Is Big Oil finally getting stranded?

so here we are at the back end of April and there's a reasonable chance that you may have already spotted that half the population of the planet is in lockdown as a result of the coded 19 pandemic that's having a bit of an impact on this lot they are of course some of the most valuable and most powerful companies on earth and right now as a result of the unprecedented reduction in global energy use that the lockdown has caused they are all in a world of pain every day our newspapers and television networks bring us a constant stream of coronavirus statistics most of which are based on this data published an updated hourly by the Johns Hopkins University as of Friday the 24th of April 2020 the dashboard shows 2.7 million people infected with the virus worldwide but that's just the officially recorded number these companies need something a bit more reflective of real-world data if they're going to try and stand any chance of working out how to get out of their current predicament so on the 15th of April Norwegian energy consultancy writes that energy published this report specifically for the benefit of the oil and gas industry the reports analysis showed that at the time of publication there were more like 39 million people infected worldwide 23 million of those were in Europe and more than 10 million were in North America and as we approach the month of May those numbers are still rising fast with no realistic prospect of any kind of widespread easing of restrictions anytime soon despite what mr. Trump might say the rice that report also shows that demand for oil has so far dropped by 27 percent year-on-year from a hundred million barrels a day to just under 73 million bells the International Energy Agency is warning that the industry is experiencing a shock like no other in its history and environmental groups like Greenpeace are suggesting we may even be entering the final decline of oil so will 2020 go down in history as nothing more than an inconvenient blip on the growth charts of corporate behemoths like these or because the current collapse in the oil market be increasing the likelihood that fossil fuel producers may find themselves saddled with what traders on financial markets refer to as stranding assets hello and welcome to just ever think if ever there was a time to use the somewhat hackneyed phrase a perfect storm then perhaps now might be that moment for being oil in industry the end of restraints on oil production earlier this year and mainly from Saudi Arabia and Russia caused a huge blood of supply in the world markets that's normally not a big problem for the oil producers they just lower the prices and that generally stimulates higher consumption hey presto equilibrium restored it's been like a carefully controlled income task for the oil producers for the best part of a century and it's why our oil stocks have traditionally been seen as a safe haven for financial market traders and long-term investment portfolios like pension funds but that fit of petulance oversupply by two of the world's largest producing nations came just before the onset of a global pandemic that drastically reduced the amount of fuel especially road vehicles and air transport as more than three billion human beings got locked down and global economic activity came to a grinding halt as demand plummeted the entire supply chain of oil refining Freight and storage began to seize up making it increasingly difficult to push new supply into the system so the oil accumulated in pipelines on oil tankers and in storage facilities until eventually investors saddled with the physical stock and to begin offering to pay people to take it off their hands and that's why we witnessed the extraordinary spectacle this week of West Texas Intermediate crude oil futures for May it's in historic low of minus 37 dollars that negative number was in all honesty probably a one off the price almost immediately went back into positive territory for June deliveries and in any case the more generally accepted barometer of world market status is actually the price of a barrel of Brent crude but even that commodity has been languishing around the twenty dollar mark for the first time since the turn of the century those numbers are unprofitable and unsustainable for the vast majority of oil producers according to the International Energy Agency even based on a Brent crude price of $25 a barrel there's about five million barrels of oil the ground everyday that isn't being sold for enough to cover the cost of extraction that means those businesses are right now losing money on every barrel of oil they produce and the size of the loss depends on who you are even the big state operators are not immune according to Michael Libra of Bloomberg low energy finance the fiscal breakeven for Saudi Arabia is around $80 a barrel meaning its foreign exchange reserves might only be able to cope with rock-bottom oil prices for a couple of years by contrast Russia's breakeven point is far lower at $40 a barrel it also has a much more diversified economy which means it could probably enjoy these low prices for as long as a decade it's on the face of it the current oil war between those two nations is not one that Saudi Arabia has got any chance at all of winning but professor bernhard Haeckel of Princeton University told the Guardian but he thinks there might be some other method in the apparent madness of the Saudi position Crown Prince Mohammed bin Salman may be many things but he's no fool he can see the unstoppable global clean energy transition approaching and he's desperate to cash out of the game while he still has a chance to throw his kingdom's fortunes into longer-term safer investments professor Hegel argues that these Saudi production increase was aimed at grabbing market share and killing off the US shale boom wants and for all if they could manage that says haeckel then bin Salman may well start to look for a final exit strategy that gets his nation out of oil production for good it's not just nation producers that are suffering every producer is feeling the pain one way or another goldman sachs are estimating that oil wells producing around a million barrels a day may have already been shut down because of the price of the oil is now lower than the cost of shipping it and they say that number is growing by the hour Goldman's analysis of the American giant Chevron suggests that company needs a market price of $50 a barrel to cover its costs and meet its dividend forecast Exxon Mobil is in an even more precarious position at about $70 a barrel for breakeven at the end of March Exxon announced it was cutting production at its Baton Rouge refinery company's second largest in the u.s. because poor demand has filled up the storage tanks the company also cut 1,800 contractors from the site depending on how long they think the crisis will last some of them robust producers may continue pumping oil at a loss if they calculate the cost of shutdown in subsequent startup at a later date a higher than the operating losses from keeping the oil flowing but you need very deep pockets or very understanding investors from that strategy of course if those companies get away with it then they may see week arrivals to go out of business which in this cutthroat Alfred mail dog-eat-dog industry would improve their own chances of survival as Professor Hegel pointed out many of those week arrivals are likely to be found in the United States fracking industry most shale operators have found it increasingly difficult to turn a profit in recent years in this March 2020 article one of the original cofounders of Greenpeace International Rex weyler argues that the whole shale oil industry is effectively nothing more than a giant Ponzi scheme he says the game works like this insiders create companies with massive debt borrow at cheap rates operate on a negative cash flow sell shares in there well marketed apparently booming companies to a naive public and then get out making millions in profits and leaving the business to fall into bankruptcy Wailer points to companies like pioneer concho Simar ex and others who collectively operated at a forty billion dollar cash flow deficit in the Permian oilfield in West Texas between 2012 and 2017 according to robert rapier at the industry's news website oil price over the last five years 208 oil and gas producers and 224 old service companies mostly linked to the shale oil industry have filed for bankruptcy walking away from 209 billion dollars of debt in a process fracking isn't the only desperate attempt to scrape the last dregs of unobtainable hydrocarbon from the earth though Canada's got its own environmentally catastrophic folly in the shape of tar sands according to this February 20 2010 udders Suncor has just taken a 2.8 billion dollar write down and in the last 18 months their value has been cut in half and also in February 2020 the Canadian tech corporation suffered a billion dollar write down forcing it to cancel a twenty billion dollar tar sands projects up in Alberta given all that carnage it makes sense that the larger more robust corporations have now been frantically making deep cuts to their spending on new production projects that these companies would have previous regarded as low-cost at around 35 to 45 dollars a barrel now look unrealistic in the context of today's historically disastrous market prices so most companies are either scaling new projects right back or shoving them completely shell recently announced 20% cut through its spending plans and a suspended its share buyback program it's also issued nearly four billion dollars of bonds to raise much-needed capital French giant hotel follows a very similar strategy with a three point three billion dollar bond issue but there's another element of the perfect storm that makes contingency planning even more challenging for these companies the industry already suffered a major drop in oil prices as recently as 2014-15 to get through that little crisis most production and servicing companies crawled all over their operations with a fine-tooth comb to unearth every possible efficiency gain and cost-cutting measure that they could find at every stage of their production and shipping cycles that means that this time around the jar of wriggle room cookies is pretty much empty and producers are finding themselves with no choice but to make direct cutbacks in activity and the pain doesn't even stop there either in recent years there's been a major ramp up of investment in oil refineries turns out the ever courageous speculators of the oil world brought more than 2 million barrels a day of new refining capacity online just in 2019 alone again in normal circumstances low crude oil prices don't really spell big trouble for the refineries but as demand for oil collapses in 2020 refinery margins and volume to being squeezed in a way that Brian and Colin in the corporate spreadsheet Department haven't factored into any of their equations that brings in the very real prospect of refinery closures which the IEA say would accelerate the restructuring of the global refinery industry towards regions where oil extraction is still cheap like the Middle East or where demand for oil is still growing like in the developing countries of Asia all those risk factors resulting the final and arguably most existentially perilous consequence for the oil industry and that consequence is the loss of the one thing that most oil companies rely upon more than anything else external investment the oil price plunge demolished the lucrative returns on exploration projects that investors have become accustomed to in late March Valentina Kretchmer Director of Corporate Research at the respected industry analyst would McKenzie was asked what the impact of a $35 oil price would be her answer was it's a very very ugly picture the $35 a barrel she said 75% of projects don't even cover the cost of capital Kretchmer also pointed out the rates of return on investment for oil and gas projects have slumped from about 20 percent down to 6 percent which she says is very much in line now with what you can get from solar and wind projects it is not a very attractive proposition Kretschmer says and at $20 a barrel the industry will be decimated but kretchner says the most pressing immediate question is how long the current lockdown situation is going to last and right now no one really knows the answer to that one in the meantime to scoop down to the comment section below and let me know your thoughts on the current and future state of the oil industry and what you think the prospects are for the future of hydrocarbons in our global energy mix that's it for this week though a massive thank you as always to the channel supporters over at patreon who make these programs possible and I must just give a quick shout out to some new patrons who since our last episode have joined our patreon page with pledges of $10 or more a month they are Michael Hasek James Holmes Arthur Valencia Russell Hills Donovan Walker and Jory Fitzgerald if you'd like to get involved with a channel and have your say in monthly content polls then you can do that by visiting WWE tree on Comm forward slash just ever think and you can show you support for the channel for free by hitting the like button and by subscribing both of which massively help to get our message out to more and more people each week it's dead easy to subscribe you just need to click down there or on that icon there and don't forget to hit the bell icon so you get notified about new content each week as always thanks very much for watching have a great week if you can and remember to just ever think see you next week you

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Views: 104,613

Rating: 4.9038925 out of 5

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Length: 13min 22sec (802 seconds)

Published: Sun Apr 26 2020