As Climate Concerns Grow, Fossil Fuels in Turmoil
January 20, 2015
The creeping bloodbath in the Oil industry continues. I’ve pointed out that, ever since the Saudis moved to encourage the recent oil price drop, a whole lot of people that had been creating headaches for Barack Obama started to feel a lot of pain.
Just sayin’.
Oil prices slumped to a six-year low earlier this week. In response, oil companies around the world have been cutting jobs and exploration and production budgets.
–The oil price is currently around $48 per barrel, down from a high of about $115 last July. Lots of oil companies have had to adjust their budgets as a consequence. In particular, they’ve had to revise how much they’re going to spend on new projects, known as ‘capital expenditure’, or ‘capex’ for short.
Companies put jobs at risk when they reduce their capex budgets, as fewer projects mean fewer workers are needed.
Here’s a list of the budget and job cuts recently announced by major oil companies:
Just over a year ago, Peter Voser, in one of his last speeches as chief executive of Royal Dutch Shell, warned about the catastrophic consequences that could arise from the energy industry failing to invest in providing the world with enough oil and gas to meet global demand.
Mr Voser told an audience of senior oil and gas industry executives gathered in London: “Our first priority must be to invest heavily in new supplies, and to maintain it through economic and political turbulence. Failing to do so would be a sure path to another crunch and major price volatility.”
It can take a decade to discover a major oil field and bring it into production, and most oil majors have been basing their long-term forecasts for such projects on the assumption of $80 oil.
Failure to ride out the bumps in oil prices along the way can lead to even bigger shortfalls in supply further down the track. The risk in the current market is that oil companies will cut back too hard, too fast, setting the world’s consumers up for another shock that will see the price of a barrel of crude trade well above $100.
Instead of heeding Mr Voser’s advice and forging ahead with new investments to boost capacity by pushing the search for new resources in the frontiers of the Arctic and offshore Africa, oil and gas companies are now looking inwards by aggressively reining in capital expenditure.
Oil majors like Shell are forensically evaluating their project pipeline to filter out schemes that may not make sense in a supposedly new era of low oil prices, which some pessimistic pundits have predicted could fall to as low as $20 per barrel. The Anglo-Dutch company and its partner Qatar Petroleum this week shelved its first major development this year when it decided not to go ahead with a $6.5bn petrochemicals plant near Doha. Its reason for cancelling the project was simple: the scheme, which probably started as a concept in a world of $100 oil, no longer makes commercial sense with the current economic circumstances weighing on the energy industry.
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The problem is that the current fall in oil prices has been artificially engineered by Saudi Arabia and its close allies within the Organisation of the Petroleum Exporting Countries (Opec). They are determined to win back lost market share from US shale oil drillers at any cost, and are keeping their spigots open with the knowledge that prices will whiplash back even higher. The latest data released by the International Energy Agency (IEA) and Opec’s research office prove that this strategy is already working after only a few months.
When money was growing on trees even for junk-rated companies, and when Wall Street still performed miracles for a fee, thanks to the greatest credit bubble in US history, oil and gas drillers grabbed this money channeled to them from investors and refilled the ever deeper holes fracking was drilling into their balance sheets.
But the prices for crude oil, US natural gas, and natural gas liquids have all plunged. Revenues from unhedged production are down 40% or 50%, or more from just seven months ago. And when the hedges expire, the problem will get worse. The industry has been through this before. It knows what to do.
Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton (NYSE:HAL) said that it was axing an undisclosed number of people in Houston. Suncor Energy (NYSE:SU), Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne (NYSE:HP) is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Schlumberger (NYSE:SLB), the world’s biggest oilfield-services company, will cut 9,000 jobs.
It had an earnings debacle. It announced that Q4 EPS grew by 11% year-over-year to $1.50, “excluding charges and credits.” In reality, its net income plunged 81% to $302 million, after $1.8 billion in write-offs that included its production assets in Texas.
To prop up its shares, it announced that it would increase its dividend by 25%. And yes, it blew $1.1 billion in the quarter and $4.7 billion in the year, on share buybacks, a program that would continue, it said. Financial engineering works. On Thursday, its shares were down 35% since June. But on Friday, after the announcement, they jumped 6%.
All these companies had gone on hiring binges over the last few years. Those binges are now being unwound. “We want to live within our means,” is how Suncor CFO Alister Cowan explained the phenomenon.
Meanwhile, the widely discussed blow to renewable energy from low oil prices has not really materialized, and to the extent it does emerge, looks to be temporary.
Spending on renewable energy, which surged 16 percent in 2014, will remain strong this year, largely unaffected by the slumping oil prices that have artificially depressed their shares.
That’s the message from Stuart Bernstein, Goldman Sachs Group Inc.’s global head of clean technology and renewables, and Vishal Shah, Deutsche Bank AG’s renewable-energy analyst. Because oil produces only 1 percent of U.S. electricity, the crude plunge that’s roiling markets should have only a “modest” effect on clean-energy developers or the companies that equip them, Bernstein said in a telephone interview.
“I don’t want to be dismissive of the impact of declining oil and gas commodity prices on renewable energy,” Bernstein said. “But they will have a very small impact on the long-term cost of electricity.”
Clean energy attracted a total of $310 billion in investment last year, up from $268 billion in 2013 and the first increase in three years, according to Bloomberg New Energy Finance. Goldman Sachs managed $4.1 billion in clean-energy public markets transactions last year. That was about 40 percent of the total and the most of any financier, according to league tables published by New Energy Finance.
Goldman has boosted its efforts in clean energy while other financial companies are pulling back, which helped the company retain the top spot, Bernstein said.
Climate Denial Crock of the Week 
January 20, 2015 at 11:30 am
“It can take a decade to discover a major oil field and bring it into production, and most oil majors have been basing their long-term forecasts for such projects on the assumption of $80 oil.”
The only fields of any significant size that have been discovered in the last two decades have been in VERY difficult to reach areas, such as Brazil’s pre-salt field offshore:
http://www.wsj.com/articles/brazils-new-oil-output-stems-decline-1407435699
Even these fields are exceedingly rare and hard to find, and such fields require high priced oil to make them economical. The Arctic theoretically has similar high-priced fields. As a result, conventional oil that costs under $50 barrel to extract is a thing of the past. We have many of those fields still in operation, like Ghawar in Saudi Arabia, but they can only deplete from here on out.
The Bakken in the U.S. and of course the tar sands (unconventional, also requiring $50/barrel plus as a rough guideline) have been known about for several decades. They’ve just sat there until the past 10 years because of the rise in prices.
Either oil prices do rise again, and capital spending again increases, or we are at global peak oil right now. There’s no way to maintain the current levels of production without increased spending. (Some technological breakthroughs are occurring in the industry, but they alone won’t keep up with relentless depletion rates.)
This article ( http://www.motherjones.com/kevin-drum/2014/07/chart-day-oil-getting-harder-and-harder-find ) has turned out to be wrong in its prediction, but it has a chart showing oil production levels by the top oil producers compared to their spending levels the past 10 years. Less spending by these companies won’t result in more oil production unless one believes in the oil fairy.
If oil prices remain at the current prices for another 1-2 years, we’ll be perfectly set up for another oil shock within the decade, and this one will be felt globally instead of nationally. The only way to avoid it is if the prices rise steadily from this point back to $80 plus within the year. Either way, the “supposedly new era” will be a very short one.
January 20, 2015 at 2:29 pm
Another confirmation of the Kingdom’s mindset – they are set for the long run and want to protect their share:
http://www.bbc.com/news/business-30876920
I truly hope this is the decline in fossil addiction and we will see a concerted move away now. It is long overdue.
January 20, 2015 at 2:35 pm
A great (and I hope visionary) prediction from Michael Liebriech, the future is clear:
http://cleantechnica.com/2015/01/18/energy-efficiency-distributed-renewables-will-kill-energy-suppliers/
January 20, 2015 at 4:36 pm
I was reading a blog (unfortunately I can’t find it again) which suggested the prime motivation for the Saudi unwillingness to cut production and lift prices, was to avoid their huge reserves becoming a stranded asset. It makes sense when you think about it. They obviously see a time in the not too distant future, when burning oil will have to be severely restricted. Their oil is cheap to produce and it’s better to sell it at $50/barrel than not sell at all!
Putting producers of expensive oil sources out of business is just a by product of not wanting to have product on hand when burning oil is curtailed.
January 20, 2015 at 6:19 pm
That really relies on the specifics of what their market share will look like over the next several decades, the price of oil, how much they have in reserve, etc. You could run scenarios where it’s better to sell 25% of your reserve at a high price, than 75% of your reserve at a low price. And vice versa.
Maybe they do have such a game plan, but if you notice how horrible all these big companies and energy think tanks are at predicting stuff 10+ years out, then that may dent the credibility of such a plan a bit. Re-fracking could come online in the US, where multiple wells are drilled with one rig, and which has a supposed break even at $30.
One thing that is good about it though, is it’s punishing these frack companies that relied on easy Wall St. money to continue their musical chairs game, whilst trying to sucker retail investors into the pot.
January 20, 2015 at 6:43 pm
Also as RenewEconomy have pointed out they are competitively and aggressively pricing Solar projects –
“It should be a little ironic – given the dramatic plunge in the oil price that is said to have been driven by Saudi Arabian supply tactics – that a Saudi company should set two global records for cheap solar power in the past two weeks.”
http://reneweconomy.com.au/category/cleantech-bites
January 20, 2015 at 8:11 pm
Keith, You might have read about fear of stranded assets being one of Saudi’s motives here.
https://climatecrocks.com/2015/01/10/the-weekend-wonk-the-saudis-stones-and-the-end-of-the-age-of-oil/
January 20, 2015 at 9:59 pm
Thanks. That’s the very one. To me, such a business plan makes a lot of sense. No doubt prices will go up again, making expensive extraction viable , but the Saudis will have less resource left stranded when the end of the oil age comes, and it is coming!
Decisions such as this, if true, may indicate some real action on emissions reduction in the not too far future.
January 20, 2015 at 2:44 pm
We are entering a whole new energy ball game and thankfully it is reflected in education.
http://cleantechnica.com/2015/01/18/smart-grid-infrastructure-demands-increased-engineering-smarts/
January 21, 2015 at 12:18 pm
Saudi Arabia is playing a poker game right now. They have more money than the rest of the players and can afford to lose it. It chases the rest of the players out of the market. They are willing to lose money to destroy competition, they hope. The price points are not just based on drilling costs. The petroleum producing countries need to support their government debts. Those prices are well over $50/bl, closer to $100/bl, even for Saudi Arabia. They are betting they can use their clout to gain market share.
http://www.economist.com/news/international/21627642-america-and-its-friends-benefit-falling-oil-prices-its-most-strident-critics
Much controversy has ensued discussions of peak oil. The fact that it is ill defined does not help. However, the IEA showed it expected conventional oil to decline around 2006, and projected unconventional sources to fill the void. That seems to be about right. We are seeing the repercussions of that now. Theorist counter the notion with the newer supplies of unconventional, but the higher cost of unconventional is a factor. It has contributed to the increased cost and all its attendant results; economic recession, less driving and auto sales, etc. Now we see that conventional supplies set a limit to the amount of oil consumed cheaply. If oil consumption increases, price jumps rapidly. The difference between cheap, conventional costs and unconventional creates an unstable step function.
http://earlywarn.blogspot.com/2010/11/iea-acknowledges-peak-oil.html
January 21, 2015 at 1:29 pm
“Peak oil’ is simply the historical peak of oil production levels at a well, field, nation, region, and on a global scale. It’s viewed in the distance and after the fact. That’s it. It’s happened in almost every region and field – it’s just not officially been diagnosed yet on the world scale or on the largest conventional oil field, Ghawar.
On a global level, we’ve been adding other fossil liquids into the count, and the rise in unconventional sources might muddies the waters, too. It’s generally accepted, though, that these are legitimate additions to the global total, and as these have been rising, at least until now, then we haven’t hit a global peak as yet.
Some people assume the implications of peak oil (possible economic collapse and so on) are a part of the term, but they are symptoms, not the event itself, and are at best guesswork. There is the possibility of an economic collapse causing a global peak oil scenario, but again, that’s guesswork. I know you ascribe to a demand-side global peak in production. I think this goes against our history, although a very high oil price might indeed cause such a thing (although a high price would mostly be a function of depletion in cheaper, conventional oil sources).
Some people think predictions of timing in global peak oil is a part of the theory, when it’s merely conjecture of the timing – it’s not the event itself. Being wrong about the timing doesn’t invalidate the theory, as some suppose.
The largest mistake about the timing on peak oil has been the underestimation of unconventional oil production, which ramped up in the United States far faster than anticipated by many. Peak oil ‘optimists’ believe we won’t hit an oil production peak on a global scale, or at least not for many decades, because of the large reserves in unconventional sources, especially the tar sands in Canada and Venezuela. It will be enormously difficult to do this for long, though, to outpace the depletion rates in conventional, cheaper oil, and to not stall the global economy from the expense of unconventional oil.
I personally agree about Saudi Arabia with your summary. It’s the best explanation according to the available info. On a darker note, if we do have a sudden spike in oil prices again, and if the Saudis indeed manage to better their market share, they’ll be in an exceptionally strong position in the future. It’d be like controlling the granary during a famine.
January 21, 2015 at 6:46 pm
Jimbills – The reference shows the large oil companies slashing capex for exploration, mostly unconventional, some offshore. The high capex for unconventional is unprofitable at these low oil prices.
The inference of demand sagging due to high fuel prices is clear.
Oil influences the overall economy, dragging down growth and demand. Countries respond by decreasing energy intensity and decoupling GNP from energy.
We will always have oil. Its not peak oil availability. The minimum oil price has passed. We will never see the cheapest oil again. That is more important than the
peak production or whether we have more.
There is a lively technical discussion at this forum. Plenty of good graphs.
http://peakoilbarrel.com/revisiting-ieas-world-energy-outlook-2013/
January 25, 2015 at 4:39 pm
It does not look like a coincidence that the King of Saudi Arabia passes and the Saudi policy of supporting oil prices by reducing production is gutted.