Oil’s “Sale of the Century” Flops

December 27, 2019

Investors hate uncertainty, but the number of moving parts in the energy picture make fossil fuel’s future cloudier than ever.

Sydney Morning Herald:

The sale of the century has ended in farce. The modest sums raised from the “privatisation” of Saudi Aramco will barely cover the kingdom’s fiscal deficit for six months. The $US25 billion ($37 billion) haul will not make any impact on Prince Mohammed bin Salman’s Vision 2030, his theatrical plan to break oil addiction and diversify into everything from car plants to weapons production. Nor will it go far to launch NEOM, his robotic half-trillion dollar white elephant on the Red Sea.

At least there was doubt before about the predicament facing the House of Saud. Now there can be none. The regime resorted to tricks just to sell just 1.5 per cent of the shares on the local Tadawul exchange: a “Ritz Carlton” shake-down of princes; doubling the bank leverage limit for Saudi retail customers so that they can buy the stock; and calling in diplomatic chips from the Gulf alliance.

Other foreigners will not touch Aramco, even after the prestige valuation of $US2 trillion was trimmed to $US1.6 trillion – $US1.7 trillion. Theoretical oil reserves are not worth much these days as the climate backlash gathers force, and Aramco carries a special discount as the opaque political instrument of a headstrong master.

Riyadh needs every dollar of current revenue to pay for its cradle-to-grave welfare system, to cover the world’s fourth biggest military budget and the war in Yemen, as well as bankrolling Egypt. This is an extraordinary cost edifice for a middle-income country like Saudi Arabia, with a per capita income similar to Greece.

The regime requires a crude price of $US85 a barrel to balance the books (IMF data) even without losing the dividend stream from Aramco. It has not been that high for five years. Brent is at $US62.

Standard and Poor’s says the fiscal deficit will be 8.1 per cent of GDP this year and stay near these levels into the early 2020s. While the Saudis are no longer running down reserves to cover the shortfall, they are racking up debt instead at a brisk pace. “It’s a fact that Saudi Arabia is gradually running out of money,” said former CIA chief General David Petraeus last week.

To buy shares in a state monopoly that also serves as the regime’s fiscal lifeline is to court fate. If push came to shove, would Prince Mohammed resist siphoning off Aramco revenues through taxes and leave nothing for dividends?

Aramco’s flop is a sobering moment for Opec. The historical window may be closing on the cartel even sooner than they feared. These countries built a spending structure on assumptions of $US100 oil and an eternal Chinese boom. But five years after the 2014 crash, there is no sustained recovery in sight.

Whenever crude prices top $US50 US shale companies lock in forward sales and drill. They nip every cyclical rally in the bud. It is an Opec mantra that frackers are exhausting their sweet spots, but the shale downturn keeps refusing to arrive. The US Energy Department says output from US tight oil will reach a record 9.1 million barrels a day (b/d) in December. Opec and Russia face a “low for longer” price landscape that could last deep into the next decade. By then electric vehicles (EV) will have reached purchase cost parity with petrol and diesel engines.

It is going to be a grim winter for the Opec-Russia alliance. They again face the risk of a price slide unless ministers agree to yet further output cuts at their Vienna meeting in December. The International Energy Agency says they are being squeezed by rivals: global oil demand is expected to grow by 1.2 million b/d next year; but supply from Brazil, Norway, Guyana, and above all the US Permian Basin will rise by 2.3 million b/d.

Opec has lost control. The drillers around the world have slashed costs far enough with seismic imaging and digital technology to undercut the structural survival price of the petro-patronage states.

The IEA’s World Energy Outlook last week must have been a frightening read for Opec ministers. It poured cold water on claims that US output is peaking. Production will keep rising to the once-unthinkable level of 20.9m b/d by 2025, cutting the Opec-Russia share of the market to 47 per cent.

But it is the demand threat that is existential for the Saudi bloc. The IEA said the growth of oil consumption will “slow to a crawl” after 2025 as EV penetration reaches critical scale. “Countries whose economies are exclusively reliant on oil-and-gas reserves are facing serious challenges,” it said.

This is what Opec faces even under the IEA’s “stated policy scenario”, which allows CO2 emissions to rise by over 100m tons per year and plays Russian roulette with the planet.

In its “sustainable scenario” – still a breach of UN policy calls – oil demand halves to 50m b/d by mid-century, much of it used for plastics. Electric car sales reach 47 per cent by 2030 and 72 per cent by 2050, with truck emissions falling by three-quarters as hydrogen takes over.

In my view the IEA is still too cautious, and too wedded to oil and gas Weltanschauung. Once market disruption reaches tipping points, the old order is swept away.

But what of Opec’s surreal denials? Its world outlook this month scoffs at the electrification threat. Oil and gas will continue to make up 53 per cent of the global energy mix in 20 years, much as today. This is an extraordinary claim. It ignores the scientific alarm call of the Intergovernmental Panel on Climate Change. It ignores the certainty of a global Pigovian carbon tax, as proposed by the IMF last month. It ignores the likelihood of a sales ban on fossil-based cars in Europe, China, India, and bicoastal America within a decade. It ignores the regulatory sledgehammer that is crashing down. It ignores the volcanic shift in political opinion under way.

The world’s oil industry is on borrowed political time. It is in financial run-off. The Saudi regime should have spent less effort trying to subvert global climate summits a decade ago and more listening to what was being said.

Had Aramco been up for sale before the world had woken up to climate science and was still talking about insatiable Asian demand for oil, the Saudis could have future-proofed their country. They could even have salted away enough to cover Prince Mohammed’s Ozymandian dreams. They waited too long.

Yahoo Finance:

But the advance of renewables and the growing global sales of electric vehicles (EV) have started to disrupt the energy sector. Renewables and battery costs continue to drop, and the share of renewables in major developed markets such as Europe is constantly growing.  

“What you have here is an energy source that’s got a zero short run marginal cost and the capital costs are plummeting, so now is the time to invest in energy storage,” BNP Paribas’s Lewis told CNBC last week, commenting on the findings of the report.

“Ten years ago – even five years ago – putting capital into that didn’t really make sense because renewables themselves were still expensive and still needed subsidies. They don’t need subsidies anymore,” Lewis added.

Last year, energy storage deployment around the world reached a record level, nearly doubling from 2017, the International Energy Agency (IEA) says.

“Technology costs for battery storage continue to drop quickly, largely owing to the rapid scale-up of battery manufacturing for electric vehicles (EVs), stimulating deployment in the power sector,” the IEA said, but noted that energy storage continues to be strongly dependent on supportive policies, meaning that progress varies greatly from one country or region to another.

In the longer term, however, continuously falling battery costs and rising capacity and usage of clean energy are set to result in booming global stationary energy storage over the next two decades, BloombergNEF (BNEF) said in a recent report.

Energy storage installations across the world are expected to soar to 1,095GW, or 2,850GWh, by 2040, compared to a modest deployment of just 9GW/17GWh as of 2018, according to BNEF’s latest forecasts. Unsurprisingly, the key driver of the energy storage installation boom will be additionally plunging costs of lithium-ion batteries, which will give financial rationale to additional uses of storage and surging installations of stationary energy storage.

Oil majors should be worried about how long they will have the advantage of scale over renewables, EVs, and stationary energy storage. According to BNP Paribas’s report “the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors.”

However, energy storage and energy infrastructure will need a lot of capital outlays to become the threat that will drive oil majors out of profitability range.  

4 Responses to “Oil’s “Sale of the Century” Flops”

  1. Brent Jensen-Schmidt Says:

    Too Bad, So Sad.

  2. Bryson Brown Says:

    We can see the broad shape of the end game– fossil fuels will lose, while doing their level best to extract every bit of profit and all the subsidies they can extract while they still have political clout. How much of that process will be confounded by the impacts of climate change is hard to say– on one hand, desperate people will use any means at their disposal to deal with immediate emergencies, but on the other, a steady drum beat of disasters will gradually poison the well, leaving big oil with a very ugly reputation…

  3. john oneill Says:

    2,850 gigawatt hours of storage installed worldwide by 2040. There are about a hundred gigawatts of nuclear in the US supplying one fifth of the power, so thats 2,400 gigawatt hours a day. Meaning in twenty years there will be enough energy storage for just a quarter of a day for about five percent of the world’s people, assuming no growth and ignoring non electric energy. Better pray for clear skies and windy nights !

  4. Sir Charles Says:

    December 26, 2019

    The European Energy Security and Diversification Act, legislation offering $1B to promote sending U.S. fracked gas to EU countries, was inserted into the federal budget bill signed into law by President Donald Trump. Democrats invoked “Russiagate” in their PR push for the bill.

    Read article and watch video here => https://therealnews.com/stories/after-democrats-push-bill-to-send-fracked-gas-to-eu-trump-includes-in-budget

    Meanwhile, Natural gas production headed for a slow-down in 2020
    Pennsylvania, Ohio and West Virginia accounted for one third of the country’s shale gas production in 2019.

    Keep in mind that shale gas is worse for the climate than burning coal!

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