have reached a deal to merge to form one of the largest publicly traded mineral and royalty companies in the U.S., worth about $4 billion, the companies announced Tuesday.
Sitio and Brigham, like the rest of the industry, both have had increasing profits in the past few months on the back of rising oil prices. Combining the two companies would allow the new entity to achieve economies of scale and become a leader in the minerals-rights industry, the companies said.
“The mineral and royalty space benefits from scale unlike any other business in the energy value chain,” Sitio Chief Executive Officer
Chris Conoscenti
said in an interview Monday.
After the deal was announced, shares of Sitio fell about 2% to $24.71 in morning trading. Brigham stock fell 3.54% to $28.36.
Mineral owners take home a cut of the oil and gas pumped on their land in the form of royalty payments, often 12.5% to 20% of the value of the fuel. They don’t control the pace of development, but they aren’t on the hook for drilling or overhead costs, either, and they reap the benefits of high commodity prices.
Both Brigham Minerals and Sitio have been making substantial acquisitions this year in the oil-rich Permian basin.
Photo:
Michael Nagle/Bloomberg News
Upon the deal’s closing,
Noam Lockshin,
a partner at private-equity firm Kimmeridge Energy Management, which currently owns 43.2% of Sitio’s shares outstanding, would become chairman of the new company, the companies said. Mr. Lockshin currently serves as chairman of Sitio. Mr. Conoscenti will serve as CEO of the combined company, which will be based in Denver and operate under the name Sitio.
The all-stock deal is expected to close in the first quarter of 2023, according to the companies. Under the terms of the deal, Sitio’s shareholders will own about 54% of the company, while Brigham’s will own the remaining 46%, the companies said.
Both Sitio and Brigham have been pursuing a consolidation strategy in the oil-rich Permian basin of West Texas and New Mexico, making substantial acquisitions this year.
Sitio was formed after the merger of Kimmeridge-owned Desert Peak Minerals Inc. and
Blackstone Inc.
-backed Falcon Minerals Corp. earlier this year.
Brigham has announced mineral and royalty interest deals in the region worth about $150 million so far this year. Sitio, meanwhile, purchased more than 40,000 net royalty acres in the Permian in the second and third quarters of the year, the company told investors last month, including a roughly $323 million acquisition in June.
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The newly formed company would have interests in more than 34% of all wells drilled in the Permian in the fourth quarter of 2021, the companies said.
Brigham CEO
Robert Roosa
said last month he is bullish on oil prices, citing supply-chain issues that limit production in the oil patch, issues related to Russia’s energy supplies, the need to refill the drawn-down Strategic Petroleum Reserve and what he described as the inability of the Organization of the Petroleum Exporting Countries to ramp up production.
“We’ve seen long-term structural advantages to being in energy,” he told investors.
Russia indefinitely suspended natural gas flows to Europe via a key pipeline hours after the Group of Seven agreed to an oil price cap for Russian crude—two opposing blows exchanged between Moscow and the West in an economic war running parallel to the military conflict in Ukraine.
Kremlin-controlled energy company Gazprom PJSC said late Friday it would suspend supplies of gas to Germany via the Nord Stream natural-gas pipeline until further notice, raising the pressure on Europe as governments race to avoid energy shortages this winter.
Gazprom said it had found a technical fault during maintenance of the pipeline, which connects Russia with Germany under the Baltic Sea. The company said the pipeline will remain shut down until the issue is fixed, without giving any timeline.
The pipeline was due to resume work early Saturday after three-day maintenance. Before the maintenance, the pipeline was operating at 20% of its capacity.
Russia first began throttling supplies via Nord Stream in June, saying that needed maintenance was being prevented by Western sanctions imposed following Russia’s invasion of Ukraine. The notion was dismissed by European officials as an excuse for Russian President
Vladimir Putin’s
regime to use its gas exports to punish Europe for its support of Ukraine.
Western leaders are preparing for the possibility that Russian natural gas flows through the key Nord Stream pipeline may never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang
A complete shutdown of Nord Stream will compel European governments to accelerate their push to become independent of Russian gas ahead of the winter months and could force them to ration energy—a move that would hurt industrial companies and tip the continent’s already fragile economy into a recession.
“By further reducing gas deliveries, Russia is tightening the screws on the EU,” said Janis Kluge, an expert on Russia at the German Institute for International and Security Affairs. “Europe will now have to take its efforts up a notch to conserve more gas.”
At the same time, the move deprives Moscow of its most potent economic leverage on the continent and could remove any remaining misgivings in European capitals about raising sanctions on Moscow for fear of retribution.
“Until it is repaired, gas transport via Nord Stream is completely stopped,” Gazprom said Friday.
Moscow and the West have been engaged in an economic war since Russia invaded Ukraine in February. Western democracies have inflicted economic and financial sanctions on Russia, and Moscow has tried to choke unfriendly countries’ access to its natural gas, which Europe uses for heating and electricity production.
ArcelorMittal SA,
one of the world’s largest steelmakers, was the latest industrial giant to say it is reducing European production capacity amid the energy crisis. The company said Friday it will close two of its plants in Germany amid soaring electricity costs.
Steelmaking is particularly energy intensive, alongside other industries like fertilizer and chemical production and glass making.
G-7 countries said on Friday they would impose a cap on the price of Russian oil. The mechanism would force buyers seeking to insure their shipment via insurers located in a G-7 or European Union country to observe the price limit on their purchases. The cap, whose level will be set at a future meeting, originated in a U.S. initiative and has been under discussion for months.
Russia has said countries imposing a cap wouldn’t receive any Russian oil. Sales of oil make up a far bigger share of Russian state revenues than sales of natural gas.
Inspectors from the United Nations’ nuclear agency visited the Russian-occupied Zaporizhzhia nuclear-power plant, despite shelling near the facility for which Ukraine and Russia exchanged blame. On Friday, Ukraine accused Russia of hindering access to the plant. Photo: Yuri Kochetkov/Shutterstock
Hours before Gazprom’s Nord Stream announcement, German Finance Minister
Christian Lindner
praised the G-7 decision, saying “Russia is generating big profits from the export of commodities such as oil, which is something we must push back on vigorously.”
The cap, he added, would help combat inflation in the EU.
Russia would have enough capacity via other gas pipelines to Europe to compensate for the Nord Stream shortfall. However, flows via these other routes declined following the start of the war in Ukraine.
Ukraine halted one gas-transit route in May, blaming interference by Russian forces. Deliveries through another, called Yamal, which traditionally transported gas from Russia to Europe, have stopped this year due to sanctions imposed by Russia on the Polish part-owner.
Germany’s economy minister,
Robert Habeck,
said this week that the country can’t count on Nord Stream during the winter.
In reaction to the Nord Stream closure, a spokeswoman for the ministry said on Friday that Germany was far better prepared than a few months ago.
“We have already seen Russia’s unreliability in the past few weeks, and accordingly we have unwaveringly and consistently pursued our measures to strengthen our independence from Russian energy imports,” the spokeswoman said.
Klaus Müller, head of Germany’s energy regulator, said the country would need to boost gas imports from other suppliers, continue to fill up gas stores and cut gas consumption.
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European officials had expected that the Kremlin would use gas flows to keep markets and governments on edge and erode support for Ukraine among Western voters.
Gazprom’s shutting down of Nord Stream “under fallacious pretenses is another confirmation of its unreliability as a supplier,” European Commission spokesman Eric Mamer wrote on Twitter.
A senior manager of a German gas company formerly controlled by Gazprom said Friday that he expects local importers of gas channeled via Nord Stream to stop paying for their contractual obligations with Gazprom.
Natural-gas prices have broken records in recent weeks amid the energy crunch, though they have also dropped sharply in the past days, with some analysts crediting the speed at which Europeans have been filling up their gas storage facilities through the summer.
Goldman Sachs analysts said that the Nord Stream outage would cause prices to surge again. The Gazprom decision “will reignite market uncertainty regarding the region’s ability to manage storage through winter, driving a significant rally,” the bank said in a note to clients.
Gazprom began throttling gas flows in June, citing technical problems with the turbines. The company insists that a key turbine couldn’t be sent to Russia after it was maintained in Canada because of international sanctions on Moscow. But Germany, where the turbine was located, said that there are no obstacles, and that Moscow was in fact blocking the turbine’s return to Russia.
On Friday, Gazprom said that it found an oil leak in a turbine at the compressor station of the pipeline. Gazprom said that similar issues had been found with other turbines this summer that have led to the reduction of the gas flows.
Gazprom said it had notified German company
Siemens Energy AG
, which maintains the turbines, of the new leak. Gazprom said that the necessary repairs could only be done in a specialized repair facility. Previously, some turbines for the pipeline had been repaired by Siemens Energy in Canada.
Siemens Energy said that Gazprom’s announcement wasn’t a technical reason for stopping operation. “Such leakages do not usually affect the operation of a turbine and can be sealed on site. It is a routine procedure during maintenance work,” the company said. It said it wasn’t currently contracted for maintenance work but is ready to assist.
Europe has been preparing for a possible Russian gas cutoff, with EU gas- storage facilities filling up faster than expected this summer, to over 80%.
Still, if Nord Stream remains shut, Europe’s gas stores would end the winter at 26% of their capacity, which would complicate Europe’s situation next winter, Massimo Di Odoardo, vice president for gas and liquefied natural gas research at energy consulting firm Wood Mackenzie, wrote this week.
Germany, which received more than half of its gas from Russia before the war in Ukraine, has been racing to diversify its supply of gas and to install floating liquefied natural gas terminals to ship in gas from the U.S. and elsewhere. In recent months, Germany’s gas imports from Norway, Belgium and the Netherlands have far outweighed the reduced Russian flows.
The country is close to hitting its 85% gas storage target, initially set for Oct. 1. German officials, however, have warned that reaching the next milestone of 95% by Nov. 1 would be challenging unless companies and households cut consumption.
The 760-mile-long Nord Stream pipeline first opened in 2011. Russia and a consortium of European energy companies built a second pipeline, Nord Stream 2, running alongside the original one, that would have doubled capacity. But the German government froze the project in February over the war in Ukraine.
—Bojan Pancevski contributed to this article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com and Andrew Duehren at andrew.duehren@wsj.com
even further isn’t expected to serve as a prelude to a full takeover of the resurgent energy company by the widely watched billionaire, at least for now.
In a regulatory filing Friday, the Federal Energy Regulatory Commission said that Mr. Buffett’s
Berkshire Hathaway Inc.
BRK.B -2.30%
had received permission to buy up to 50% of the driller’s shares. The news stoked speculation that Berkshire could be gearing up to acquire Occidental.
Analysts have said Occidental’s oil business would complement Berkshire’s existing energy holdings, which include utilities, natural gas and renewables. Mr. Buffett has a warm relationship with Chief Executive
Vicki Hollub
and has publicly praised her efforts to turn the company around after its acquisition of Anadarko Petroleum Corp. and her plans to pay down debt and increase dividend payouts.
But Mr. Buffett hasn’t informed Occidental of any plans to acquire a controlling stake in the company, according to people close to the matter. Given Mr. Buffett’s well-known aversion to hostile deal making, it would be out of character for him to make a bid without sounding out the company’s executives and directors first.
Owning such a big stake—Berkshire is Occidental’s largest shareholder—gives him major influence over the company already, and acquiring control could cost him a hefty premium to the current share price. The stock closed Friday at $71.29, up nearly 10% on the news, giving the company a market capitalization of about $66 billion.
Why would Berkshire seek out permission to buy more of Occidental, then?
For one, it was close to running up against FERC-imposed investing limits.
Filings show Berkshire currently has a 20% stake in Occidental. It also has warrants to purchase another 83.9 million common shares and 100,000 shares of preferred stock that pay a hefty dividend—both of which it acquired after helping Occidental finance its 2019 acquisition of Anadarko.
If Berkshire were to exercise the warrants, its stake would rise to roughly 27%. That would have exceeded the 25% limit FERC allowed for before Friday’s ruling.
“This is not a company that’s going to raise regulators’ hackles,” said Cathy Seifert, an analyst for CFRA Research.
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It should also give Berkshire breathing room in case share buybacks or other company moves decrease the amount of shares outstanding, thus increasing its percentage stake.
There are other reasons to doubt a Berkshire takeover of Occidental is imminent.
One of them is price, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.
So far, Berkshire has bought virtually all of its Occidental shares at a price in the range of $50 to $60, Mr. Kass said. The highest price Berkshire paid was $60.37 in July, according to filings.
Mr. Buffett is a well-known bargain-hunter, so it is difficult to imagine Berkshire rushing to buy more Occidental shares at the current price, Mr. Kass said. The shares are up 146% for the year, boosted by a rally in the price of oil, compared with an 11% decline for the S&P 500.
People familiar with deliberations at Occidental said the company’s leadership believes Mr. Buffett might consider making an offer if oil prices fall, bringing down Occidental’s stock price. If Mr. Buffett made an offer the company viewed as fair, a majority of the Occidental’s board would likely approve presenting it to shareholders, one of the people said.
Mr. Buffett didn’t respond to a request for comment. An Occidental spokesman declined to comment.
Mr. Buffett is currently represented as a passive shareholder in Occidental, based on the so-called 13G filing he has on record with the U.S. Securities and Exchange Commission. If he were to change his intentions and hold meaningful discussions with the company about a full-on takeover, he would likely need to change his filing to a 13D, which is required by large shareholders who intend to get actively involved in the running of a company.
Taxes could also play a role in Mr. Buffett’s bid for a bigger minority stake in Occidental. Corporations with a stake of at least 20% in another company are eligible to deduct 65% of dividends received, up from the standard 50%.
Berkshire’s 20% stake also allows it to include a proportionate share of Occidental’s earnings in its own results. That could give its earnings a multibillion-dollar boost annually, based on analyst estimates of Occidental’s earnings. Before the most recent purchases, disclosed this month, Occidental fell below the 20% threshold for both benefits.
Since Berkshire started buying Occidental shares in February, Mr. Buffett has had a friendly and collaborative relationship with Ms. Hollub, and the pair speak regularly, according to people familiar with the matter.
When Mr. Buffett bought another slug of Occidental shares this spring, he called Ms. Hollub to let her know about the transaction, according to one of the people. Ms. Hollub was driving at the time and pulled over to take the call, the person said.
Mr. Buffett’s message was simple: “Keep doing what you’re doing,” he told Ms. Hollub.
Berkshire’s growing ties with Occidental have an unexpected link to Mr. Buffett’s earliest days of investing.
At age 11 in 1942, Mr. Buffett made his first investment: three shares of Cities Service’s preferred stock. Forty years later, Occidental went on to acquire the oil company, which Ms. Hollub had just joined the year before.
Mr. Buffett’s investment in Occidental this year shows his first stock purchases “coming full circle 80 years later,” Mr. Kass said.
—Benoît Morenne contributed to this article.
Write to Akane Otani at akane.otani@wsj.com, Christopher M. Matthews at christopher.matthews@wsj.com and Cara Lombardo at cara.lombardo@wsj.com
In a regulatory filing Friday, the Federal Energy Regulatory Commission said that Berkshire Hathaway had asked for and received its permission to buy up to 50% of the driller’s shares. Berkshire has been loading up on Occidental’s shares this year, amassing roughly 20% of the company’s stock, public filings show, leaving many analysts to speculate whether Mr. Buffett would seek control of the company, one of the largest U.S. oil producers.
Occidental’s shares jumped to lead stock gains among the S&P 500 Friday, rising 9.9% after the publication of the ruling. The company’s stock has risen about 146% this year, far and away tops in the S&P 500 stock index, which is down 11% this year.
Berkshire requested the authorization on July 11 and said at the time it owned approximately 18.72% of the outstanding common shares of Occidental, according to the federal ruling. Berkshire has since added shares and earlier this month said in a securities filing that it held roughly 20% of Occidental’s common stock. Berkshire also owns warrants to buy another big slug of Occidental’s common stock as well as $10 billion worth of preferred shares that pay Berkshire about $800 million annually, filings show.
“It is concluded that the Proposed Transaction is consistent with the public interest,” Carlos D. Clay from the FERC’s Office of Energy Market Regulation wrote in the filing.
A spokesman for Occidental confirmed that Berkshire could now buy up to 50% of common shares and didn’t comment further. A Berkshire Hathaway representative didn’t respond to a request for comment.
Mr. Buffett has invested billions in renewables such as wind-farm projects through Berkshire’s energy unit and has also added oil companies to the holding company’s portfolio in recent years.
Chevron Corp.
is now one of Berkshire’s largest stock investments.
Occidental has raked in high profits from elevated oil prices, netting $3.7 billion in the second quarter. The profits are a dramatic turnaround for the company, which lost around $14.8 billion in 2020 after the global pandemic gutted oil demand. Berkshire’s stock purchases, as well as that of the many investors who follow Mr. Buffett’s moves, have helped lift Occidental’s shares to the head of the broad rally in energy stocks.
Occidental’s ill-timed $38 billion deal to take over rival Anadarko Corp. in 2019 loaded the company with debt, leaving it in a perilous position as oil prices tumbled during the pandemic. Chief Executive
Vicki Hollub
made deep spending cuts over the past two years, moved to rein in growth and focused on using cash to pay down debt.
The company has repaid $8 billion in debt this year to bring it to $22 billion, down from nearly $36 billion a year ago, according to the company and analysts. Occidental’s endeavor to reach investment-grade status and its cash-generating capabilities have made it an attractive target for Mr. Buffett, said Neal Dingmann, an analyst with Truist Securities. “It’s a great sort of hedge against a lot of his other businesses to own such a high free-cash-flowing business,” he said.
Occidental has raked in high profits from elevated oil prices, netting $3.7 billion in the second quarter.
Photo:
Reuters Staff/REUTERS
Mr. Buffett has made no secret of his admiration for Ms. Hollub, describing her as one of the best executives in the business. In 2019, he acquired $10 billion in preferred stock to help the company pay for the Anadarko deal.
“What Vicki Hollub was saying made nothing but sense,” Mr. Buffett said at Berkshire’s annual shareholder meeting in April. Occidental looked like “a good place to put Berkshire’s money,” he added.
Mr. Buffett had to show his hand to the market because power plants controlled by both Occidental and Berkshire Hathaway feed the same grid in Louisiana. Occidental owns a power plant in Taft, La., that feeds its chemical plant next door. Leftover power is sold on the local grid, which Berkshire Hathaway Energy plants also feed.
FERC ruled that since Occidental’s plant accounts for just 0.48% of the capacity connected to the region’s grid, a combination with Berkshire “will not have an adverse effect on competition” in the local electricity market. Mr. Buffett had to ask, though, before beefing up Berkshire’s Occidental stake.
In recent years, Occidental has ventured into renewables through its Oxy Low Carbon Ventures unit. This new focus dovetails with Berkshire’s own investments in renewable energy and puts Mr. Buffett’s company in a position to benefit from tax breaks, said
Bill Smead,
chief investment officer at Smead Capital Management.
“We see Berkshire’s filing as a vote of confidence in the oil macro and the value proposition in energy equities,” said Kevin MacCurdy, a managing director at investment firm Pickering Energy Partners.
Write to Benoît Morenne at benoit.morenne@wsj.com and Ryan Dezember at ryan.dezember@wsj.com
BERLIN—Russian natural gas began flowing again at a reduced volume through a critical pipeline into Europe on Thursday, according to its operator, buying time for governments to decouple from the Kremlin’s exports amid what they expect will be an increasingly unreliable supply of energy from Moscow heading into the winter.
The Nord Stream pipeline connecting Russia with Germany under the Baltic Sea resumed operation after its annual maintenance, ending 10 days of tense speculation about whether President
Vladimir Putin’s
regime would cut off the gas flow to Europe in retaliation for Western sanctions after his invasion of Ukraine.
The operator, Nord Stream AG, said the pipeline was in the process of restarting, which would take a few hours. “Gas is flowing,” a spokesman for the operator said.
The spokesman said flows are expected to be at pre-maintenance level of around 40% of total capacity, but it would take a few hours to reach that volume. One of the German network operators, NEL Gastransport GmbH, later said Thursday that this volume of gas was currently flowing through the pipe, as also confirmed by Nord Stream’s own online monitoring tool.
The German energy regulator said gas flows could reach 40% of capacity Thursday.
“Unfortunately, the political uncertainty and the 60% cut from mid-June remain,” the regulator’s head, Klaus Müller, said on Twitter.
The restart sent wholesale European natural-gas prices down 5% Thursday to €154.55, the equivalent of about $157.50, a megawatt-hour. Including Thursday’s fall, prices have fallen by 14% over the past week but have more than doubled this year and are more than four times as high as 12 months ago. The rally has propelled electricity prices to historic highs across Europe. Broader financial markets were steady Thursday as investors awaited earnings reports from major U.S. companies and an expected interest-rate increase by the European Central Bank.
A compressor station in Mallnow, Germany.
Photo:
filip singer/Shutterstock
The pipeline has been operating below capacity since Russia began throttling supplies in June, invoking technical issues related to Western sanctions against Russia.
Mr. Putin earlier this week said Russia would meet its contractual obligations for gas deliveries to Europe. The Nord Stream pipeline is the main conduit for Russian gas into Europe. Mr. Putin also warned that Western sanctions adopted to punish Russia in the wake of the invasion could cause further disruptions and cap pipeline volumes as low as 20%.
European officials and executives had worried the pipeline might not restart at all, or do so at even lower volumes. While gas is now flowing again, how much Russia sends—and for how long—will be closely watched by European capitals, who are in the midst of filling reservoirs for the higher-demand winter just a few months away.
An abrupt cutoff would have pushed Germany, Europe’s largest economy and industrial powerhouse, and several of its neighbors into a severe recession, according to most economists. But even reduced flows and the uncertainty regarding future supplies mean governments may still be forced to ration energy and subsidize mounting costs for households, experts and officials say.
Nord Stream channels gas extracted from Siberia by state-controlled Gazprom PJSC.
Mr. Putin this week blamed the drop on the absence of a turbine that had been held up in Canada after undergoing repairs because of Western sanctions, but is now on its way back to Russia.
Berlin and most Western experts said the cut in supplies was an attempt to pressure the West into easing sanctions and to push up gas prices. Several German officials and a Gazprom manager in Europe told The Wall Street Journal that Nord Stream had an elaborate contingency system with at least one spare turbine available at all times.
German officials say they expect the pipeline to continue to operate at its reduced pre-maintenance capacity—a level they think was deliberately set to prevent Germany and others from building up enough gas reserves for the winter. Because of technical reasons related to the pressure levels in the pipeline, Nord Stream can’t transport volumes below 30% of its capacity of 55 billion cubic meters a year.
A German government minister said that Mr. Putin was deliberately causing anxiety in the global energy markets, but that he was unlikely to sever supplies completely because it would remove his leverage and risk a harsher response from the West.
The reduced flows and uncertainty are already hitting Germany’s economy. The largest gas utility,
Uniper SE,
is in bailout talks with the German government. The company said Monday that it had drawn down a €2 billion, or $2.04 billion, credit line with German state-owned KfW bank. A German Economy Ministry spokesperson said Monday that the government was working with Uniper and its Finnish parent,
Fortum Oyj,
to find ways to help the company.
Germany and other European Union nations, which pledged to end purchases of Russian energy by 2024, are now working on two basic contingency plans.
The Nord Stream pipeline has been operating below capacity since Russia began throttling supplies in June.
Photo:
Markus Schreiber/Associated Press
The first envisages a status quo, with Nord Stream operating at around 40% of its capacity. Under that scenario, Germany, where gas storages are currently 65% full, would have to significantly reduce consumption compared with the previous year to avoid a shortfall in the winter. Some regions, however, are expected to be more severely affected, possibly triggering local measures such as limited factory shutdowns and a cut in supply to some businesses.
Under this scenario, Germany would be unable to completely fill its reserves before year-end, leaving the country vulnerable to new surprise supply cuts and keeping energy prices high.
This could be politically explosive for Berlin, with some 66% of Germans currently feeling that the government isn’t doing enough to tackle high energy prices, while 53% believe the sanctions are hurting Germany more than Russia, according to a Forsa poll published on Wednesday.
“We need to prepare for a war economy…the next two winters will be difficult,” said
Günther Oettinger,
a former chief energy official of the EU and German politician. “Our very democracy is in danger of disruption from the energy costs fallout.”
The second scenario, seen in Berlin as less likely according to German officials, foresees an end to Russian gas supplies before the end of the year, triggering an emergency plan that would allow Chancellor
Olaf Scholz
to take control of the gas market and ration consumption.
Under legislation that protects households and critical infrastructure, rationing would hit mainly businesses, leading to a drop in Germany’s gross domestic product of between 5% and 6% in 2023, according to estimates by
Deutsche Bank.
With many European countries that depend on Russian gas reliant on supplies transiting through Germany, irregular or dwindling supplies through Nord Stream would have effects across the continent.
The EU this week issued guidelines recommending measures to cut gas consumption by 15% between August 2022 and March 2023, including by limiting the temperature in office spaces to 66 degrees this winter.
Germany’s immediate neighbors are working on their own contingency plans.
Germany and Austria negotiated a deal to share their gas-storage capacity and help each other’s regions that are at risk of fuel shortages.
“Russian dictator Vladimir Putin is using energy as a weapon against us. It is clear that the cooperation with Germany, through which almost all gas flows to us, will be essential for us in this direction,” Josef Sikela, the minister of industry and trade of the Czech Republic, told reporters earlier this month.
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Europe is also adjusting its gas infrastructure, which has so far been largely geared to receive supply from Russia. Belgium and Germany are working to expand the capacity of a pipeline connecting the two nations, while Austria and Italy are looking into importing their infrastructure to be able to channel more Norwegian gas into their storage.
The Netherlands, once among the world’s largest gas producers, is considering temporarily prolonging the life of a gas field scheduled for closure after mining work there caused numerous earthquakes.
Many governments are trying to secure gas from other suppliers, from Norway to Algeria, the U.S. and Qatar, which often comes in the form of liquefied natural gas transported by ship.
Germany is building several LNG terminals on its coast to receive shipments from faraway countries and has chartered five floating terminals that can handle those inflows in the short term. Increased LNG purchases by EU nations—Germany alone is investing over €15 billion—have caused a shortage on the global market, leaving countries such as Pakistan struggling to access supply.
Berlin, meanwhile, has said it would review its decision to shut down its three remaining nuclear-power plants. It is already planning to increase use of coal to produce electricity this winter to save gas for heating.
Write to Bojan Pancevski at bojan.pancevski@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com
lamented he wasn’t finding much out there that was worth buying.
That is no longer the case.
After a yearslong deal drought, Mr. Buffett’s
Berkshire Hathaway Inc.
BRK.B -2.55%
is opening up the spending spigot again. It forged an $11.6 billion deal to buy insurer
Alleghany Corp.
Y -0.62%
, poised to be Berkshire’s biggest acquisition in six years. It bought millions of shares of
HP Inc.
HPQ -2.53%
and
Occidental Petroleum Corp.
OXY -3.40%
And it dramatically ramped up its stake in
Chevron Corp.
CVX -3.16%
, making the energy company one of Berkshire’s top four stock investments.
The big question: Why?
“It’s a gambling parlor,” Mr. Buffett said Saturday of the markets over the past few years. He added that he blamed the financial industry for motivating risky behavior among investors. While he finds speculative bets “obscene,” the pickup in volatility across the markets has had one good effect, he said: It has allowed Berkshire to find undervalued businesses to invest in again following a period of relative quiet.
“We depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing,” Mr. Buffett said.
Mr. Buffett, 91 years old, shared his thoughts on the state of the markets, Berkshire’s insurance business and recent investments at the company’s annual shareholder meeting in downtown Omaha.
Berkshire also held votes on shareholder proposals, with investors ultimately striking down measures that asked Berkshire to make its board chairman independent and called for the company to disclose climate risk across its businesses.
Shareholders eager to score prime seats lined up for hours before the doors opened in the arena where Mr. Buffett; right-hand-man
Charlie Munger,
98; and Vice Chairmen
Greg Abel,
59, and
Ajit Jain,
70, took the stage. As Mr. Buffett entered, a lone audience member took the opportunity to send a message. “We love you,” the person shouted.
Mr. Buffett appeared equally enthused to see the thousands of shareholders sitting before him.
It was a lot better being able to be with everyone in person, he said.
Up until recently, Berkshire had largely been sitting on its cash pile. Its business thrived; a recovering economy and roaring stock market helped push net earnings to a record in 2021. But it didn’t announce any major deals, something that led many analysts and investors to wonder about its next moves. Berkshire ended the year with a near record amount of cash on hand. (After Berkshire’s buying spree, the size of the company’s war chest shrank to $106.26 billion at the end of the first quarter, from $146.72 billion three months earlier.)
Mr. Buffett’s feeling that there were no appealing investment opportunities for Berkshire quickly gave way to excitement in late February, he said Saturday, when he got a copy of Alleghany Chief Executive
Joseph Brandon’s
annual report.
The report piqued his interest. He decided to follow up with Mr. Brandon, flying to New York City to talk about a potential deal over dinner.
Warren Buffett headed in to speak to shareholders at Berkshire Hathaway’s annual meeting in Omaha, Neb., on Saturday.
Photo:
SCOTT MORGAN/REUTERS
If the chief executive hadn’t reached out, “it wouldn’t have occurred to me to write to him and say, ‘Let’s get together,’” Mr. Buffett said.
Berkshire’s decision to build up a 14% stake in Occidental also came about with a report. Mr. Buffett said he had read an analyst note on the company, whose stock is still trading below its 2011 high, and decided the casino-like market conditions made it a good time to buy the stock.
Over the course of just two weeks, Berkshire scooped up millions of shares of the company.
“I don’t think we ever had anything quite like we have now in terms of the volumes of pure gambling activity going on daily,” Mr. Munger said. “It’s not pretty.”
But the amount of speculation in the markets has given Berkshire a chance to spot undervalued businesses, Mr. Munger said, allowing the company to put its $106 billion cash reserve to work.
“I think we’ve made more because of the crazy gambling,” Mr. Munger said.
Another business that caught Berkshire’s eye? Chevron. Berkshire’s stake in the company was worth $25.9 billion as of March 31, up from $4.5 billion at the end of 2021, according to the company’s filing. That makes Chevron one of Berkshire’s four biggest stockholdings, alongside
Apple,
American Express Co. and Bank of America Corp.
Neither Mr. Buffett nor Mr. Munger specifically addressed Berkshire’s decision to increase its Chevron stake.
But the two men offered a defense of the oil industry. It is a good thing for the U.S. to be producing more of its own oil, Mr. Buffett said. Mr. Munger went further, saying he could hardly think of a more useful industry.
At the meeting, Mr. Buffett also revealed that Berkshire has increased its stake in
Activision Blizzard Inc.
The company now holds a 9.5% position in Activision, a merger-arbitrage bet from which Berkshire stands to profit if
Microsoft Corp.’s
proposal to acquire the videogame maker goes through.
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At the end of the day, Berkshire doesn’t try to make its investments based on what it believes the stock market will do when it opens each Monday, Mr. Buffett said.
“I can’t predict what [a] stock will do…We don’t know what the economy will do,” he said.
What Berkshire focuses on is doing what it can to keep generating returns for its shareholders, Mr. Buffett said. Berkshire produced 20% compounded annualized gains between 1965 and 2020, compared with the S&P 500, which returned 10% including dividends over the same period.
“The idea of losing permanently other people’s money…that’s just a future I don’t want to have,” Mr. Buffett said.
BERLIN—Germany is now ready to stop buying Russian oil, clearing the way for a European Union ban on crude imports from Russia, government officials said.
Berlin had been one of the main opponents of sanctioning the EU’s oil-and-gas trade with Moscow.
However on Wednesday, German representatives to EU institutions lifted the country’s objection to a full Russian oil embargo provided Berlin was given sufficient time to secure alternative supplies, two officials said.
The German shift increases the likelihood that EU countries will agree on a phased-in embargo on Russian oil, with a decision possible as soon as next week, diplomats and officials say. However, how quickly the bloc ends its Russian oil purchases, and whether it also uses measures such as price caps or tariffs, is still being negotiated. The U.S. is pressing its European allies to avoid steps that could lead to a protracted increase in oil prices.
Europe’s debate on banning Russian oil has shifted decisively in recent days with Germany and some other countries taking practical steps to replace Russia with other suppliers. Some member states remain cautious about the economic impact of an oil embargo, including Hungary, Italy, Austria and Greece, diplomats say. All 27 EU governments must approve an oil ban.
The oil moves come as EU nations scramble to help member states Poland and Bulgaria make up for a natural gas shortfall after Russia stopped deliveries this week in reaction to what it said was the two countries’ refusal to pay for imports in rubles. The Kremlin demands EU buyers pay into special bank accounts where deposits would be converted from euros and dollars into rubles.
The EU pays state-controlled Russian firms around €1 billion, equivalent to $1.05 billion, a day for energy, according to estimates by Bruegel, a Brussels-based think tank. Critics have said that these funds are bankrolling Russian President
Vladimir Putin’s
regime and its war in Ukraine.
The consequences of harsh economic sanctions against Russia are already being felt across the globe. WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict might transform the global economy. Photo Illustration: Alexander Hotz
On Thursday, Gazprom PJSC, Russia’s biggest gas producer, said profit soared in 2021 on the back of higher gas and oil prices.
Senior officials from EU member states discussed oil sanctions at length on Wednesday and the European Commission, the EU’s executive body, will hold further discussions with EU countries in coming days before presenting a proposal probably early next week, officials and diplomats say.
U.S. Treasury Secretary
Janet Yellen
said last week that a full European oil embargo on Russia would push up international oil prices, hurting a fragile global economy, and might “actually have very little negative impact on Russia,” which would benefit from higher oil prices on its remaining exports. She suggested Europe could keep buying oil while restricting Russia’s access to payments, echoing talk in Europe of making payments into an escrow account.
The EU imports between 3 million and 3.5 million barrels of oil a day from Russia, sending just under $400 million in payments daily, according to Bruegel. That amounts to some 27% of EU oil imports. Oil and gas revenues accounted for 45% of Russia’s federal budget in 2021, according to the International Energy Agency.
Many companies have been self-sanctioning, according to analysts and traders, avoiding trade in Russian oil over reputational concerns and the risk that the Western pressure campaign could soon encompass Moscow’s energy exports. That is already contributing to a sharp fall in Russian oil exports, according to the IEA.
EU officials designing the next sanctions proposals have to factor in that it will take some European oil refineries time to adapt to receive non-Russian crude. They also acknowledge that for countries such as landlocked Hungary, which receives its Russian oil through pipelines, adjusting to a Russian oil embargo will be complex.
The bloc is considering the option of combining a gradual phaseout of oil purchases with more immediate measures to reduce demand or cut payments to Moscow, such as a price cap or a tariff on oil imports. Another possibility is to phase out shipped oil purchases quickly and pipeline deliveries more slowly.
“There are all sorts of things that we’re running through,” said a senior EU official. “The aim is to hit the Russians as hard as possible while at the same time minimizing” the cost.
While Germany has swung behind the idea of phasing out Russian oil purchases, Berlin remains skeptical of price caps, tariffs and proposals to put Russia’s oil payments into escrow accounts.
German officials doubt that Mr. Putin would maintain oil deliveries if the EU unilaterally cut the price it pays, and they caution that Russia could easily sell its oil to other customers such as India and China instead of accepting a lower European price.
Berlin’s change of mind on oil came after it struck a deal with Poland that will enable Germany to import oil from global exporters via the Baltic Sea port of Gdansk, officials said Wednesday.
The Polish port is located close to the PCK oil refinery in Schwedt, Germany, which is controlled by the Russian oil giant
Rosneft
and receives crude via a Russian pipeline known as Druzhba, Russian for friendship.
The Gdansk port infrastructure, which is equipped to receive oil supertankers, is connected to the Russian pipeline with a separate link operated by Poland. This means oil imports to Gdansk could be immediately channeled through the pipeline to the Schwedt refinery, replacing Russian supplies, government officials said.
Oil imports to Gdansk, Poland, could be channeled to the Schwedt refinery, replacing Russian supplies.
Photo:
Michal Fludra/Zuma Press
The Schwedt refinery was the biggest obstacle to Germany accepting a ban on Russian oil imports because thousands of jobs in the region depend on it and there was no alternative supply to feed it until now, the officials said.
The Polish deal was necessary because the German port closest to the refinery, Rostock, doesn’t have the capacity to receive supertankers. In addition, Germany’s railways no longer operate oil wagons. The landmark deal was announced on Wednesday by German Economy Minister
Robert Habeck
during a visit to Poland.
Some 12% of Germany’s oil consumption relies on Russian imports, down from 35% before the war, Mr. Habeck said in a video statement posted on his ministry’s social media. He said Germany was now ready for the possibility that Rosneft would stop channeling oil, a scenario he said would no longer spell disaster for the German economy.
“Rosneft is a Russian state company and they have no interest in processing non-Russian oil,” Mr. Habeck said.
Should Rosneft refuse to process non-Russian oil imports, Germany could put the refinery under state management under laws protecting strategic assets. Berlin has already assumed stewardship of the main Russian gas-trading hub in Germany, a subsidiary of Russia’s state-controlled Gazprom.
Write to Bojan Pancevski at bojan.pancevski@wsj.com, Laurence Norman at laurence.norman@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com
Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.
The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of
Saudi Arabian Oil Co.
, known as Aramco.
Russia’s attack on Ukraine helped push the price of oil to over $100 a barrel for the first time since 2014. Here’s how rising oil costs could further boost inflation across the U.S. economy. Photo illustration: Todd Johnson
It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.
China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.
China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince
Mohammed bin Salman’s
pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President
Xi Jinping
to visit later this year.
Saudi Foreign Minister Faisal bin Farhan met Chinese Foreign Minister Wang Yi in China in January.
Photo:
Anonymous/Associated Press
Meanwhile the Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.
It also comes as the U.S. economic relationship with the Saudis is diminishing. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.
By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.
“The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.
“China has been offering everything you could possibly imagine to the kingdom,” the official said.
More on Relations Between the U.S., Saudi Arabia and China
A senior U.S. official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.
It is possible the Saudis could back off. Switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy, which has a currency, the riyal, pegged to the dollar. Prince Mohammed’s aides have been warning him of unpredictable economic damage if he moves ahead with the plan hastily.
Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.
Some officials have cautioned Prince Mohammed that accepting payments for oil in yuan would pose risks to Saudi revenues tied in U.S. Treasury bonds abroad and the limited availability of the yuan outside China.
The impact on the Saudi economy would likely depend on the quantity of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to repeg the riyal to a basket of currencies, similar to Kuwait’s dinar.
“If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola and Iraq.
The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.
“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”
Talks with China over pricing oil in yuan started before Prince Mohammed, the de facto leader of the kingdom, made his first official visit to China in 2016, people familiar with the matter said. The crown prince asked the kingdom’s then-energy minister
Khalid al-Falih
to study the proposal, the people said.
Mr. Falih instructed Aramco to prepare a memo that heavily focuses on the economic challenges of switching to the yuan pricing.
“He really did not think that was a good idea but he could not stop the talks as the ship had already sailed,” said another person familiar with the meetings.
Saudi officials in favor of the shift have argued the kingdom could use part of yuan revenues to pay Chinese contractors involved in mega projects domestically, which would help mitigate some of the risks associated with the capital controls over the currency. China could also offer incentives such as multibillion-dollar investments in the kingdom.
Another official familiar with the talks said yuan pricing could give the Saudis more influence with the Chinese and help convince Beijing to reduce support for Iran.
Ali Shihabi, who sits on the board of Neom and formerly ran a pro-Saudi think tank in Washington, said the kingdom can’t ignore China’s desire to pay for oil imports in its own currency, particularly after the U.S. and EU blocked the Russian central bank from selling foreign currencies in its reserves stockpile.
“Any doubts countries had about the need to diversify into Yuan and other currencies/geographies would have ended with that huge step,” Mr. Shihabi tweeted in response to this article.
—David S. Cloud contributed to this article.
Write to Summer Said at summer.said@wsj.com and Stephen Kalin at stephen.kalin@wsj.com
Russia didn’t cause Europe’s current energy crisis, which has seen natural gas prices spike 5x over last year, but Vladimir Putin seems intent on using it to his advantage.
Why it matters: Gas prices fluctuate with Putin’s every word (they fell Thursday after he signaled supply would increase next month), and the supply crunch has been an uncomfortable reminder of Europe’s reliance on Russian fuel. At least one country, Moldova, is in danger of a very cold winter if Russia turns off the tap.
Driving the news: Putin recently dismissed accusations that Moscow is exploiting the crisis as “utter nonsense, drivel and politically motivated tittle-tattle.”
The Kremlin has noted that high prices are actually a risk for Russia because countries could turn to other fuels like coal.
But Putin is no stranger to using gas to serve geopolitical purposes, notes Anna Mikulska of Rice University’s Baker Institute, including to increase the dependence of neighboring countries on Russia or to punish countries that move toward the West.
Putin’s envoy to the EU, Vladimir Chizhov, hinted earlier this month that geopolitics were indeed a factor. “Change adversary to partner and things get resolved easier,” Chizhov said, referring to the way the bloc treats Russia.
Putin has pushed EU countries to agree to longer-term contracts that will keep them reliant on Russian gas but, he contends, guarantee consistent supply.
And he has claimed that one way to ease the supply crunch would be for Germany and the EU to expedite approval of the controversial Nord Stream 2 pipeline, which circumvents Ukraine (Russian gas giant Gazprom has already been shipping less gas via Ukrainian pipelines).
The other side: Amos Hochstein, the U.S. special envoy for energy security, dismissed that suggestion, telling reporters on Monday that if Russia has the ability to increase supply, it can do so using existing pipelines.
Between the lines: It’s not clear that Russia could actually ramp up supply enough to “decrease the pain in any significant manner,” says Mikulska. “But Russia has at the very least been trying to exploit these conditions to push their own objectives.”
Asked if Russia was using energy as a weapon, Hochstein said: “I think we are getting close to that line, if Russia indeed has the gas to supply and it chooses not to, and it will only do so if Europe accedes to other demands that are completely unrelated.”
He added: “The only supplier that can really make a big difference for European energy security for this winter is Russia.”
The big picture: Russian gas remains a major part of the energy mix in many European countries.
In Germany, for example, two-thirds of natural gas imports came from Russia as of 2018, and Russian gas accounted for 16% of all energy consumption.
In several countries in Eastern Europe, 100% of natural gas supplies come from Russia.
No country is feeling the pinch more acutely than Moldova.
The former Soviet republic has a new government that is seeking to turn away from Moscow and toward the West — but has until now been entirely reliant on Russian gas.
Moldova’s contract expired at the end of September, at which point Gazprom raised the price and reduced supply when Moldova refused to pay it.
The government has declared a state of emergency, said it will negotiate a new contract only if Gazprom lowers its price, and searched frantically for other suppliers — including by sealing a relatively small-scale deal with a Polish firm this week.
Zoom out: The energy crisis has a medley of causes that have little to do with Russia.
Supply tightened due to a cold winter followed by a hot summer.
Gas production in the EU has long been in decline, and renewables have taken a hit in part due to low winds.
Asian demand has sucked up much of the global supply of liquefied natural gas, limiting the potential suppliers for EU countries.
The bottom line: Europe will continue to rely more on Russia for gas than any other source, the Baker Institute’s Mikulska says, for reasons of capacity, proximity and existing infrastructure.
But rather than locking in long-term contracts with Russia, several EU countries like Poland have sought to diversify their supply or sign shorter-term agreements, Mikulska says.
She says Putin is in danger of overplaying his hand and undermining any claim that Russia is a reliable partner.
Royal Dutch Shell operates a plant in Qatar, known as Pearl GTL, that transforms natural gas into liquid fuels.
Stuart W. Conway/Shell International Limited
Text size
Natural gas has long been oil’s poor step-cousin, a commodity that many ignore until they have to pay their heating bill.
Now, natural gas is the lead player in a drama that is gradually dragging down the world economy. A surge in the price of the commodity—along with other fuel sources, like coal and propane—is forcing countries to reduce factory production, and could drive heating and electricity prices sky-high this winter.
Analysts have already been downgrading global growth forecasts based on the energy crunch. Goldman Sachs recently forecast that China wouldn’t grow at all in the third quarter versus the prior quarter, in part because of its energy problems. In the United Kingdom, power companies serving nearly two million people have gone out of business.
In the U.S., natural-gas futures rose above $6 per million British thermal units (BTUs) during the week, nearly quadrupling from their pandemic lows. Oil demand is rising with gas, as some utilities are likely to switch their input fuel to oil as gas stays expensive.
The problem is even more acute in places that have to import more of their fuel. Europe and Asia are bidding up the cost of liquefied natural gas, or LNG, to secure enough for winter. European gas prices have roughly quadrupled from their five-year average, and were recently trading at a record $32 per million BTUs, according to S&P Global Platts Analytics. The Asian benchmark price hit an all-time high of $34 on Thursday.
There is no simple answer for why multiple energy sources are expensive and scarce today. A cold spell late last winter in Europe led to low levels of gas in storage. U.S. producers, which account for the largest share of gas production in the world, have held back on drilling new wells as they work to get their balance sheets in line after years of overspending. The Chinese economy had been rebounding, causing demand to surge just as supplies were running low. And the prices of other commodities such as coal have been rising too, making it difficult for power producers like utilities to switch their input fuels. Oil and gas have also been beset by the same problems facing all global markets—too few workers to move the fuel.
Climate change’s role in the power crunch is also tricky. Carbon emissions are leading to more severe weather that is damaging energy infrastructure. One reason oil and gas supplies are low now is that Hurricane Ida damaged infrastructure in the Gulf of Mexico, taking substantial supplies off line.
But combating climate change also brings challenges. The transition to cleaner fuels hasn’t always gone smoothly. One reason European power prices have increased is that the wind simply didn’t blow enough in recent weeks to power turbines that make up a growing portion of the Continent’s power supply.
“There will be two parties in this debate,” says Daniel Yergin, an expert in energy markets who is vice chairman at IHS Markit. “One is saying let’s go faster, and the other is saying you’re going too fast. Don’t constrain investment when you don’t really have sufficient alternatives to replace what you’re constraining.”
For investors, the power crunch opens up new opportunities. It could be months before the market comes back into balance. A cold winter could lead to even higher prices that would not only sap economic growth but possibly cause political upheaval.
The obvious beneficiaries would seem to be natural-gas producers. But it isn’t quite so simple, in part because most producers have already hedged their 2021 production and most of their 2022 output at lower prices. “Any of the hedges even for next year are well under $3,” says Truist Securities analyst Neal Dingmann.
He thinks that investors can still get natural-gas exposure, and benefit from rising oil prices too, by purchasing stocks of oil companies that also happen to be large gas producers.
Among those are
Cimarex Energy
(ticker: XEC), which won shareholder approval this week to merge with
Cabot Oil & Gas
(COG). Cabot is unhedged on 2022 production as of its latest earnings report. Similarly, dry natural gas and natural gas liquids account for nearly half of production at
Marathon Oil
(MRO), which also has reported relatively few hedges for this year and next, Dingmann says.
Larger oil companies tend not to hedge production, either. Among the biggest beneficiaries could be
Royal Dutch Shell
(RDS.B), a major producer of propane, whose prices have also skyrocketed, Dingmann notes. “In the third quarter, I think people are going to be very surprised” by how much these companies make from gas, he says.
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Another way to play these dynamics is to invest in companies that are key cogs in the global supply system, like
Cheniere Energy
(LNG), whose terminals on the Gulf Coast allow U.S. gas to be processed and shipped overseas. Small-cap
Tellurian
(TELL) offers exposure to the same theme, though it is more speculative.
“It’s excellent for LNG companies,” says Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “There was concern that there was overinvestment in LNG as recently as two years ago.” No longer.
Some petrochemical companies could benefit, too. Chemical plants need natural gas to run. Those with operations in the U.S. are in better shape because they’re paying relatively less, notes Rich Redash, the head of global gas planning at S&P Global Platts. That could benefit
