Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[SharperDingaan]

And it starts ...    https://ca.reuters.com/article/topNews/idCAKBN1YY0II

 

"The U.S. military carried out air strikes on Sunday against the Iranian-backed Kataib Hezbollah militia group in response to the killing of a U.S. civilian contractor in a rocket attack on an Iraqi military base, officials said." "Iraqi security sources said on Monday that U.S. forces in Iraq’s northerly Nineveh province were ramping up security overnight, with U.S.-led coalition jets circling the perimeter of its military bases in Mosul and Qayarah."

 

The Aramco underwriters guarantee expired just before Christmas, and delivered the 2T valuation that MBS wanted.

A week later - aggressive US strikes on both Syria and Iraq (routinely 're-branding' six digit boe/d of Iranian crude crossing the border)

Captive IPO buyers need an exit, and few in the west are going to object to strikes that close that 're-branding' facility.

Can't smuggle, if you have no product to smuggle.

 

May we all do well.

 

SD

 

[Joe689]

Embassy now under siege and oil drops a buck.  Never a dull moment. 

 

Hope all the Americans stay unharmed. 

 

This will be a tough situation for Trump to navigate with Iraq PM turning on us

[Joe689]

And it escalates...

[TwoCitiesCapital]

So where are we at now? I've generally agreed energy has provided an value opportunity and is attractively priced.

 

At the high level, I also agreed with the thesis that a tightening of the oil markets was the most likely outcome do to increased demand and decreased investment/discovery following a tough time for the industry.

 

But that doesn't really seem to have happened over the last few years. Oil prices still remain range bound between $50-60. Despite the obvious skepticism towards certain releases of inventory builds and etc, I would think after a year or two of growing demand we would've been in for a period of sustained price rises if supply was actually tightening relative to demand.

 

So what is the current state of oil/gas markets? When can we expect the long awaited tightening between supply/demand? Anyone care to hazard a guess?

[SharperDingaan]

Supposedly 2020 US production is going to keep on rising, despite the current disruption in the US shale fields.

Could even be true, but it will be 're-branded' Canadian crude making up the difference ;) 

 

SD

 

[RadMan24]

I can't help but think the energy names are a good buy for next 2-3 years. What are people's thoughts on Exxon's counter cyclical strategy? The oil sands seem to be a great investment as they are sitting on gobs of cash generating assets with no major capex requirements.

[SharperDingaan]

Exxon is just being smart. For about the same cost as doing something offshore, it is a lot less risky, and most of the investment risk is pretty well known. Ongoing scaling efficiencies will continuously drive up margin, it is politically ‘safe’, and for decades to come - it will continue to be the major ‘go to’ for NA heavy crude.

 

SD

[sculpin]

Right back to the initial reason I created this topic...

Government Agency Warns Global Oil Industry Is on the Brink of a Meltdown

 

The report warns that global production growth may therefore soon stall due to the dodgy debt-driven economics of the US shale industry. While Saudi Arabia will no longer be able to ramp up production much, the US shale oil sector could be on the brink of unravelling due to massive unrepayable debts, declining production rates, and poor well quality.

 

https://www.vice.com/en_us/article/8848g5/government-agency-warns-global-oil-industry-is-on-the-brink-of-a-meltdown

 

Growth in GDP therefore amounts to a “debt fueled mirage,” according to the report. As we have not properly planned for the possible phasing out of fossil fuel energy, it is entirely possible that as energy systems, oil in particular, come to contract, we could witness “the peak of industrial output per capita sometime in the next few years.”

[woodstove]

Sculpin ... Thank you so much for that article link.  Here is a URL for the report (about 500 pages with appendixes).  Great source of info. 

 

https://tupa.gtk.fi/raportti/arkisto/70_2019.pdf

 

Best wishes,

Woodstove

[sculpin]

You’re crazy if you support hydrocarbons, and you’re crazier if you don’t – welcome to the world’s largest nest of Catch-22s

 

February 26, 20205:52 AM Terry Etam

 

It’s been a very tiring week of energy madness, so this post is full of bafflement and the sentences are too long and there’s cultural generalizing and geographical stereotyping and just see if I give a crap.

 

Imagine you landed in England in the middle of rainy season, that is, a month whose name includes a Y or an A or an E. Imagine you find an active and antagonistic battle going on between people using umbrellas and people providing umbrellas, and the really weird part is that the people that provide the umbrellas are having to explain to the people using them that they’re really handy and that maybe they’re not perfect and they occasionally poke people in the eyes on busy streets, but that that doesn’t invalidate their value, and at the same time those users of umbrellas are getting legislation passed to ban umbrellas. Wouldn’t that be perplexing?

 

Or imagine you’re in northern Ontario in January, and you sell winter coats, and local groups, who are wearing your winter coats, are trying to not just to shut down your business but have coats banned from town, all the while they’re wearing them – what the hell is this, you’d probably ponder.

 

In slightly different form, however, those situations are life in Canada, and here is our true national divide – those that provide hydrocarbons are living the life of the umbrella makers or coat providers, and, outside of a few whose mental acuity is sharp enough to grasp the lunacy, much of the rest of the population has been convinced by well-funded campaigns that they need neither umbrellas nor coats, and they are all actively campaigning against umbrellas and coats, and the government joins their fight because they smell votes, and citizens whose attention spans extend beyond gossip columns stand dumbfounded, wondering how to save the bands of climate-warriors from themselves? Because left to their own devices they are intent on impaling themselves on sticks, and it’s a lot of work to prevent that from happening.

 

This overarching madness isn’t unprecedented, and if it is leaving you feeling lost and bewildered, you’re not alone. There is, if not help, several generations of support groups that get it. Joseph Heller captured it all spectacularly in the novel Catch-22 quite a few decades ago in a brilliant analysis of the madness of war (I’ve read the book twice, but was lazy and raided Wikipedia for this gem from the book: “There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. To agree to fly dangerous combat missions when one could be declared unfit for duty meant one must be crazy. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. If he flew them, he was crazy and didn’t have to; but if he didn’t want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.”

 

This whole dialogue might sound like madness itself, but hear me out – it is a necessary path one must go down if one provides hydrocarbons to the world. We need to understand that the world is now governed by Catch-22s.

 

By providing hydrocarbons, we are deemed guilty of killing the planet by the press, by governments, by Swedish teenagers, by climate activists, and by most citizens that don’t understand where energy comes from. But if we were to cease providing hydrocarbons, everyone would die, and we would be guilty of killing the planet. (For the record, I’m not using the term fossil fuels anymore, wherever possible; hydrocarbons are a more accurate term (thanks, you know who you are).)

 

The opponents of hydrocarbons live in their own private Catch-22, on top of the big one. They demand an end to the development of hydrocarbons. At the same time, they demand “social justice” around the world, which means raising their standard of living through better access to medicine, education, air conditioning, heat, proper nutrition, etc etc., all of which require hydrocarbons. Catch-22.

 

Opponents of hydrocarbons live with yet another personal Catch-22 daily; they, to a man/woman/child/LGBTQ+/- cannot live without them, yet they demand that we quit producing hydrocarbons. That is, in plain language, they demand that we quit providing the fuel that keeps them alive. They choose short-term annihilation of the population to prevent a theoretical annihilation if the worst-case scenario of climate change does occur. But wait, some roll their eyes and say they don’t demand an immediate transition, they know it will take time. But then those same people joyfully retweet how fast the “divest fossil fuel investments” movement is becoming, or celebrate life-threatening lawsuits against petroleum companies, and they celebrate when teenagers take to the streets to demand immediate action, and they watch silently without protest as the world is urged to “panic” by their new messiah. They support by silent default immediate action and panic, and cheer its success, while at the same time declare that a transition needs time.

 

And there’s another level yet. Opponents of hydrocarbons choose to ram through a too-fast energy transition that does not work because it is not planned out, in an effort to save the world’s population from a potential shift in weather patterns that we have decades to plan for and that might not materialize at all in any meaningful way. In other words, we need to change the entire world’s infrastructure in an unbelievably huge way within a decade, based on the assumption that we won’t be able to change the world enough over the next 50 years to deal with creeping-higher oceans or modified weather patterns.

 

But wait, it gets weirder. Opponents of hydrocarbons block the safest way to transport them – pipelines – because the development of pipelines may lead to more global warming which will harm humans, or because said pipelines might leak at some point. Because of the moratorium on new pipeline construction, we now see things like a train full of oil turn into a giant fireball that killed 50 poor Quebeckers, and train after train after train derail and spill oil into whatever they happen to be near when they decide to overturn.

 

But they can’t ban the transportation of hydrocarbons outright, because, though they won’t say it out loud, they just like them so darn much. That’s not crazy talk; they really do. They love flying, though they hate the fuel. They love heat, but hate what provides it. They love sushi, but will fight to the death to dismantle the delivery system that brings it to them. So it is crazy. But it’s not, because it makes sense to want continued access to the fuel that keeps us alive. It’s crazy not to want that fuel. Except that they declare it to be crazy to allow producers to provide the fuel that they need, so they blockade producers and cheer happily when they win, though the world’s citizens are the losers because they need the petroleum, and if they don’t get petroleum global standards of living are reduced, which makes activists angry and forces them to act, which is yet another Catch-22.

 

And we’re not done yet, they’re piling up like hay bales. Hydrocarbon opponents block hydrocarbon development in regions where they are freely able to do so, because the live in a free society, and successfully halt new projects from going ahead. But they don’t block hydrocarbons in regions of the world that don’t have environmental standards, which means that they are strangling supplies of hydrocarbons that they can observe, measure, and hold accountable, and encourage development of hydrocarbons in places that choose not to do much about emissions at all.

 

But hold on, I hear the climate activists say, this all about democracy. Didn’t Canadians vote for “real action on climate change?” Well, no, they didn’t – two parties went all in on climate change, and two supported hydrocarbon pipeline development, and Canadians voted more than 80 percent for the latter pair. But one of the latter two declared a climate emergency, yet supported (bought, actually) an oil pipeline project which invalidates the claim that there is a real emergency. Catch-22.

 

We, as providers of energy, grow more and more speechless each passing day watching the insanity unfold before our very eyes. Where do we go from here, now that we’re up to our eyeballs in Catch-22’s?

 

Just as Yossarian in Catch-22 watched the war unfold, it looks like we must too, and the insanity will eventually reveal itself. On one side is religion, escalating fear, and politics masquerading as environmentalism; on the other side is the fuel supply and the brain power to adapt to changes the world throws at us. As the storm rages outside, take a bit of solace at least from knowing that.

 

https://boereport.com/2020/02/26/column-youre-crazy-if-you-support-hydrocarbons-and-youre-crazier-if-you-dont-welcome-to-the-worlds-largest-nest-of-catch-22s/#disqus_thread

[sculpin]

What if the market has the demand for oil completely wrong in terms of the Corona virus?? Very interesting thesis that turns the Oil Demand consensus completely on its head....

 

Summary

 

There are predictions that global oil demand will drop by 3-million barrels per day because of the Coronavirus contagion. So why is China stocking-up?

 

In the SARS contagion starting in November 2002, constraints on flying and public transport increased driving, which is much less fuel-efficient.

 

SARS was controlled by mid-2003, but the disruptions to transport continued until early 2005. China’s oil consumption went up by 11% in 2003 and by 16.5% in 2004.

 

Extrapolating the China/SARS model for “what-if COVID-19 goes global”,spits-out a number of nine-million barrels per day of extra oil demand in 2020.

 

Long oil and long offshore E&P.

 

 

https://seekingalpha.com/article/4328510-what-china-knows-coronavirus-oil-traders-dont-know

[sculpin]

Horizons Kinetics Q3...

 

 

Two Assessments of Energy: ‘The Market’ and

Contrarian (fact-based) Investing

Introduction

 

Today we’re talking about energy. Not

exclusively, but mostly. Specifically because

many of you have been asking about how the

fossil fuel divestment movement and green

energy initiatives will impact the energy sector –

more frequent questions, and more alarmed. If

we don’t address this, there might not be the

mind space to hear anything else. The fear isthat

there will be such a drastic collapse of oil and gas

use, or that, as some have suggested, fossil fuel

use will be non-existent by the year 2035, that it

will create a permanent failure among energy

stocks; stranded assets, and all of that.

 

We see the investment reality entirely

differently; entirely. The imminent danger is not

the collapse of fossil fuel use; the imminent

danger is an oil supply shortage and oil price

shock. However peculiar this might at first

sound, energy, right now, is one of the few ‘once-in-a-lifetime’ investment opportunities that one can be

fortunate enough to actually come across in a lifetime.

 

https://horizonkinetics.com/wp-content/uploads/Q3-CVALUE-Review_FINAL.pdf

[SharperDingaan]

As of this morning (Nov-24 EST) the WTI strip entered backwardation - or spot price > future price. In practical terms there is no more inventory available for sale, unless you pay a premium for it. The size of that premium depends on the state of current global supply disruption, and Opec+ decisions to release more crude.

 

Nigerian crude (low sulphur Bonny light) was shut-in this morning. Libyan exports (low sulphur Sarir) are declining, and the displacement of VZ heavy with Iranian heavy is reaching its limits - current supply disruption on both ends of the scale, and returning demand from covid immunization still to come.

 

Good luck to all  :)

 

SD

 

 

 

[Spekulatius]

https://www.reuters.com/article/us-japan-autos-gasoline/japan-may-ban-sale-of-new-gasoline-powered-vehicles-in-mid-2030s-media-idUSKBN28D044

[SharperDingaan]

The more immediate issue is Covid.

All else equal, medical facilities in the US and much of Europe, will be overwhelmed over the next 6 weeks - as people refuse to take precautions over the holiday period. There will still be treatment; but in many places - it will have been augmented with temporary field hospitals and military staffing. Most would not expect vaccine benefits to start significantly showing up in the numbers until mid January at the earliest.

 

Hard to see US demand remaining at current levels while this goes on. And easy to see a diminished supply, being met heavily from inventory drawdowns versus new US production. Great for the medium term .... not so much over the near term.

 

SD

 

 

[Castanza]

“That’s a bold move Cotton”

 

https://www.reuters.com/article/us-usa-biden-keystone/biden-to-cancel-keystone-xl-pipeline-permit-on-first-day-in-office-cbc-idUSKBN29N00A

[SharperDingaan]

Just to throw it out there .....

 

Assume Cdn side construction continues throughout 2021, with nothing in the US. Cdn/US 'negotiation' over 2021, new terms, and resumption of US side construction in 2022. As both sides need the work that the mega-project will bring, construction may even resume a little earlier. Oil moves south, if Alberta caps net emissions < X, consistent with the US returning to the climate accord agreement.

 

Net positive for Alberta/Canada overall, carbon tax, and carbon trading; but there will be some short-term disruptions.

Prospective Alberta vs US Gulf Coast refining displacement probably on the table as well  ;)

 

SD

[DooDiligence]

Will an end to subsidies spur growth in affordable, sustainable clean energy and enable us to survive discovering 1 out of every 20 bbls we now use?

 

—-

 

Direct Subsidies

 

Intangible Drilling Cost Deduction (26 U.S. Code § 263. Active). This provision allows companies to deduct a majority of the costs incurred from drilling new wells domestically. In its analysis of President Trump’s Fiscal Year 2017 Budget Proposal, the Joint Committee on Taxation (JCT) estimated that eliminating tax breaks for intangible drilling costs would generate $1.59 billion in revenue in 2017, or $13 billion in the next ten years.

 

Percentage Depletion (26 U.S. Code § 613. Active). Depletion is an accounting method that works much like depreciation, allowing businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time. However, with standard cost depletion, if a firm were to extract 10 percent of recoverable oil from a property, the depletion expense would be ten percent of capital costs. In contrast, percentage depletion allows firms to deduct a set percentage from their taxable income. Because percentage depletion is not based on capital costs, total deductions can exceed capital costs. This provision is limited to independent producers and royalty owners. In its analysis of the President’s Fiscal Year 2017 Budget Proposal, the JCT estimated that eliminating percentage depletion for coal, oil and natural gas would generate $12.9 billion in the next ten years.

 

Credit for Clean Coal Investment Internal Revenue Code § 48A (Active) and 48B (Inactive). These subsidies create a series of tax credits for energy investments, particularly for coal. In 2005, Congress authorized $1.5 billion in credits for integrated gasification combined cycle properties, with $800 million of this amount reserved specifically for coal projects. In 2008, additional incentives for carbon sequestration were added to IRC § 48B and 48A. These included 30 percent investment credits, which were made available for gasification projects that sequester 75 percent of carbon emissions, as well as advanced coal projects that sequester 65 percent of carbon emissions. Eliminating credits for investment in these projects would save $1 billion between 2017 and 2026.

 

Nonconventional Fuels Tax Credit (Internal Revenue Code § 45. Inactive). Sunsetted in 2014, this tax credit was created by the Crude Oil Windfall Profit Tax Act of 1980 to promote domestic energy production and reduce dependence on foreign oil. Although amendments to the act limited the list of qualifying fuel sources, this credit provided $12.2 billion to the coal industry from 2002-2010.

 

—-

 

Indirect Subsidies

 

Last In, First Out Accounting (26 U.S. Code § 472. Active). The Last In, First Out accounting method (LIFO) allows oil and gas companies to sell the fuel most recently added to their reserves first, as opposed to selling older reserves first under the traditional First In, First Out (FIFO) method. This allows the most expensive reserves to be sold first, reducing the value of their inventory for taxation purposes.

 

Foreign Tax Credit (26 U.S. Code § 901. Active). Typically, when firms operating in foreign countries pay royalties abroad they can deduct these expenses from their taxable income. Instead of claiming royalty payments as deductions, oil and gas companies are able to treat them as fully deductible foreign income tax. In 2016, the JCT estimated that closing this loophole for all American businesses operating in countries that do not tax corporate income would generate $12.7 billion in tax revenue over the course of the following decade.

 

Master Limited Partnerships (Internal Revenue Code § 7704. Indirect. Active). Many oil and gas companies are structured as Master Limited Partnerships (MLPs). This structure combines the investment advantages of publicly traded corporations with the tax benefits of partnerships. While shareholders still pay personal income tax, the MLP itself is exempt from corporate income taxes. More than three-quarters of MLPs are fossil fuel companies. This provision is not available to renewable energy companies.

 

Domestic Manufacturing Deduction (IRC §199. Indirect. Inactive). Put in place in 2004, this subsidy supported a range of companies by decreasing their effective corporate tax rate. While this deduction was available to domestic manufacturers, it nevertheless benefitted fossil fuel companies by allowing “oil producers to claim a tax break intended for U.S. manufacturers to prevent job outsourcing”. The Office of Management and Budget estimated that repealing this deduction for coal and other hard mineral fossil fuels would have saved $173 million between 2012 and 2016. This subsidy was repealed by the Tax Cuts and Jobs Act (P.L. 115 – 97) starting fiscal year 2018.

[DooDiligence]

How to spot the bubble in a barrel. A historical hysterical perspective.