Friday, July 3rd, 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
Light, sweet crude (dollars per barrel): $38.49
Last week: $39.75
Natural Gas (dollars per million British thermal units): $1.495
Last week: $1.731
Rig count (United States): 265
Last week: 266
+ How Frac Lost Its Profitability – Spears Insider
The Spears Brothers make a comparison of the frac industry to Uber. Only certain elements of the frac industry are really profitable. Often times, the money invested in the pump trucks and materials are used at the well site, so the real money is in the proppant and chemicals that the oil companies provide. Therefore, the oilfield services companies lose out.
The comparison to Uber is that the drivers of Uber cars end up making very little money when you factor in their time and the wear and tear on their car. On the contrary, it’s a great deal for the rider and Uber itself.
+ Energy Industry Eyes New Opportunities With Federal Approval of LNG By Rail – Houston Chronicle
“U.S. officials on Friday authorized the use of cryogenic railcars to ship the supercooled fuel from production plants to destinations across the nation.”
According to the Houston Chronicle, this puts LNG in the same category as crude oil, gasoline, diesel, and propane in that they can be shipped by rail.
The main business for LNG will still be massive tankers that transport LNG from energy exporting countries, like the United States, Qatar, and Australia, to energy importing countries like China, Japan, and South Korea.
However, as the article mentions, there has been some demand for smaller tanker trucks to haul 10,000 gallons or so of LNG by rail to remote areas of the US and Mexico. This is quite a bit less than the 30 million capacity of most ocean tankers, but it serves a different purpose. The remote areas eligible to receive LNG could be residential, or more commonly, LNG-powered generators for remote drilling or fracking sites, mines, pipelines, power grids, etc. The point is there are quite a good amount of small scale LNG opportunities that are possible because of this new law.
+ Pipeline Innovation In The Digital Oilfield – Oilman Magazine
This article tackles digitalization in the midstream sector of oil and gas.
To summarize, the article points to several core characteristics of the midstream industry that make it more eligible for a digital transformation than, let’s say, the upstream sector of oil and gas.
For starters, the contract model of pipeline operators, entrenched infrastructure, and heavy regulation all make the midstream industry less reactive, somewhat more predictable, and arguably more stable than upstream. This is one reason why it may be easy to run many midstream operations on the cloud.
The article goes into a great deal of detail on this topic for folks interested not only in the feasibility of digitalization in the midstream industry, but also specific solutions to get there.
+ Petroleum Refiners Pose Hurdle to Oil’s Recovery – The Wall Street Journal
Refinery margins were a problem heading into the COVID-19 pandemic. The article argues that the massive surge in oil from April lows is straining margins, but oil is still relatively cheap compared to earlier months and 2019 averages. The main problem, as the second half of the article addresses, is that the sheer capacity of oil is discounting the value of refined products.
There are two main aspects of refinery profitability. The first is the input levels of the crude itself. A lower input cost means higher profitability. That said, the larger issue is the demand for refined products. Input costs only tell part of the story. For example, ExxonMobil and other major refiners were reporting 10-year low refining margins during a rather temperate price environment in 2019. At first glance, one would think that refining margins would vastly improve in a $40 oil environment compared to one in the mid to high $50s, but they haven’t because the demand for the refined products themselves, whether that be jet fuel or gasoline, remains low.
The article takes a deep dive into the events that have affected the downstream sector over the past few months.
+ API: US Petroleum Demand Recovered 14% Between April and May – Oil & Gas Journal
This article discusses the recovery of oil and gas demand in May as compared to April. Although May demand levels were still 20% lower than May of 2019, the rebound from April lows is a signal that demand for gasoline and other transport fuels is recovering, at least for now.
+ Monthly Statistics – IEA
Monthly natural gas statistics, oil price statistics, oil statistics, and electricity statistics.
The Future of Oil and Gas
This free-to-access article is absolutely packed with statistics that all support just how crucial of a time this is for the oil and gas industry.
Research and consulting firm, McKinsey, alludes to many concepts already discussed in this newsletter, namely the change in sentiment of financial markets. The firm notes that this is the third downturn in oil and gas in 12 years. In the previous two, the weaker companies would fall but the stronger companies, with a lot of help from capital markets in the form of loans, would rebound. The article is very apparent about making it clear that the financial market has reached a breaking point. It is no longer interested in uplifting even strong companies in a climate where oil and gas demand is expected to peak in the 2030s.
The article cites various forms of evidence, chiefly the stock market, noting the following:
Image Source: McKinsey & Company
All in all, there are many headwinds against the oil and gas industry. “We argue that the unprecedented crisis will be a catalytic moment and accelerate permanent shifts in the industry’s ecosystem, with new future opportunities.”
Up until this point, the narrative has been fairly bleak. But despite McKinsey’s pessimism, the firm makes no mistake in acknowledging the significance of the oil and gas industry. Although it believes many businesses will fail, it thinks that certain ones will succeed, if even thrive, in the new environment.
I particularly enjoyed Mckinsey’s comparisons to other industries that faced similar challenges and the characteristics that made certain companies successfully emerge from those challenges. Nucor in the steel industry, 3M in basic materials, JPMorgan Chase from the financial crisis.
Going forward, the oil and gas industry may not see the level of financial assistance that allowed virtually every large company with deep pockets to get through a crisis, but it could face a level of sophistication that rewards companies who demonstrate prudence and discipline.
Overall, it’s an article worth reading given the sheer amount of free data that covers the industry during the pandemic.
+ Look Who’s Talking About Zero Emissions – Bloomberg
This is a gem of an article. Bloomberg sits down with Ben van Beurden, the CEO of Shell, to discuss the company’s goals of cutting all emissions to zero by 2050. As covered in this newsletter, Shell has been arguably the most publicly pessimistic out of all the oil majors when it comes to the present state of the oil and gas industry.
What van Beurden is looking for is an identity shift. He wants to find a balanced approach to the energy needs of the future, not make things one-sided or create “us and them” schools of thought.
I think it’s refreshing to hear a CEO speak so candidly about issues. Aside from refreshing, his points are informative and worth reading.
Flaring, especially in EKT Interactive’s home state of Texas, has long been a topic of concern in this newsletter.
Thankfully, a multitude of different perspectives recently came together to try to improve the situation and reduce the environmental harm of flaring.
“The Railroad Commission of Texas invited testimony from the Blue Ribbon Task Force for Oil Economic Recovery, environmental groups and oil and natural gas operators focused on recommendations to reduce routine flaring of natural gas.”
At this point, there’s a general consensus that the industry needs to reduce flaring. Hopefully, a realistic and feasible solution that favors multiple stakeholders, from environmental groups, to citizens, to the companies themselves, can emerge from these discussions.
+ Will Canada Send Oil and Gas Packing? – The Wall Street Journal
This article discusses the energy politics of Canada. In response to the falloff in oil and gas demand, anti-oil and gas Canadian politicians are discouraging further investment or bailout of the industry, citing it as a perfect time for renewables to take over and get ahead.
The “let it bleed” approach is ironic given the oil and gas industry’s contribution to Canadian tax revenue.
According to the article, “from 2014 to 2019 the oil-and-gas industry generated more than 5% of Canadian gross domestic product. From 2016 to 2018 payments to government averaged $8 billion annually.”
Have a great weekend!
EKT Interactive Managing Editor