CDN NEWS | 
US NEWS 
By David Yager
In 2021 an unintended but welcome consequence of the COVID-19 vaccine will be a major reduction in aspirational and often disingenuous predictions about the future of oil.
Using the time-worn adage of never letting a good crisis go to waste, since the pandemic gripped the world last March seemingly endless commentaries, forecasts and ideas have emerged predicting what petroleum’s fate could or should be.
The sources are as varied as the messages. But be assured climate change alarmists, anti-carbon campaigners, and advocates for more and larger government have exploited the opportunity.
Several major European oil producers have added credibility to the narrative by claiming they are exiting their legacy business.
New buzzwords have worked their way into the political vernacular. “Peak oil demand”. “Stranded assets”. “Resilient recovery”. “Build back better”. “Sustainable finance”.
These ideas have been publicized by a media that has proven it will distribute anything that includes the words “coronavirus”, “pandemic” or “COVID-19”. With people trapped in their houses searching for the latest information, the audience has never been larger or more attentive.
You can be forgiven if you believe that the end of oil is near because the whole world is already switching as quickly as possible to wind, solar, geothermal and biomass.
This will be accelerated by increasingly restricted access to capital for fossil fuel industries.
Except it isn’t true.
Following is a summary of what we’ve been told in the last nine months about what could or should happen to the oil industry in 2020 and thereafter.
End of Oil
When world governments ordered that international and domestic travel stop immediately to prevent the further transmission of the COVID-19 virus, oil demand and prices collapsed. It was breathtaking as crude plummeted over US$90 a barrel from US$60 to open the year to negative US$30 one unforgettable day in April. That week the Energy Information Administration (EIA) reported WTI averaged only US$3.32 a barrel, the lowest real oil price in history.
The price collapse was exacerbated by the short-lived bravado of Saudi Arabia and Russia. In March they claimed they would actually increase production. By April cooler heads had prevailed and OPEC+ agreed to take 9.7 million b/d off the market. This was assisted with the shut-in of over 3 million b/d of higher cost production in the US and Canada.
Ignoring 30 years of warnings about how the world was doomed unless oil consumption declined immediately, in late 2019 petroleum reached an all-time consumption record of 102 million b/d and showed no signs of declining in 2020.
The pandemic changed everything. At least for now.
What followed was open season on the future of oil. Forecasted Q2 demand drop was 30 million b/d or more. As planes were grounded, offices and stores were closed and people were sent home, the theories emerged about how the world would change forever. Oil demand would plummet because people would stop travelling abroad or never resume commuting to and from the office.
This would make the drop in oil demand permanent. We were inundated with seemingly credible news reports and analysis how oil was not only down but would never come back.
But by June oil consumption in Asia was already recovering. A Reuters story on June 3 was titled, “China drives global oil demand recovery out of coronavirus collapse.” It opened, “China’s oil demand has recovered to more than 90% of the levels seen before the coronavirus pandemic struck early this year, a surprisingly robust rebound that could be mirrored elsewhere in the third quarter as more countries emerge from lockdowns.”
And rebound it did. By November EIA world consumption estimates proved accurate as consumption hit 96 million b/d, only 6 million b/d below the all-time high set a year earlier. This was the same as total world oil demand at the end of 2017. The EIA also reported that in the second quarter, the actual peak decline was only 15 million b/d, about half of earlier estimates.
The EIA now figures the world will be back to needing 100 million b/d in the latter half of 2021. Goldman Sachs released a report December 10 that estimated crude consumption will be back to historic levels by 2022.
As demand has recovered and production is being held off the market by OPEC+ and withdrawn high-cost production, inventories are declining steadily. The EIA reports that US output is still 2 million b/d lower than it was earlier this year. ARC Energy Research Institute’s latest estimate for 2020 is that Canadian crude output in 2020 will average about 540,000 b/d less than 2019, a 10% decline. This all contributes to restoring the global supply/demand balance.
Meanwhile, capital expenditures have been slashed. When demand outstrips supply, higher prices and the return to development of new supplies are inevitable.
New Strength of Renewables
Lockdowns also resulted in a reduction in electricity demand. In Europe and North America a lot of power from wind and solar is protected by feed-in tariffs or attractive supply arrangements. When electricity demand plunged, market distortions occurred that will not continue.
On July 22 news agency Reuters released a story with the headline, “Green energy ratchets up power during coronavirus pandemic”. The first paragraph stated, “Renewable power has taken up a record share of global electricity production since the onset of the coronavirus pandemic, according to a Reuters review of data, suggesting a transition away from polluting fossil fuels could be accelerated in the coming years.”
What actually happened is when total electricity demand declined, the percentage of power from renewables did indeed reach record levels. Fortunately, the same article reported that when demand declines power distributors buy the cheapest source available. With no energy input costs like coal or natural gas, installed and connected renewables are indeed cheaper than the fossil fuel backup sources they still require when the sun isn’t shining, or the wind isn’t blowing.
The International Energy Agency (IEA) pointed out that the power mix during this period was not sustainable. Reuters wrote, “The recent boost for wind and solar power came for all the wrong reasons: the health crisis has tipped the world into recession, pushing down electricity usage by more than a fifth in some countries, according to the Paris-based IEA.”
For 2020 the IEA reports that renewables were the fastest growing new electricity source, up 7% as total global energy demand declined by 5%. But what is often overlooked is that only a portion of oil and natural gas production compete in electricity markets. Only 1% of petroleum and about 1/3 of natural gas output is used for power generation. For transportation, renewables only propel light electric vehicles, 1% of the global fleet in 2019. Low carbon electricity is meaningless when it comes to essentials like petrochemicals, plastics and fertilizer.
The IEA figures that renewables will grow again in 2021, thanks in part to strong government and legislated support. Of the growth in 2020 the IEA wrote, “…but long-term contracts, priority access to the grid and continuous installation of new plants are all underpinning strong growth in renewable electricity.”
But population and total energy demand will also grow. Website https://www.worldometers.info/world-population/ reports that as of mid-December, there are 77.8 million more people on the planet than when the year began. That’s over twice the population of Canada. In its 2020 oil price outlook OPEC estimated the world’s population in 2045 will be 9.5 billion, 22% higher than today. Global GDP will be 213% higher than the 2011 benchmark. All forms of energy will be required to meet continually expanding demand.
Big Oil Abandons Its Core Business
The idea that oil was on its last legs got a lot of support from the producers themselves. The trading value of their shares had been under assault since March. The market capitalizations of E&P and OFS companies were clobbered as cash flow, production, revenue and underlying values of their assets plunged.
COVID had two impacts on the disclosure of publicly traded producers.
First, they had to review their balance sheets and the carrying value of their assets in light of the price collapse and the current COVID-influenced future commodity price deck. This resulted in major write-downs. The headline grabbers in June were BP, which wrote down the book values of its reserves by US$17.5 billion, and Shell which reported a US$22 billion write-down.
In aggregate producers reduced their stated reserve values by over US$50 billion in Q2 2020, an event that helped coin the term “stranded assets”. While this was a public company disclosure regulation, the perception grew that these assets would never be produced, hence the adjective “stranded”.
What was not reported was that the reserves only disappeared from the balance sheet, not the planet. If commodity prices rise and if a market for the product exists, they will be developed and produced.
Second, some of the larger European producers declared their intention to focus more of their future investments on renewable energy, not oil. This included BP, Shell, ENI and Equinor.
BP’s iconic annual world energy outlook released in September was a jaw dropper as this year’s version forecast a 75% reduction in world oil consumption if the world truly embraced “net zero by 2050”. Industry observers remain perplexed at how BP could undergo such a radical change in its view of the world in only 12 months. BP also disclosed that it believed peak oil demand had already been reached. If not, it was coming very soon.
Of interest is that none of the companies making headlines about oil’s uncertain future were among the top 10 producers which account for nearly 35% of total output. Of these only ExxonMobil and Chevron are privately-owned companies, ranking 6th and 9th respectively. The rest are state oil entities or public/private hybrids like Saudi Aramco and Petrobras.
In 2019 Shell and BP combined only produced 3.9% of total world oil and petroleum liquids. Right now they could go out of the oil business entirely tomorrow without causing a global shortage.
Meanwhile, United Arab Emirates recently announced a major production expansion program, US$122 billion over the next five years. Norway’s Equinor opened up several new areas for exploration. Iran is waiting for the removal of US sanctions to put another 2 million b/d back on stream. Libya has finally brokered an agreement among warring factions that has allowed it to increase output by 1 million b/d.
If Canada were to quit producing any oil whatsoever, political stability in Libya, Iran and Venezuela alone could replace Canada’s 5 million b/d of production.
It is remarkable how all this information was able to converge into the single and often repeated public message that the end of oil was underway or imminent. And how oil producers had read the climate tea leaves and were exiting the business.
Fossil Fuel Investments Are Doomed
The fossil divestment movement has been gaining ground for the past decade. At first it was simply fashionable not to own oil, coal or gas stocks, a form of financial virtue signaling. This year hardly a week goes by without another bank or financial institution proudly declaring it won’t finance some sort of hydrocarbon development somewhere.
Then this expanded to the ESG phenomenon. ESG began proposing and is increasingly demanding that public companies disclose the degree to which their business could be disrupted by climate change and what they are doing to prevent it.
Since stock markets tanked in March the recovery has been very uneven. Large companies that were either benefiting immediately from the lockdown like Amazon and Netflix were quickly rewarded. Tesla, part of the non-oil future, reached record highs. Established tech giants like Apple, Google and Microsoft and newcomers like Zoom provided investment returns that ignored the horrid overall state of the economy.
When oil prices collapsed, fossil fuel stocks joined their owners as “stranded assets”. Meanwhile, anybody associated with renewable energy such as solar power or biofuels did well. Those that actually generated profits received steadily rising P/E valuations in the absence of earnings growth. ETFs of renewables commonly outperformed fossil fuels and the broader industrials. Not because they were necessarily doing better but because the others were doing so much worse.
Only a handful of the largest and best managed oil producers will exit 2020 at half or more of their value a year ago. CNRL and Suncor have performed as well or better than Shell or BP while producing the world’s most awful oil and without declaring their fundamental business model was of diminishing future value.
Stable oil prices, the recent announcements of COVID vaccines and yet-another production management agreement by OPEC+ have caused a change in investor sentiment. Companies that were declared dogs or dying for most of the year have staged a remarkable and rewarding comeback.
While still about 1/3 below where it began the year, the TSX Energy Capped Index is up 50% in the last six weeks. The oil services sector is showing renewed investor interest although the improvement in activity since summer is modest and terrible compared to past years. The Petroleum Services Association of Canada oil service index of 13 public traded Canadian OFS operators is up 50% since October. The larger Philadelphia OSX index has gained over 60% over the same period.
For an industry that was widely regarded as having no future, a lot of investors don’t agree. It seems the biggest problem with oil equities this year is not their products but their profits.
A Financial Post article December 14 reported that oil sands were back in favor on Wall Street because of their ability to generate free cash even in 2020. Data compiled by Bloomberg revealed, “The eight largest oilsands producers by market value posted a combined free cash flow of US$1.4 billion for the third quarter, compared with US$163.7 million from the top eight US exploration and production companies.”
While the general belief is that oil and gas producers are being systematically starved for capital to save the world, recent events in the US raise questions about the true motives of investors.
New activist ESG investment fund Engine No. 1 LLC has bought a position in ExxonMobil and intends to seek four board seats next year to demand a voice in the company’s future. Engine No. 1 is backed by the California teachers’ pension plan. News reports indicate other ExxonMobil shareholders that are concerned include Blackrock, Vanguard and State Street Global Advisors. Blackrock and State Street are part of Climate Action 100+, a group of funds that push the companies in which they invest to move more quickly on climate change issues.
If you follow the news, you’d wonder why these funds own ExxonMobil at all. It turns out their primary concern is the sustainability of ExxonMobil’s dividend. A stated objective of Engine No 1’s is for ExxonMobil to reduce capital expenditures on new oil supplies which, of course, would free up cash for dividends.
Unlike the European oil majors which are publicly embracing renewable energy and a new business model, ExxonMobil is stubbornly sticking to its core business. But if the dividend is the issue, it is not intuitive to this writer how giving shareholders more cash, abandoning the oil business and moving into energy sources that are hardly cash cows can be classified as “sustainable”.
On October 28 ExxonMobil traded a seven-month low of US$31.57. On December 15 it closed at US$41.04, a 36% gain.
According to an article on http://oilprice.com/ on December 14 titled “Asset Managers Are Turning Up The Heat on Energy Companies”, multiple groups of institutional investors will be pressuring hydrocarbon producers to do more to reduce emissions or face consequences through replacement board members or motions to reduce executive compensation. The funds regularly repeat the “net zero by 2050” mantra as part of their public pronouncements.
But there is no mention of no longer owning their shares.
What is really going on? Is the intention really to starve fossil fuel producers of capital?
Or is this just another form of financial climate virtue signaling to attract investors?
Conclusion
The uncertainty caused by the pandemic and restrictive governments responses created a massive thirst for information at a time when predicting the future was the most uncertain in recent history.
While every sector of the economy was affected, oil and its prospects remained front page news because of its massive economic value, its importance to the continued functioning of the modern world, and its well-publicized threat to the future of the planet.
Into this information vacuum, advocates for a different future seized the opportunity to forward their views on oil and decarbonization. It was an ideal time because governments were making more decisions about what their citizens could and could not do since the end of the Second World War.
The message from climate campaigners is not directed at ordinary folks ordered not to leave their homes for their own safety. Their focus is policy makers. The objective is to take society and the economy in directions that history has proven it will not go if ordinary consumers are permitted to drive the bus.
Sometime next year enough people will have received COVID vaccinations that they will demand the right to return to making their own decisions.
This will not include paying more for anything including energy; not investing in companies with no earnings or free cash flow because they are told they should; living without electricity because the sun isn’t shining and the wind isn’t blowing; or being told what to do and think by governments that have been running and/or ruining their lives for a year or longer.
Fortunately, in 2021 and beyond the oil business will still be there to keep the wheels turning and the economy moving.
David Yager is an oil service executive, energy policy analyst, oil writer and author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca
Share This:
Canadians Should Decide What to do With Their Money – Not Politicians and Bureaucrats