Energy Sector

[Ulti]

https://oilprice.com/Energy/Energy-General/The-Commodities-To-Benefit-From-Chinas-Stimulus-Plan.html

[StevieV]

3 hours ago, Gregmal said:

And in 2008 we had $100 oil.
 

People I think, tend to be too confident in what they think they know about oil and gas. I’ve noticed it even with the best analysts I’ve followed over many years. It’s why, outside of forecasting supply and demand, I happily admit I know virtually nothing about it. the biggest tailwind you have now, especially in Europe and Canada, is stupid politics. The US, that could all start changing in a few months.

 

I think a Democratic executive and a Republican legislature is probably best for O&G companies.  If we get a Republican legislature, that doesn't change anything with the regulatory environment.  They aren't going to pass any relevant legislation that Biden will sign.  Just a continuation of the current executive policies and deadlock legislatively.

[Gregmal]

The bigger thing is that what a high price is, is subjective and almost always relative to expectation. $4 a gallon to me isn’t all that crazy and is hardly longer term out of line with how things in life go up in price. But don’t tell that to folks who planned erroneously on it being $2-3 forever and now feel like we re in the midst of a crisis. 

[Viking]

4 hours ago, Kupotea said:

Agreed but supply is only so elastic. With a current deficit and spare capacity almost fully tapped you get demand destruction as the balancing factor. 
 

You need a way to encourage supply growth in what many see as a sunset industry. If we do get a recession and oil prices collapse do we not just end up with a bigger gap coming out of the other side? If the economy muddles along how long does it take to fill the current deficit?

 

I think we continue to grind higher until the economy breaks or the investment community changes their minds on the need for higher capex. 

The comment was made somewhere before: oil is effectively in runoff.
 

Politically speaking we are currently in the BEST OF TIMES for oil companies. Political risk from governments in the West will only get worse from here. Higher, and possibly much higher costs are coming in the future. Higher taxes likely coming too. Profit tax. Carbon tax. Oil companies will be a piggy bank for Western governments (someone has to pay for climate change/ESG/energy transition).
 

What is a rational oil company to do? Sweat the assets for as much cash as possible as fast as possible. Cherry pick your best assets. Acquisitions only make sense if they are strategic and/or have an exceptionally quick payback. How do you even value a long life assets like the oil sands? 
 

What all this means is perhaps oil companies remain permanently on sale. Suggests to me that dividends are a much better ‘shareholder return’ option that stock buybacks. Long term? Who cares!
 

Perhaps the biggest takeaway is supply is likely permanently screwed moving forward. Who in their right mind is going to sink billions in large projects that will only start producing in 6 or 7 years? (I was thinking of the recent announcements for Newfoundland.) And the case to invest in new production will only get worse with each passing year.
—————

What an absolutely crazy incentive system. Because oil is actually essential to life as we know it today. 
—————

Where this really gets interesting is… what if we do not transition to alternatives as fast as people assume? What if it takes 10 more years before we are ready to start the transition to alternatives for real? We will have a scenario where demand for oil keeps growing and supply remains increasingly constrained. Oil prices will remain high (and will likely go much higher). And the “high oil prices solves the problem  of high oil prices” moment actually never comes… 
 

Edited July 19, 2022 by Viking

[Viking]

A couple of good overviews of the nat gas situation in Europe.

—————

Looming Natural Gas Shortages Has the EU Scrambling for Solutions

- https://www.spiegel.de/international/europe/a-stress-test-for-solidarity-looming-natural-gas-shortages-has-the-eu-scrambling-for-solutions-a-c3e1cdb9-e11b-4f7a-bdbc-f252e1ebe013

 

With the threat of recession and further inflation, Vladimir Putin could deal a devastating blow to the European Union if he cuts gas supplies this winter. Should that happen, it would be a major test of solidarity for the block.

—————

The Anatomy of Germany's Reliance on Russian Natural Gas

- https://www.spiegel.de/international/business/anatomy-of-germany-s-reliance-on-russian-natural-gas-decades-of-addiction-a-ad156813-3b24-424f-a51e-3ffbd7b6385c

 

The Americans warned Germany, as did the Eastern Europeans. But Germany just continued buying more and more natural gas from Russia. The addiction stretches back several decades, and it is full of misjudgments and errors.

 

…Anyone could have recognized that energy shortfalls were a distinct possibility. Instead, though, Germany's political parties forged ahead and set about abandoning technologies to save the climate. The nuclear phase-out was accelerated in 2011, followed by decision to phase-out of coal in 2018. And along the way, Germany decided not to access its own natural gas, since it involved fracking, and shunned natural gas from the United States for the same reason.

 

But the great energy transition failed to materialize, or at least it hasn't taken shape quickly enough. "We elevated our climate goals, but even today, we still don't know how we are going to achieve them," says a leading economic policymaker from the center-left Social Democrats, the party of Chancellor Olaf Sholz. Altmaier also speaks of how surprised he was when he became environment minister in 2012 and found no master plan waiting for him for how the country planned to secure its energy supply while also phasing out all fossil fuels by 2050.

Time Has Run Out: As a result, desires have transformed into a reality in which the approval process for a wind turbine can sometimes take as long as six years. And in the meantime, political and business leaders elected to rely on what was left, and which was the most profitable for companies anyway: cheap Russian natural gas.

Edited July 19, 2022 by Viking

[SharperDingaan]

WTI is at about the same inflation (US) adjusted price as it was in 2011 through 2013. Per the below source, USD 113.01, 110.09, and 114.38. Prices were highest during the Iranian Revolution of 1980, at USD 132.90.

 

WTI closed yesterday at USD 102.60. Yesterday’s price is only high when compared to the many years when the world was calm; however, in the current times, the world clearly is not calm. If you think the current disruption is not that dissimilar to that of the Iranian Revolution, the current price is cheap, and the GS USD 140 projection not out of line. However, most would expect a spike through USD 140, and not a sustained period of USD 140 oil.

 

Every large inflation adjusted price spike has been a black swan event, and unpredictable. Most have capped out at an inflation adjusted USD 110-115; to go much above that this, the disruption has to be severely disruptive and systemically wide spread. Most would argue that todays 'perfect storm' is such an event.

 

The table tells us that price hikes are not permanent, and that the price of WTI has been progressively rising over the last 50 years. Components of todays 'perfect storm' have been building for a very long time.

 

https://inflationdata.com/articles/inflation-adjusted-prices/historical-crude-oil-prices-table/

 

SD

[Pelagic]

Dallas Fed survey of O&G executives. Some interesting responses and then their own additional commentary near the bottom.

 

https://www.dallasfed.org/research/surveys/des/2022/2202.aspx#tab-questions

 

Quote

Shale will likely tip into terminal decline in about five years as the main shale plays run out of locations. Unfortunately, by then, most of the individuals with incumbent knowledge about offshore and international development will have retired. The brain drain in the industry will create a real and much larger crisis in the mid-to-late 2020s.

 

This is a particularly interesting comment IMO. The industry has adapted to the shale boom, and is rapidly losing the know-how to drill elsewhere. Look at how "brain drain" has affected Venezuela's production - among other issues to say the least. Anyone who could get out, usually those with relationships with western oil companies, did.

 

Edit: link to additional longer comments. A lot of risk aversion being expressed.

 https://www.dallasfed.org/research/surveys/des/2022/2202.aspx#tab-comments

Edited July 19, 2022 by Pelagic

[Sweet]

It’s not even $100 oil, the world coped well with oil hovering at that level for a period of 4-5 years.

 

It’s two other issues which are the bigger problem:

 

1. The price of products which very recently traded at $200 barrel of oil equivalent.

 

2. US dollar strength.

 

Oil could sit quite comfortably at $100 if 1 + 2 were not a problem.

[SharperDingaan]

With this degree of uncertainty, the smartest thing a o/g producer can do is to minimize their development exposure, and apply their FCF to debt and capital redistribution. Hold production flat, and focus purely on manufacturing - new production simply replacing depletion in the pipeline. Grow the share price via reverse splits/share buybacks, merge into bigger entities.

 

The industry relies on a great many people doing shitty jobs, with no future, in return for high pay. The wide spread brain drain and labour shortages across the entire supply chain, are evidence that the compensation package is no longer big enough - or appropriate for the times. The US price at the pump is going to have to rise materially. Disruption.

 

SD  

Edited July 19, 2022 by SharperDingaan

[Minseok]

On the topic of labour, Just an anecdote here.  I started my career in oil and gas industry in canada around 2011 and switched to nuclear 2017. I was only one of a whole cohort of engineers who switched when the oil industry downturn started. When the industry capex has such a close correlation to the job market of your profession, you can feel the ebb and flow of the industry capex without looking at any cashflow statements. When you see your former colleagues, colleagues of colleagues, and former engineering contractors your worked for and their competitors bidding for nuclear jobs, and then you meet new colleagues in Nuclear who used to do fly-in fly-out fort mcmurry gigs in alberta ‘back in the good ol’ days’,  you get a sense of how dry the oil capex is.

 

With bleak o&g capex forecast, and decades of new nuclear capex (public money) in plan, many engineers have switched already and there is no sign of going back. Outside of niche and specialized incumbent knowledge, the vast majority of engineering work and skill involving steel/concrete/piping/rotating equpment/ project execution is nearly identical and transferrable, and transfer they have.

 

If oil companies want them back, you now have to pry their fingers off with very competitive salaries.

How high? As a baseline, aside from qualitative factors such as nuclear jobs are close to the cities with limited travel requirements. A competent and experienced nuclear engineer can easily push $200,000 simply by willing to work 3 hours north of gta at Bruce Power. Even at OPG east of GTA, mid level engineering managers and project managers can push $200,000.

 

So What would it take to move them to Alberta and fort mcmurry? Away from civilization (and spouse who cant quit work and kids who cant move school) and into the tundras? You have to bring back the $300,000 $400,000 and above salaries just to get started on a negotiation. 

 

But nuclear jobs are cushy (unionized at client level, little competition among vendors), slower paced (35 hour work weeks) and most of all project execution in o&g runs circles around anything nuclear does relieving the individual of concentrated accountability for errors in execution in a typical nuclear project ( and private investment demands more accountability than public investment), so the job is relatively stress free.  All the while staying close to and spending time with your family.

 

The gap is even wider for blue collar. A qualified Nuclear operator already pushes $300,000, $400,000 salaries.

 

Normally we used to say if your company didn't win the job, you can easily jump ship to the competitor who did. If oil industry is down, you can stay afloat by going over to nuclear for a while. Now with the renaissance of nuclear investments allowed by public sentiment change to ESG-ish mentality, government is allowing for significant capex in new builds and developments, so you have to stay in nuclear to experience the boom times.
 

The cycle seems to have made an unusual turn this time indeed.
 

Edited July 19, 2022 by Minseok

[Sweet]

Interesting Minseok - thanks

Edited July 19, 2022 by Sweet

[lessthaniv]

23 hours ago, Spekulatius said:

I think you can determine that oil prices are high relative to historical prices as well as production costs. So yes, I consider them high.

By looking at a graph, it’s determinable that oil prices are high relative to historical prices and production costs, agreed. But, I think that view falls short of determining whether oil prices are in fact high relative to the current market dynamics. Things such as supply and demand; inventory levels; low capex investments; strategic reserve releases; choke points in refining and labour; change in business models … all seem to suggest something different.

 

A good article on how big oil CEO’s are investing in shareholders not as opposed to output like in the past.  Its a significant change in attitude. 
 

https://www.bloomberg.com/news/articles/2022-05-07/big-oil-spends-on-investors-not-output-prolonging-crude-crunch

 

“All five supermajors have kept their capital expenditure budgets firmly in check and pledged that this discipline will hold in future years -- even as oil prices have closed above $100 a barrel on all but five days since Russia invaded Ukraine in February. With wells naturally declining in production every year and large projects taking half a decade or more to come online, any expansion lag happening now will push the possibility of new production even further into the future.”

 

”BP Chief Executive Officer Bernard Looney told analysts Tuesday. The London-based major isn’t budging on its $14 billion to $15 billion spending plans for the year, with its mid-term guidance creeping up to a maximum of $16 billion despite 10% cost inflation in some parts of its business.”

 

”Sinead Gorman repeated time and time again that Shell would keep within its $23 billion to $27 billion range. “Nothing has changed in terms of our capital allocation framework,” she said. ”

 

”“Two years in a row of large and abrupt underinvestment in oil and gas development is a recipe for higher prices and volatility later this decade,” warned Joseph McMonigle, Secretary General of the IEF.”

The higher for longer arguments are hard to invert.

 

Edited July 19, 2022 by lessthaniv

[Ulti]

[Ulti]

https://podcasts.apple.com/us/podcast/the-gas-crisis-deepens/id1081481629?i=1000570498496

[cubsfan]

6 hours ago, Sweet said:

Interesting Minseok - thanks

 

Yup, terrific input Minseok

[Gregmal]

On whether it’s expensive or not, what were the thoughts when we were sub $3 and even sub $2 for a while? I always thought those prices were too good to be true. $3-5 a gallon is probably where the world works best, and I think once you start escaping in to that $5+ a gallon range for most of the country, is where it really gets expensive. $100 a barrel isn’t cheap but it’s definitely not expensive. What else can you buy at 2014 prices?

[Xerxes]

Haven’t read this column yet but probably belongs here :

 

 

[Viking]

On 7/19/2022 at 5:15 PM, Ulti said:

https://podcasts.apple.com/us/podcast/the-gas-crisis-deepens/id1081481629?i=1000570498496

@Ulti thank you for posting the podcast by Columbia Energy Exchange. It was excellent and a must listen for anyone who wants to better understand what is really going on right now in oil and gas. It is increasingly looking to me like we are in the beginning stages of a complete re-set in global energy markets. Putin has decided it is time to make Russia Great Again. And he is going to do it via oil and gas, the most important products on the planet. People who try and understand what Putin is doing right now through the lens of Ukraine are completely missing the forest for the trees. 
 

Russia is firmly in control of global energy markets. Why is Russia in control? Because we are under supplied. And we will be undersupplied for years. At the same time demand continues to grow. Hydrocarbons are the core building block for our quality of life. Life/society as we know it is built on cheap energy. Leaders in the West have completely lost their minds demonizing the industry for years. Putin understands this stupidity and will leverage it to his advantage. The crazy thing is leaders in the West are doubling down on their hatred of oil and gas. Michael Lewis… you need to write a book on the complete catastrophe energy policy has become in the West (the stupidity he wrote about in Liars Poker or the Big Short pales in comparison).
 

The world is in the process of creating a Russia energy block and a West energy block (including Japan/Australia). And we will see in the coming years which block other countries in the globe decide to join. What about the Middle East? My guess is they will try and straddle the two blocks; their relationship with the US has been going downhill since Obama. If you are a poor country you will be joining the block that has the cheapest price; in fact you will resent Western countries for driving up the price as they are forced to replace Russian energy at any price. Putin will be happy to sell them cheap energy (hello India). 
 

What does all this insanity mean for investors? It is a wickedly bullish set up for energy. The most important resource on the planet (oil and gas) has been completely turned on its head. And Putin has the ambition and the means to finish the job. Most investors do not yet grasp what is going on. The first inning has not even ended (baseball games are 9 innings for our non-North American readers).

————-

PS: what about the environment, you ask? Do you think Russia gives a shit about the environment? Are the citizens in Sri Lanka thinking about the environment right now? Priorities change when you can’t feed your kids or heat your home. What is the priority? Access to cheap oil and gas… the basic building block of life. Today. And for at least the next 10 years IF we make smart decisions. Much longer if we stay stupid.

Edited July 21, 2022 by Viking

[Ulti]

V, 

your welcome…… I think the only solution is that the US , Canadian governments and energy producers get together and figure out how to increase production and exports while being environmentally aware… This also should include energy conservation and helping renewable energy along… As one gal said on the podcast… we are at war with Russia ( and maybe other autocratic states) and need to approach this crisis with that in mind… As an aside I like the Columbia podcasts/ always thoughtful 

 

[Spekulatius]

Yes, we need to increase energy production and save energy at the same time.

 

As for Russia, they still sell their oil and it doesnt really matter to whom. If they sell oil to India or China, then those consumers need to buy less from the Saudi‘s etc.

 

The NG is a bigger problem than oil because some of the Russian NG will be stranded come next year and Europe will buy up LNG everywhere they can get their hands on.

 

Shell is the biggest player in integrated NG by far. This business should mint money, but while they have a nice asset, their Management is lousy. 

[mcliu]

I think many US/EU companies & funds have divested their oil sands investments.

Would US/EU take it further and pressure Canada to reduce or even stop production?

[Viking]

1 hour ago, mcliu said:

I think many US/EU companies & funds have divested their oil sands investments.

Would US/EU take it further and pressure Canada to reduce or even stop production?

The big problem for Canada is the EU/US will look the other way for now and take all the oil/nat gas Canada can produce because the world is in an energy crisis. But as soon as the EU solves their current problem (it will take a couple of years) of course the knives will come out and Canada will be ostracized even more for its ‘dirty’ oil. This is likely one of the many reasons why oil producers in both Canada and the US are being so disciplined with new investment… they KNOW as soon as we get through this crisis Western governments will be coming to take them out behind the woodshed. The end result is supply will increase much more slowly than past cycles.
 

The supply issues will not get solved until the demonization of the industry by Western governments stops. And of course that is not going to happen. Just one of the many reasons why i find the current set-up for oil and gas so interesting. 
—————

Now in all fairness to Europe and the US most of Canada does not want oil or gas produced in Canada either. I live in BC - our current government tried to shut down the TMX pipeline. I don’t think it is too strong to say they loathe the oil and gas industry. Quebec is the same. Completely bizarre situation given how important the products are to maintaining and improving our standard of living. 
 

RBC just did an analysis of the tax revenue the various levels of government actually will receive in 2022 from oil and gas… it is something like $64 billion. This pays for lots of hospitals, schools etc. 

Edited July 22, 2022 by Viking

[Viking]

3 hours ago, Ulti said:

V, 

your welcome…… I think the only solution is that the US , Canadian governments and energy producers get together and figure out how to increase production and exports while being environmentally aware… This also should include energy conservation and helping renewable energy along… As one gal said on the podcast… we are at war with Russia ( and maybe other autocratic states) and need to approach this crisis with that in mind… As an aside I like the Columbia podcasts/ always thoughtful 

i think the ‘war footing’ analogy fits the current situation well. The logical thing to do is get all the players together and build out a 3-5-10 year step plan. Part of the plan would include the necessary investments to accelerate the transition to EV/renewables (power grid, materials etc). A kind of Marshall plan for energy. But herding cats is next to impossible in a democracy. So we try all the dumb things first and then, when catastrophe hits, finally do the right thing. I guess what is going on in Europe has not reached ‘catastrophe’ yet because Europe certainly doesn’t look interested in actually moving in a pragmatic direction. So the beatings will continue…

Edited July 22, 2022 by Viking

[mcliu]

46 minutes ago, Viking said:

The big problem for Canada is the EU/US will look the other way for now and take all the oil/nat gas Canada can produce because the world is in an energy crisis. But as soon as the EU solves their current problem (it will take a couple of years) of course the knives will come out and Canada will be ostracized even more for its ‘dirty’ oil. This is likely one of the many reasons why oil producers in both Canada and the US are being so disciplined with new investment… they KNOW as soon as we get through this crisis Western governments will be coming to take them out behind the woodshed. The end result is supply will increase much more slowly than past cycles.

I agree with you. It seems like policy is driven by ideology and not economic rationality. It is not clear that governments will do the right thing. I think this is the biggest LT risk to the oil sands companies, but might be a ST benefit.

[Ulti]

https://www.energy.gov/fecm/carbon-negative-shot-summit