Friday, May 1st, 2020
Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
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Now, onto this week’s issue.
Curated weekly oil and gas newsletter
Oil Prices and Markets
Light, sweet crude (dollars per barrel): $16.94
Natural Gas (dollars per million British thermal units): $1.746
Rig count (United States): 465
Demand is falling for natural gas, mostly from decreased demand in the power generation industry, but natural gas prices haven’t endured nearly the downturn or volatility that oil has. Natural gas prices have basically been bouncing around the $1.55 – $2.00 level throughout the course of the COVID-19 crisis.
With the drama caused by the May oil futures contracts subsiding, WTI seems to have found a new range between $10.00 and $20.00 or so per barrel. A far cry from the $50-$70 range we enjoyed a few months ago but not nearly as dramatic as the negative prices we saw last week (see Energized #54). Still, no country or company is profitable at these levels (see Energized #49 for a breakeven price breakdown by country and region).
+ Key ingredient in coronavirus tests comes from Yellowstone’s lakes – National Geographic
While not directly related to energy, this National Geographic article tells the fascinating story of how enzymes used in the polymerase chain reaction (PCR) are found at Yellowstone National Park. PCR is the method used widely in labs around the world to study small samples of genetic material by making millions of copies. “This technique, which would have been impossible without the discovery of heat-resistant bacteria more than half a century ago, is now being used to boost the signal of viruses in most of the available tests for COVID-19.”
+ Uncharted waters – The Drilldown, Spears & Associates
“Richard and John look outside the oilpatch to examples of surviving unprecedented events and overcoming challenging tasks as lessons for today’s oil industry.”
Key takeaways from the podcast:
- Operating rigs are down 50% in about 6 weeks.
- Even industry veterans like Richard and John and EKT’s own Marty and Doug (see Energized #54) have never experienced anything like this.
- Richard compares the situation in the oil patch to Uruguayan Air Force Flight 571, the infamous 1972 flight that struck a glacier, led to the survivors experiencing more than two months of frigid temperatures trapped in the Andes, and where, ultimately, the survivors resorted to eating the dead. Cannibalism isn’t the point of the story, the point is the rescue mission led by Nando Parrado and Roberto Canessa that ended up saving the lives of the remaining 16 people. If you don’t know the story, listen to the podcast, but for the sake of this newsletter, the comparison was made to explain just how unknown this crisis is.
- The value of the oil and gas industry remains in question because it is based on something that essentially sells for almost nothing right now.
- “If I keep doing the thing I do, drill more wells, frac more wells, I’m probably going to die,” said Richard Spears. So how do you get to the other side when what you do isn’t valued at this time?
- John then cites the 15th-century Portuguese mission to sail around the Cape of Good Hope. During this voyage, the caravel was introduced, which is a master innovation in sailing ship construction. The caravel, along with a whole slew of navigation and sailing strategies to compliment the age-old technique of dead reckoning allowed these sailors to accomplish seemingly impossible feats.
- John’s comparison is a direct comment on the oil industry. That what exists today cannot work and it seems it is technology that will take the industry to where it needs to go, although it is technology that allowed oil to get to where it is with horizontal drilling and hydraulic fracturing. It is these very technologies that allowed oil to be produced so cheaply, and ultimately, let to the current oversupply we are facing.
- More specifically, Richard cites the example of polycrystalline diamond compact (PDC) drill bits that were developed a few years ago. Without them, drilling as we know it today in the formations we are drilling in today wouldn’t be economical.
- The brothers then discuss how outdated hydraulic fracturing is in the sense that there hasn’t been a meaningful technological advancement in this field for some time. “That looks like one of those techniques, or tools, or technologies that don’t look all that different from when it was originally brought to maturity 30 or 40 years ago,” said Richard. “It’s bigger, but it’s not fundamentally different.”
- Management can take a few different paths, but ultimately the Spears Brothers are suggesting that companies are at a crossroads right now and need to make a decision that could involve technology.
- “If you’ve run out of money and it’s the end of May, that’s the wrong choice,” Richard joked half-heartedly.
- It’s going to take time but starting the development of that technology now is what matters.
An absolutely fascinating update on the energy mix of one of Europe’s leading economies, the UK.
“Britain has gone without coal power for 18 days in a row – the longest period since the industrial revolution.”
“The milestone was recorded as demand for power fell almost 20 percent compared to the same period last year, as the majority of businesses remain closed due to the coronavirus outbreak.”
“The result is a cut in the UK’s CO2 emission of around one-third, according to analysis by climate website Carbon Brief.”
Aside from these interesting facts, the article provides a fascinating history of coal-based power generation in the UK.
It truly is the dawn of a new age in energy when the very source that started an era of industry is now on the way out.
The article notes IHS Markit data that suggests that in 2019, 90% of Southeast Asian power generation came from coal, gas, and hydro whereas 10% came from other renewables.
An accompanying interview and article suggest that “Vietnam’s power demand could match that of Germany and [explains] why conventional power and renewables will be included in the region’s future energy mix.”
While the article (titled “Assessing the Power Generation Fuel Mix of Southeast Asia for the Next Decade”) cannot be accessed without downloading the latest issue by IHS Markit, the video (free on YouTube) is a great 15-minute insight into the thoughts of Allan Wang, the director of Gas, Power, and Energy Futures for IHS Markit.
Seeing as Southeast Asia is the primary growth driver for oil and gas demand, most notably in the form of liquefied natural gas (LNG), I think that the video is worth listening to.
Basically, the fundamental assumption is that a minimum of 5% GDP growth by Southeast Asia as a whole over the next decade will drive power generation demand growth, a significant portion of which will come from oil and gas.
Governor Greg Abbott’s order “allows businesses like retail stores, malls, restaurants, and theaters to reopen Friday but limits occupancy to 25%. The order will also allow libraries and museums to open.”
The UK is expecting about one fifth, or 30,000 of the 151,000 people employed by the oil and gas sector, to lose their jobs.
“Some job losses have already been announced with “many more” expected to be confirmed in the coming months.”
The Future of Oil
“The energy sector’s valuation is shrinking to such a degree that it has become the second smallest segment in the entire S&P 500 index, with its weighting down 80% from a decade ago.”
A very in-depth and good Op-ed piece that dives deep into the psychology of this crisis, who will survive and what survival means. How will investors and consumers view oil going forward? It’s a story that makes you think and is worth the read.
Have a great weekend!
EKT Interactive Managing Editor