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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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Venezuelan crude oil production falls to lowest level since January 2003

monthly venezueal crude oil production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.

monthly venezuela crude oil rig count

Source: U.S. Energy Information Administration, based on Baker Hughes

Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.

EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.

Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.

India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.

monthly venezuela crude oil exports by destinatoin

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.

A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.

If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.

EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.

May, 21 2019
Your Weekly Update: 13 - 17 May 2019

Market Watch

Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b

  • Crude oil prices are holding their ground, despite the markets showing nervousness over the escalating trade dispute between the USA and China, as well as brewing tensions in the Middle East over the Iranian situation
  • China retaliated against President Trump’s decision to raise tariffs from 10% to 25% on US$200 billion worth of Chinese imports by raising its own tariffs; crucially, China has also slapped taxes on US LNG imports at a time when American export LNG projects banking on Chinese demand are coming online
  • In the Middle East, Saudi Arabia reported that two of its oil tankers were attacked in the Persian Gulf, with the ‘sabotage attack’ near the UAE speculated to be related to Iran; with the US increasing its military presence in the area, the risk of military action has escalated
  • The non-extension of US waiver on Iranian crude is biting hard on Iran, with its leaders calling it ‘unprecedented pressure’, setting the stage for a contentious OPEC meeting in Vienna
  • In a move that is sure to be opposed by Iran, Saudi Arabia has said it is willing to meet ‘all orders’ from former Iranian buyers through June at least; Saudi Aramco is also responding to requests by Asian buyers to provide extra oil
  • The see-saw trend in US drilling activity continues; after a huge gain two weeks ago, the active US rig count declined for a second consecutive rig, with the loss of two oil rigs bringing the total site count to 988, below the equivalent number of 1,045 last year
  • There is considerably more upside to crude prices at the moment, with jitters over the health of the global economy and a delicate situation in the Middle East likely to keep Brent higher at US$71-73/b and WTI at US$62-64/b


Headlines of the week

Upstream

  • Occidental Petroleum and Warren Buffet have triumphed, as Chevron bowed out of a bidding war for Anadarko Petroleum; Occidental will now acquire Anadarko for US$57 billion, up significantly from Chevron’s US$33 billion bid
  • The deal means that Occidental’s agreement to sell Anadarko’s African assets to Total for US$8.8 billion will also go through, covering the Hassi Berkine, Ourhoud and El Merk fields in Algeria, the Jubilee and TEN fields in Ghana, the Area 1 LNG project in Mozambiuqe and E&P licences in South Africa
  • BP has sanctioned the Thunder Horse South Expansion Phase 2 deepwater project in the US Gulf of Mexico, which is expected to add 50,000 boe/d of production at the Thunder Horse platform beginning 2021
  • Africa is proving to be very fruitful for Eni, as it announced a new gas and condensate discovery offshore Ghana; the CTP-Block 4 in the Akoma prospect is estimated to hold some 550-650 bcf of gas and 18-20 mmbl of condensate
  • In an atypical development, South Africa has signed a deal for the B2 oil block in South Sudan, as part of efforts to boost output there to 350,000 b/d
  • Shell expects to drill its first deepwater well in Mexico by December 2019 after walking away with nine Mexican deepwater blocks last year

Midstream & Downstream

  • China’s domestic crude imports surged to a record 10.64 mmb/d in April, as refiners stocked up on an Iranian crude bonanza due to uncertainty over US policy, which has been confirmed as crude waivers were not renewed
  • Having had to close the Druzhba pipeline and Ust-Luga port for contaminated crude, Russia says it will fully restore compliant crude by end May shipments, including cargoes to Poland and the Czech Republic
  • Mexico’s attempt to open up its refining sector has seemingly failed, with Pemex taking over the new 340 kb/d refinery as private players balked at the US$8 billion price tag and 3-year construction deadline
  • Ahead of India’s move to Euro VI fuels in April 2020, CPCL is partially shutting down its 210 kb/d Manali refinery for a desulfurisation revamp
  • China’s Hengli Petrochemical is reportedly now stocking up on Saudi Arabian crude imports as it prepares to ramp up production at its new 400 kb/d Dalian refinery alongside its 175 kb/d site in Brunei
  • South Korea’s Lotte Chemical Corp expects its ethane cracker in Louisiana to start up by end May, adding 1 mtpa of ethylene capacity to its portfolio
  • Due to water shortage, India’s MRPL will be operating its 300 kb/d refinery in Katipalla at 50% as drought causes a severe water shortage in the area

Natural Gas/LNG

  • Partners in the US$30 billion Rovuma LNG project in Mozambique now expect to sanction FID by July, even after a recent devastating cyclone
  • Also in Mozambioque, Anadarko is set to announce FID on its Mozambique LNG project on June 18, calling it a ‘historic day’
  • After talks of a joint LNG export complex to develop gas resources in Tanzania, Shell and Equinor now appear to be planning separate projects
  • Gazprom has abandoned plans to build an LNG plant in West Siberia to compete with Novatek, focusing instead on an LNG complex is Ust-Luga
  • First LNG has begun to flow at Sempra Energy’s 13.5 mtpa Cameron LNG project in Louisiana, with exports expected to begin by Q319
May, 17 2019
Shell Eclipses ExxonMobil Once Again

The world’s largest oil & gas companies have generally reported a mixed set of results in Q1 2019. Industry turmoil over new US sanctions on Venezuela, production woes in Canada and the ebb-and-flow between OPEC+’s supply deal and rising American production have created a shaky environment at the start of the year, with more ongoing as the oil world grapples with the removal of waivers on Iranian crude and Iran’s retaliation.

The results were particularly disappointing for ExxonMobil and Chevron, the two US supermajors. Both firms cited weak downstream performance as a drag on their financial performance, with ExxonMobil posting its first loss in its refining business since 2009. Chevron, too, reported a 65% drop in the refining and chemicals profit. Weak refining margins, particularly on gasoline, were blamed for the underperformance, exacerbating a set of weaker upstream numbers impaired by lower crude pricing even though production climbed. ExxonMobil was hit particularly hard, as its net profit fell below Chevron’s for the first time in nine years. Both supermajors did highlight growing output in the American Permian Basin as a future highlight, with ExxonMobil saying it was on track to produce 1 million barrels per day in the Permian by 2024. The Permian is also the focus of Chevron, which agreed to a US$33 billion takeover of Anadarko Petroleum (and its Permian Basin assets), only for the deal to be derailed by a rival bid from Occidental Petroleum with the backing of billionaire investor guru Warren Buffet. Chevron has now decided to opt out of the deal – a development that would put paid to Chevron’s ambitions to match or exceed ExxonMobil in shale.

Performance was better across the pond. Much better, in fact, for Royal Dutch Shell, which provided a positive end to a variable earnings season. Net profit for the Anglo-Dutch firm may have been down 2% y-o-y to US$5.3 billion, but that was still well ahead of even the highest analyst estimates of US$4.52 billion. Weaker refining margins and lower crude prices were cited as a slight drag on performance, but Shell’s acquisition of BG Group is paying dividends as strong natural gas performance contributed to the strong profits. Unlike ExxonMobil and Chevron, Shell has only dipped its toes in the Permian, preferring to maintain a strong global portfolio mixed between oil, gas and shale assets.

For the other European supermajors, BP and Total largely matched earning estimates. BP’s net profits of US$2.36 billion hit the target of analyst estimates. The addition of BHP Group’s US shale oil assets contributed to increased performance, while BP’s downstream performance was surprisingly resilient as its in-house supply and trading arm showed a strong performance – a business division that ExxonMobil lacks. France’s Total also hit the mark of expectations, with US$2.8 billion in net profit as lower crude prices offset the group’s record oil and gas output. Total’s upstream performance has been particularly notable – with start-ups in Angola, Brazil, the UK and Norway – with growth expected at 9% for the year.

All in all, the volatile environment over the first quarter of 2019 has seen some shift among the supermajors. Shell has eclipsed ExxonMobil once again – in both revenue and earnings – while Chevron’s failed bid for Anadarko won’t vault it up the rankings. Almost ten years after the Deepwater Horizon oil spill, BP is now reclaiming its place after being overtaken by Total over the past few years. With Q219 looking to be quite volatile as well, brace yourselves for an interesting earnings season.

Supermajor Financials: Q1 2019

  • ExxonMobil – Revenue (US$63.6 million, down 6.7% y-o-y), Net profit (US$2.35 billion, down 49.5% y-o-y)
  • Shell - Revenue (US$85.66 billion, down 5.9% y-o-y), Net profit (US$5.3 billion, down 2% y-o-y)
  • Chevron – Revenue (US$35.19 billion, down 5% y-o-y), Net profit (US$2.65 billion, down 27.2% y-o-y)
  • BP - Revenue (US$67.4 billion, down 2.51% y-o-y), Net profit (US$2.36 billion, down 9.2% y-o-y)
  • Total - Revenue (US$51.2billion, up 3.2% y-o-y), Net profit (US$2.8 billion, down 4.0% y-o-y)
May, 15 2019