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Last Updated: March 21, 2016
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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:

  • Exxon Mobil estimates the electric vehicle adoption rate at no more than 1% of total market until 2050.
  • Ryan Lance, CEO of ConocoPhillips says electric vehicle adoption will not happen in a significant manner during his lifetime and it will take another 50 years.
  • OPEC estimates electric vehicles to be about 1% of total vehicles on the road by 2040.

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:

  1. The advent of the current oil glut.
  2. The demise of deep water.

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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The Impact of COVID 19 In The Downstream Oil & Gas Sector

Recent headlines on the oil industry have focused squarely on the upstream side: the amount of crude oil that is being produced and the resulting effect on oil prices, against a backdrop of the Covid-19 pandemic. But that is just one part of the supply chain. To be sold as final products, crude oil needs to be refined into its constituent fuels, each of which is facing its own crisis because of the overall demand destruction caused by the virus. And once the dust settles, the global refining industry will look very different.

Because even before the pandemic broke out, there was a surplus of refining capacity worldwide. According to the BP Statistical Review of World Energy 2019, global oil demand was some 99.85 mmb/d. However, this consumption figure includes substitute fuels – ethanol blended into US gasoline and biodiesel in Europe and parts of Asia – as well as chemical additives added on to fuels. While by no means an exact science, extrapolating oil demand to exclude this results in a global oil demand figure of some 95.44 mmb/d. In comparison, global refining capacity was just over 100 mmb/d. This overcapacity is intentional; since most refineries do not run at 100% utilisation all the time and many will shut down for scheduled maintenance periodically, global refining utilisation rates stand at about 85%.

Based on this, even accounting for differences in definitions and calculations, global oil demand and global oil refining supply is relatively evenly matched. However, demand is a fluid beast, while refineries are static. With the Covid-19 pandemic entering into its sixth month, the impact on fuels demand has been dramatic. Estimates suggest that global oil demand fell by as much as 20 mmb/d at its peak. In the early days of the crisis, refiners responded by slashing the production of jet fuel towards gasoline and diesel, as international air travel was one of the first victims of the virus. As national and sub-national lockdowns were introduced, demand destruction extended to transport fuels (gasoline, diesel, fuel oil), petrochemicals (naphtha, LPG) and  power generation (gasoil, fuel oil). Just as shutting down an oil rig can take weeks to complete, shutting down an entire oil refinery can take a similar timeframe – while still producing fuels that there is no demand for.

Refineries responded by slashing utilisation rates, and prioritising certain fuel types. In China, state oil refiners moved from running their sites at 90% to 40-50% at the peak of the Chinese outbreak; similar moves were made by key refiners in South Korea and Japan. With the lockdowns easing across most of Asia, refining runs have now increased, stimulating demand for crude oil. In Europe, where the virus hit hard and fast, refinery utilisation rates dropped as low as 10% in some cases, with some countries (Portugal, Italy) halting refining activities altogether. In the USA, now the hardest-hit country in the world, several refineries have been shuttered, with no timeline on if and when production will resume. But with lockdowns easing, and the summer driving season up ahead, refinery production is gradually increasing.

But even if the end of the Covid-19 crisis is near, it still doesn’t change the fundamental issue facing the refining industry – there is still too much capacity. The supply/demand balance shows that most regions are quite even in terms of consumption and refining capacity, with the exception of overcapacity in Europe and the former Soviet Union bloc. The regional balances do hide some interesting stories; Chinese refining capacity exceeds its consumption by over 2 mmb/d, and with the addition of 3 new mega-refineries in 2019, that gap increases even further. The only reason why the balance in Asia looks relatively even is because of oil demand ‘sinks’ such as Indonesia, Vietnam and Pakistan. Even in the US, the wealth of refining capacity on the Gulf Coast makes smaller refineries on the East and West coasts increasingly redundant.

Given this, the aftermath of the Covid-19 crisis will be the inevitable hastening of the current trend in the refining industry, the closure of small, simpler refineries in favour of large, complex and more modern refineries. On the chopping block will be many of the sub-50 kb/d refineries in Europe; because why run a loss-making refinery when the product can be imported for cheaper, even accounting for shipping costs from the Middle East or Asia? Smaller US refineries are at risk as well, along with legacy sites in the Middle East and Russia. Based on current trends, Europe alone could lose some 2 mmb/d of refining capacity by 2025. Rising oil prices and improvements in refining margins could ensure the continued survival of some vulnerable refineries, but that will only be a temporary measure. The trend is clear; out with the small, in with the big. Covid-19 will only amplify that. It may be a painful process, but in the grand scheme of things, it is also a necessary one.

Infographic: Global oil consumption and refining capacity (BP Statistical Review of World Energy 2019)

Region
Consumption (mmb/d)*
Refining Capacity (mmb/d)
North America

22.71

22.33

Latin America

6.5

5.98

Europe

14.27

15.68

CIS

4.0

8.16

Middle East

9.0

9.7

Africa

3.96

3.4

Asia-Pacific

35

34.75

Total

95.44

100.05

*Extrapolated to exclude additives and substitute fuels (ethanol, biodiesel)

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Crude oil prices hold their recent gains, staying rangebound with demand gradually improving as lockdown slowly ease
  • Worries that global oil supply would increase after June - when the OPEC+ supply deal eases and higher prices bring back some free-market production - kept prices in check
  • Russia has signalled that it intends to ease back immediately in line with the supply deal, but Saudi Arabia and its allies are pushing for the 9.7 mmb/d cut to be extended to end-2020, putting the two oil producers on another collision course that previously resulted in a price war
  • Morgan Stanley expects Brent prices to rise to US$40/b by 4Q 2020, but cautioned that a full recovery was only likely to materialise in 2021

End of Article

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May, 31 2020
North American crude oil prices are closely, but not perfectly, connected

selected North American crude oil prices

Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.

The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.

Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.

pricing locations of selected North American crudes

Source: U.S. Energy Information Administration

First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.

Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.

Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.

Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.

Principal contributor: Jesse Barnett

May, 28 2020
Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020