The industry is still reeling from the impact of the latest downturn. The current oil glut started late 2014, and the end is still nowhere in sight.
So why ask the question and the suggestion of another crash ahead? Well, our industry has not had the best track record of keeping up with the times, and those sure are changing.
Ten years ago, proponents of electric plug-in cars were laughing stock and their creators considered out of touch loonies who were day-dreaming. Today, electric cars are being mass produced by Tesla in the USA (albeit not yet profitably) and most carmakers are making progress in leaps and strides towards bringing their own models to the market.
In addition, dozens of other giant corporations are investing billions to produce electric vehicles with a range between 200 and 300 miles between recharges that will cost around $30,000 in today's money and they plan to be ready by 2020. Battery technology is evolving at breakneck speed producing lighter and higher capacity units to improve autonomy and reduce overall weight of the vehicles while getting cheaper all the time. Tesla is expanding their factory capacity from 50,000 cars to 500,000 cars a year and sales are still good. In fact 2015 was a record year for them, one year into cheap gas.
So what is the fuss about electric cars you might ask? Well, every electric car will not use about 50 Bbl of oil a year and instead use electricity generated from a variety of sources that are not all hydrocarbon dependent. Right now the reduction in gas consumption is still negligible, but as the momentum of the adoption of electric cars as an alternative to traditional combustion engine cars increases, so will be the amount of gas and thus oil not used to fuel vehicles. This is taken from a study conducted by Bloomberg New Energy Finance group and the article was penned by Tom Randall: "BNEF The Next Oil Crash".
What is worrying is the fact that the oil and gas industry is dismissing the threat posed by electric vehicle adoption in an almost unanimous way. One can see it in their comments about this topic:
This is sounding the same way as the almost militant rejection of the oil and gas industry of the effects of climate change on the energy markets, dismissing the concept due to “flawed science”. The point is not so much if the science is flawed or not, it is the public’s perception of climate change as a serious issue, and this has become an undisputed fact with the signature of the Paris Accord last year on CO2 emissions reduction efforts. We all tend to forget that Perception = Reality, regardless of the fact that perceptions can be false or un-founded.
Then there is the argument of where those 1,900 Tera-Watts/hour of extra electricity needed to power all those electric vehicles is going to come from. It is hard to tell what the proportion of fossil fueled electricity to nuclear to clean power ratios will be, but for sure, it won’t be all from oil and gas. So the impact on oil and gas consumption will inevitably be one of overall reduction of hydrocarbon consumption, but more importantly, a fall in gasoline consumption that will affect refineries and gas station businesses in a permanent manner.
The authors of the Bloomberg study predict a time window somewhere in the middle to the end of the next decade (the earliest by 2023, realistically somewhere between 2027 and 2030). This is just around the corner in oilfield time scales.
There are plenty of examples of entire industries that have disappeared over the last couple of decades because of a dismissal of the effects new technologies would have on them. Kodak is now just a distant memory in older people’s minds because it did not believe that digital photography would make the old film and print obsolete and was just “a passing fad”.
There are others that understood the existential threat to their businesses and reinvented themselves, such as Xerox recognizing that the photocopier was dead the minute the modern scanner appeared.
So what is the message that we all need to read, understand and then act upon?
There are tremendous changes going on in the 21st Century. Technology is advancing ever more rapidly and the oil and gas industry better embrace those changes and adapt with them, lest it becomes the next Kodak of the world because it is so much easier to be in denial than to face facts. Electric cars are just one of those changes, the other one is the rapid development of green energy, mostly wind, solar and geothermal.
There is another example of how technology overtook our industry by complete surprise: the economical exploitation of shale oil and gas.
The oil and gas industry has known for generations the existence of these vast shale deposits saturated with oil and gas, but since the time we first encountered them, we deemed them uneconomical to produce. But then there came the time when the biggest oil consumer in the world (USA) ran out of conventional hydrocarbon reservoirs, all had been drilled. Well, some non-conformists and very dogged entrepreneurs started to experiment with shale to make it yield its riches in commercial quantities.
At the beginning it was almost a quimera, as it was too costly and the ideas to squeeze the oil or gas from shale rock had not matured. Then came the decade of 100$ oil and suddenly shale started to make economic sense, so much so, that it achieved two unintended consequences:
Shale became the victim of its own success by oversupplying the world crude market, not with shale oil exports, but with crude that the USA did no longer need to buy. The established IOCs and NOCs dismissed shale in the beginning and only at the very end, just a couple of years before the glut arrived did the majors start to take shale seriously, once it was a proven concept.
But there is more. At the mid-30$ range, some shale oil seems to be still commercially viable, and all shale producers have not stopped to drill and much less have they stopped to flow their wells, so here is the second blow: new Deep Water projects are now hopelessly uneconomical, and unless they find a way to drastically reduce the cost of production, it will accompany Kodak and all those that could not adapt to change in the dust of the history books.
Hundreds of billions of dollars invested in all these complex and immensely expensive offshore developments are doomed if we as an industry can’t find the answer to significantly lower its costs.
All we have to do is look at the shale accumulation map of the world to see that we have the potential of producing oil onshore from shale for a very long time. Even if many countries ban hydraulic fracturing, there are still huge quantities of relatively easy and simple ways to produce shale oil and gas that will keep the price of oil low for a long time. Argentina and the UK are working hard towards exploiting their shale potential even in this depressed market scenario.
There may be a few geopolitical blips affecting the crude market, but it won’t be for decades. Even something as unthinkable that for example Saudi Arabia or Russia become failed states like Libya or Yemen and we lose 10 million barrels of oil production, the effect will not last for long. There are too many “pinch hitters” that will come and save the day, shale being one of them.
Let’s not forget there are millions of barrels of production currently not on the market due to conflict (Libya, Yemen, Iraq), sanctions and incompetence (Iran, Venezuela) to name just a few.
So what should the industry do about all of this?
We should all be focusing on the impact all these changes are bringing to our industry and look for ways to change so that we can benefit instead of being run over by change.
The oil and gas industry should collectively be researching effective carbon capture and sequestration technologies to reduce significantly the impact of CO and CO2 coming from hydrocarbon combustion.
Another idea would be to partner with leading combustion engine manufacturers to develop cleaner combustion engines, again to reduce or eliminate the pollution effects of hydrocarbon fuel combustion.
Last but not least, the oil and gas industry should be leading the charge into developing green energy, to eliminate fossil fuel combustion and save hydrocarbons for generations to come to produce all the other goods we take for granted in our lives that are all manufactured from oil and gas: fertilizers, synthetic fibers, resins, composite materials, lubricants, polymers, and the list goes on and on. There will be billions more humans on the planet, all wanting to benefit from these products and others not even invented yet.
I for one will keep trying to delay the time when I will become part of the dust of history. I will do this by keeping an open mind and embracing change instead of rejecting it.
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Headline crude prices for the week beginning 12 August 2019 – Brent: US$58/b; WTI: US$54/b
Headlines of the week
The momentum for crude prices abated in the second quarter of 2019, providing less cushion for the financial results of the world’s oil companies. But while still profitable, the less-than-ideal crude prices led to mixed results across the boards – exposing gaps and pressure points for individual firms masked by stronger prices in Q119.
In a preview of general performance in the industry, Total – traditionally the first of the supermajors to release its earnings – announced results that fell short of expectations. Net profits for the French firm fell to US$2.89 billion from US$3.55 billion, below analyst predictions. This was despite a 9% increase in oil and gas production – in particularly increases in LNG sales – and a softer 2.5% drop in revenue. Total also announced that it would be selling off US$5 billion in assets through 2020 to keep a lid on debt after agreeing to purchase Anadarko Petroleum’s African assets for US$8.8 billion through Occidental.
As with Total, weaker crude prices were the common factor in Q219 results in the industry, though the exact extent differed. Russia’s Gazprom posted higher revenue and higher net profits, while Norway’s Equinor reported falls in both revenue and net profits – leading it to slash investment plans for the year. American producer ConocoPhillips’ quarterly profits and revenue were flat year-on-year, while Italy’s Eni – which has seen major success in Africa – reported flat revenue but lower profits.
After several quarters of disappointing analysts, ExxonMobil managed to beat expectations in Q219 – recording better-than-expected net profits of US$3.1 billion. In comparison, Shell – which has outperformed ExxonMobil over the past few reporting periods – disappointed the market with net profits halving to US$3 billion from US$6 billion in Q218. The weak performance was attributed (once again) to lower crude prices, as well as lower refining margins. BP, however, managed to beat expectations with net profits of US$2.8 billion, on par with its performance in Q218. But the supermajor king of the quarter was Chevron, with net profits of US$4.3 billion from gains in Permian production, as well as the termination fee from Anadarko after the latter walked away from a buyout deal in favour of Occidental.
And then, there was a surprise. In a rare move, Saudi Aramco – long reputed to be the world’s largest and most profitable energy firm – published its earnings report for 1H19, which is its first ever. The results confirmed what the industry had long accepted as fact: net profit was US$46.9 billion. If split evenly, Aramco’s net profits would be more than the five supermajors combined in Q219. Interestingly, Aramco also divulged that it had paid out US$46.4 billion in dividends, or 99% of its net profit. US$20 billion of that dividend was paid to its principle shareholder – the government of Saudi Arabia – up from US$6 billion in 1H18, which makes for interesting reading to potential investors as Aramco makes a second push for an IPO. With Saudi Aramco CFO Khalid al-Dabbagh announcing that the company was ‘ready for the IPO’ during its first ever earnings call, this reporting paves the way to the behemoth opening up its shares to the public. But all the deep reservoirs in the world did not shield Aramco from market forces. As it led the way in adhering to the OPEC+ club’s current supply restrictions, weaker crude prices saw net profit fall by 11.5% from US$53 billion a year earlier.
So, it’s been a mixed bunch of results this quarter – which perhaps showcases the differences in operational strategies of the world’s oil and gas companies. There is no danger of financials heading into the red any time soon, but without a rising tide of crude prices, Q219 simply shows that though the challenges facing the industry are the same, their approaches to the solutions still differ.
Supermajor Financials: Q2 2019
Source: U.S. Energy Information Administration, CEDIGAZ, Global Trade Tracker
Australia is on track to surpass Qatar as the world’s largest liquefied natural gas (LNG) exporter, according to Australia’s Department of Industry, Innovation, and Science (DIIS). Australia already surpasses Qatar in LNG export capacity and exported more LNG than Qatar in November 2018 and April 2019. Within the next year, as Australia’s newly commissioned projects ramp up and operate at full capacity, EIA expects Australia to consistently export more LNG than Qatar.
Australia’s LNG export capacity increased from 2.6 billion cubic feet per day (Bcf/d) in 2011 to more than 11.4 Bcf/d in 2019. Australia’s DIIS forecasts that Australian LNG exports will grow to 10.8 Bcf/d by 2020–21 once the recently commissioned Wheatstone, Ichthys, and Prelude floating LNG (FLNG) projects ramp up to full production. Prelude FLNG, a barge located offshore in northwestern Australia, was the last of the eight new LNG export projects that came online in Australia in 2012 through 2018 as part of a major LNG capacity buildout.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL), trade press
Note: Project’s online date reflects shipment of the first LNG cargo. North West Shelf Trains 1–2 have been in operation since 1989, Train 3 since 1992, Train 4 since 2004, and Train 5 since 2008.
Starting in 2012, five LNG export projects were developed in northwestern Australia: onshore projects Pluto, Gorgon, Wheatstone, and Ichthys, and the offshore Prelude FLNG. The total LNG export capacity in northwestern Australia is now 8.1 Bcf/d. In eastern Australia, three LNG export projects were completed in 2015 and 2016 on Curtis Island in Queensland—Queensland Curtis, Gladstone, and Australia Pacific—with a combined nameplate capacity of 3.4 Bcf/d. All three projects in eastern Australia use natural gas from coalbed methane as a feedstock to produce LNG.
Source: U.S. Energy Information Administration
Most of Australia’s LNG is exported under long-term contracts to three countries: Japan, China, and South Korea. An increasing share of Australia’s LNG exports in recent years has been sent to China to serve its growing natural gas demand. The remaining volumes were almost entirely exported to other countries in Asia, with occasional small volumes exported to destinations outside of Asia.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL)
For several years, Australia’s natural gas markets in eastern states have been experiencing natural gas shortages and increasing prices because coal-bed methane production at some LNG export facilities in Queensland has not been meeting LNG export commitments. During these shortfalls, project developers have been supplementing their own production with natural gas purchased from the domestic market. The Australian government implemented several initiatives to address domestic natural gas production shortages in eastern states.
Several private companies proposed to develop LNG import terminals in southeastern Australia. Of the five proposed LNG import projects, Port Kembla LNG (proposed import capacity of 0.3 Bcf/d) is in the most advanced stage, having secured the necessary siting permits and an offtake contract with Australian customers. If built, the Port Kembla project will use the floating storage and regasification unit (FSRU) Höegh Galleon starting in January 2021.