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Big Oil Thinks Its Real Problem Might Be You

Business

Two things to bear in mind when someone tells you they suffer from a problem of perception. First, perception shapes and sometimes outright supplants reality. Second, the complaint comes with a subtext of “it’s not me, it’s you.”

Which brings us to Big Oil.

Speaking at an industry conference in London last week, Amin Nasser, chief executive of Saudi Arabian Oil Co. – AKA Saudi Aramco – said the industry suffers from “a crisis” of perception. People mistakenly think the oil business is finished, he argued, so they won’t invest in it, and that’s going to lead to a crisis of supply, which hurts everyone. He said a “senior financial figure” he ran into at Davos predicted the end of the oil industry in about five years, while another claimed most vehicles on the road would be electric within a decade.

In other words, important stakeholders believe that the entire world will soon run on anything … but oil!

Here’s the thing: Hardly anyone serious thinks the oil business is “finished” within five years or even ten. My colleagues at Bloomberg NEF produce long-term projections for electric vehicles typically at the bullish end of the spectrum. Yet even they expect only 9 percent of the global passenger-vehicle fleet will be electrified by 2030, leaving 1.3 billion internal-combustion vehicles still around. That doesn’t sound like zero oil demand. Similarly, Nasser warned of a drop of one-fifth in global oil supply “if investment stopped today.” I just sat through umpteen oil-sector earnings calls, and I am here to tell you investment is not stopping today.

The hyperbole matters because, if the oil industry is to deal with what ails it, then it had better clearly define what that is.

Nasser’s explanation as to why stakeholders apparently ignore the industry’s success in providing reliable energy supply essentially boils down to them ignoring “logic and facts” and mostly responding to “pressure and hype” in forming views that are, nonetheless, “sincerely held.” Few things win hearts and minds quite like a dollop of condescension, but the real problem is that this is all too simplistic.

As Nasser said several times, fossil fuels have helped lift billions of people out of poverty. What he didn’t say several times was that those fuels also inflict a cost in terms of carbon emissions. This is the conundrum: We rely on fuels to support our way of life that we now know also threaten it. Lifting one generation out of poverty is a stunning achievement, but it won’t seem that way as and when their children’s or grandchildren’s homes get inundated. It is telling that the phrase “climate change” didn’t appear once in the speech, yet Nasser boasted of Aramco’s oil having relatively low carbon intensity – which is nice but ignores the fact that the vast majority of emissions relate to combustion of the fuel, not producing it.

At one point, Nasser said the industry should remind investors that “despite being a much smaller proportion of the S&P 500, energy pays twice the dividends of tech.” He really nailed something there, though I suspect not in the way he intended.

The majors must pay higher dividends than technology companies, partly because poor returns on a decade of high-octane investment leading up to 2014 sullied the energy sector’s reputation as a steward of capital. Moreover, even though the industry isn’t “finished” by any stretch, investors question whether new projects with a lifespan measured in decades will fully pay for themselves if oil demand plateaus. Notice I didn’t write “collapses”; it’s a subtle but important distinction.

For financial markets, it matters less that things like renewable energy and electric vehicles represent a small part of overall demand today and more that they capture much of the marginal growth. On Wall Street, that sort of perception, grounded in reality, creates reality. Energy’s weighting in the S&P 500 hasn’t collapsed over the past decade just because fund managers suddenly found some Greenpeace flyers.

Even OPEC’s own projections show oil demand essentially flattening out in the late 2030s, and I’m pretty sure they aren’t in the business of hyping alternatives. Yet Nasser calls for pushing back on “exaggerated theories like peak oil demand.” Less than three years ago, he was telling an audience in Istanbul that Aramco’s technology would help raise its oil resources to 900 billion barrels and the recovery factor on its major fields to 70 percent. As it stands, Aramco’s existing proved reserves are around 270 billion barrels – equivalent to almost a third of OPEC’s projection for global oil demand through 2040 and representing almost 70 years’ worth of Saudi Arabian production.

Somehow, this doesn’t sound like a strategy for dealing with potential disruption or an energy transition. It sounds more like the traditional mindset of “drill it and they will come.” That has damaged the industry’s credibility with investors and likely explains the flawed thinking behind that $2 trillion figure thrown around for Aramco’s elusive IPO.

The oil industry’s products remain in high demand, natural gas is taking market share, and it can use the cash flow generated by this to pay out high dividends and invest judiciously.

Yet for this to resonate with investors and society in general, it must be set in a more realistic context. Nasser calls oil and gas “ample, reliable, and affordable”, but the “affordable” bit ignores the costs of climate change and the possibility of more widespread carbon pricing. Equally, calling a plan to re-convince everyone about the benefits of fossil fuels a “radical new mission” is a striking way to describe what amounts to the preservation of the status quo.

Instead, as Nasser also said, the industry should be transparent:

• Releasing fulsome stress test results so investors can make up their own minds should be a priority for IR departments at this point, not a concession granted under duress.

• Rather than dismissing competing technologies as too small to matter, recognize this is something said by every company that got upended by a newcomer. Instead, emphasize your market remains large for now and the foreseeable future and talk about how and why you can last longer in relative terms as and when it peaks and shrinks (or will eventually bow out gracefully in a fountain of dividends).

• By all means, continue striving for lower carbon intensity in your own operations while being honest about the trade-offs from using oil and gas and how society may shift priorities against those trade-offs.

• Above all, focusing on costs rather than growth, and being careful to maintain a flexible portfolio of projects that aren’t all weighted to returns beyond 2030, are sound strategies being deployed by some already.

Whatever you do, don’t think that talking more forcefully will suddenly make everyone understand. The conversation, the very language, has changed.

Washington Post



21 Comments on "Big Oil Thinks Its Real Problem Might Be You"

  1. Cloggie on Wed, 6th Mar 2019 12:00 am 

    The Nasser’s of this world are the problem. A bunch of camel jockeys, who happened to sit on huge oil reserves, discovered by westerners, the only ones who could put the oil to good use, extracted by westerners, all the while being so kind to pay huge sums of money to the Nasser’s, who developed a lavish lifestyle and now want to see that lifestyle continued ad infinitum, rather than having deep thoughts about how to avoid being a camel jockey again after oil. They should copy the behaviour and work-ethic of East-Asians and use the oil wealth to invest in future industries, with prime candidate #1 being massive solar parks that could produce electricity and next hydrogen or one of its many derivatives, so the Middle-East can remain an important energy producer.

  2. Antius on Wed, 6th Mar 2019 3:22 am 

    Things are looking ‘dark’ for France, quite literally.

    https://www.zerohedge.com/news/2019-03-05/project-transform-france

    Beyond street protests, the yellow vest movement does not appear to be developing into a real political movement capable of winning control of the state.

    Macron is mobilising Muslims to his cause. There are so many of them, that they may tip the elections in his favour. Their numbers grow every year, whilst the native French population shrinks. Unless nationalists are able to pull off a miracle and gain control relatively soon, I fear that we may be witnessing the end of French (and European) civilisation. The far left have literally destroyed it.

  3. Cloggie on Wed, 6th Mar 2019 3:47 am 

    Antius, you are quoting Gatestone Institute, a kosher dominated neocon club, that deviates from the usual kosher party-line, in that they (rightly) consider Muslims a danger to the Jewish agenda of destroying whitey with darkie mass immigration and cement jewish power once and for all.

    Muslims understand the agenda and are using the Jews as their useful idiot to open the doors to the West for them, so the Muslims can integrate the West into their intended global Caliphate.

    John Bolton chairs the club, nuff said.

    Gatestone Institute is targeting Macron with fake news about him “mobilizing Muslims against whitey”. What these kikes hate about Macron is that he favors a strong EU.

    Now, Macron is certainly not a white nationalist, but it goes too far to see in him a proponent of “Rothschildt bankers”. The truth is that he is fairly reluctant in opening France for further mass immigration, much in contrast to Merkel.

    Macron has said that Europe needs an army and that somehow Russia needs to be integrated in the European security structure. The first act of Macron government was inviting Putin with all egards.

    European white nationalists/populists should use Macron as their useful idiot and team up with Russia (the classic Gaullist agenda)…

    http://en.kremlin.ru/events/president/news/59317

    …in order to form an Aryan super power of 640 million, nuclear armed to the teeth and lay claim on white North-America and take that hapless demographic over from the kikes, as soon as CW2 will be a reality, while the Chinese have a good time with Downunder and American bases throughout East-Asia and get the empire over with, including Eurasian nuclear brinkmanship.

  4. Antius on Wed, 6th Mar 2019 4:16 am 

    The problem for big oil is not rooted in human perception; it is all about hard economics and the laws of physics. Take a look at the graph in the article below:

    https://tinyurl.com/y2zcmk7x

    Global capital expenditure is nearly five times what it was in 2001. Between 2011 and 2014, average CAPEX was seven times higher than it had been in 2000.

    And yet, if figures from Peak oil barrel are to be believed, crude and condensate production volumes are 25% higher now than they were in 2001. Prices keep bouncing around the $50-70/barrel mark; which is about $30-40/barrel in 2001 dollars. Oil prices are held down by affordability. The consumers of this world simply cannot afford to pay much more than $50/barrel long-term, because of the underlying energy intensity of the real economy. High energy prices are leading to debt accumulation and ultimately, another great recession.

    So, CAPEX has increased 5 times; production volumes have increased 1.25 times and price paid per barrel has increased 1.75 times. Logic dictates that the oil industry simply isn’t as profitable as it used to be. The cost of production is increasing faster than revenues. We need to spend twice as much in CAPEX to get the same earnings as we did in 2001. That cuts the average annual return on investment by half. Thank god for low interest rates!

    This will not end well. And it would be a mistake to assume that battery electric vehicles will rapidly remove all need for oil. Transportation is only 60% of global oil consumption and the automobile sector is only one third of that.

    https://tinyurl.com/yxwwsn3r

    Even if every automobile on the planet were replaced by an all-electric version, oil demand would decrease by a modest 20%. The economics of electric vehicles only appear competitive at all thanks to subsidy. The biggest hidden subsidy is that fact that gasoline is subject to 200% tax in European countries and electricity for road use is not. Factor in an equivalent level of tax; unsubsidised capital cost and battery replacement costs and the net cost benefits of electric vehicles (even at relatively high oil prices) will shift into the negative.

    Welcome to humanity’s thermodynamic energy collapse.

  5. Cloggie on Wed, 6th Mar 2019 4:29 am 

    LOL American princess warns against American food:

    https://www.dailymail.co.uk/news/article-6774985/Duchess-Sussex-reveals-fears-chlorine-washed-chicken-US.html

    “Now the Duchess of Sussex reveals fears over chlorine-washed chicken from the US as she wades into post-Brexit trade deal row”

    Jeremy continues to amaze, while getting rid of the moneymen:

    https://www.dailymail.co.uk/news/article-6775059/ANDREW-PIERCE-Tony-Blairs-old-pal-Jeremy-Corbyns-new-crony.html

    “ANDREW PIERCE: From Tony Blair’s old pal to Jeremy Corbyn’s new crony… another anti-Semitism shambles”

    https://www.dailymail.co.uk/news/article-6775817/Jeremy-Corbyns-allies-intervened-anti-Semitism-probes.html

    “Jeremy Corbyn’s allies ‘intervened in anti-Semitism probes as a matter of routine and demanded leniency’, whistleblowers claim”

    Blairites getting serious about forming an new globalist party that is pro-EU (will they still be pro-EU after the coming EU-elections in May.lol?).

    https://news.sky.com/story/independent-group-mps-hold-talks-on-becoming-political-party-11655902

  6. Antius on Wed, 6th Mar 2019 4:47 am 

    Rystad energy projections of global Oil & Gas CAPEX through to 2025.

    https://tinyurl.com/y4gube9t

    By this point, just 6 years from now, CAPEX will need to be hitting $700billion; almost 8 times higher than it was in 2001; for a supply that is maybe 1.7 times greater in volume terms. The US CAPEX alone will need to be 3 times greater than the entire worlds was in 2001.

    This will need to happen at a time when the world is mired in debt and struggling against the effects of the second great recession.

    If something cannot continue, then it won’t. But the alternative involves huge levels of human suffering.

  7. Davy on Wed, 6th Mar 2019 5:41 am 

    “…in order to form an Aryan super power of 640 million, nuclear armed to the teeth and lay claim on white North-America and take that hapless demographic over from the kikes”

    OH BOY, we are on the grand euro army coming to American fantasy again. LOL

  8. Antius on Wed, 6th Mar 2019 5:42 am 

    “European white nationalists/populists should use Macron as their useful idiot and team up with Russia (the classic Gaullist agenda)…”

    I hope you are right. I did not know about the Gatestone institutes’ pernicious roots. Thank you for letting me know.

    Macron certainly isn’t someone that I would consider a friend to the European peoples. I have posted links before demonstrating that Macron is basically ‘a good little goy’ for Zionists in France. He has even promised to ban some tiny little right wing groups, that don’t appear to have anything to do with anything, but are useful for Macron in demonstrating that he is tough on anti-Semitism. So off to prison they must go.

  9. Davy on Wed, 6th Mar 2019 6:00 am 

    “Trade Panic: China To US Weekly Spot Rates For 40′ Containers Collapse”
    https://tinyurl.com/y3gvwrhj Zero Hedge

    “A continued slowdown in the rate at which weekly spot rates for 40′ shipping containers are being shipped from China to North America suggests US demand for Chinese goods continues to stumble, and signals a broader economic slowdown globally looms.”

    “During the last sixteen weeks, FBX 40′ shipping container rates from China to North America have seen a dramatic move lower, raising concerns about the health of underlying demand.”

    “As a whole, the FBX Global Index shows container rates are in danger of taking out their December lows, signaling that the global slowdown is not a “glitch,” but rather the start of a severe synchronized downturn.”

    “Of course, the FBX data is just the latest in a long line of worrying news for the Chinese economy but now shows the global slowdown is contagious, infecting the US economy where growth is expected to be less than 1% to near zero for 1Q19. “

  10. Antius on Wed, 6th Mar 2019 6:03 am 

    The thing that disgusts me the most about Marxists and left-wing idealists (European ones in particular) is the way in which they cannot tolerate and therefore criminalise their opponents.

    https://tinyurl.com/y3weywp6

    These people do not appear able to live in anything other than a totalitarian dictatorship.

    Isn’t it ironic? LePen is going to be jailed for posting pictures of what the Muslims did to the French people. Muslims that the French political establishment let in!

  11. Davy on Wed, 6th Mar 2019 6:05 am 

    “None Of Their Business”: Qatar Blasts Saudi Objections To Possible Russian S-400 Purchase”
    https://tinyurl.com/yxo2rp3w Zero Hedge

    “Over the past year Saudi Arabia has routinely leveled the charged that Qatar is a state-sponsor of terror and thus should be prevented by global powers from purchasing advanced weapons, a charge that Qatar denies. In its corner Saudi Arabia also has other Gulf Cooperation Council (GCC) states like the UAE that have long sought to isolate Doha. But since Saudi-led GCC states initiated a blockade against tiny but oil and gas rich Qatar staring in 2017, ties between Doha and Moscow have actually improved and grown. Qatari FM al-Thani addressed the continuing GCC crisis by saying: With regards to Saudi or other countries, it is none of their business, it’s a sovereign decision by Qatar. Last month reports suggested the Saudi king had threatened “military action” in a personal letter to French President Emmanuel Macron should Qatar move forward with obtaining the S-400s from Russia. The letter reportedly said “the kingdom would be ready to take all necessary measures to eliminate this defense system, including military action,” according to a French Le Monde report. For the past two years Russia has aggressively promoted its S-400 with agreements recently reached with Saudi Arabia and Turkey, something which has alarmed US defense planners. Broader proliferation of the advanced system in the Middle East would mark a significant and potentially irreversible retreat for already waning American influence in the region. This would mean the Middle East could soon witness the Russian-made S-400 in Saudi Arabia, Qatar, Turkey, and Syria.”

  12. Antius on Wed, 6th Mar 2019 6:10 am 

    “A continued slowdown in the rate at which weekly spot rates for 40′ shipping containers are being shipped from China to North America suggests US demand for Chinese goods continues to stumble, and signals a broader economic slowdown globally looms.”

    The great crisis of our time lurches closer; like a wolf stalking its prey. You had better get working on that farm Davy. Think potatoes.

  13. Davy on Wed, 6th Mar 2019 6:17 am 

    “Waking into our new volatile age of oil prices”
    https://tinyurl.com/y2bg4go8 Energy Matters

    All was calm when I predicted in February 2018 at oil-price.net that mid-June 2018″ would see an upsurge in oil price volatility. Four months later, on June 26 2018, a volatility spike in West Texas Intermediate crude oil spot price marked the beginning of the turbulent phase in the oil markets that we are now experiencing.

    “For those who have followed my articles at oil-price.net, which began in early 2010, you’ll know that there is no magic to my forecasts. I may be mildly autistic, but I am not psychic. They are based on a repeating pattern of spiking variance in oil prices that seems to have initiated from around the year 2000. For the last two decades, wave-like palpitations have surged through the oil markets like clockwork every 3 to 4 years. Who knows whether this pattern will continue going forward, but so far it has conformed to an ongoing succession with 6, possibly 7 repetitions, if one counts a modest bump of increased variance that occurred in 1996.”

  14. Davy on Wed, 6th Mar 2019 6:19 am 

    “You had better get working on that farm Davy. Think potatoes.”

    If you add goat meat to it and you get a nice stew. I prefer that to plain boiled potatoes.

  15. Davy on Wed, 6th Mar 2019 6:27 am 

    “Why SEPA’s DERMS document is a time- and money-saver for all energy industry stakeholders”
    https://tinyurl.com/y5qxdgvm Renewable Energy World

    “DERMS is probably one of the hottest (and most complicated) issues in the utility industry today — and SEPA has a plan for how to simplify it. DERMS seek to manage power flow, regulate voltage and control distributed energy resources (DERs) such as energy storage, solar PV, electric vehicles and demand response. Because utilities don’t have access to appliances and energy devices behind the meter, DERMS focus on systems like energy storage at substations, community solar interconnections, solar canopies over parking lots and commercial solar + storage, said Sharon Allan, Chief Innovation Officer at SEPA, in an interview. “It really looks at the grid side, in front of the meter, and how to monitor, analyze, optimize and control the voltage, frequency and parameters,” she said. And because every state and utility is different — and the penetration of DER varies in every market — vendors and utilities have been unsure about what they need to make grid management easier. Without it, the grid could quickly become the wild west, said Allan.”

  16. Dredd on Wed, 6th Mar 2019 7:45 am 

    It’s like Trump saying “I’ve done absolutely nothing wrong” (The Authoritarianism of Climate Change).

  17. Davy on Wed, 6th Mar 2019 8:56 am 

    “OECD Slashes Global GDP Forecast, Warns “Outcome Could Be Weaker Still”
    https://tinyurl.com/y2hj8s9u Zero Hedge

    “The world is rapidly headed for a recession unless something changes, according to the latest gloomy warning from the OECD overnight, which has joined the IMF in warning that the global economy is suffering more than expected from trade tensions and political uncertainty which are clouding prospects particularly in Europe, where the OECD slashed its 2019 growth outlook to just 1%, almost half its prior 1.8% forecast. “The global expansion continues to lose momentum,” the Paris-based Organization for Economic Cooperation and Development said as it downgraded the 2019 GDP forecast of almost every Group of 20 nation including the US, China, UK and euro area, while it now expects Italy to be headed to worst year since 2013. “Growth outcomes could be weaker still if downside risks materialize or interact.”

    “The OECD seemed especially worried about Europe’s near-recession, noting that while central banks should stay in expansionary mode, the group called for structural reforms and fiscal stimulus in the European countries that could afford it (cough Germany), saying that “monetary policy alone cannot resolve the downturn in Europe or improve the modest medium-term growth prospects.” As noted above, Europe suffered the brunt of the downgrades, and while the US outlook was lowered slightly, the U.K.’s 2019 forecast was cut to 0.8 percent from 1.4 percent, and Germany’s to 0.7 percent from 1.6 percent. Predictably, the OECD also singled out Brexit as one of the persistent threats, warning that If the U.K. doesn’t secure a deal, it sees a risk of a near-term recession, with “sizeable negative spillovers” on other countries. Finally, China – which two days ago announced its new growth target range of 6- 6.5% from “around 6.5%” – remains another major concern as a sharper slowdown there would have “significant adverse consequences for global growth and trade”, just as we warned in out 2019 year ahead preview. The OECD now expects China’s expansion to slow to 6 percent next year from 6.2 percent in 2019.”

  18. Antius on Wed, 6th Mar 2019 9:26 am 

    “The world is rapidly headed for a recession unless something changes, according to the latest gloomy warning from the OECD overnight, which has joined the IMF in warning that the global economy is suffering more than expected from trade tensions and political uncertainty which are clouding prospects particularly in Europe, where the OECD slashed its 2019 growth outlook to just 1%, almost half its prior 1.8% forecast.”

    A somewhat disingenuous article that pins blame for the approaching recession on trade disruption due to Trump-tariffs. No doubt Trump will be the fall-guy for the next down turn. I’m sure that the fed raising interest rates at a time of record global debt levels has literally nothing to do with it; just as declining EROI has nothing to do with global debt accumulation in the first place. People will be all too happy to jump to all the wrong conclusions.

  19. Richard Guenette on Wed, 6th Mar 2019 12:54 pm 

    The US is declining due to $22 trillion in debt, it is facing skyrocketing deaths, a drug overdose crisis, suicides, mass shootings, lower life expectancy. Their military is stretched too thin, its government is hijacked by neocons and other lunatics who are placing sanctions on countries that never threatened or attacked them.

  20. makati1 on Wed, 6th Mar 2019 6:00 pm 

    Another sucker ad from WaPo. Anyone in the market casino today is a fool. I’m waiting for it to crash. Well overdue.

  21. Davy on Sat, 9th Mar 2019 5:09 am 

    Dear Reader,

    I’m so sorry PO.com readers for losing my shit this morning. I realize it’s not too difficult to figure out I routinely engage in identity theft and deploy multiple sock puppets.

    Why? I am sick.

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