This week, with a single stroke of a pen, President Trump rolled back eight years of Obama-era rules and directives designed to combat climate change. While Mr. Trump has yet to nix American participation in the 2015 Paris agreement, his administration’s reversal of Obama-era climate rules will make it difficult for the U.S. to meet its emission-reduction targets. The recent move will promote aggressive exploitation of America’s vast energy resources, bolstered by the shale revolution, without having to consider climate change and environmental impact. Flanked by coal miners, he promises that the rolling back of restrictions will ‘end the theft of American prosperity’ and bring back all the coal and energy jobs lost over the past four decades.
Except it won’t. American coal production has actually increased since the 1970s, and even though it has dipped recently since the promotion of clean energy, it remains above a billion tons a year, up from 600 million tons in 1970. All of this has come from the benefits of automation and a change in mining techniques, shedding labour intensive jobs in favour of tireless machines. The jobs Trump touts will come back to coal country don’t exist anymore, says Caterpillar, a heavy machinery producer developing fully automated coal mining trucks. Coal country voted heavily for Trump, swayed by snake oil sales techniques, and they will be disappointed. The good old days are never coming back, but Trump is coasting on the pretence that they will. Ironically, Trump seems to be ignoring the real job growth story that is happening in the renewables sector. Interestingly in the state of Texas, ground zero of the Oil industry in the US, jobs in renewables grew by 34 percent last year, giving the state the third largest number of solar jobs in the nation. California is the top solar employer, with more than 100,000 jobs, followed by Massachusetts, which has more than 14,500, according to data from the Solar Foundation. These numbers are hard to ignore, if Trump is actually looking for votes again in the next 4 years.
Trump knows this. He must. But though his overtures are publicly to blue collar, working class Americans, the measures are actually designed to benefit corporate players, millionaires and billionaires that Trump identifies with like Carl Icahn. Gutting the EPA’s power – in the first two weeks of Trump moving into the White House, the section on climate change on the EPA’s website disappeared – and now removing the regulations designed to minimise climate change impact frees what much of the energy industry sees as burdens. Essentially, it is to regress the energy industry back to the rapacious, free wheeling days of the Wild West, an unregulated era that helped create dynasties such as the Rockefellers and Vanderbilts.
Throughout a recent important industry conference known as CERAWeek by IHS Markit, energy ministers, CEOs and other top executives showed that the industry is running ahead of policymakers on climate change, no longer treating it as an inconvenient theory, but rather as a hard reality to which it must adapt and change. Khalid al-Falih, the Saudi Arabian energy minister, called on his colleagues to find ways to “minimize the carbon footprint of fossil fuels.” Exxon Mobil chief executive Darren Woods said energy development can only move forward by protecting the environment and climate. Ben van Beurden, CEO of Royal Dutch Shell, said the industry needed to produce more energy with fewer carbon emissions. Supermajors have begun to strategically invest in the direction of cleaner fuels such as natural gas and renewables, and even if Trump’s machete to climate change benefits them in the short term – opening up drilling in the Arctic, for example – they know this is a momentary dip. Even Trump’s Secretary of State, Rex Tillerson, knows that renewables are the future. While the US regresses, China and Russia are moving ahead, plotting to assume leadership of the clean energy movement.
General Electric Co. CEO Jeffrey Immelt recently defended efforts to reduce emissions and fight climate change, after President Donald Trump reversed rules that pushed U.S. utilities to use cleaner-burning fuels. Mr. Immelt said in a blog post that ‘climate change is real and the science is well accepted.’ Mr. Immelt mentioned the administration’s move and said climate change “should be addressed on a global basis through multinational agreements,” such as the 2015 Paris Agreement.
Rather oddly and in direct contradiction to the Trump administration, the Chinese government has come under a lot of pressure from its own population after years of ignoring climate protection. The government there is now actually supportive of the scientific consensus about climate change. Chinese state media has called President Trump "selfish" over his plan to abolish environmental regulations enacted by the Obama administration. The Global Times, a state-run tabloid argues that China is the largest emitter of greenhouse gasses in the world with the US in second but “China will remain the world’s biggest developing country for a long time. How can it be expected to sacrifice its own development space for those developed western powerhouses?” Interesting.
Trump’s myopia isn’t accidental or obtuse; his ability to cause regression is limited by his tenure, and meant to benefit and profit those closest to him during his short time in the White House. With scientists recently declaring the CO2 levels have reached the ‘point of no return’ globally, the world is at crossroads to deal with the looming climate crisis. From being a leader in climate protection, the US is now an administration of climate change deniers. And so it is now up to conscience of the American private sector to mitigate the worse excesses that Trump’s new policies will unleash or wait for another 4 years.
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Headline crude prices for the week beginning 18 March 2019 – Brent: US$67/b; WTI: US$58/b
Headlines of the week
Midstream & Downstream
Risk and reward – improving recovery rates versus exploration
A giant oil supply gap looms. If, as we expect, oil demand peaks at 110 million b/d in 2036, the inexorable decline of fields in production or under development today creates a yawning gap of 50 million b/d by the end of that decade.
How to fill it? It’s the preoccupation of the E&P sector. Harry Paton, Senior Analyst, Global Oil Supply, identifies the contribution from each of the traditional four sources.
1. Reserve growth
An additional 12 million b/d, or 24%, will come from fields already in production or under development. These additional reserves are typically the lowest risk and among the lowest cost, readily tied-in to export infrastructure already in place. Around 90% of these future volumes break even below US$60 per barrel.
2. pre-drill tight oil inventory and conventional pre-FID projects
They will bring another 12 million b/d to the party. That’s up on last year by 1.5 million b/d, reflecting the industry’s success in beefing up the hopper. Nearly all the increase is from the Permian Basin. Tight oil plays in North America now account for over two-thirds of the pre-FID cost curve, though extraction costs increase over time. Conventional oil plays are a smaller part of the pre-FID wedge at 4 million b/d. Brazil deep water is amongst the lowest cost resource anywhere, with breakevens eclipsing the best tight oil plays. Certain mature areas like the North Sea have succeeded in getting lower down the cost curve although volumes are small. Guyana, an emerging low-cost producer, shows how new conventional basins can change the curve.
3. Contingent resource
These existing discoveries could deliver 11 million b/d, or 22%, of future supply. This cohort forms the next generation of pre-FID developments, but each must overcome challenges to achieve commerciality.
Last, but not least, yet-to-find. We calculate new discoveries bring in 16 million b/d, the biggest share and almost one-third of future supply. The number is based on empirical analysis of past discovery rates, future assumptions for exploration spend and prospectivity.
Can yet-to-find deliver this much oil at reasonable cost? It looks more realistic today than in the recent past. Liquids reserves discovered that are potentially commercial was around 5 billion barrels in 2017 and again in 2018, close to the late 2030s ‘ask’. Moreover, exploration is creating value again, and we have argued consistently that more companies should be doing it.
But at the same time, it’s the high-risk option, and usually last in the merit order – exploration is the final top-up to meet demand. There’s a danger that new discoveries – higher cost ones at least – are squeezed out if demand’s not there or new, lower-cost supplies emerge. Tight oil’s rapid growth has disrupted the commercialisation of conventional discoveries this decade and is re-shaping future resource capture strategies.
To sustain portfolios, many companies have shifted away from exclusively relying on exploration to emphasising lower risk opportunities. These mostly revolve around commercialising existing reserves on the books, whether improving recovery rates from fields currently in production (reserves growth) or undeveloped discoveries (contingent resource).
Emerging technology may pose a greater threat to exploration in the future. Evolving technology has always played a central role in boosting expected reserves from known fields. What’s different in 2019 is that the industry is on the cusp of what might be a technological revolution. Advanced seismic imaging, data analytics, machine learning and artificial intelligence, the cloud and supercomputing will shine a light into sub-surface’s dark corners.
Combining these and other new applications to enhance recovery beyond tried-and-tested means could unlock more reserves from existing discoveries – and more quickly than we assume. Equinor is now aspiring to 60% from its operated fields in Norway. Volume-wise, most upside may be in the giant, older, onshore accumulations with low recovery factors (think ExxonMobil and Chevron’s latest Permian upgrades). In contrast, 21st century deepwater projects tend to start with high recovery factors.
If global recovery rates could be increased by a percentage or two from the average of around 30%, reserves growth might contribute another 5 to 6 million b/d in the 2030s. It’s just a scenario, and perhaps makes sweeping assumptions. But it’s one that should keep conventional explorers disciplined and focused only on the best new prospects.
Global oil supply through 2040
Things just keep getting more dire for Venezuela’s PDVSA – once a crown jewel among state energy firms, and now buried under debt and a government in crisis. With new American sanctions weighing down on its operations, PDVSA is buckling. For now, with the support of Russia, China and India, Venezuelan crude keeps flowing. But a ghost from the past has now come back to haunt it.
In 2007, Venezuela embarked on a resource nationalisation programme under then-President Hugo Chavez. It was the largest example of an oil nationalisation drive since Iraq in 1972 or when the government of Saudi Arabia bought out its American partners in ARAMCO back in 1980. The edict then was to have all foreign firms restructure their holdings in Venezuela to favour PDVSA with a majority. Total, Chevron, Statoil (now Equinor) and BP agreed; ExxonMobil and ConocoPhillips refused. Compensation was paid to ExxonMobil and ConocoPhillips, which was considered paltry. So the two American firms took PDVSA to international arbitration, seeking what they considered ‘just value’ for their erstwhile assets. In 2012, ExxonMobil was awarded some US$260 million in two arbitration awards. The dispute with ConocoPhillips took far longer.
In April 2018, the International Chamber of Commerce ruled in favour of ConocoPhillips, granting US$2.1 billion in recovery payments. Hemming and hawing on PDVSA’s part forced ConocoPhillips’ hand, and it began to seize control of terminals and cargo ships in the Caribbean operated by PDVSA or its American subsidiary Citgo. A tense standoff – where PDVSA’s carriers were ordered to return to national waters immediately – was resolved when PDVSA reached a payment agreement in August. As part of the deal, ConocoPhillips agreed to suspend any future disputes over the matter with PDVSA.
The key word being ‘future’. ConocoPhillips has an existing contractual arbitration – also at the ICC – relating to the separate Corocoro project. That decision is also expected to go towards the American firm. But more troubling is that a third dispute has just been settled by the International Centre for Settlement of Investment Disputes tribunal in favour of ConocoPhillips. This action was brought against the government of Venezuela for initiating the nationalisation process, and the ‘unlawful expropriation’ would require a US$8.7 billion payment. Though the action was brought against the government, its coffers are almost entirely stocked by sales of PDVSA crude, essentially placing further burden on an already beleaguered company. A similar action brought about by ExxonMobil resulted in a US$1.4 billion payout; however, that was overturned at the World Bank in 2017.
But it might not end there. The danger (at least on PDVSA’s part) is that these decisions will open up floodgates for any creditors seeking damages against Venezuela. And there are quite a few, including several smaller oil firms and players such as gold miner Crystallex, who is owed US$1.2 billion after the gold industry was nationalised in 2011. If the situation snowballs, there is a very tempting target for creditors to seize – Citgo, PDVSA’s crown jewel that operates downstream in the USA, which remains profitable. And that would be an even bigger disaster for PDVSA, even by current standards.
Infographic: Venezuela oil nationalisation dispute timeline