnings at all the big players' refining units will continue. Downstream activities are notoriously sensitive to economic headwinds and there still remain doubts, particularly in the UK and mainland Europe, as to how solid the recovery will remain.

But, those caveats aside, the latest sector Q3 performance shows major players on the front foot and with further profit advances in prospect.

Positive signs for Edinburgh's key financial services industry

SOURCES ranging from Scottish housebuilders to senior Square Mile financial figures have told me anecdotally that Edinburgh has largely put to bed jitters associated with the city's bank sector implosion.

More tangible evidence has emerged. Scotland's chief statistician has published a report suggesting wider Edinburgh financial employment has withstood the banking crisis. Figures for firms in "financial intermediation" show an employment level of 42,540 at 370 companies. That compares with 38,650 at 370 companies in 2009 and 37,860 in 315 companies in 2007, the year of Northern Rock's collapse.

Although the statistics have been called a "blunt instrument", this is a positive sign for Scotland.