Friday, May 29th, 2020
Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
Before diving into this week’s content, we’d like to remind you to join over 400 members in our Energized LinkedIn Group. We will be releasing frequent news and snippets of Energized newsletters through the group. We hope to see you there. Also, if you haven’t already, visit our website to gain access to our free Oil 101 introductory course, our popular series of mobile-ready videos describing “How the industry works.” Ready for more? Check out our in-depth Oil 201 course which covers exploration, drilling, production, well completions, and refining. If your company or group is interested in Oil 101, let’s talk. We license our courses for use as internal training for sales, IT and operations teams. Think you know someone who would enjoy this newsletter? Pass it on! They can subscribe and access our Energized archives. Finally, be sure to check out the 2019 Energy Recap for a quick refresher on 2019 content.
Now, onto this week’s issue.
Curated weekly oil and gas newsletter
Oil and Gas Prices and Markets
Natural gas prices are higher at $1.857 compared to last week’s $1.69 or so. Natural gas continues to remain relatively range-bound. The article cites recent reports by the EIA and their effect on prices.
Coal usage was down 9.8% from February.
Coal usage is now just 16.5% of U.S. power generation compared to 40.3% for natural gas.
“From the five-year average of over 103 TWh in March, gas was up 19.8%.”
That puts coal behind nuclear and other renewables by percentage share.
The switch from coal to natural gas and renewables is happening faster than once anticipated.
+ Exxon, Chevron face shareholders as oil faces uncertain future – Houston Chronicle
Exxon and Chevron hosted their annual shareholder meetings this week where investors find themselves in “prove it” mode.
“”There are two types of energy companies going through this crisis: The ones that are doing everything they can to survive and the ones with strong balance sheets that are looking to be more competitive long-term,” said Duane Dickson, vice chairman of Deloitte Consulting specializing in the oil, gas and chemicals sector. “The oil majors are not in survival mode. They’re trying to come out of this in the best possible position, and potentially redefine themselves.””
The article highlighted big cuts by both companies in the Permian Basin, which was once one of the main growth drivers for both Exxon and Chevron.
“In order to bring back rigs to the U.S., you need $50-plus West Texas Intermediate,” the benchmark grade of crude of oil”
The diversified nature of majors like Chevron and Exxon has “allowed them to pivot in response to the coronavirus. Exxon Mobil’s petrochemical operations have increased production of isopropyl alcohol and polypropylene, used in the production of hand sanitizer and protective masks, gowns and wipes, while shifting manufacturing in Louisiana to produce hand sanitizer.”
This pivoting is great but it remains to be seen how effective it will be in counteracting the struggles across their broad businesses.
The article also notes the different opinions by Exxon and Chevron. As discussed in this newsletter, Exxon is arguably the most optimistic of all oil majors when it comes to the future of oil and gas whereas Chevron has invested in solar, wind, and geothermal power sources. Shell has also invested heavily in renewables and BP set its net-zero emissions goal for 2050. Shell even said that oil demand could peak within the decade.
“Occidental Petroleum Corp has been sued by investors who claim they suffered billions of dollars of losses because the heavily indebted company concealed its inability to weather plunging oil prices, after paying $35.7 billion to acquire Anadarko Petroleum Corp.”
Oxy has already cut its dividend and severely cut its budget as discussed in Energized #48.
We talked about Oxy a lot last year in this newsletter, first discussing the merger as early as Energized #5 then continuing the saga throughout the year. For a refresher on the acquisition and Oxy outbidding Chevron, refer to the “2019 Energy Recap”.
It didn’t take a genius to figure out that Oxy was spreading itself dangerously thin when it bought a company that was practically its same size, using mostly debt. Chevron ended up being the real winner by collecting a $1 billion break up fee thanks to its savvy negotiating skills.
Since the acquisition, Oxy shares have lost over 75% of their value.
+ Halliburton lowers dividend, National Oilwell stops paying – Yahoo Finance
Halliburton lowered its dividend by 75% and National Oilwell Varco (NOV) cut its dividend altogether.
This comes on top of dividend cuts by the likes of Shell, Apache, Schlumberger, and several other oil and gas companies desperate for cash to weather the storm.
“Occidental Petroleum and Total canceled the remaining part of the deal for Africa assets.”
“U.S. liquefied natural gas exports are down by more than a third since governments started imposing lockdowns to stop the spread of the coronavirus.”
“Buyers in Asia and Europe have already canceled over 20 U.S. LNG cargoes for June and July, and more cancellations are anticipated.”
There are other good points in this Reuters article that suggest continued cargo cancellations into the fall. Worth a quick read if you want an update on the LNG market.
+ Petrochemical Market Highlights – Argus Media
Chuck Venezia, senior vice president of petrochemicals for Argus Consulting Services, gave a presentation yesterday on the downstream industry which included Argus data on the current petrochemical market and predictions going forward.
- US oil production could fall by more than 2 million bpd for over two years if there’s a prolonged price war. Drilling would fall dramatically and hurt supply in an unrecoverable way over the short-term.
- “Of total NGL production, 45% comes from associated gas, (from crude production) and 55% comes from natural gas/condensate wells.”
- “This could result in an NGL production decline by up to 1 million bpd by 2022, pressuring BGL prices higher relative to crude oil and natural gas.”
- Argus data shows a dramatic drop during week 14 and week 17 of this year in motor fuels and jet fuels.
- US refinery utilization rates recently fell below 70% of nameplate capacity. This has improved slightly since then thanks to increasing demand, but an added concern for refiners and petrochemical plants is the personnel requirements. Argus notes that many plants are already operating with barebones staff, and any more declines in personnel due to sickness or social distancing mandates could provide a tipping point for further digitalization at these plants.
- Automobile demand is down 22% in 2020.
- Naptha prices have almost doubled in Asia and have gone up by over 80% in Europe in the past couple of weeks. Feedstock prices have generally gone up the past few weeks.
- Chuck explains that when ethane is cracked to make ethylene you get a 70-75% conversation rate. As liquids get heavier, from propane to butane and so on, the amount of conversion to ethylene is diminished. As such, the move toward more Naptha cracking has resulted in an oversupply in butadiene and other fuels needed for manufacturing.
- Cracker output varies according to the feedstock used.
- US polyethylene is no longer a price taker because of the sharp declines in Naptha prices. Now, it’s a price setter.
- Expect Naptha cracking to be more expensive down the road.
- Over 8 million tons of PE production coming online this year in a time when there’s expected to be a 5.5 million drop in demand. Expect to see delays in projects that are being planned or scraping of projects altogether. The same goes for propylene projects that were planned this year.
- “Global propylene operating rates will be dragged down by excess new capacity but the impact will vary across the regions.”
- Typically, you’d expect more M&A activity in this environment, but actually it probably won’t occur as much on the downstream side. However, Chuck sees M&A activity occurring more on the upstream side as well as more bankruptcies. But as far as the US Gulf coast is concerned, Argus doesn’t see a lot of M&A happening this year.
- Argus anticipates a 4% growth in ethylene demand globally per year going forward. Chuck is pretty optimistic and admits this is a somewhat bullish forecast.
- On the midstream side, take-or-pay contracts have been good for the midstream industry, but if buyers on the other side of these contracts are not financially solvent enough, it complicates the whole thing.
- Another challenge for midstream is that there’s been a lot of investment in moving hydrocarbons from shale plays to the Gulf Coast in the form of pipelines which now look overbuilt if crude demand drops by 2 million bpd over the next two years as Argus expects.
- “Ethylene and derivative margins will continue trending lower on average over the next two years.”
- “Ultimately, cancelation of projects will bring a recovery, but strong project momentum existed up until recently.”
- “Recovery is expected to start by mid-decade.”
- “Coronavirus is making a difficult market potentially much worse, but dynamics and full impact not clear.”
+ Chevron cutting jobs; Exxon has “no layoff plans” – Houston Chronicle
“Chevron said Wednesday that it would cut up to 15 percent of its global workforce while its rival, Exxon Mobil, said it had no plans to lay off employees.”
This article is a painful read because it notes that both Exxon and Chevron’s CEO’s received salary increases this year despite the market conditions.
“Chevron shareholders voted to raise CEO Mike Wirth’s 2020 base salary to $1.65 million, up from $1.6 million in 2019. Wirth’s total compensation in 2019, including stock options, was more than $33 million…Exxon shareholders approved increasing CEO Darren Woods’ 2020 base salary to $1.62 million, up from $1.5 million in 2019. Woods’ total compensation in 2019, including stock options, was nearly $23.5 million.”
+ Texas oil & gas industry cut record 26,300 jobs in April – Houston Chronicle
“The oil and gas industry shed a record-breaking 26,300 jobs in Texas during April.”
“Drilling, completion, production and related sectors employed 192,600 people in Texas last month, a 12 percent drop from the 218,900 jobs in March, new figures from the Texas Workforce Commission show.”
The article breaks down the job losses and the reasons why they occurred, most notably that crude prices in the $30 range are simply far below “the $55 per barrel needed by most U.S. shale producers.”
Have a great weekend!
EKT Interactive Managing Editor