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Page added on June 19, 2018

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Oil producers face their ‘life or death’ question

Consumption

Asked last month by a frustrated investor if, “hand on heart”, Royal Dutch Shell was more concerned about “the sustainability of the company or with the sustainability of the planet”, chief executive Ben van Beurden acknowledged that climate change will be “the defining challenge” facing the oil industry for years to come. He then went on to describe the benefits of energy for millions of people around the world as “quite often a matter of life and death”. He could have been talking about his own industry, which has only just emerged from a brutal downturn and which, according to some, is facing an even graver challenge: whether to invest in oil at a time when climate concerns could see demand peak as early as the 2020s. It is a question that dominates the energy industry and will determine what the oil majors, including Shell and BP, look like in the future. Driven by investor pressure and a need to rein in costs after the oil price halved in 2014, the industry has largely abandoned new investment in the type of mega-projects, from Arctic exploration to Canadian oil sands, which were once its forte. In the second half of this decade total capital expenditure by the large oil and gas groups is projected to fall by almost 50 per cent to $443.5bn from $875.1bn between 2010-15, according to Norwegian consultancy Rystad Energy.

 

Although partly offset by a fall in oilfield development costs, the drop also coincides with the big groups ploughing more capital into shorter-term projects, which pay off quickly, as well as renewable energy. The moves come amid fears that electric vehicles pose a huge threat to oil’s dominance. Oil chart In keeping with that Mr van Beurden told investors last month that Shell is no longer an oil and gas group, but is an “energy transition company” — a nod to its shift towards a low-carbon energy system. It is a statement that would have been unthinkable just a few years ago. But persistent cost-cutting and mounting climate concerns have left many in the sector worried that the industry is making a miscalculation. They fear it is turning its back on many big oil and gas projects before efficiency gains, renewables, electric cars and efforts to conserve fossil fuels are able to cap consumption.

 

The result could be supply shortfalls and price rises, storing up a problem for the global economy. “It’s not wise to be cavalier about a lack of investment,” says Stewart Glickman, an energy equity analyst at CFRA. “The drop over the past four years eventually will have an impact on crude prices.” He adds that while investment in US shale has grown as companies look to short-cycle projects, bottlenecks and the declining quality of reserves mean it alone might not be able to fill the gap. “To blithely assume that because [the US shale industry] has been able to generate enough production so far that we’ll be able to continue doing so is a risky expectation,” he says. Investment cut victims Project Mad Dog 2 (redesigned) Company BP Location US, Gulf of Mexico Originally scheduled to start producing oil before 2020, the project was put on ice five years ago as cost forecasts ballooned to more than $20bn. BP has come back with a new plan it believes will cap costs at $9bn, with 140,000 barrels a day of output coming on stream in late 2021. Estimates for when oil demand will peak vary wildly.

Some experts say it could happen as soon as 2023, others put it off to 2070. That lack of consensus presents a danger, critics say, that the oil groups are being pushed — against their instincts — into shelving complex long-term investments just as demand for oil nears 100m barrels a day for the first time as emerging economies in Asia and Africa expand. “There is so much uncertainty,” says Andrew Gould, former chairman and chief executive of oilfield services company Schlumberger. “It’s increasingly difficult now to get boards to sign off on projects that have a 20-25 year life.” Cost deflation has allowed approval of certain projects such as Mad Dog 2, BP’s deepwater offshore project in the US, while others are on hold or have been scaled back. Such projects would have provided a baseline cushion of supplies to smooth out any future market shortages or additional demand.

If that supply is not there, some fear a backlash from consumer countries as oil prices escalate. Officials in India, which will lead oil demand growth in the coming years, are already anxious after the price hit $80 a barrel earlier this year, while eurozone governments will come under pressure should pump prices rise. For big energy companies and resource-rich economies reliant on vast oilfields for public spending, the fear of demand hitting a peak is pronounced. That it is being discussed at a time when demand has actually been growing at an average of 1.7m b/d every year since 2014 — double the rate at the start of this decade, when oil averaged close to $100 a barrel — is mystifying to some. Tony Hayward, the former chief executive of BP who is now chairman of the mining and trading group Glencore, casts doubt on the whole strategy, hinting that placating shareholders was winning out against their better interests. “I don’t think the supermajors really believe the long-term story of peak demand,” Mr Hayward told the Financial Times last week. “Looking at the trajectory, we’re more likely to have a supply crunch in the early 2020s.”

Investment cut victims Project Bonga Southwest (delayed) Company Shell Location Nigeria Shell’s plan to develop its Bonga oilfield in deep water off Nigeria has been delayed several times since 2015. Having started pumping crude in 2005, Bonga’s $12bn extension was expected to add up to 175,000 barrels a day to output but its future now depends on cutting costs. Investors are driving this shift. Mainstream asset managers and pension funds are increasingly concerned about the potential financial impact of global warming and of policies to limit it. Legal & General Investment Management, one of the biggest owners of BP and Shell shares through the UK pension funds it manages, has led the way in telling them to focus less on the risks of short-term price moves, and prepare instead to manage an industry in decline. Nick Stansbury, who heads L&G’s strategy in energy and commodity markets, says their argument is that while it is impossible to predict exactly when oil demand will peak, they are now convinced the moment is coming. Electric vehicles, a backlash against plastics and the rise of alternative fuels all threaten to cap oil demand, L&G argues. Oil groups should therefore, he says, avoid projects that take 10 or more years to become profitable — which used to be the industry standard.

Instead they should focus on maximising returns to shareholders, including eventually returning capital rather than trying to transform themselves into renewable companies in which they lack expertise. Oil chart “We’re not in the school of thought that says peak oil comes in 2021 or that there’s no need to invest in any new oil projects at all,” Mr Stansbury says. “But what we do want them to commit to doing . . . is become the cash flow engines that fund the energy transition.” He says such a strategy poses risks for the wider world in the form of volatile oil prices, but argues that funds investing other people’s money in energy companies have to remain focused on any longer-term risks. It is part of a bigger debate. Investors often deemed the oil majors’ spending programmes were far too wasteful when oil was above $100 a barrel, yielding inadequate returns. The 2014 oil price crash forced an overhaul in their approach to investment. Recommended Energy sector Oil majors plug into electric vehicle technology Brian Gilvary, BP’s chief financial officer, insists it is not just investor fear of peak demand that has seen the company move away from longer-term oil and gas projects. In the wake of the 2014 price drop— triggered in part by the rise of US shale and subsequent supply glut — he argues it is sensible for companies such as BP to focus on the fastest and cheapest projects. “We’re becoming more efficient at how we deploy capital,” Mr Gilvary says. He adds that BP and other energy groups are ploughing a middle road: raising oil production by using technology to sweat more barrels out of existing fields, while also funnelling smaller amounts of capital into so-called short-cycle projects such as US shale. Presiding over an era of transition: Shell chief executive Ben van Beurden © Bloomberg “We are not seeing any indication that there is [a supply crunch] coming, but we understand the fear,” says the BP executive. “We are continuing to grow our business . . . and we still see sufficient activity.” Chris Midgley, a former chief economist at Shell who is now the head of analytics at S&P Global Platts, believes BP’s approach makes sense but warns that the biggest risk will come in five to seven years when focusing investment largely on existing fields could fail to yield enough baseline production. Even if that led to higher prices, oil companies may not respond. “If we do get higher prices, unlike previous cycles the [international oil companies] might choose to effectively sit on their hands, saying they’ll use the windfall to accelerate into the energy transition rather than making more [oil] investments,” he says. Any prolonged period of higher prices that might follow would inevitably lead to a curb in consumption. “That would be . . . recessionary for the entire economy,” he says. Investment cut victims Project Rosebank (delayed) Company Chevron Location UK, North Sea Just off the west coast of Shetland. the Rosebank field was discovered in 2004. Chevron was examining the feasibility of developing a reported $10bn project shortly before the oil price crash. In 2016 it cancelled a $1.8bn order for a floating production and offloading (FPSO) vessel to service the field. Chevron has said the project remains under consideration and it is working on its design and economics.

For now the strategy appears to be working. According to Wood Mackenzie, an oil consultancy, output growth among the oil majors is expected to rise, on average, by approximately 3.5 per cent a year between 2017 and 2020. After a more than 40 per cent drop in conventional onshore drilling globally from 2014-16, it has since risen by 17 per cent, says Rystad Energy. In US shale oilfields, drilling dropped by 55 per cent over the same period but has increased by 65 per cent since 2016, illustrating the popularity of short-cycle projects. ExxonMobil, which has been slower to address climate risk than its peers, has said there would still be a need for trillions of dollars of investment in new oil and gas production, even in a world where temperature rises would be limited to 2C. Meanwhile, the recovery in oil prices has largely been driven by factors outside the energy companies’ control. Demand is strong, Opec and Russia purposely trimmed back production in 2017, and since then output in Venezuela has fallen because of the economic and political crisis gripping the country. US president Donald Trump’s decision to withdraw from the Iran nuclear deal and reimpose sanctions on the country’s energy exports was the final bump to take oil above $80 a barrel. But since then prices have fallen back to around $74 as Saudi Arabia and Russia discuss releasing additional barrels on to the market — something oil ministers will debate at Opec this week. Some of the biggest oil traders, however, remain unconvinced that it is possible to keep the market well supplied with short-term investments.

Pierre Andurand, a hedge fund manager who oversees more than $1bn in investor money and bets on oil price moves, says it could hit $150a barrel within two years, partly due to the focus on peak demand while consumption is still rising.

 

Other industry executives and analysts see a lower rise but believe prices will return to above $100 a barrel. “There is pressure from investors for these companies not to invest too much in oil, but at the same time we don’t see electric cars having a major impact on demand growth for at least another decade,” he says. “It is not obvious to me where this supply growth is going to come from.” Some dismiss this as scaremongering, saying the industry has shifted from an age of perceived scarcity to abundance, meaning much of the long-term investment into big projects is unnecessary. For now Mr van Beurden is betting that Shell has made the right calculations. A slightly higher oil price would not be the worst thing in the world for his company as it grapples with the energy transition. After all, no chief executive wants to be left holding multibillion-dollar oilfields the world no longer wants or needs.

FT



24 Comments on "Oil producers face their ‘life or death’ question"

  1. MASTERMIND on Tue, 19th Jun 2018 4:08 pm 

    The death of the oil industry by cars that can’t even leave the city and catch on fire…I think not..

    LMFAO!

  2. baha on Tue, 19th Jun 2018 4:32 pm 

    This is the most insightful article I have read in a while. The bottom line is: Just the fear of alternatives is enough to stop the FFs and change the world.ie..TSHTF.

    It’s gonna hurt but we will be a better species in the end.

  3. MASTERMIND on Tue, 19th Jun 2018 4:36 pm 

    America’s rising suicide rate

    Research suggests that poor, white men may be particularly at risk

    https://www.economist.com/democracy-in-america/2018/06/15/americas-rising-suicide-rate

    Peckerwoods are dropping like flies..We need to open up those borders and bring in some new workers..who won’t turn into fat obese slobs…

  4. Plantagenet on Tue, 19th Jun 2018 7:30 pm 

    Every molecule of CO2 that goes into the atmosphere increases global warming. It isn’t enough for companies like Shell to be “concerned” about global warming. We need to drastically reduce CO2 emissions now. Its time to chuck out the phony and fraudulent Paris Accords and set up a new global climate treaty that actually reduces CO2 emissions. CHEERS!

  5. Antius on Tue, 19th Jun 2018 8:02 pm 

    “whether to invest in oil at a time when climate concerns could see demand peak as early as the 2020s”

    Does anyone honestly believe that ‘climate concerns’ will have anything to do with future oil demand?

  6. Antius on Tue, 19th Jun 2018 8:06 pm 

    “Peckerwoods are dropping like flies..We need to open up those borders and bring in some new workers..who won’t turn into fat obese slobs…”

    Sounds like you need some aromatherapy. Preferably at a holiday camp in East Poland.

  7. Antius on Tue, 19th Jun 2018 8:16 pm 

    “Its time to chuck out the phony and fraudulent Paris Accords and set up a new global climate treaty that actually reduces CO2 emissions. CHEERS!”

    That would imply rapid reductions in energy use and living standards. Good luck selling that one to anybody that isn’t already dead.

    “Sorry Dear, we can’t fly to Greece this year, we have to reduce our CO2 emissions.” – Quote taken from ‘Things that People Never Say – Part 1’.

  8. twocats on Tue, 19th Jun 2018 8:33 pm 

    Oil producers face their easiest question ever, “do we use this pathetically flimsy propaganda campaign about peak-demand as an excuse to slash capex and skillfully bow out of the oil game or throw shit-tons of money into the gaping maw of depletion?”

    that is a hum-dinger of a decision.

  9. twocats on Tue, 19th Jun 2018 8:42 pm 

    and meanwhile, yet again, the shale investing numbskulls are about to eat their own poo.

    the discount for permian oil is probably going to blow out as surplus pipeline capacity is already negligible.

    so we are going to “break new liquids records” yet again and do it yet again with a massive loss of capital.

    not that it will matter – the world needs the oil so it will be produced. apparently debts will never matter again. its just fun. we need to start a deadpool of every investment fund manager that kills themselves over this next round of losses. I want in on the action.

  10. Roger on Tue, 19th Jun 2018 9:30 pm 

    ” Tony Hayward, the former chief executive of BP who is now chairman of the mining and trading group Glencore, casts doubt on the whole strategy, hinting that placating shareholders was winning out against their better interests. “I don’t think the supermajors really believe the long-term story of peak demand,” Mr Hayward told the Financial Times last week. “Looking at the trajectory, we’re more likely to have a supply crunch in the early 2020s.”

    Yep. Everyone sees it coming.

  11. MASTERMIND on Tue, 19th Jun 2018 9:35 pm 

    Twocats

    Lets not forget the shale king Aubrey..Back in 2009 he was the highest paid CEO on the fortune 500..And five years later he lobotomized himself with his Chevy!

  12. MythBuster on Wed, 20th Jun 2018 1:27 am 

    Hi Roger. You post a very interesting quote by Mr. Hayward. Isn’t it interesting that the EIA has raised the alarm about “possible” oil shortages in 2020, the Saudi Oil minister has also made public statements about the possibility of oil shortages “by” 2020, and now another informed prediction by Mr. Hayward. Isn’t it coincidental that Ben Bernanke said last week the he expects the economy to crash in 2020 — all Trump’s fault of course, but still, he put a date on it. My only question is, do these guys really think we’ll make it to 2020 before the shit hits the fan?!!

  13. print baby print on Wed, 20th Jun 2018 4:23 am 

    Shell is no longer an oil and gas group, but is an “energy transition company” — a nod to its shift towards a low-carbon energy system
    Hahahahah( if they find 10 new ghavars they will change the tune in seconds) no more bilions for ceo and shareholders. How short sighted we are . God help us nothing else will

  14. Davy on Wed, 20th Jun 2018 4:58 am 

    Not a peep about where the economy is going as usual because we are habituated to average annual growth that satisfies growth in population and affluence. It was so then it will be mentality which is ok until it “don’t”. The real impact influencing demand destruction will be economic in the shorter term. In the longer term renewables with their EV cousins will have an impact.

    It is anyone’s guess where the economy is going short term. Most here think down or collapse but we have been surprised for 10 years now. In the next 5 years central banks may be able to manage what they are doing now. We may have suppressed the business cycle but we may have also sowed the seeds of global financial collapse by not having the cleansing and the discipline of real recessions. Real recession are not allowed today because they are going to be dangerously destructive if they occur. Recessionary behavior is occurring along with growth in a stagflation of sorts. Recessionary results are occurring where current policy is impacting traditional classes and economic sectors. Not everyone is profiting from the new normal. We are likely ok for a while but looking out further to the end of the decade I don’t see how the current excesses and lack of rationalization of bad investments and failed firms can end well. We are now allowing investments without good productive returns to survive.

    All this is weakening the economy just as species are weakened by the unfit surviving. It may be OK now but as this irrational behavior becomes cumulative the systematic danger increase dramatically over time. The nature of global finance is likewise being allowed to transfer wealth from classes and economic sectors with yield seeking instead of productive investments. Not all of course but a certain amount of financial activity is Ponzi related bubbles that are eventually destructive. The economic and social fabric is being weekend by this undisciplined economic activity. Social behaviors are in decline because of debt at a time when we need more wise decisions. This can’t end well and when it starts to end there will be economic demand destruction. This will be the real stuff.

    Renewables have so far to go before they cause demand destruction with oil and transport. In the electrical sector more effects will be felt and are being felt quicker. NUK power and coal is being impacted but recently the impact has been mostly from gas but now renewables are accelerating. Oil on the other hand appears to be the last fossil fuel to be impacted by renewables because EV market penetration is still so low. It is questionable if renewables can break out as an energy transition paradigm that will end oils dominance in transport and heavy industry. There is little evidence yet renewables can drive renewables so if they are to increase oil must increase. If oil declines renewables will have a hard time. This says real demand destruction will be economic and peak oil influenced more than renewables that require a strong robust economy and plenty of oil.

  15. Davy on Wed, 20th Jun 2018 5:21 am 

    “Deutsche Bank’s Troubles Raise Worries About The Future Of The Euro Zone”
    https://tinyurl.com/y8w6kay6

    “The euro banking sector is huge: In April 2018, its total balance sheet amounted to 30.9 trillion euro, accounting for 268 per cent of gross domestic product (GDP) in the euro area. Unfortunately, however, many euro banks are in lousy shape. They suffer from low profitability and carry an estimated total bad loan exposure of around 759 billion euro, which accounts for roughly 30 per cent of their equity capital.”

    “For this reason, it makes sense to remind ourselves of the fundamental risks of banking – namely liquidity risk and solvency risk –, for if and when these risks materialize, monetary policy-makers can be expected to resort to inflationary actions. In fact, to fend off these risks from materializing, central banks have committed themselves to pursuing chronically inflationary policies.”

    “Keep the Fiat Money System Going If and when insolvency makes liabilities exceed its assets, however, a bank’s equity capital is wiped out, and the bank may even default on its debt, and savers and investors lose their funds. While it is relatively easy for a central bank to prevent a liquidity crisis in the banking sector, it is quite another matter when it comes to an insolvency crisis: Once asset values start falling and losses are getting realized, problems reach a new dimension.”

    “A Vicious Circle This is what sets a truly vicious circle into motion. For today’s fiat money causes booms which sooner or later must turn into a bust. The liquidity risk and especially the insolvency risk can be expected to hit the banking industry at some point. To prevent it from materializing, the central bank must keep expanding the quantity of (base) money and keep interest rates at artificially low levels, keeping the inflationary scheme going. Central banks sow the seeds of crisis, and once the crisis unfolds, especially when it affects banks negatively, central banks run bailouts by injecting new money provided at artificially low interest rates, and the vicious cycle starts all over again. Needless to say that such a cycle causes economic and social problems on a grand scale. It makes the purchasing power of money drop. Only a few benefit, while the majority of the people is taken advantage of.”

    “The euro area provides a textbook example of a rather unholy alliance between the central bank and commercial banks: It has not only caused an inflationary boom and bust cycle that has resulted in a severe financial and economic crisis. The unholy alliance has also made possible an oversized (and poorly performing) banking industry, and the policy to keep it going will result in a rip off of the majority of the people on a truly grand scale.”

  16. Davy on Wed, 20th Jun 2018 5:22 am 

    Some of you may think I am being bias against Europe because you know we have wars on this board. This article shows that Europe has its problems along with China and the US. It is the converging nature of all three economic regions problems that will eventually push the economic system to boundaries of stability. Any one of these regions can bring the others down. This points to the need of increasing central bank coordination but if you look around we have trade wars and political cold wars. That bodes ominously for a future downturn. It will take coordination to maintain this new normal of central bank economic management. Will they be up to it and what will shake out if it fails.

  17. Davy on Wed, 20th Jun 2018 5:37 am 

    “Italy Is Collapsing…And 5 Star Is Our Last Hope”: How Young Italians Fueled A Populist Uprising”
    https://tinyurl.com/yavcfy3b
    https://tinyurl.com/yak2woxr

    “Of the many statistics that point to an intractable economic malaise, the youth unemployment rate is particularly troubling: Nearly 30% of Italians aged 20 to 34 aren’t working, studying or enrolled in a training program, according to Eurostat. This comes after the employment rate for Italians under 40 fell every year between 2007 and 2014, before flatlining for three years. That’s higher than any other EU member state – including Greece, which is sporting youth unemployment of 29% – the second highest – as well as Spain’s 21%.”

    “Now that they’ve found their way into power, the future of these euroskeptic parties will depend on whether they keep their promises. Instituting labor-market, welfare and immigration reforms is only one part of the problem. Many younger Italians are deeply distrustful of both the European Union and the euro currency – while many older Italians still view both projects as integral to maintaining a sense of European Unity and lasting peace on the continent.”

    “Both The League and Five Star’s controversial flirtations with abolishing the euro (League leader Matteo Salvini was reportedly photographed wearing a T-shirt reading “Basta euro” – or “enough with the euro – to the chagrin of many older voters) have been popular with their base. But when directly confronted about their stance on leaving the euro, they’ve been noncommittal. The question now is: Will the Five Star and the League allow voters a chance to speak on the possibility of an “Italexit”, as the analysts on Wall Street have taken to calling an Italian departure from the European Union? Or will they stop short of threatening an orthodoxy that a growing number of Italian young people view as the root cause for their economic suffering?”

  18. JuanP on Wed, 20th Jun 2018 7:10 am 

    MM “Research suggests that poor, white men may be particularly at risk.”

    That is easy for me to understand. White men dominated the planet for five centuries, but now women and other colors are improving their relative situation. This is fair, and white men still enjoy more benefits than others, in general, so equality hasn’t been reached yet. This has been a particular problem for American white working class men. Increasing economic inequality and competition from women and foreign countries have have cost a lot of them their jobs, prospects, futures, and expectations. Living like this leads to problems like acute depression and PTSD, which can lead to suicide for the most unlucky.

  19. JuanP on Wed, 20th Jun 2018 7:15 am 

    “Outrage” by Raul Ilargi Meijer.
    https://www.theautomaticearth.com/2018/06/outrage/

  20. MASTERMIND on Wed, 20th Jun 2018 7:22 am 

    Juanp

    That article is changing the subject away from Trump torture techniques..Only Nazi would rip a baby away from its mother, even ones with down syndrome..

  21. twocats on Wed, 20th Jun 2018 11:32 am 

    absolutely davy – the EU is not in good shape. once the US started down the CB/QE road everyone pretty much followed suit on the print-frenzy. now that the US has begun shrinking its balance sheet its basically forcing everyone else to do it as well. Not so easy going back the other way.

    I would say the US has been pretty successful so far during the Obama/Trump recovery. I’m not gloating or anything – or start a war of words – and yeah some of the math is smoke-n-mirrors (e.g. unemployment doesn’t factor in reduced labor participation rate). but still – most people in the lower to middle classes are having no problem finding work here in the rust belt.

    will it fall apart – sure – is it held together with duct tape – probably. we shall see…

  22. Davy on Wed, 20th Jun 2018 12:00 pm 

    Two cats. I agree it won’t last anywhere.

  23. Makati1 on Thu, 21st Jun 2018 7:07 pm 

    The oily industry’s motto: “Damn the CO2! Full speed ahead!”

  24. MASTERMIND on Thu, 21st Jun 2018 7:43 pm 

    Donald Trump’s Trade Wars Could Lead to the Next Great Depression

    https://www.thenation.com/article/donald-trumps-trade-wars-lead-next-great-depression/

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