The energy industry has always had one rock solid foundational belief — worldwide demand for hydrocarbons would rise as more and more nations enlarged their GDP through increased energy demand.
Demand forecasts are still unpredictable due to a number of COVID-19-related factors: a troubling rise in cases in Europe, parity in deaths in U.S. red and blue states, Florida’s full reopening despite a 10% positivity rate, and fears of a second global wave of infections coupled with a cold weather flu season.
China, accounting for 22% of worldwide energy use, has seen economic output and GPD contract, leading to an expected increase in transportation energy use of only 50% from 2017-2040, compared with a 639% increase from 1995-2017. Even starker is the energy demand projection increase for industry consumption — down to only 3% for 2017-2040, compared with an increase of 226% from 1995-2017.
According to the BP Energy Outlook, China’s deployment of renewables increases nearly sixfold for the period of 2017-2040, and will account for 26% of global renewables in 2040.
Electrification of Transportation
While reading the Austin American-Statesman on Saturday, September 26, 2020, was struck by the reporting on electric vehicles in an article published in the Cars section.
Kia Motors announced last week that it is planning an aggressive push into this market with a goal of offering 11 models by 2025.
Starting at $35,000 the Fusion Hybrid has incredible fuel efficiency with 109 miles to the gallon in cities.
The Nikola Badger is rated for 300 miles of electric-only range plus an additional 300 miles of range using hydrogen.
This assumes, of course, that Nikola remains a concern after the brutal expose published by short seller Hindenburg Research.
Its aggressive plan involves introducing 25 electric vehicles by 2023.
For Cadillac dealers the price tag is estimated to be $200,000 to transition dealerships for coming electric vehicles … GM is investing $20 billion through 2025 on electric and autonomous technologies and pushing to release 20 electric nameplates across multiple brands by 2023.
And … ChargePoint, the world’s largest provider of electric vehicle charging stations, plans go public by the end of the year.
Assuming this march towards the electrification of transportation continues, a primary demand market for oil — gasoline and diesel — will continually erode.
Roll into the equation potential changes in commuting, driven by how large companies determine their in-office real estate needs based on their COVID-19 experiences, and it seems that oil prices will struggle in the near and mid-term, and probably long term, to achieve the levels that will allow our industry to bolster margins.
Big oil with good, or at least decent, balance sheets have the wherewithal and access to capital to work through the transitions that are coming. But smaller companies, especially those that are privately held and heavily invested in unconventional development, are facing an uncertain, maybe grim, future.
The diversity of operators is the greatest strength of the American oil patch. In the past, thousands of operators analyzed subsurface data in different ways to generate thousands of drilling prospects.
A lot of these prospects were disappointing dry holes, but enough of them were huge successes that stimulated more exploration within the known limits of the geological fairways that contained the successful wells.
The net result was a huge amplification of our understanding of basin geology and stratigraphy, along with a massive increase in data points that became the foundation on which today’s unconventional boom has been built.
However, as the unconventional model began acquiring more and more acreage, smaller operators, who either didn’t have the balance sheet to drill and complete expensive horizontal wells or who couldn’t get financing to do so, got tossed to the sidelines.
With the economic returns of unconventional development under pressure from low demand, threats of increasing supply, and financial markets that have decided “live within your means” financial discipline is preferable to “drill baby, drill” operations, the entire industry — especially the large number of moderately or poorly capitalized companies — is under pressure.
Unfortunately, an industry under pressure — from both internal economic weaknesses and external environmental detractors — will be an industry that will have trouble attracting new generations of students to its ranks. With the exit of thousands of experienced, mature explorationists and engineers from this great industry due to age, this is trouble.
Is there a silver bullet out there for the industry? Can the Lone Ranger make a comeback?
There may be silver bullets, but they will not be .45 cal.
Here are some potential strategies:
Evaluate Your Reservoirs for Storage
As the majors move more and more towards carbon capture and sequestration, and high producing CO2 industries, such as the cement business, become desperate for ways to mitigate their global warming impacts, there will be a growing market for old depleted oil and gas fields — or even still producing fields that need pressure maintenance — to accommodate produced CO2. Fields with the right combination of porosity, permeability, seal integrity, reservoir geochemistry and proximity to client CO2 backlogs, should do well in the race for storage.
There may even be a brokerage opportunity to create a storage marketplace.
Positioning an old field as a carbon capture facility could allow an operator to arbitrage a deal with a client that would exchange storage costs for rights to sell carbon credits in the voluntary emissions reduction market. These credits would be sought by a wide variety of businesses and tapping into that market would diversify income streams beyond boom and bust oil and gas. Think portfolio management.
BTU for Power
A couple of weeks I heard about a novel idea: operators dedicating flare gas to power generation that was consumed onsite by mobile bitcoin miners. Although it’s an image that seems equal parts Mad Max and Matrix, it’s an intriguing out-of-the-box way of converting waste into revenue — with an environmental benefit to boot.
Awhile back I did very quick model on the revenue differences that would result from dedicating prolific natural gas production to gas turbine power generation that would sell power to the grid versus traditional sales to a natural gas gatherer. During just one year of production, revenues from power generation were nearly $6 million higher than the revenues generated from sales to a pipeline. A few years of these kinds of returns would completely amortize the cost of the turbine, assuming it was purchased instead of leased.
If the electric vehicle continues to build market share, gas transporters should entertain the idea of tapping their pipelines at strategically located points on heavily travelled roadways and maybe partner up with Tesla or ChargePoint.
Strategic Petroleum Reserve
No one likes the heavy hand of government — unless it’s doing us a favor. Like most in our industry, I was incensed when the Windfall Profit Tax was rolled out in 1980. Although the tax paid could be deducted against gross revenues to reduce tax liabilities, it was a federal boot on the neck of the industry, taking revenues from the industry in good times while gleefully accepting all the crude we could produce during bad times.
The current Strategic Petroleum Reserve (SPR) stockpile can meet our imported production shortfall needs for about 1,100 days. But if our domestic production output tanks, the SPR would have about 78 days of stockpile to meet our needs. We’re one major conflict in an important overseas producing area — Middle East, North Africa, Vietnam — or one shift in policy from OPEC+1 to put our oil and gas supplies at risk.
It’s clear that the vitality of our domestic oil patch is critical to maintaining our national security. And as the graph below of imported production shows, the shale revolution has consistently reduced our vulnerabilities to imported crude.
If the government committed to enter the oil market, on occasion, to buy oil for the SPR to boost our emergency reserves to double what we have now, we’d have about a six year cushion if our sources of imported oil all went away.
The benefits would be strategic in two ways. It would obviously give us, as a nation, a better hedge against supply disruptions and it would help stabilize the oil markets around nearly breakeven pricing — which would help preserve our domestic oil patch.
At a price of $45/bbl and a midway estimate of 750 million barrels in current storage, doubling our strategic hedge would cost about $34 billion dollars and would represent about 1.3% of the original COVID-19 stimulus package.
Any political pushback could be answered by an increase in royalties on federal land from the current 12.5% to somewhere around 15% — this would recover almost two-thirds of that expense.
A federal buy of oil that doubles the SPR’s stockpile would require, I believe, new holding areas to be defined and secured. Whether these would also be large salt caverns, or possibly traditional oil and gas reservoirs in depleted fields, is an open question.
As artificial intelligence, machine learning and massive number crunching become the norm in the oil patch, the gap between the older managers, who have may not have the technical chops required to perform and verify the results, and the new hires who are getting more and more comfortable with Python and other coding tools is growing.
Do yourselves a favor and find a way to fund intern positions that leverage the growing demand for geodata scientists. Our experience with the work product, ethics and intellectual honesty of interns has been outstandingly positive, and I can almost guarantee that your intern hires will improve your bottom line and give you positive ROI on your hiring expenses.
Latest posts by Mark Nibbelink (see all)
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