September 29, 2023
Things I Learned This Week in Amsterdam
September 29, 2023
The IADC HSE & Sustainability Europe Conference was held this week in the lovely city of Amsterdam. I was honored to be asked to speak.
Top Tier Topic. The aspect of safety has always been a paramount concern to our industry. There were over 130 HSE executives who got together in Amsterdam to talk about that aspect of the industry. The sophistication of digital tools and methods to track and improve safety has grown dramatically from when I ran field operations. Since it is Europe, the focus was very much slanted to the offshore sector, which is doing much better now after 6-7 years in the ditch. There was a myriad of statistics on safety, injuries, lost time incidents and deaths. The most drastic? The significant drop in hand and thumb injuries in the last 8 years as iron roughnecks and other tools greatly reduced the number of lost wedding ring fingers! Most injuries happened in areas like tripping pipe, so it is still dangerous, but the severity of the injuries in that area has dropped like a stone.
Stole the Show. Dan Romito from Pickering spoke about the reporting requirements by regulatory bodies and their costs, complexities, and misunderstandings. Overall, a very interesting presentation. Over the next 2-3 years, the required reporting requirements are staggering and include ISSB, STDI, TSRD, SFDR and other acronyms that were completely new to me but will now be required. It is really a part of the business that has been best understood by companies since it is their cost and reporting requirements. The NGOs, various groups, politicians and regulators are all influencing and dictating decisions with no regard to the practical or financial impacts. A great deal of conversation centered around the level of ignorance and/or misunderstanding about our industry by the public because other than selling them gasoline, they have little idea of what we actually do. We need to do a better job of educating the decision makers. We can do this by taking a data focused approach rather than anecdotal or subjective. In 3 years, 50,000 companies will be forced to report data in a format that can be understood outside our industry.
Headlines! Markets waver as oil’s surge spooks traders. - WSJ. We’re baaaaacccckkk. Whether we are heroes or goats, we are back in the news. A money losing group becoming irrelevant. Then we are on the front page every day as gougers of price; then are hit to the skids and become irrelevant again and new searches of newspapers showed nothing. Then Russia invaded Ukraine and oil was all that mattered, generating egregious profits, more gouging, and the best performing sub sector of the market. And then, after OPEC+ cut production and oil prices fell, we dropped off not just the front page but the first section. Now we are back!! The issue is that the progression I described has just been in the last four years, not the last 40. Volatility. Momentum. The darling of commodity and hedge fund trading. Good when it works, and terrible when it doesn’t go your way. The industry has shown great discipline in this latest run, taking more measured risks than before. It was that “drunken sailor” risk that caused much of the volatility. So, the disciplined approach will make for a more stable market? That works.
Fusion? Can we do this yet? It was announced this week at Nucor that Helion Energy plans to develop a 500 MW fusion power plant that would be placed on Nucor steel mills by 2030. There is currently no power or electricity being generated anywhere in the country by fusion. But 16 years ago, nobody had an iPhone either. You never know if one of these technologies will be the game changing technology that we need. Remember there were several cell phone manufacturers before the iPhone came along. Remember Nokia? Not hardly. It is interesting since the scale of the plant they’re planning to build will serve about 350,000 homes. Nucor is going to use it to run their steel plant. I think this is a fabulous idea. Having a nuclear plant run a steel facility would result in a dramatic reduction in emissions and if done correctly, significantly lower and stabilize costs. Small nuclear reactors are starting to take off around the world. If I can put one on a submarine, I can put one in some remote location that isn’t Comanche Peak. We started to sell them into Europe and eastern Europe, and I would expect Asia to be next. No one has announced building a fusion reactor however, at least not from anything I have seen. This appears to be a first and it’s definitely the first to be done by a steel company. So how many businesses out there would build a nuclear facility be it fusion or fission or small nuclear reactors to run their industrial complex and take themselves off the grid, fixing their energy costs long-term. Irresistible? It just depends on the cost. Thanks to the IRA bill the government passed, there is a huge amount of government money to be thrown at such projects. Hydrogen, fusion, and other technologies that are not yet widespread, and in fact barely used, are the golden children of the IRA bill. Wind and solar get their fair share. And we get penalized. But to see a resurgence in U.S. acceptance of nuclear in any form is heartwarming and maybe one day these new small nuclear reactors and thorium reactors, which cannot go critical, will start to see greater acceptance in the U.S. One can hope.
A Little-Known Fact. Starting next year, buyers can’t use the $7,500 credit on EVs that contain battery components sourced from anywhere outside the U.S. Now it was a little-known fact to me, but one has to believe that the explosion in battery manufacturing in the U.S. is aimed at taking advantage of the rule coming into effect in a year. The concern is that without that credit, the incentive to buy an electric vehicle will fall, stalling the global effort to remove ICE‘s from the road. Regardless of the aim, the result is going to be an explosion in battery and components manufacturing. If there is anything you make or do in the context of batteries, from charging locations to mining, start looking for those sectors to show more growth over the next several years than we are likely to see in our business. Be creative. All of this will happen regardless of all the railing about it not being economical. That takes some pretty big ‘cojones’ considering how uneconomical it has been for years. Adjust, just in different ways than was presented to the board three years ago. And two years ago. And last year. It will be different next year, but some longer-term trends are being identified and among them, the huge expansion of the now all-encompassing word – ENERGY. Not oil or gas or biomass and increasingly not wind, solar and nuclear, but ENERGY. And as all-encompassing as that is, our industry must start shifting its focus higher, above the many sub-sectors of ENERGY, to a broader and higher understanding of where they can play and what they can do. Or be stuck in a small sub-sector, already shrinking from the expansion of digital technologies that were developed by other industries and adapted to ours. Exxon hiring Amazon five years ago would have sounded absurd. For what? Amazon Web Services has seen its revenue double five times in nine years. That is a compounded annual growth rate of 45%. Amazon sold stuff online which required a lot of computing power, so it decided to commercialize its spare resources. This is the result. Think outside of the box. It’s where we are going, like it or not.
Further Dumbed Down. The state of Oregon passed a law changing the high school graduation requirement of passing a basic skills test in reading and math. “Politicians and school officials in Oregon are embarrassed that too many minority children fail tests designed to confirm they’ve mastered the ‘essential skills’ that high school is meant to teach,” said the WSJ in its editorial. “So, in the name of racial equity, they’ve now done the progressive thing.” We all know that in the future, education is the key to moving up in life, yet schools are being dumbed down to not make some students feel bad about themselves. I thought the goal was an education. We recently wrote about the performance of the schools in and around the Chicago area where only 20% of students at most are at their appropriate learning level. The future of poverty is a lack of education and we continue to dumb it down.
Okay, We Are Confused. But we will get to the bottom of this. It was announced yesterday that a California judge rejected Exxon’s bid to restart its offshore properties that have been shut in since 2015 after a pipeline leak. The latest rejection was over Exxon’s plan to truck the oil from an onshore terminal since the new pipeline is still underway. But earlier this year, it was announced that Exxon was selling these properties to a SPAC organized by known oil man Jim Flores, who runs Sable Offshore, with almost 97% financing for the $643 million purchase, with the promise that if they can’t get approval to produce the fields by 2026, they revert back to Exxon. One problem was that the plan called for almost 25,000 truckloads a year for seven years using coastal and state highways. Environmental groups praised the court decision which stated that they had a right to produce the oil but not to transport it by truck or pipeline.
Weekly EIA Data – Evercore.
Crude Implications: Neutral – draw above expectations. WTI backwardation between 1M-12M @ $11/bbl, unchanged w/w. SPR lower by 0.25mm bbls. Money managers’ net long positions in ICE Brent and NYMEX WTI are higher by 6% w/w, a new record since early 2022. Open interest is higher as the market gains visibility and confidence in continued inventory draws till YE23.
U.S. Crude Production: Indicated at 12.9mm BOPD, flat w/w, and up 0.9mm BOPD y/y.
Refinery Runs: 16.1mm BOPD, down 0.2 w/w and up 0.3 y/y. Utilization at 89.5%. The peak of seasonal demand is behind us but hurricane disruption and turnaround season are here, reducing runs.
Crude Imports (net): 3.2mm BOPD, up 1.8mm BOPD w/w and up 1.4mm BOPD y/y. Brent-WTI spread at $3.7/bbl, down $1.7/bbl w/w.
Gasoline: Bearish – build vs expected draw. Demand up 2.5% w/w and down 2.3% y/y.
Distillate: Bearish – build vs expected draw. Demand down 4.7% w/w and down 4.9% y/y.
Not Dead Yet. The CEOs of Saudi Aramco and Exxon on Monday pushed back against forecasts that oil demand will peak at the World Petroleum Conference in Calgary and said the transition to cleaner energy to fight climate change would require continuing investment in conventional oil and gas. - Reuters
Jaded. At least 125 people were killed in an explosion in Azerbaijan where thousands of ethnic Armenians are fleeing a contested Nagorno-Karabakh region, a breakaway region where Azerbaijan carried out a military offensive last week. Around 100 people are dead and 150 injured in a fire. Azerbaijan says 192 of its troops were killed, and over 500 were wounded in last week's offensive in Nagorno-Karabakh. Over 100 people killed in a massive fire at a Christian wedding ceremony in Iraq. At least 52 people were killed and more than 50 injured in a suicide attack on a religious gathering to mark the birthday of Prophet Mohammed in Pakistan's restive Balochistan province. Maybe Chicago isn’t that bad after all.
Headlines.
Petrobras recruits Chinese banks to finance deepwater oil expansion with world’s largest FPSO fleet.
Global Oil Prices on a Massive Upward Trend.
Oil to Rise, But Won’t Break $100.
(The Above Two headlines were in the same publication on the same day).
“I see many shortcomings in the current transition approach that can no longer be ignored,” Amin Nasser, the chief executive of Saudi Aramco.
Can You Say “Bust!”? In a highly anticipated event, the Biden administration held the first-ever auction of offshore wind development rights in the Gulf of Mexico. Wow. This is big!! But, oh wait. There was only one successful bid. One $5.6-million bid on the day, reflecting meager demand for the clean energy source in a region known for its oil and gas production. The winner was German Utility RWE. Two other areas received no bids at all. The Lease is 44 miles off the coast of Louisiana, with water depths of 30-80 feet. RWE said that the lease area has the potential to host up to 2 GW of new capacity, enough to power over 350,000 U.S. homes. The project is expected to be in operation by the mid-2030s, contingent upon permitting timelines. One factor mentioned as a reason for the weak interest was the fact that offshore Atlantic wind farms are killing baleen whales and didn’t want to bring that liability on them. In the Gulf however, we deal with the Rice’s whale. They’re everywhere!!!
We Are Cleaner Than Most Know. The facts clearly show U.S. offshore oil and gas is a viable source of energy with lower emissions. Considered one of the most climate advantaged energy-producing provinces in the world, recent research regarding carbon emissions reveals that Gulf of Mexico production has approximately half the carbon intensity per barrel of other producing regions worldwide. When it comes to flared or vented methane, the U.S. offshore industry has consistently been one of the best performing provinces in the world with a ratio of less than 1.25% of flared or vented to produced gas. Furthermore, when comparing import volumes and sources to a 2020 Wood Mackenzie report, one can conclude that at least 73.4% of the oil imported to the United States had a higher carbon intensity than Gulf of Mexico production. – The Amazing Scott A. Angelle.
Who Knows. Will the government shut down? The best TV shows have a cliffhanger at the end of each season, and we seem to have them each season too, but we have several every year. My forecast? Let me get the quarter out of my pocket. Like oil prices, I am either too smart or too stupid to predict oil prices. Or political actions. Will it matter? Of course. Everything matters. How much it matters to our industry is pretty much zero. We are expecting a recession and oil is still above $90. Predictions? We will survive a government shut down just fine and by “we”, I mean our energy industry. I always sympathize with people who lose their jobs for any reason, but the Fed has been trying to cool the economy for a year. Political shenanigans can have broad impacts but most of those waves have attenuated by the time they reach our shores.
Foreshadowing? Sweden had liberal immigration policies for many decades and took in more immigrants per capita than any other European nation during the 2015 migration crisis. Those policies were reversed by the former Social Democrat-led government, but have been tightened by the current government, headed by Prime Minister Kristersson. About 20% of Sweden's 10.5 million inhabitants were born abroad. Sweden's prime minister summoned the head of the armed forces and the police commissioner in a bid to stem gang violence. Kristersson said on Thursday, following a wave of violence that has taken at least 11 lives in September alone, “It is an irresponsible immigration policy and a failed integration that has brought us here.” Story from Reuters.
Deeper Meanings? This was in a major news feed - “Saudi Arabia is determined to secure a military pact requiring the United States to defend the kingdom in return for opening ties with Israel and will not hold up a deal even if Israel does not offer major concessions to Palestinians in their bid for statehood”. If true, or at least partially true, it shows that Saudi is worried about its future security and is willing to pick sides. And it appears to desire our side. So, who are they worried about? And why us? And why now, to the point it almost looks like desperation? Regardless, I would like more countries to seek our help than seek our demise.
And It Starts. Mach Natural Resources LP has filed for an IPO. And so it begins. TXO Energy completed its IPO about a year ago and I can’t think of much in between. Vital closed a big debt and equity deal but they were already public, and it was M&A financing. Tom Ward is leading it. I have known Tom since he was an investor in Spinnerhawk, my hedge fund 100 years ago. A great guy and all the best sir! This will be an interesting event. Private equity has loads of E&P investments they would love to monetize, so is this foreshadowing of a rush to the exits if the deal works well? That is the $64,000 question.
Climate Pledge Arena in Seattle. No comment.
China – AirBnB. We have been writing and warning of the real estate debacle unfolding in China. Property valuations have dropped, interest rates have risen and now some of the country’s largest property companies are failing. The repercussions should be significant in a world of heightened asset valuations due to interest rates at almost zero. One of the largest players, Evergrande, has lost $56 billion in value this year and it’s accelerating as stocks took their biggest hits this week. Ping An Real Estate has an overdue loan payment and China Oceanwide Holdings disclosed it is facing liquidation after a Bermuda court issued a winding-up order.
We Try to Be Helpful. API Perforating Services LLC is one of the leading providers of wireline solutions, including perforating, logging, pipe recovery and other wireline related services to the U.S. energy industry. The Company was founded in 2010 by industry veterans in the oilfield services sector and primarily operates in North, South and West Texas. API is headquartered in New Albany, Texas, operates over 30 wireline and hauling trucks and has over 160 employees between its’ three facilities. PPHB advised the company in securing an asset-backed loan.
Great Idea!!! Or Who Needs to Make Money?? French President Emmanuel Macron announced this week his plan to push the country’s oil and gas companies to start selling gasoline and diesel at cost. Yes, at cost. For no margin. Because after all, we need it. BS. The problem is that last year the government gave everybody money to offset inflation, including fuel. Of course, that only increases the rate of inflation, but these are politicians. Macron also said the government cannot afford to cut taxes on diesel and gasoline if it is to continue financing the green transition and the welfare state. They are putting $40+ billion into green initiatives. “There is one thing we can take action on and that is acting on abusive margins in refining,” Macron said. They just don’t understand.
Hysteria As a Tool. Ravaged by climate change? The prime minister of Barbados — who has spearheaded efforts by small nations “ravaged by climate change” to secure more funding from the wealthy world — declared that “enough is enough”. Data shows the severity of hurricanes is not rising and after a few decades the Statue of Liberty sits in the same water depth as it did 100 years ago. Hysteria? More like a way to justify asking for more money. “These are shocking levels of windfall profits we are seeing, and they are coming at the expense of countries in the global south. These petrostates could contribute to the solutions of the climate crisis,” said former UK prime minister Gordon Brown. “How do we raise trillions of dollars to fight the climate crisis? The answer is staring us in the face.” “Saudi Arabia would be asked to pay about $10 billion under the proposal, which is less than the country is spending on football, boxing and golf. If just a few of the highest-earning petrostates contributed – including Saudi Arabia, the United Arab Emirates, Qatar and Norway – a total of $25 billion would be quickly raised.” When it isn’t your money…
More U.S. LNG Coming. NextDecade secured debt financing to build its $18.4 billion Rio Grande LNG project in South Texas. The first phase calls for three liquefaction trains with a capacity of 17.6 million tons per annum (mtpa). A second phase of construction is planned in Brownsville and could eventually add two more trains, boosting the export facility’s capacity up to 27 mtpa. This is the third U.S. LNG project this year including the second phase of Venture Global’s Plaquemines LNG project in Louisiana and Phase 1 of Sempra’s Port Arthur LNG project.
Presentation Schedule
Any and all comments, arguments and rebuttals are welcome!
In addition to my association with PPHB, I serve on three private company boards. Merit Advisors is a property valuation company and I have long been a fan of optimizing how a business is run, not just the tools we make. Merit is in the business of savings companies’ money, actual cash, by doing a much more in-depth and realistic view of equipment and reserve valuations and I am very impressed with their work. I am also on the advisory board of Preng & Associates, a leading executive search boutique that specializes in all things related to Energy & Power. Nova is a gas compression company run by a very dynamic CEO with a very strong board and ownership.
I serve on the Advisory board of the Energy Workforce & Technology Council (formerly PESA), the National Ocean Industries Association (NOIA), and the Maguire Energy Institute at SMU my alma mater.
jim
214-755-3914 | james.wicklund@pphb.com
Leveraging deep industry knowledge and experience, since its formation in 2003, PPHB has advised on more than 180 transactions exceeding $11 Billion in total value. PPHB advises in mergers & acquisitions, both sell-side and buy-side, raises institutional private equity and debt and offers debt and restructuring advisory services. The firm provides clients with proven investment banking partners, committed to the industry, and committed to success.
