Oil News Special
What happened in January
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The oil industry is in upheaval and I wanted a dedicated place to write about it so I am doing a special edition newsletter on the first Wednesday of every month this year. Let me know what you think by replying to the email or if you have tips/suggestions please email me at polymerist@substack.com
Big Oil Staying Away From Alaska
Henry Fountain reporting for the New York Times reported on Jan 6th that the arctic refuge drilling lease bids were more dismal than people expected. Half of all the leases up for bidding were actually bid on and all the bids were by Alaska itself except for two.
Only two companies, neither of them major oil producers, made bids to acquire 10-year rights to explore and drill for oil on two tracts totaling about 75,000 acres. A state-owned economic development corporation, offering the minimum of $25 an acre, was the sole bidder on the other tracts, totaling about half a million acres. The rights to another 400,000 acres remained unsold.
Fountain’s reporting stated that for the most part the opening of all this land for potential drilling was a big flop. The current state of political affairs right now makes it seem unlikely that these bids will actually go through. Despite there being estimates of billions of barrels of oil no one seems to think its worth drilling for it in the far northern reaches of Alaska.
If you want an indicator on the future development of new oil exploration here it is and I would expect there to be more oil well closures and shuttering of refineries in order to buoy oil prices. If we ever get back up above $100 dollars/barrel maybe things will open back up, but I do not see this happening anytime soon. Especially once shareholders at companies have realized that traveling for face to face meetings is probably not an efficient use of capital.
Oil Companies Reconsider Political Donations
James Osborne and Paul Takashi reported for the Houston Chronicle on Jan 11th that oil companies are reconsidering donations to political action committees and direct contributions to the senators and representatives of the US Congress that voted against the certification of Joe Biden.
Houston-based ConocoPhillips and BP’s employee political action committee on Monday said they will halt political contributions for six months while they re-evaluate criteria for candidate support. Houston-based Occidental Petroleum said it is pausing donations “to ensure that we contribute to candidates who support our interests and align with our values.”
ConocoPhillips cited Congress’s vote on the certification of the electoral college results for its decision to temporarily suspend political contributions. “While the company has a robust governance for political contributions, we are actively reviewing our current policies,” a spokesman said.
Exxon Mobil, the Texas oil major, told the online newsletter Popular Information that it too is reviewing contributions from its own PAC. Its U.S. rival, Its U.S. rival, Chevron, said it would review its political giving policy in light of “the events of the past week.”
Dino Grandioni with Alexandra Ellerbeck reported a similar story in the Washington Post on Jan 12th and confirmed that Exxon Mobil and Chevron are considering to stop donations, but it is unclear if they actually will. They further reported that critics of the industry doubt that these pauses will actually do anything or make any significant difference.
Marathon Petroleum, the largest petroleum refinery operator by volume in the country, is also pausing political contributions. The Ohio-based firm did not say when it would resume them.
"The violence that took place at the Capitol was appalling, and we condemn it unequivocally," Marathon Petroleum spokesman Jamal Kheiry said. “We’re glad Congress was able to resume its important work toward the lawful transition to the Biden-Harris administration.”
And ExxonMobil and Chevron, the two most valuable U.S. oil companies, said they are reviewing PAC donations, but did not say they were pausing contributions. “Previous contributions to a candidate do not indicate that the ExxonMobil PAC will contribute again in the future,” Exxon spokesman Casey Norton said.
To me it seems likely that these companies will continue to donate to these politicians unless they come under so much internal pressure from shareholders that contributing politically just goes against the wishes of shareholders. These companies are extremely large, but institution shareholders I believe make up a large portion of the shareholders for the companies and have already put pressure on them with respect to climate change and alternate revenue sources. Grandioni and Ellerbeck further report that:
The loss of oil sector contributions would be particularly painful for Texas politicians who have long relied on the industry to help fund their campaigns.
Cruz, for instance, received $1.6 million in political donations from the oil and gas industry over the last five years, more than any business group other than real estate professionals, according to the Center for Responsive Politics.
Rep. Randy Weber, of Beaumont, one of 16 Texas Republican House members to vote against certifying election results, counted oil companies Koch Industries, Marathon Petroleum, Phillips 66 and Exxon Mobil among his 20 largest contributors ahead of last year’s election.
Neither Cruz nor Weber responded to a request for comment
It appears that these oil giants have quite the sway over someone like Ted Cruz and Randy Weber not only due to the political donations, but they are big employers in the state of Texas and the respective districts. It will be interesting to see if these politicians denounce their old actions or if they will oppose the Biden-Harris administration for the next four years.
One thing that I find interesting is if the Biden-Harris administration can pass their proposal on pandemic relief and infrastructure spending then oil companies will see at least some growth for fuel sales for trucks to deliver raw materials to infrastructure projects and all of the downstream effects that investing in infrastructure causes. Paving roads means using downstream oil products (asphalt) and the fuel to get it there (gasoline and diesel) is good for business.
If the oil companies can get into these further downstream businesses and green energy generation then they might have even more to gain from a Biden-Harris administration than they ever did from the Trump administration.
Occidental Investing In Direct Air Capture
Kevin Crowley and Ashkat Rathi reported for Bloomberg Green on Jan 13th that Occidental Petroleum is seeking to do direct air carbon capture in order to send planet warming CO2 down into the ground in order to push the more valuable oil to the surface.
The facility, expected to cost hundreds of millions of dollars, will also need support from tax credits and outside investors to be financially viable.
The climate crisis has increasingly found its way to the boardrooms of the world’s largest oil companies, which many environmentalists say are to blame not only for pumping emissions into the air but also for spreading misinformation on the consequences of doing so. Some, such as BP Plc, have responded by plowing money into renewable energy. Others, such as Exxon Mobil Corp., are doubling down on fossil fuels.
Occidental is essentially just a partner in the whole process. Carbon engineering will be building and supplying the actual direct air capture device and proposed the mechanism of pumping CO2 into the ground and getting oil in return. Occidental has the leases to operate in the Permian basin and the infrastructure to deal with the oil that comes out. The funding for the project will come from Rusheen Capital and Occidental’s venture capital arm, Oxy Low Cost Ventures to form a funding vehicle known as 1PontFive.
I didn’t know much about any of this so I did some more digging and I came up with this excellent Axios article. Ben Geman reported for Axios on August 19th 2020. Essentially Carbon Engineering is funded by Occidental, Chevron, and Bill Gates to name a few and this type of opportunity is exactly why companies like Occidental and Chevron are making these types of bets. They are just raising more money and putting more of their own capital to work on a highly risky venture that has a huge amount of upside for the oil business.
Even if we switch to 100% renewable energy we will likely still need to extract petroleum to make chemicals. This sort of direct air capture technology theoretically at least makes the extraction of the oil carbon neutral.
Oil Prices Coming Back, But How Far?
Saket Sundria and Alex Longley reported in World Oil on Jan 12th that oil pricing is coming back and has surged over the last quarter of 2020 and is roaring into 2021 with a potential price of $53/barrel. The higher oil prices are linked to vaccine news and potential for life getting back to normal in 2021 once everyone is vaccinated (haha ok).
This might sound like good news, but when looking at historical prices of oil and listening to to the talk about offices never being the same again I don’t see a future where oil is over $100/barrel without significant cuts to production or a significant amount of demand. As of the writing of this section of the newsletter on Jan 22nd United Airlines posted a 4th quarter loss of $1.9 billion and $7 billion for 2020. If demand for flights do not come back and white collar workers only drive to work 3 of the 5 days of the week then our need for gasoline decreases.
Couple this with Tesla making more cars than ever in 2020 and its competitors starting to release their own EVs designed to take on Tesla and we have a recipe for stagnate oil prices. We might see prices hit $70/barrel in September/October if enough people get vaccinated.
Total Leaves American Petroleum Institute
The French oil company Total has decided that it was time to leave the American Petroleum Institute according to reporting from Stanley Reed for New York Times and Total’s own press release on Jan 15th. The departure is apparently due to disagreements over the Paris climate agreement and the trade organization’s opposition to subsidies for electric vehicles. In Total’s press release they assess their membership to trade organizations according to a six point system:
our science-based position that the link between human activity and climate change is an established fact,
our support for the objectives of the Paris Agreement,
our belief in the necessity to implement carbon pricing,
our confidence in the key role that natural gas plays in the energy transition,
our support for policies and initiatives that promote the development of renewable energy, and
our support for the development of CO2 capture and storage.
I’ve covered it here already in numerous emails, but companies like Total and Neste are seeking alternative paths to making money outside of their traditional methods that have been reliant on selling refined oil. It is hard to change. These companies have basically been able to just print money by refining oil, keep costs down, and minimizing oil related disasters. Low oil prices, massive layoffs, and a public that is demanding alternatives to oil means that the executives at these oil companies have a different job ahead of them.
The European oil companies appear to be leading the way when it comes to transitioning towards new revenue generation. I expect them to make more investments into chemicals as a way to diversify and keep some of their oil refineries in business in the event fossil fuel powered vehicles experience a sharp decline.
Keystone XL Pipeline Halted. Again.
Justine Calma reported for The Verge on Jan 20th that President Biden halted the Keystone XL Pipeline through an executive order. Calma reports that:
The order directed federal agencies to review environmental rollbacks made under the Trump Administration, according to the Huffington Post and The New York Times. That includes revisiting fuel efficiency standards, and the boundaries for the Bears Ears and Grand Staircase Escalantenational monuments. It also temporarily halts oil and gas leasing in the Arctic National Wildlife Refuge.
The halting of oil and gas leasing in the Arctic National Wildlife Refuge is kind of amusing at this point due to the lack of bids on anyone wanting to try and extract oil and gas from the area with the recent oil high price of $53/barrel.
Calma further reports that:
830,000 barrels of crude oil were expected to flow through the $8 billion Keystone XL pipeline every day. In an apparent last-minute attempt to get the project in Biden’s good graces, on January 17th, the company said it would spend $1.7 billion to purchase enough renewable energy to match the pipeline’s power consumption by 2030. Keystone XL developer TC Energy suspended work on the pipeline today and said in a statement that it is “disappointed” with Biden’s decision.
To me it seems like these pipelines are being built on the basis of the sunk cost fallacy with the idea that oil is going to come roaring back, which I do not think will happen anytime in the near future without significant cuts to production. Further, the oil in Alberta that the Keystone XL was trying to move is some of the most expensive oil to refine due to it being primarily a very subpar version of crude oil known as bitumen, a key ingredient in rubberized asphalt.
National Geographic’s Stephen Leahy reported in August 2019:
Perhaps surprisingly, the oil sands don’t actually have any oil per se. Instead, a huge area about the size of Florida or Wisconsin north and east of Edmonton, Alberta, contains a tarry bitumen mixed with sand that is mined from underneath the boreal forest.
The 120-odd active oil sands projects are owned by major oil companies from Canada and around the world, including the U.S. and China. Together, the companies pump out 2.6 million barrels every day, virtually all of which is shipped to U.S. refineries. What’s shipped is diluted bitumen, not crude oil. Bitumen is too thick to pump, so light crude oil and chemicals are added.
In most of Alberta, the bitumen is buried so deep that wells must be drilled to extract it, and steam injected to mobilize it, at great energy cost. But north of Fort McMurray the bitumen layer is shallow enough that it can be strip mined in huge open pits.
With oil prices so low it makes little sense to keep up with these activities especially since Liggio et al. reported in Nature Communications in 2019 that oil from the oil sands region of Canada results in 30% higher green house gas emissions to extract the “oil” if we can call it that.
Part of the problem with all of this investment into oil is the question of what the labor in Alberta will pivot to if the oil industry starts shrinking not just due to attempts to meet targets from the Paris Climate Accord, but because the business of extracting and refining the oil sands is going to become non-profitable.
Alberta will need to figure out a different economic model than oil if it wants to retain its residents for the future. Perhaps replanting much of the strip mined oil sands region with forest could be a temporary salve, but this is a problem that many other oil economy dependent areas will have to figure out.
Shale Output in Decline
Jeremieh Shelor reporting for Natural Gas Intelligence on Jan 20th that output from on-shore US sites have declined except for Haynesville and Appalachia Shale regions, which will remain flat. Shelor is getting his data from the Energy Information Agency’s report which you can read here. I copied the table from the report and pasted it below.
As I have written this over the month of January and read the stories from the month things are not looking great from oil. The combination of lower productivity, no one wanting to bid on new oil exploration, pipelines that should never have been being built getting stopped, and oil prices at what we consider new highs of $53/barrel, which are similar to what they were in 2016, which was considered a terrible year for oil companies.
New York City Pension Fund Votes to Divest of Fossil Fuel Stocks
The NYC mayor Bill DeBlasio and comptroller Scott Stringer announced on Jan 25th that New York City’s pension funds have voted to a first in the nation of a public pension fund intent to divest from fossil fuel based stocks. This represents about $4 billion in securities tied to fossil fuel companies.
“Fossil fuels are not only bad for our planet and our frontline communities, they are a bad investment,” said Mayor Bill de Blasio. “Our first-in-the-nation divestment is literally putting money where our mouth is when it comes to climate change. Divestment is a bold investment in our children and grandchildren, and our planet. I applaud the trustees, advocates and experts for their hard work, and I look forward to seeing more cities around the world join this call for change.”
The NYC pension funds announced in 2018 that they intended to divest from fossil fuel stocks within 5 years and it appears that they are well on track to do it. Unwinding 4 billion in investments from fossil fuel stocks is probably going to send some shares tumbling in oil stocks, but it also hopefully represents about $4 billion being invested in climate change solutions.
I was in Brooklyn during Hurricane Sandy and walking through lower Manhattan after the flooding had receded felt like I was in a post-apocalyptic movie. I can understand why the NYC pension funds would vote to divest themselves from these stocks and move towards what they consider the future of energy. Ultimately it will be companies that bring in the renewable energy revolution that will return the most money to the pension funds.
Cenovus-Husky Oil Patch Merger Layoffs To Start
Tony Seskus on Jan 26th for CBC News reported that Cenovus-Husky the new company will start work force reductions on Jan 26th in Calgary, CA.
The companies announced the $3.8-billion deal in October, with the aim of creating a single business that is stronger and more resilient. However, Cenovus has said that 20 to 25 per cent of the combined workforce would face job cuts.
The majority of the layoffs of 1,720 to 2,150 positions were expected to take place in Calgary, where the two firms are headquartered. It's anticipated those layoffs will occur in stages.
As the oil business becomes more difficult I expect we will see more consolidation in the sector under the guise of “efficiency” and “cost savings.” Seskus further elaborates:
Combining the companies will create annual savings of $1.2 billion, the companies have said, largely achieved within the first year and independent of commodity prices.
In October, the companies told analysts about $400 million of the savings are expected to come from "workforce optimization," along with savings from IT and procurement.
If I worked in the oil sector in Alberta I would be looking to transition my career out of oil. The tar sands are a difficult type of oil to refine that will only face more difficulty in the face of low oil prices, the rise of EVs, and new work from home practices that many companies seem to be adopting. I think we will see these traditional oil companies getting bigger and bigger until they are so big that they might eventually qualify for bail-outs by governments.
Capitalism on the way up and socialism on the way down for the shareholders.
US Oil Industry Seeks Partnership with Farm Belt
Jarret Renshaw and Stephanie Kelly reported in Reuters Jan 29th that the oil industry is seeking an alliance with biofuel producers.
The U.S. oil industry is seeking to forge an alliance with the nation’s corn growers and biofuel producers to lobby against the Biden administration’s push for electric vehicles, but is so far meeting a cool reception, according to multiple sources familiar with the discussions.
The effort to promote liquid fuels and combat expected federal subsidies for electric vehicles marks an unusual attempt by the petroleum industry to join with its long-time rivals, reflecting the scale of its concern over President Joe Biden’s measures to combat climate change and tamp down fossil fuels.
While the oil industry and biofuels producers are competitors for space in America’s gas tanks, they share a desire to ensure a future for internal combustion engines.
I had taken a meeting once in graduate school with a company that was looking to commercialize a biobased platform chemical. They told me a story about how one of their chemical’s derivatives was actually an amazing biofuel additive and could perform even better than ethanol in gasoline. They had met with a consortium of fossil fuel producers who promised to take their chemical fully commercial, invest, etc and then essentially locked them out of the business somehow and closed that area of research and product development to them completely.
I’m not sure how one would do this, but my guess would be developing and holding IP that the smaller company cannot litigate against due to lack of capital. If that story I was told was true (and I think it is, they were good guys as far as I could tell) then I am sure that has happened to the biofuel producers over the last 10-20 years numerous times by these oil companies.
I don’t expect the biofuel market to grow dramatically, but there might be uses for it in furnaces and on-site power generation that you might get from a GE Turbine? If you have any insights let us all know in the comments.
General Motors Announces Fully Electric by 2035
On Jan 28th, Neal E. Boudette and Coral Davenport reported for the New York Times that General Motors has announced a plan to zero emission vehicles by 2035. This move has been shock to the US automotive sector and represents the first US based automotive company to make a public commitment to transition to electric vehicles. Boudette and Davenport report:
G.M. said its decision to switch to electric cars was part of a broader plan to become carbon neutral by 2040. “General Motors is joining governments and companies around the globe working to establish a safer, greener and better world,” Mary T. Barra, G.M.’s chairman and chief executive, said in a statement. “We encourage others to follow suit and make a significant impact on our industry and on the economy as a whole.”
G.M.’s announcement comes just one week after Mr. Biden signed an executive order directing the Environmental Protection Agency and the Transportation Department to quickly reinstate tough auto fuel-economy rules put in place during the Obama administration, and one day after he signed a follow-up order directing the federal government to purchase all-electric vehicles. He is also pushing for a new economic recovery package to include funding to build 500,000 electric vehicle charging stations, and to create a system of rebates and incentives for purchasing electric vehicles.
This is bad news for GM’s competition and this is worse news for oil companies. I think Elon is probably dancing a little jig since his goal with Tesla was to transition the world to electric vehicles and it appears to be working. It probably also doesn’t hurt that Tesla’s current market valuation is far greater than GM and Ford combined despite selling only a fraction of the cars that GM and Ford sell. I should also note that 2035 is the “no new combustion engine” law that California and European countries appear to be targeting for banning sales of new internal combustion engine vehicles.
I think its just a matter of time until we see all of the major automotive makers make a big push to EVs. Just like the oil business I cover here this is a transformative moment for automotive companies. I expect there to be a blitz of hiring and new corporate debt. I do not think every car company will be successful in the transition.
Exxon and Chevron Discussed Possible Merger
On Jan 31st, Christopher Matthews, Emily Glazer, and Cara Lombardo reported for the Wall Street Journal that the CEOs of Exxon and Chevron had discussed a potential merger at the start of the Covid-19 pandemic just before oil prices his all time lows and oil futures went negative. Matthews, Glazer, and Lombardo report that:
Such a deal would reunite the two largest descendants of John D. Rockefeller’s Standard Oil monopoly, which was broken up by U.S. regulators in 1911, and reshape the oil industry.
A combined company’s market value could top $350 billion. Exxon has a market value of $190 billion, while Chevron’s is $164 billion. Together, they would likely form the world’s second largest oil company by market capitalization and production, producing about 7 million barrels of oil and gas a day, based on pre-pandemic levels, second only in both measures to Saudi Aramco.
A merger seems very unlikely given the current Biden Administration who just shut down the Keystone XL pipeline. Again. Further, antitrust cases for big technology firms that were started under the Trump administration are still progressing and it seems unlikely that a Exxon-Chevron deal would ever get approved due to anti-trust concerns.
I understand getting bigger for both companies could allow them to cut costs, be more efficient, return better value to shareholders, etc. Another thing that getting this big could do would be to get a bailout from Congress and the American Taxpayer because the executives don’t know how to steer their companies through a transformation in the next 15 years.
What are these companies going to do when all of the major automobile companies have transitioned 90% of their business to electric vehicles? I’d rather see Exxon and Chevron buying chemical companies and plastic processing companies to diversify themselves downstream from their own products. A merger of Chevron and Exxon would be capitalism on the way up and socialism on the way down in 2035.
Exxon Investing in Carbon Capture and Other Technologies
The New York Times reported on Feb 2nd that Exxon Mobil is investing around $3 billion into carbon capture and other technologies to lower emissions over the next five years. $3 billion by a single company is not virtue signaling I think Exxon is trying to be serious about how they move forward as a company and I hope for the employees that this is only the first step in a long journey to transitioning the company.
The company said the first area it would work on is capturing carbon dioxide emissions from industrial plants and storing the gas so it does not enter the atmosphere, where it contributes to global warming. Many climate experts have said that such carbon capture and sequestration will be critical in the fight against climate change.
Exxon said it was creating a new business called ExxonMobil Low Carbon Solutions and is working on 20 carbon capture projects around the world, including in Texas, the Netherlands, Singapore and Qatar.
The New York Times attributes this to the Biden administration’s environmental position and partially to the shareholders. I would attribute this primarily to institutional shareholders putting pressure on Exxon Mobil to come up with a plan on how to transition the company especially with GM and other car manufacturers speeding up efforts to launch fleets of electric vehicles, Tesla getting ready to launch their Cyber Truck, and Rivian looking to launch their own electric truck this year in August.
I wouldn’t be surprised to see a change in Exxon’s leadership in the next few years if they cannot change fast enough.
Tony
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