Corporate Debt Review

Energy’s Downside under European Nationalism

French Fraud

The talk these days here in Paris revolves about the latest political scandal. This one highlights a time-honored French practice of elected legislators hiring relatives for staff work. The work, of course, may or may not ever get done but the salaries are drawn nonetheless.

The French politician currently in the cross hairs is Francois Fillon, the conservative Force Républicane leader, former Prime Minister, and until last week the expected next President of France. At issue is €831,440 ($897.539) paid to his Welsh wife Penelope. Two of his children also received about €85,000.

An investigation is now underway. Fillon claims the work was legitimate, but the matter has been compounded by the reclusive Penelope denying she had ever been an aide and then claiming only half of the salary on forms.

The press is widely calling the mess “Penelopegate.”

Now such nepotism is common enough practice in what is often regarded as a privileged political class in France. Some legislators claim it is even essential as family becomes a guarantor of confidential information.

But in these days of populist push back, such conduct is coming under pressure. The revelations are shaking up politics here.

The latest polls conducted through the weekend now put Fillon third – behind centrist Emmanuel Marcon and hard right National Front leader Marion Anne Perrine Le Pen (known as Marine Le Pen).

It is a statement of the times in French politics that the primary discussion filling the pages of the press over the past month has been between conservatives (supporting Fillon) and ultra conservatives (Le Pen).

The French system allows all candidates to run in a first round of presidential balloting (this year held on April 23). Assuming nobody wins an outright majority, there is a runoff between the top two vote getters two weeks later (May 7). The same latest polls now put Marcon as the favorite to defeat Le Pen in the second round.

Of course, pollsters have been spectacularly wrong twice recently in estimating voting unrest. The first was a shocking U.K. decision to exit the European Union last June 23 (“Brexit’). The second was the election of Donald Trump as U.S. President last November.

The National Front has been a fixture in French politics since 1972. Until the last few years, it was a marginalized influence in national politics, led first by the fiery Jean-Marie Le Pen until he transferred the reins to his daughter in 2011. This is hard line French nationalism, intent on withdrawing from the EU and the euro zone, putting French first, closing borders to immigrants, introducing a range of protections for domestic industry against foreign competition, and a concerted attack against globalization.

The “official” unemployment rate here hovers about 10%, but citizens receive among the highest per capita government benefits found anywhere.

Here Comes Le Pen

Le Pen’s platform was released on Saturday using the slogan “Made in France.” Word is there was another suggestion floated earlier and rejected as too familiar – “Make France Great Again.” At 20-22% in the current polls, Le Pen is now quite competitive in a race where no candidate is likely to reach the high twenties in the first round of voting.

All of this has already become an issue in discussions I am having here about energy investment. Le Pen’s combination of leaving the EU, returning to the franc as the national currency, and going it alone is creating some concern.

Because I have already seen this before – after the Brexit vote.

In the case of France, it leads the world in producing the overwhelming majority of its electricity from nuclear plants. However, it is entering a period in which the upkeep and refurbishment of that network is carrying a very high price tag.

Natural gas is rising as a second source of power and has been prominent in planning. But leaving the EU and relying on a national currency has already produced a crisis in natural gas on the other side of the Channel.

As I noted last July when analyzing the energy sector impact of Brexit, this hit average British citizens hard.

This is what I wrote then:

“History tells us that the winter of 1946-1947 was one of the worst experienced by the British Isles in a century. Coming so soon after the end of World War II a crippled economy felt the full impact. At one point, Winston Churchill observed that he could not even obtain his favorite cigars.

Of primary concern, was the provision of power. Not a single electricity generating station in all of England escaped wartime destruction and a return to “normalcy” in the power sector would take years. The winter of 1946-1947 would require that an entire population hunker down.

The current situation is hardly as dire. But ever since the UK voted to separate from the EU (the co-called Brexit referendum) on June 23, I have been waiting for the initial signals that the divorce will have consequences in the energy sector.

Over the past week that sign has emerged. Seventy years ago, the cause was waves of Luftwaffe bombers. This time around, it has been the democratic ballot box.

What it signals is a double whammy for British domestic natural gas users, with both parts a result of the multi decade decline in the value of the British Pound Sterling post Brexit. The currency has collapsed to more than thirty year lows against the dollar. And the decline has prompted two energy moves in very different directions, neither good if you are intending on living in the UK as temperatures decline.

First, the descent of the pound sterling has prompted UK retail natural gas distributors to forego discounts moving forward. This is, of course, based on the same reasoning that will certainly result in another round of appreciable electricity price hikes by the major national utilities later in the year.

Maintaining profit margins will be impossible at current levels, given the forex pressure on the bottom line. Most observers also believe that increased taxes are now inevitable in an environment in which all revenue considerations will have to factor in a quite unexpected effective currency devaluation.

Even before Brexit, this was shaping up to be a hard fall and winter in any event, placing additional pressure yet again on an already strained power sector. The new government headed by Prime Minister Theresa May is still Conservative. And while she will delay the substantive Brexit negotiations with the EU in Brussels, the party’s policies of cutting subsidies will remain intact.

That means some difficult times lie ahead, both for end users and domestic power distributors. Problems, some Brexit, some not, are hitting all energy sources – resurging North Sea production profitability concerns, a decimation of renewable alternatives (for example, over a third of all employment positions in UK solar have vanished), and rising indication that French EDF may be having second thoughts about moving forward with a major nuclear energy plant at Hinkley Point (way over budget and certain to be hit hard by currency fluctuations moving forward).    

The British end user, however, is going to feel the pinch in an additional way (once again hitting the pocket book).

On July 15, utility giant Centrica announced it will not inject any additional gas into the offshore Rough field until spring of 2017. Rough accounts for about 70% of all British natural gas storage capacity. Immediately, that caused a spike of over 10% in winter month natural gas futures contract prices.

Even then the capacity issue at Rough does not illustrate the seriousness for British consumers. The field has a capacity put at 150 billion cubic feet. But the present volume stored there is only 50 billion. Unless there is a subsequent revision to Centrica Storage’s plans – and there are no indications change is likely to occur – that 50 billion cubic feet is now the maximum that will be available from Rough this winter.

There is a knock-on effect shaping up. U.K. summer gas demand usually results primarily from the storage for winter heating. But Centrica’s has decided to shut Rough “for tests” at least until November.

And that has introduced the second factor. The dramatic change in cross currency valuations has resulted in the UK exporting more natural gas to Belgium (and onward to a broader continental market) than at any point in more than two years.  

The “spare fuel” is actually coming primarily from volume that would have gone to Rough and is being sent along the North Sea Interconnector east-west pipeline to the terminal center at Zeebrugge on the Belgian coast.

Last week, Trevor Sikorski – the head of natural gas, coal and carbon at Energy Aspects Ltd. in London – told Reuters that the spike in exports comprised gas “that would otherwise be going to Rough, now being incentivized to go and get injected into European storage.”

However, just about all analysts agree that the rising exports from Britain to Europe are more a result of the collapse in currency value than with any outage at Rough. A Brexit-induced “pounding of the pound” has provided some nice profits for European importers and Centrica has obliged.

But what of the average citizens back home? Given the decision to close injections of gas into Rough, the short-term future will require a traditional British stiff upper lip. Sikorski adds that he expects “higher UK imports of gas then to occur in the winter.”

Thanks to a much weaker currency, those imports in lieu of the normal domestic draw off of storage out of Rough will be far more expensive. A nasty cycle has formed.

Current rising exports of British gas will go to European storage with some of that returning as higher-priced imports when matters get colder. This may attend to profit considerations along the Interconnector.      

But it is hardly welcome news for people living in Britain.”

Franc Talk

Under a Le Pen government, the French energy quandary would have some common elements with what has impacted Britain. The exchange rate from what will certainly be a weaker domestic currency will drive up energy prices, making a natural gas fallback position more costly and difficult. No subsidies coming from the Euro Zone in this scenario.

As a major exporter of electricity to the rest of Europe – henceforth to be a foreign competitor – France would also find the cross-border energy trade placing greater economic burdens on its power grid. Balancing that broader grid requires that some of the exported electricity return. It will do so at a higher price – a disturbing parallel to the gas cycle in the U.K.

And as London has already recognized, Paris will need to understand that Brussels will have no interest in making the post-divorce easy or painless.

Nationalism may feel good, but it has unsavory consequences. When it comes to energy in a global infrastructure, turning inward challenges the undergirding necessary for industrial survival, employment prospects, and a basic sustainable way of life.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.