Easwaran Kanason

Co - founder of NrgEdge
Last Updated: March 12, 2020
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Business Trends
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The unthinkable as happened.

In Vienna on Friday, the OPEC 14-country group failed to persuade Russia to agree to an extension and deepening of their existing supply deal. And with that, the fate of the wider OPEC+ is at stake, as well as the nascent health of the global oil industry.

It didn’t seem like it would come to this. At least not yet. The Covid-19, now expanding aggressively in Italy, South Korea and Iran, but also elsewhere in Europe and the US as well, has pushed the oil ecosystem into a corner, over concerns of massive demand destruction. Led by Saudi Arabia, OPEC had been pushing to extend the deal to the end of Q2 2020 at least. OPEC’s technical committee had reportedly recommended a new quota of 1 mmb/d, with Saudi Arabia pushing for OPEC to take a 1 mmb/d cut and an additional cut of 500,000 b/d be distributed among the OPEC+ group until the end of 2020. Pre-Vienna, it seemed that Russia was on board; after scuppering a planned mid-February meeting to address the Covid-19 outbreak’s impact on demand, various quotes from key Russian figures suggested that it would back a deal. Even Russia’s main energy firms, Lukoil, Gazprom and Rosneft agreed.

The stage was set for OPEC+ to once again attempt to place a floor on crude prices at a level relatively comfortable to all members in the face of disintegrating demand. That didn’t happen.

Russia balked. And the meeting ended without a conclusive decision on the current supply deal, which ends March 31 2020. So, unless something drastic happens, the OPEC+ club ceases to exist and it will be a return to unbridled production.

But even worse, Saudi Arabia’s counter to this development is a return to 2014 tactics, where it attempted to decapitate the American shale industry by turning its oil spigots on to full blast. The Kingdom is now preparing to increase its production back above the 10 mmb/d mark, possibly closer to the maximum capacity of 12.5 mmb/d. Russia also commented that from April 1, it would no longer be mindful of quotas and reductions previously agreed.

But Saudi Arabia took a step further, by slashing the price of its crude for April delivery. That’s a price war, and war has casualties. Saudi Arabia and Russia are both by far some of the lowest-cost oil producers in the world, flipping the narrative to a race for market share instead of an attempt to preserve prices. Caught in the middle will be OPEC members counting on steady oil prices to keep their economies afloat (Iran, Iraq, Venezuela), supermajors and majors with projects that have just launched or are about to launch (ExxonMobil’s strikes in Guyana, Equinor’s Johan Sverdrup) and, of course, the massive US shale patch that is already facing an existential crisis by being over-leveraged.

In 2014, when this last happened, crude oil prices plummeted below US$30/b from US$110/b over the course of a year. This time, however, there is the issue of Covid-19 to reckon with as well, with deep uncertainty over how long the outbreak will last and how much further the already-massive havoc it has wrecked on consumption and confidence will last.

Some think that this is a fundamental shift in how Saudi Arabia (and OPEC) will deal with its rivals. Some think that this is posturing by the Kingdom to draw Russia back into negotiations – after all, there is still some time to the end of March, plus Aramco is now a public company as well. But what is certain is that crude prices have collapsed.

Brent fell below US$50/b on Friday, and has now sank 30% in weekend trading to a low of US$32/b. US$20/b oil could be a possibility if this continues. That may be a boon to shore up consumption and promote recovery in these dire economic times, but the negative geopolitical implications are also vast. Saudi Arabia and Russia have always been oil frenemies even at the best of times. But between 2014 and 2020, the power dynamics between the two have changed, and an all-out price war between the two could be disaster for the global oil industry.

Recent Brent crude oil prices:

  • 20 February 2020, US$58.80/b
  • 4 March 2020, US$51.13/b
  • 6 March 2020 (day of OPEC meeting), US$45.27/b
  • 8 March 2020 (weekend trading), US$35.74/b

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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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