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Natural Gas Price Plunge Could Soon Lead To Shut-Ins

Natural Gas Price Plunge Could Soon Lead To Shut-Ins

Natural gas prices plunged to new lows this week, falling below $1.50/MMBtu, a catastrophically low price for U.S. gas drillers.  The factors afflicting the gas market are multiple. Prices had already fallen below $2/MMBtu at the start of 2020, weighed down by oversupply. But it wasn’t a problem confined to the U.S. There was also a global glut of LNG due to a wave of capacity additions in 2019.  

That was the situation heading into 2020. But just as the Covid-19 pandemic tore apart the oil market, natural gas also went into a tailspin. Global gas demand is expected to fall by 4 percent this year, “largest recorded demand shock” in history, according to the International Energy Agency. 

Buyers of U.S. LNG are now cancelling shipments at a rapid clip. U.S. LNG exports have declined by more than half compared to pre-pandemic levels.

“There would have been too much LNG in the world even without Covid-19,” Ben Chu, a director at Wood Mackenzie’s Genscape service, said in a statement. “Covid-19 has made it worse.”

Buyers abroad are willing to pay a cancellation fee instead of receiving shipment from U.S. exporters, a sign of how badly the market has deteriorated. For August delivery, between 40 and 45 cargoes have been cancelled, nearly double the rate of cancellation in June. 

Typically, cheaper gas can stimulate demand, particularly in the electric power sector. But that outlet is not as large as it may have been in the past, not least because gas has already been cheap for quite some time. Thus, the coal-to-gas option is limited. Without an export route, and without larger uptake from utilities, the gas glut has deepened. 

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Peak Fuel Demand Will Occur Within 10 Years

Peak Fuel Demand Will Occur Within 10 Years

It has been a tough few months for the oil industry, and there’s more pain on the way as the industry struggles with disruptive forces that could completely transform it. Now, according to BloombergNEF, oil and gas companies have one more thing to worry about: peak fuel demand.  In an outlook for road fuels published earlier this month, BloombergNEF forecasts that gasoline demand will peak in 2030, with diesel following three years later. As a result, demand for crude oil from the road transport sector is seen peaking in 2031, BloombergNEF said, at 47 million barrels daily. That’s higher than BloombergNEF’s 2019 projection, which saw oil demand from light and heavy-duty vehicles peaking at 45.1 million bpd.

To fully realize the implications of this trend, here is some context. As of 2019, road transport accounted for more than 40 percent of overall global oil demand. What’s more, road transport has accounted for more than half of total oil demand growth over the past two decades. Peak demand for road transport fuels, therefore, is a harbinger of peak oil demand.

The immediate outlook for fuel demand is also not rosy, with the lockdowns and international movement restrictions erasing ten years’ worth of demand growth, according to BloombergNEF. This effect will likely be temporary; as lockdowns ease, demand for fuels begins to recover, even though it remains doubtful whether it will recover fully to pre-pandemic levels.

So, what are the culprits behind this looming slump in fuel demand? First, there is fuel efficiency: a factor that, according to BP, will improve so much that energy consumption in the transport sector will only rise by 20 percent by 2040. BP made that forecast last year, long before the coronavirus. Now, those changes could accelerate.

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30% Of U.S. Shale Drillers Could Go Under

30% Of U.S. Shale Drillers Could Go Under

U.S. shale was one of the big losers of the Saudi-Russian price war that many saw as a war on U.S. shale. Producers scrambled to stay afloat as prices sank back to lows not seen since 2016, and they are still scrambling. Banks are giving them the cold shoulder, worried that many will not be able to pay their debts. Is there a way out? According to various forecasting agencies, there is, but it will take a while. A Bloomberg analysis of forecasts for the shale industry made by outlets such as the International Energy Agency, energy consultancy Rystad, IHS Markit, Genscape, and Enervus suggests shale will be back on its feet by 2023, with production back to over 12 million bpd.

This is not a long time for a full recovery, really, especially given the current circumstances, including shut-in wells, abandoned drilling plans, tight cash, and, for many, looming bankruptcies.

As much as 30 percent of shale drillers could go under if oil prices fail to move substantially higher, Deloitte said in a recent study, as quoted by CNN. These 30 percent, the firm said, are technically insolvent at oil prices of $35 a barrel. Right now, West Texas Intermediate is higher than $35 but not by much. Oil is now trading closer to $35 than to $50—the level at which most shale drillers will be making money.

And they need to make money: banks have started cutting credit lines for industry players as they reassess their assets and the production that they promised would be realized from these assets. According to calculations by Moody’s and JP Morgan, cited by the Wall Street Journal, banks could reduce asset-backed loan availability for the industry by as much as 30 percent, which translates into tens of billions of dollars.

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Global Gas Production Set To Tumble In 2020

Global Gas Production Set To Tumble In 2020

  • Natural gas production, which was originally projected to grow in 2020, is now facing an estimated decline of 2.6 percent.
  • Associated gas from oil fields is going to be hit hardest, with an expected decline of 5.5 percent compared to 2019 levels
  • The biggest drop in associated gas production will be in North America, which makes up roughly half of the global output

The Covid-19 pandemic has landed a lasting blow to both oil and gas markets. Global oil production has absorbed the lion’s share of the impact, but natural gas output, which was previously set to grow, is also set to decline by 2.6 percent this year, Rystad Energy forecasts. Production of associated gas from oil fields will be hit most, losing some 5.5 percent compared to 2019 levels.

Before Covid-19 forced a new reality upon the energy world, Rystad Energy expected total natural gas production to rise to 4,233 billion cubic meters (Bcm) in 2020, from 4,069 Bcm last year. Now this estimate is revised down to 3,962 Bcm for this year, rising to 4,015 Bcm in 2021 and to 4,094 in 2022.

Production from natural gas fields, which was initially expected to rise to 3,687 Bcm this year from 3,521 Bcm in 2019, is expected to reach 3,445 Bcm instead, recovering to 3,485 Bcm in 2021 and further to 3,551 Bcm in 2022.

The most affected output in percentage terms is the one of associated gas, which was initially forecast to stay largely flat year-over-year from the 2019 level of 547 Bcm. It is now expected to fall to 517 Bcm instead in 2020, rising to 530 Bcm in 2021 and 542 Bcm in 2022. Associated gas will likely only again exceed 2019 levels from 2023 onwards.

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U.S. Oil Dominance Is Coming To An End

U.S. Oil Dominance Is Coming To An End

  • U.S.’ energy dominance agenda is dead as the country’s shale industry is looking at a steep production decline.
  • The U.S. tight oil or shale rig count has fallen 69% this year from 539 in mid-March to 165 last week.
  • U.S. oil import dependence is set to grow in the next couple of years.

U.S. energy dominance is over. Output is probably going to drop by 50% over the next year and nothing can be done about it. It has nothing to do with the lack of shale profitability or other silly memes cited by people who don’t understand energy.

It’s because of low rig count.

The U.S. tight oil or shale rig count has fallen 69% this year from 539 in mid-March to 165 last week. Tight oil production will decline 50% by this time next year. As a result, U.S. oil production will fall from to less than 8 mmb/d by mid-2021.

What if rig count increases between now and then? It won’t make any difference because of the lag between contracting a drilling rig and first production.

The party is over for shale and U.S. energy dominance.

Energy Dominance is Over

Tight oil is the foundation of U.S. energy dominance. The U.S. has always been a major oil producer but it moved into the top tier of oil super powers as tight oil boosted output from about 5 to more than 12 mmb/d between 2008 and 2019 (Figure 1).

Conventional production has been declining since 1970. It fell from almost 10 mmb/d in 1970 to 5 mmb/d in 2008.

Figure 1. Tight oil is the foundation for U.S. Energy Dominance.

Conventional production has been in decline since 1970. Tight oil boosted U.S. production to more than 12 mmb/d in 2019.

Source: EIA and Labyrinth Consulting Services, Inc.

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How Saudi Arabia Caused The Worst Oil Price Crash In History

How Saudi Arabia Caused The Worst Oil Price Crash In History

  • Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March.
  • The Kingdom’s oil exports jumped by 3.15 million bpd to 11.34 million bpd in April.

Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March, exporting a record 10.237 million barrels per day (bpd) in April 2020, up from 7.391 million bpd in March, data from the Joint Organisations Data Initiative (JODI) showed.  

Total oil exports from Saudi Arabia, including crude oil and total oil products, also soared in April – by 3.15 million bpd to 11.34 million bpd, mostly due to the surge in crude oil exports, according to the data released by the JODI database, which collects self-reported figures from 114 countries.    

Production at the world’s top crude oil exporter also jumped in April—to over 12 million bpd, at 12.007 million bpd, the database showed.

After flooding the market with oil in April and contributing to the oil price crash, OPEC’s de facto leader and largest producer, Saudi Arabia, agreed that same month to a new round of OPEC+ cuts in response to the demand crash and plunging oil prices. Saudi Arabia had to reduce its oil production to 8.5 million bpd in May and June under the OPEC+ deal for removing 9.7 million bpd of collective oil production from the market. 

According to OPEC’s secondary sources in the latest Monthly Oil Market Report (MOMR), Saudi Arabia slashed its crude oil production in May to the required level of 8.5 million bpd.  

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Canadian Banks Hit Hard By Low Oil Prices

Canadian Banks Hit Hard By Low Oil Prices

Canada’s government has been perhaps surprisingly ready to help the country’s ailing oil industry. Interest-only loans, backstopping loans that troubled companies can’t pay have been among the steps taken so far. But they may not be enough. Canada’s oil industry has arguably suffered more than its peers across its southern border or even most producers around the world. Already cheap because of pipeline troubles, Canadian oil slumped to new lows amid the oil price war and the coronavirus pandemic earlier this year. While it has since improved in line with the international benchmarks, it hasn’t improved enough for the comfort of the local extractive industry. And it may drag banks down with it.

Bloomberg reported earlier this month that Canada’s largest banks reported an almost two-fold increase in impaired energy loans over their second quarter due to the oil price plunge and the pandemic. The increase amounted to more than US$1.47 billion (C$2 billion). What’s more, according to the report the country’s top six lenders had boosted their new lending to energy companies jumped by as much as 23 percent during that same quarter.

“Canadian banks’ energy exposure risks are increasing, with oil in a freefall and Canadian oil producers fighting to survive, as cash burn accelerates and liquidity dwindles,” a Bloomberg Intelligence analyst said in April when banks and companies were both bracing for this year’s renegotiation of borrowing bases amid the price plunge. According to Paul Gulberg, if just a tenth of the loans that Canadian banks had on their books at that time went bad, the lenders could lose a collective US$4.40 billion (C$6 billion).

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The Unique Ways Oil Companies Are Looking To Avoid Bankruptcy

The Unique Ways Oil Companies Are Looking To Avoid Bankruptcy

Many U.S. shale firms have cruised through the past couple of years by borrowing money and drilling new wells, making the United States the world’s top crude oil producer. The strategy worked for a while, especially when oil prices were around $60 a barrel.  

But this year’s oil price crash exposed the financial vulnerability of many U.S. shale companies who are now fighting for survival. All producers across the U.S. patch pulled back production volumes in April and May in response to the collapse in prices.    

For some oil and gas firms, reduced capital budgets will not be enough to save them from defaulting on debt or seeking restructuring as cash flows are shrinking, while the window of access to capital markets and new debt remains, for the most part, closed.

Those firms who choose not to seek (or are not forced to seek) protection from creditors via Chapter 11 restructuring could look at other options to avoid bankruptcy, some of which may be a little unconventional.

Today, unconventional may be an understatement when it comes to describing the oil industry’s state of affairs. All options – regardless of how (un)common they are – are on the table for struggling oil producers.

Industry consolidation, private equity firms acquiring assets or distressed companies, banks ending up holding oil and gas assets, or power utilities buying their providers of energy could be some of the options that oil firms might consider, Suzy Taherian, who worked with Exxon and Chevron at the start of her career, writes in Forbes

Mergers & Acquisitions Hit By Uncertainty 

U.S. shale firms have fewer financing options now than they did in the 2015-2016 downturn. Thus could drive consolidation in the industry with some attractive M&A opportunities emerging, according to Robert Polk, principal analyst with Wood Mackenzie’s U.S. Corporate Research team, covering Lower 48 independents.

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The Most Dramatic Year In The History Of Oil

The Most Dramatic Year In The History Of Oil

There are very few industries in the world that have been hit as hard or are set to face as many consequences as the oil and gas industry in 2020. In a recent report, Fitch Ratings forecast that oil and gas exploration and production companies would lose $1.8 trillion in revenues this year, which is six times more than the retail sector is set to lose. But the long-term consequences are going to be even more devastating. Perhaps the most visible change taking place in the oil and gas industry is the drastic cost-cutting measures being taken by the oil majors. BP has been forced to cut 10,000 jobs, or 15 percent of its workforce, as it tries to control costs in this new low oil price environment. Schlumberger had already slashed salaries and cut jobs in late March, while Shell and Chevron have announced plans to shrink their workforces.

And it isn’t just in the workforce where we are seeing unprecedented cuts. Shell’s decision to cut its dividend for the first time since 1945 was probably the single largest indicator of the long-term impact this pandemic will have on the oil industry. Shell and its fellow oil majors have prided themselves on paying out dividends regardless of market conditions in order to keep their shareholders happy. Its decision to cut its dividends marks a shift in strategy that suggests the oil major is now determined to cut its debt going forward and focus on financial sustainability rather than just pleasing shareholders.

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Mediterranean Oil Tensions Are Boiling Over

Mediterranean Oil Tensions Are Boiling Over

Under pressure in Libya–where it’s gone head-to-head with General Haftar in an ongoing battle to decide who gets to ultimately control the country’s oil revenues–and floundering in Syria, Turkey is once again upping the ante in the Mediterranean, this time preparing to issue new oil and gas exploration licenses in direct confrontation with the European Union. 

It’s not just about Cyprus, anymore. Turkey’s state-run oil and gas company has been given licenses from the Turkish government to explore for oil and gas in 24 locations in the East Mediterranean. Seven of those locations are just off the coast of key Greek islands. 

It’s a direct provocation that has Greece infuriated, and experts worried that this could lead to direct clashes once Turkey starts exploration drilling. 

Last weekend, Turkey released a draft plan for Turkish Petroleum’s exploration license. 

Source: Resmigazete.gov.tr

On Monday, Greek Foreign Minister Nikos Dendias said in a statement that the country “stands ready to deal with this provocation should Turkey decide to implement this decision”. 

The draft plan explicitly violates Greek sovereignty, and it is designed to take advantage of a new maritime boundary agreement Erdogan wrangled last year with the Government of National Accord (GNA) in Libya. This was the trade-off for Libya’s aid in fighting back General Haftar in his push to take the Libyan capital, Tripoli. 

The maritime boundary is meant to perform a pincer movement against Cyprus, which is drilling offshore in its EEZ where Turkey has also provocatively deployed drillships. In the Greek Cypriot EEZ alone, there are an estimated 120 billion cubic meters of natural gas, for which drilling began in 2011. The first license here was granted in 2008 to American Noble Energy (the same company behind the massive Israeli discoveries).

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COVID Crisis Could Unify World’s Largest Oil Companies

COVID Crisis Could Unify World’s Largest Oil Companies

Sir Winston Churchill once admonished leaders to never let a good crisis go to waste. Wall Street banks and other large banks have been paying attention: They were shrewd enough to seize the opportunity presented by the last financial crisis to get hard-nosed government agencies to approve giant M&A deals they would otherwise have frowned upon.

The oil sector should take its cue from the banking sector and try out a little Churchillian wisdom. 

Rob Cox, global correspondent for Reuters Breakingviews, seems to feel that is inevitable. He has told Reuters that the Covid-19 crisis could lead to merger mania in sectors like telecoms, auto, consumer goods, and energy.

But unlike the mid-cap energy mergers that had begun to break out before the crisis struck, Rob says tie-ups between giant producers like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and BP(NYSE:BP) among others is now within the realm of possibility.

Cutting Costs

Pre-crisis notions about competition and antitrust concerns, Cox argues for Reuters, might take a backseat as economies emerge from lockdowns with governments changing tack and beginning to prioritize building industries with better operational efficiencies, lower costs, and healthier balance sheets. 

Giant energy companies could use the cost-cutting gambit to justify mammoth deals that would otherwise fail to pass muster.

Under this backdrop, Exxon and Chevron might bandy together, and even throw in BP for good measure, to form the acronymous “ExChevBrit” whose combined market cap of $425 billion and reserve pool of ~70 billion barrels of oil equivalent would still pale in comparison to Saudi Aramco’s $1.6 trillion value and 270 billion Boe.

The financial crisis of 2008 that crippled the global banking sector, Cox notes, opened the way for mega-mergers such as Bank of America paying $50 billion for Merrill LynchWells Fargo ponying up $15.1B to snag West Coast rival Wachovia and high-street lender Lloyds TBS coughing up £12bn for HBOS.

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Is EIA Data Disguising A Disastrous Decline In U.S. Shale?

Is EIA Data Disguising A Disastrous Decline In U.S. Shale?

The Trump administration claims that the U.S. is “transitioning to greatness,” and that energy companies are going to see “massive gains.” U.S. Secretary of Energy Dan Brouillette says there is “stability” in the oil market, and that economic activity will “explode” on the other side of the pandemic.


Dan Brouillette✔@SecBrouillette

Thanks to the leadership of President @realDonaldTrump, the transition to greatness is well underway, and our economy along with our U.S. energy companies are going to see massive gains on the other side of this pandemic.

Embedded video

Meanwhile, back in reality, U.S. oil production continues to decline as drillers shut in wells and cut back spending. Output has already declined by 1.1 million barrels per day (mb/d), and more losses are likely. New data from Rystad Energy predicts U.S. oil production declines of roughly 2 mb/d by the end of June.

“Actual production cuts are probably larger and occur not only as a result of shut-ins, but also due to a natural decline from existing wells when new wells and drilling decline,” Rystad said in a statement.

Energy expert Philip Verleger, in an article for Energy Intelligence reports that the magnitude of output declines is much larger. His latest research shows that production as of May 10 is down by almost 4 million bpd from its peak as the below chart shows.

Source: PK Verleger LLC

To be sure, the U.S. government is doing quite a bit to try to bailout the oil industry. A new report finds that some 90 oil and gas companies will benefit from the Federal Reserve’s corporate bond buying program. The Trump administration is also quietly reversing environmental protections on the oil and gas industry.

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The Oil Crisis Puts The Entire U.S. Economy At Risk

The Oil Crisis Puts The Entire U.S. Economy At Risk

Job losses, well shut-ins, and bankruptcies have replaced the praise surrounding the shale oil boom that greatly enhanced America’s energy independence and gave President Trump a reason to tout energy dominance. Now, the federal government is mulling over ways to help the industry curb its losses amid historically low prices and little chances of their improvement anytime soon.  And the crisis will have much wider repercussions.

The trough of the oil industry cycle always harms the broader economy, usually on a regional level. During the last crisis, for example, once-thriving towns in Texas and New Mexico shrunk as mass layoffs dealt a blow to the local economies. This is bound to repeat again and already is: the Wall Street Journal reports state economies from Wyoming to Alaska, Oklahoma, and North Dakota are taking a hit from the oil industry’s crisis.

According to the American Petroleum Institute, the oil and gas industry in the United States supports as many as 10.3 million jobs and generates close to 8 percent of gross domestic product. This is, of course, nowhere near the over 50 percent that oil makes up in the Saudi GDP, but it is a portion sizeable enough to suggest that a crisis in the oil industry could have a ripple effect on the national economy. The question is, how strong this ripple effect would be.

According to a Goldman Sachs analyst, it has the potential to be quite strong. “Typically, oil price fluctuations have a small aggregate impact on U.S. growth, with roughly offsetting effects from the energy capex and consumption channels,” Paul Choi wrote in a note cited by Axios. “However, the sharp rise in the likelihood of bankruptcies in the energy sector and spending constraints due to the virus suggest that the decline in oil prices might be a larger drag on growth this time.”

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Why Trump Is Desperate To Secure This Rare Metal

Why Trump Is Desperate To Secure This Rare Metal

While the United States is slowly working towards ending the lockdown and restarting the economy, the federal government is quietly fighting a second war with China over critical metals. 

One of those critical metals in particular is the extremely rare key to global technological dominance because it’s crucial to winning the 5G war–the national security battle of the century.    

The metal is cesium (Cs), the most active metal on Earth, and it’s so rare that it’s hard to even put a price on it. It’s also a vital ingredient in our ability to make 5G happen.

Despite this, America has none, and it dropped the ball a long time ago. At the 11th hour, the Trump administration is now bent on reversing the loss of cesium to China, spanning the globe for lower-risk venues with potential reserves.And that desperate search for cesium potentially makes one particular Canadian junior miner–Power Metals (TSXV:PWM,OTC:PWRMF)–a highly critical component.      

There are only three cesium mines in the world and Power Metals owns three of the five cesium occurrences in the province of Ontario.

In February this year, Power Metals started drilling for what is hoped to become the only potential cesium mine that China doesn’t already control. 

“There is a global shortage of this rare metal and we are very lucky to have found it at our 100% owned Case Lake Property with grades as high as 14.7 % Cs2O,” Power Metals Chairman Johnathan More said in a recent press release

Cesium: The Star of the Critical Minerals Show

Unlike some other commodities, cesium is immune to the demand-decimating effects of the coronavirus pandemic because it is critical to everything from the 5G revolution, healthcare advances and defense to oil and gas drilling–and even time itself.  

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Oil Producers May Ditch Old FPSO Offshore Projects In This Downturn

Oil Producers May Ditch Old FPSO Offshore Projects In This Downturn

FPSO

The swift oil price crash caused by the Covid-19 pandemic will reduce the combined free cash flow of FPSO fields, which have produced above three quarters of their original resources at just $2.20 per barrel this year. This is a jaw-dropping decline from 2019’s $11.10 per barrel, a Rystad Energy impact analysis reveals. We also estimate that 40% of the 96 assets which have produced more than 75% of their original resources will end 2020 with a negative cash flow. Given our base case oil price outlook, with prices recovering next year and into 2022, free cash flow will climb back to 2019 levels. However, as these mature fields see production stagnate, free cash flow will quickly return to a decline, ultimately threatening the profitability of many FPSO assets.

“A concern arising for operators is whether the profitability of producing fields will degrade to such an extent that prematurely shutting down ageing fields will prove to be the most rational decision,” says Aleksander Erstad, a Rystad Energy energy service analyst.

Field economics alone are causing headaches for many FPSO operators, but other challenges might also compound the problems.

Unplanned production shut-ins on FPSOs due to Covid-19 outbreaks have already occurred, and continue to be a risk that could seriously harm both the health of individuals and the field’s profitability. Some FPSOs are also the target of supply cuts, a factor which could add to other woes and result in several late producing FPSOs being shut down for good.

Fields utilizing leased FPSOs are in the worst position, with around 70% of late producing assets estimated to have net present values below zero. This puts not only operators in an uncomfortable position, but also FPSO suppliers, who are faced with two possible outcomes – none of which are favorable.

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