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So President Trump has pulled America out of the shackles of the Paris Agreement. Back in December 2015, 196 countries of the United Nations adopted the agreement, requiring them to tackle climate change through emissions cuts. Under the previous administration, the US was an enthusiastic proponent of the measure, aiming to reduce its emissions by 23-25% through 2025. This week, President Trump, joins Syria and Nicaragua as the three lone holdouts. Syria is in the middle of a civil war. Nicaragua didn’t think the agreement went far enough. Russia supports the agreement. Even North Korea has adopted it!
The logic behind Trump’s decision can be debated ad infinium. In the dramatic ebb and flow of his administration, it now appears that the right-wing led faction has asserted itself over the argument for what is best for America. There have been observations that Trump’s decision was a petulant one in the wake of what he perceived as disrespect as he met the leaders of the European Union and the G7 last week. But whatever the actual reasons, the reality is that the US no longer wants to be bound to the (voluntary) targets.
President Trump wants to free the US to drill for oil anywhere and burn coal as much as it wants, to grow its economy and create jobs. Good news for medium and small-sized drillers, who may now face fewer costly environmental regulations. It is also nectar to the ears of American mining towns, hoping for a return for coal, his strong voter base. The mining towns of the Appalachia were instrumental in handing Trump the Presidency.
“I was elected to represent the citizens of Pittsburgh, not Paris,” Mr. Trump said, on Thursday, calling the decision a “reassertion of our sovereignty.” Mr. Trump cited disadvantages to US workers and the blocking of the development of “clean coal” technologies as reasons for pulling the out of the agreement, which is aimed at curbing greenhouse-gas emissions, believed to be a key driver of climate change, the Wall Street Journal reports.
But there are some risks associated with this new freedom. What Trump has done will unleash market forces that may minimise any clear economic advantage in the long term. Amongst other things, further increased oil and gas supply in the US, will push crude prices down. OPEC may just decide that it is futile to continue their supply cuts, and revert to a war for market share, driving prices further down again. And there will be so much gas sloshing around America that coal will continue to decline; not because it is a dirty fuel, but because burning it is too expensive.
Ironically, the heads of America’s largest energy firms (including ExxonMobil and ConocoPhillips) are all committed to it – recognising that energy now needs to include clean energy. American states are in rebellion. California, New York and Washington states – collectively the fourth largest economy in the world – have formed a pact to adhere to the Paris targets within their states. Some 11 American state governors and 71 city mayors - including Republicans – are defying their President to stick to the Paris climate accord emission standards. Across the pond, the EU has agreed closer cooperation with China to ensure the Paris Agreement does not collapse. However it is worth noting that it will take the US four years to pull out from the already implemented framework, so any effect will be in the long term.
Will the US be no longer a partner in global climate initiatives? It is worth noting that the US is not totally against any future climate accords but just a better deal (for itself). “President Trump said he would begin negotiations to either re-enter the Paris agreement under new terms or craft a new deal that he judges fair to the U.S. and its workers,” the Wall Street Journal reports. In response to the announcement from the White House, recently elected President Emmanuel Macron of France issued a joint statement with the leaders of Germany and Italy saying the accord “cannot be renegotiated, and there is no plan B, as there is no planet B”. This will be a mistake. The US is currently the world’s second largest greenhouse gas emitter, and to exclude it from any future climate discussion would be like ignoring the elephant in room. The world needs real leadership on how it can save itself.
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In times of crisis, oil and gas company default to two things: staff layoffs and asset sales. The idea is to preserve cash and to focus on core operations, forgoing ambitious potential built up during the good times. It happened in 2002/2003, after 9/11 and the invasion of Iraq, and it happened again in 2015, as crude prices more than halved from over US$100/b. And it will happen once more in 2020-2021, as the industry reacts to what is being called the greatest challenge to the global economy since the Great Depression.
Which, itself, makes the notion of buying and selling oil and gas assets considerably difficult. The Covid-19 crisis has thrown up too many uncertainties in too short a time, and there are some in the industry that are openly wondering whether global oil demand will ever return to its pre-crisis level. Factor in the strengthening climate change argument that is changing the core strategies of energy supermajors, the idea of buying a (potentially distressed) oil or gas asset is now quite unappealing, not matter how strategic that asset could be. Consultant Rystad Energy recently reported that the global industry as a whole was planning to divest over 12 million barrels of oil equivalent in assets. That’s great and all, but is anyone going to buy?
The crisis has already affected deals struck pre-Covid. BP recently slashed the value of its North Sea assets set to be sold to Premier Oil by half to US$210 million (including some oil-price linked payments) and also revised the terms of its Alaska asset sale to Hilcorp Energy. The announcement came with the reason that it was ‘being adjusted to reflect developments in global commodity markets’ – which is a broad understatement indeed. Elsewhere, Total walked out of two deals to acquire the African assets of Occidental Petroleum, forgoing the deals in Ghana and Algeria that were originally done as part of Oxy’s debt-laden acquisition of Anadarko last year – a deal that at the time was considered controversial, but it now looks foolhardy. Total was to use the deal, valued at US$8 billion for Anadarko’s African assets, to deepen its footprint in Africa. It was considerably more candid, citing ‘extraordinary market environment and the lack of visibility the group faces’ and a need to be ‘financially flexible’. In Australia, Eni is going ahead with its planned sale of natural gas assets, effectively exiting the market and disposing of high-quality assets that are a critical part of Australian domestic gas network. Why sell then? The answer is to raise cash.
Asset sales are a normal part of life in the industry. But any sale requires a seller and a buyer. In these cash-strapped, challenging times, are there even any buyers in the market? In the case of BP, Total and Eni, the sales were already planned and buyers already courted. What about now? Reports suggest that finding buyers is going to challenging. In 2015, the last time the industry went on a major selling spree, private equity-backed companies started taking over assets, buying into acreage in the North Sea and other mature basins as the supermajors evolved to be leaner and meaner. This could happen again. But what won’t happen is the trend of majors and supermajors acquiring from each other. Not because they can’t afford to, but because they don’t want to. The conversation around climate change has pushed almost all supermajors and global majors to work towards being carbon neutral by 2050 with net-zero emissions. That means moving away from conventional assets towards renewables; and the reason why although Total walked away from the Occidental Petroleum deals, it is still snapping up solar and wind assets.
If private equity doesn’t deploy its capital this time round, then there will be other interests. Either from local players, British independents in the case of the North Sea, tempted by opportunities deemed non-core by the majors, or by Asian energy players. The latter trend has already been apparent for a while.
Malaysia’s Petronas had a decades-long head-start in this area, recently expanding into Latin America for the first time through Mexico and Suriname. China’s CNOOC has also been on a decade-long spending spree, while Thailand’s PTTEP was one of the very few energy companies not to slash its upstream capex budget for 2020-2021. These players, with captive domestic markets from their roles as (de facto) state oil firms, have a stronger base to work on than supermajors, while shareholder pressure (especially on issues such as climate change) lesser. In March, South Korea’s SK E&S bought a 25% stake in the Darwin LNG and the Bayu-Udan gas condensate field. In May, ExxonMobil put up its 6.8% stake in the Azeri-Chirag-Guneshli field in Azerbaijan for sale again, citing renewed interest from Asian companies.
More high-quality assets will be coming on the market at bargain prices, and there should be plenty of interest to sustain sales from established behemoths like CNOOC to less-expected players like Pertamina or ONGC. Asia has been the driving force behind oil demand growth over the past two decades. And now, it could be the driving force behind upstream growth for the next decade.
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The latest issue of one of the industry's best read and most enjoyed geoscience magazines is now available for download. If you are signed up to the print subscription, a copy should be on its way to you right now!
This issue of GEO ExPro Magazine focuses on Europe and South East Asia; Unconventional Exploration; Visualisation and Imaging; and Alternative Energy.
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Bounce back in China’s manufacturing sector points the way; other countries expected to follow as lockdown is lifted
Latest in series of on-line ADIPEC Energy Dialogues hears it could be late 2021 before oil and gas markets recover to 2019 volumes
OPEC+ supply constraints coming under pressure from US shale and indebted oil producers as prices strengthen; production cuts likely to be rolled over and extended
Abu Dhabi, UAE – XX June, 2020 – A revival in manufacturing across the world holds the key to the mid-term recovery of oil and gas markets, with consumer demand likely to lag as the energy industry begins to recover from the twin shock of the COVID-19 crisis and the resulting demand crash.
Participating in the latest online ADIPEC Energy Dialogue, Rachel Ziemba, an economic and political risk expert and Founder of Ziemba Insights, said the early signs from China, the first major economy to exit from the COVID-19 induced lockdown, are that manufacturing has bounced back more than consumption and that trend could be repeated in other countries.
“It is notable that the COVID crisis and the associated economic and energy crisis has really been the first to blow out the global consumer,” Ziemba said. “2008 was much more of a hit to the financial sector and manufacturing. This time it is the reverse. The big question is how quickly consumer demand will come back.”
Ziemba added it could be well into 2021 before oil and gas markets get to volumes approaching where the industry was at the end of 2019.
Looking at the trends likely to impact the recovery of oil markets in the mid-term, Ziemba said the OPEC Plus group of producers has had some success in tightening the market. But a question mark hangs over how long supply can be constrained.
“The challenge is that a few countries, those that are most economically strapped and not eligible for debt relief, are not complying in full and some have barely reduced production,” Ziemba said. “Despite pressure from the likes of Saudi Arabia and Russia, it is going to be very difficult for them to comply because these are countries that had big fiscal deficits when oil was $70 a barrel.
“The other challenge is that we are starting to see parts of the US shale industry starting to reverse shut ins. We are also seeing more rig activity after many weeks of decline. In a price range of mid-30s into a 40 range, there will be more entities that can make some money and the risk is that it puts even more pressure on OPEC Plus. So, I do think the most likely scenario is a rolling over and extension of the supply cuts.”
Access to credit, to support economic recovery, is an additional challenge for indebted oil producing countries, which are having to deal with multiple shocks at the same time, including sizable outbreaks of the COVID-19 coronavirus that may or may not be under control. Many of the oil producers that are in a tougher financial position than their rich peers are too wealthy to qualify for debt relief, Ziemba said, heightening social, political and economic risks which could further impact the oil and gas industry.
Elsewhere, as oil and gas companies seek for ways to recover, Ziemba said she expects to see some industry consolidation, particularly in the United States with more cash rich entities looking to go into smaller, more speculative areas that are lower cost. She also highlighted the possibility of further job cuts as companies become leaner and decide between boosting commercial reserves, or partnering with governments. Meanwhile, she added she expects to see more National Oil Company enter into partnerships, for example Middle East producers and Asian buyers, which enable greater creativity in payment terms and contracts.
The ADIPEC Energy Dialogue is a series of weekly online thought leadership events created by dmg events, organisers of the annual Abu Dhabi International Exhibition and Conference. Featuring key stakeholders and decision-makers in the oil and gas industry, the dialogues focus on how the industry is evolving and transforming in response to the rapidly changing energy market.
ADIPEC 2020 is projected to attract more than 155,000 energy professionals from 67 countries; including senior decision-makers and energy industry thought leaders, over 2,200 exhibiting companies and 23 national exhibiting pavilions as oil and gas companies convene to share views and best practices to address the long-term impact of the triple challenge of lower oil prices, weaker demand and over supply.
Held under the patronage of His Highness Sheikh Khalifa Bin Zayed Al Nahyan, President of the UAE; hosted by the Abu Dhabi National Oil Company (ADNOC); and supported by the UAE Ministry of Energy & Industry, the Abu Dhabi Chamber, and the Abu Dhabi Tourism and Culture Authority, ADIPEC is scheduled to take place from November 9 to 11, at the Abu Dhabi National Exhibition Centre (ADNEC).
To watch the Energy Dialogue series go to: https://www.youtube.com/channel/UCnFtPtFwMrRkuGUTk4Rh4tA