Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 6, 2019
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Business Trends

Lower crude prices across the board across July-August saw financial performance from oil supermajors fall in response. This was despite a temporary spike in prices from an attack on the world’s largest crude processing plant in Saudi Arabia; initially fearing the worst, the recovery in Saudi production capacity was largely re-instated within 2-3 weeks, returning oil prices to a downward trend. Worries about the overall health of the world economy is depressing demand for oil, with particular worrying economic data from India and China.

The decline were across the board, with ExxonMobil taking the biggest hit. Quarterly profits were down by almost 50%. Despite oil and oil-equivalent production rising by 3% (driven by shale liquids production in the Permian), the fall was largely due to lower crude prices. It was actually anticipated, and results actually topped analyst expectations. ExxonMobil has stated that it is making ‘excellent progress’ on its long-term growth strategy, citing potential production coming from its blockbuster discoveries in Guyana. ExxonMobil’s results were also clouded by its current trial in New York, over misleading investors over its financial reporting.

BP and Chevron also reported large drops in their quarterly results. BP’s net profit fell 39.7% - beating expectations on lower upstream earnings and weaker oil prices. BP’s CEO Bob Dudley will be stepping down from his role as CEO, completing a tenure that has seen him rebuild the company in the aftermath of the Deep Horizon disaster back to regular profitability. Chevron mirrored the decline with net profits falling by 36%, again within expectations.

The champion among the supermajors was, once again, Shell. Quarterly profits were down by 15%, with Shell citing prices and lower chemicals margins. Upstream profits were down 51.9% y-o-y, but Shell’s broader focus on downstream and natural gas over the past few years has paid off, with the downstream and integrated gas units reporting adjusted income that were 7.1% and 16.7% higher than Q318. Buoyed by this, Shell announced that it was launching the next tranche of its share buyback programme, repurchasing US$2.75 billion worth of shares up to January 2020 as part of its major, 3-ear US$25 billion buyback programme.

Total also performed relatively well. That doesn’t mean it was immune from the overall market trends, it was shielded by the start-up of the Culzean gas field in the UK North Sea bolstering its bottom line. Output contribution from Culzean, which started up in June, helped overall production rise to 3 mmboe/d. Better performance is expected in Q419, as the startup of Equinor’s massive Johan Sverdrup field, in which Total owns a 8.44% stake which should allow y-o-y production growth to reach 9%, up from the current 8%.

This does reflect the general pull back from offshore among the supermajors, as the focus  has defaulted to onshore opportunities of shale. In that sense, they are a victim of their own success, surging US shale production has blunted the ability of the OPEC+ club to keep prices in the higher US$60-70/b range, burdening their bottom line. The two best performers – Shell and Total – stand out as being the two with the strongest downstream and, in particular, natural gas businesses: a diversification that spreads the risk. And with prices in no position to climb back it, it is this distinction that will continue to colour performance among the world’s largest oil companies.

Supermajor Financials Q3 2019:

  • ExxonMobil – Revenue (US$65 billion, down 15.1% y-o-y), Net profit (US$3.17 billion, down 49.1% y-o-y)
  • Shell - Revenue (US$89.5 billion, down 11.9% y-o-y), Net profit (US$4.7 billion, down 15% y-o-y)
  • Chevron – Revenue (US$36.1 billion, down 17.8% y-o-y), Net profit (US$2.58 billion, down 36% y-o-y)
  • BP - Revenue (US$69.3 billion, down 14.2% y-o-y), Net profit (US$2.3 billion, down 40% y-o-y)
  • Total - Revenue (US$48.5 billion, down 11% y-o-y), Net profit (US$2.8 billion, down 29% y-o-y)

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The Growing Divergence In Energy

Two acquisitions in the energy sector were announced in the last week that illustrate the growing divergence in approaching the future of oil and gas between Europe and the USA. In France, Total announced that it had bought Fonroche Biogaz, the market leader in the production of renewable gas in France. In North America, ConocoPhillips completed its acquisition of Concho Resources, deepening the upstream major’s foothold into the lucrative Permian Basin and its shale riches. One is heading towards renewables, and the other is doubling down on conventional oil and gas.

What does this say about the direction of the energy industry?

Total’s move is unsurprising. Like almost all of its European peers operating in the oil and gas sector, Total has announced ambitious targets to become carbon-neutral by 2050. It is an ambition supported by the European population and pushed for by European governments, so in that sense, Total is following the wishes of its investors and stakeholders – just like BP, Shell, Repsol, Eni and others are doing. Fonroche Biogaz is therefore a canny acquisition. The company designs, builds and operates anaerobic digestion units that convert organic waste such as farming manure into biomethane to serve a gas feedstock for power generation. Fonroche Biogaz already has close to 500 GWh of installed capacity through seven power generation units with four in the pipeline. This feeds into Total’s recent moves to expand its renewable power generation capacity, with the stated intention of increasing the group’s biomethane capacity to 1.5 terawatts per hour (TWh) by 2025. Through this, Total vaults into a leading position within the renewable gas market in Europe, which is already active through affiliates such as Méthanergy, PitPoint and Clean Energy.

In parallel to this move, Total also announced that it has decided not to renew its membership in the American Petroleum Institute for 2021. Citing that it is only ‘partially aligned’ with the API on climate change issues in the past, Total has now decided that those positions have now ‘diverged’ particularly on rolling back methane emission regulations, carbon pricing and decarbonising transport. The French supermajor is not alone in its stance. BP, which has ditched the supermajor moniker in favour of turning itself into a clean energy giant, has also expressed reservations over the API’s stance over climate issues, and may very well choose to resign from the trade group as well. Other European upstream players might follow suit.

However, the core of the API will remain American energy firms. And the stance among these companies remains pro-oil and gas, despite shareholder pressure to bring climate issues and clean energy to the forefront. While the likes of ExxonMobil and Chevron have balanced significant investments into prolific shale patches in North America with public overtures to embrace renewables, no major US firm has made a public commitment to a carbon-neutral future as their European counterparts have. And so ConocoPhillips acquisition of Concho Resources, which boosts its value to some US$60 billion is not an outlier, but a preview of the ongoing consolidation happening in US shale as the free-for-all days give way to big boy acquisitions following the price-upheaval there since 2019.

That could change. In fact, it will change. The incoming Biden administration marks a significant break from the Trump administration’s embrace of oil and gas. Instead of opening of protected federal lands to exploration, especially in Alaska and sensitive coastal areas and loosening environmental regulations, the US will now pivot to putting climate change at the top of the agenda. Although political realities may water it down, the progressive faction of the Democrats are pushing for a Green New Deal embracing sustainability as the future for the US. Biden has already hinted that he may cancel the controversial and long-running Keystone XL pipeline via executive order on his first day in the office. His nominees for key positions including the Department of the Interior, Department of Energy, Environmental Protection Agency and Council on Environmental Quality suggest that there will be a major push on low-carbon and renewable initiatives, at least for the next 4 years. A pledge to reach net zero fossil fuel emissions from the power sector by 2035 has been mooted. More will come.

The landscape is changing. But the two approaches still apply, the aggressive acceleration adopted by European majors, and the slower movement favoured by US firms. Political changes in the USA might hasten the change, but it is unlikely that convergence will happen anytime soon. There is room in the world for both approaches for now, but the future seems inevitable. It just depends on how energy companies want to get there.

Market Outlook:

  • Crude price trading range: Brent – US$54-56/b, WTI – US$51-53/b
  • Global crude oil benchmarks retreated slightly, as concerns of rising supplies and coronavirus spread impact consumption anticipations; in particular, new Covid-19 outbreaks in key countries such as Japan and China are menacing demand
  • Mapped against the new OPEC+ supply quotas, there is a risk that demand will retreat more than anticipated, weakening prices; however, a leaking pipeline in Libya has reduced oil output there by about 200,000 b/d, which could provide some price support
  • However, the longer-term prognosis remains healthier for oil prices factoring out these short-term concerns; the US EIA has raised its predicted average prices for Brent and WTI to US$52.70 and US$49.70 for the whole of 2021

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January, 22 2021
EIA expects crude oil prices to average near $50 per barrel through 2022

In its January Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global demand for petroleum liquids will be greater than global supply in 2021, especially during the first quarter, leading to inventory draws. As a result, EIA expects the price of Brent crude oil to increase from its December 2020 average of $50 per barrel (b) to an average of $56/b in the first quarter of 2021. The Brent price is then expected to average between $51/b and $54/b on a quarterly basis through 2022.

EIA expects that growth in crude oil production from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) will be limited because of a multilateral agreement to limit production. Saudi Arabia announced that it would voluntarily cut production by an additional 1.0 million b/d during February and March. Even with this cut, EIA expects OPEC to produce more oil than it did last year, forecasting that crude oil production from OPEC will average 27.2 million b/d in 2021, up from an estimated 25.6 million b/d in 2020.

EIA forecasts that U.S. crude oil production in the Lower 48 states—excluding the Gulf of Mexico—will decline in the first quarter of 2021 before increasing through the end of 2022. In 2021, EIA expects crude oil production in this region will average 8.9 million b/d and total U.S. crude oil production will average 11.1 million b/d, which is less than 2020 production.

EIA expects that responses to the recent rise in COVID-19 cases will continue to limit global oil demand in the first half of 2021. Based on global macroeconomic forecasts from Oxford Economics, however, EIA forecasts that global gross domestic product will grow by 5.4% in 2021 and by 4.3% in 2022, leading to energy consumption growth. EIA forecasts that global consumption of liquid fuels will average 97.8 million barrels per day (b/d) in 2021 and 101.1 million b/d in 2022, only slightly less than the 2019 average of 101.2 million b/d.

EIA expects global inventory draws will contribute to forecast rising crude oil prices in the first quarter of 2021. Despite rising forecast crude oil prices in early 2021, EIA expects upward price pressure will be limited through the forecast period because of high global oil inventory, surplus crude oil production capacity, and stock draws decreasing after the first quarter of 2021. EIA forecasts Brent crude oil prices will average $53/b in both 2021 and 2022.

quarterly global liquid fuels production and consumption

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

You can find more information on EIA’s expectations for changes in global petroleum liquids production, consumption, and crude oil prices in EIA’s latest This Week in Petroleum article and its January STEO.

January, 22 2021
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January, 21 2021