February 14, 2019 - Nom Geo
Is This Just Business as Usual in the Oil Patch?
Anyone listening oil industry commentary may be fooled into thinking that we live in a time of massive disruption in the demand for crude oil and that the industry is under siege because oil prices are not “rallying”.
But nothing could be further from the truth. If one looks at oil price alone, it is easy to see that with Brent at $63-67 per barrel that most producers are happily making their desired profit margins – and then some from an estimated average break-even of less than $38 per barrel.
Similarly, natural gas markets have had a huge boost from the build up of demand via the LNG route to market. Despite lacklustre prices this quarter (with Henry Hub March futures now lower than $2.75/mmBtu) the industry remains sustainable. Note that seasonal lows mean that marginal players hinge their annual results on a few months of peak winter prices while giants such as Gazprom and Shell are already profitable at even low prices. But this could just be business as usual – I mean in the oil business the more things change, the more they stay the same, right?
The scenario in fact appears as one that is very familiar to long term industry observers. Most operators are making money as they always have, and balance sheets show backup reserves of hydrocarbon molecules in every corner of the globe, except nowadays unconventional shale reserves are also included in the asset count as never before.
Unchanged is the fact that major private oil companies have lots of cash to spend and leading-edge technology to sell to state owned companies.
Also looking very much the same is that Saudi Arabia is furthering its soft power play in Asia, the Russians continue trying to bolster regional influence to the East, to the West and also South, the Americans are being dominant, the Iranians are trying to work around US imposed sanctions and a bunch of offshore projects are going ahead in resurgent North Sea, African, Latin and South American sectors.
What is new is gas sector growth in the Mediterranean, but the players are already showing their usual propensity for petty nationalistic disputes and are moving these into their offshore zones. Notably Turkey, Cyprus, Israel, Lebanon and Egypt will be forever bickering over territorial boundaries – it is a natural part of each country’s geographically-driven DNA.
Where are Markets Heading?
Consumer markets are still growing with most demographers including the United Nations putting the peak global population at 11.2 billion people by the year 2100. This means that demand for liquid hydrocarbons will rise commensurately beyond 2019’s 100 million daily barrels to somewhere close to 125 million barrels per day, while global energy demand will rise from 13.15BTOE (billion tonnes of oil equivalents) per year in 2015 to 29.46TOE by 2100 based on IEA estimates (the United Nations low-ball annual figure is 19BTOE). So, the growth story will continue, but the composition of energy use will almost certainly be changed.
Markets are always changing, and this is where one can expect to see some nuanced trends developing that lie well beyond the wellhead. One of the long-term trends is a move towards electric vehicles and some believe, hydrogen powered vehicles, and a continued fragmentation of energy markets into solar, wind and nuclear.
While this suggests a lesser role for hydrocarbon fuels, the downstream players are already lining up to significantly lift chemicals and derivatives production. Like it or not, hydrocarbons are a brilliant source of chemical materials whose universal usefulness will continue beyond the end of this century.
In fact, natural gas is still the most economic-option for the manufacture of hydrogen gas. Hydrogen, an oft-quoted alternative to gasoline, is really a form of “carbon pre-capture” from gas and coal base-stocks.
The End of the Rough-Neck!
Change in the industry is really the “default” condition. This is because it is fundamentally an engineering and technology driven sector that has “change and innovation” in its DNA. To add value from innovation, the sector seeks to pursue ever more challenging targets. So expect more automation and a move towards well-field industrialization that will be increasingly dominated by robotics, replacing human drillers and rough-necks.
The New Quest for Heavy Molecules
The current theme of market lament has been in play for several years. With Venezuela’s heavy oil output plummeting and with Canadian heavy crude bumping against its infrastructure capacity ceiling, global markets are awash with light oil from Siberia, Nigeria, Texas and North Dakota but actually need more supplies of heavy molecules. This is ironic, since for years a premium was paid for light oil. But under the influence of the laws of supply and demand, heavy oil is in demand by refiners who want to avoid expensive “turn-arounds” and also optimise their deep conversion capabilities.
This shortage of heavy-molecules is far from catastrophic but will translate into more pressure on kerosene jet-fuel, lubricant and distillate production. As such, one short-term outcome could be that heavy fuel-oil and distillation residues will be more heavily traded between refiners who have an excess of heavy-intermediates and those who are looking for heavier oils to balance out their preferred feedstock blends. This is now looking like it could coincide with the shift away from high-sulphur fuel oil in 2020 as IMO rules kick in, a fortuitous confluence of seemingly unrelated events.
So yep, everything is going just fine and there are enough changes and regional imbalances to ensure that the sector will enjoy sustained profits for years to come. In short this is looking a lot like business as usual.
(Reservoir to Bowser will be back next week)