Editorial: Lower for longer again [NGW Magazine]
As NGW went to press, three of the majors had just published their Q4 results. They made the kind of dismal reading that one should brace oneself for over the coming week or two, as the other international oil companies (IOCs) relive a lighter version of 2014.
The weak economic outlook, the uncertain but bearish impact of coronavirus and tensions between major global trading partners continue to weigh on trade and consumer confidence. The writing for the oil market has been on the wall for some time, perhaps most vividly when the September attacks on Saudi infrastructure proved to have so short-lived an effect on Brent crude.
Shell had the dubious distinction of going first and set the alarm bells ringing with its greatly reduced share buy-back for this quarter, scaled down to $1bn. It had promised to use its best endeavours to buy back $25bn of shares by the end of this year: this might not happen. Indeed, Shell had warned that the programme could slip if the oil price fell below $65/barrel and it is also trying to bring down the debt gearing.
There was not much wrong on the operational side: Shell’s usual safety-net, Integrated Gas, saw bigger numbers than in the same period last year in all the meaningful rows – trade, liquefaction, production – but the company’s average sale price, at just $4.42/’000 ft3, was down 23% on Q4 2018.
In the US, where more of its upstream activity is going to be centred in the coming decades, ExxonMobil’s profit figure was strong at first glance, but once the sale of its Norwegian upstream business had been deducted, there was not much left over. And it cannot repeat that particular trick at the end of this quarter. And if it does make progress with its other European asset sales, it could well be in an even lower market. And Chevron made a downright loss.
Alongside the IOCs, the governments of major producer nations such as Saudi Arabia, Qatar, Algeria and Russia, who rely heavily on export revenues, have all been hit in the pocket to a greater or lesser extent by the growing supply-demand mismatch for oil, gas and refined products. Egypt has had again to close in LNG production as the market does not need it, even as the giant Zohr field ramps up. None of this bodes well for the stability of those societies, particularly if their governments are also engaged in expensive overseas wars.
In the OECD, for all its cheap energy and rampant exports of gas and liquids, the US economy is barely growing: it has missed the president’s 3% target now for two years. Last year it grew 2.3%, the Commerce Department said, the slowest since 2016, and down further from 2018’s 2.9%.
In Europe, one of the largest economies is about to embark on 11 months of probably difficult trade negotiations with the European Union, January 31, 2020 being the UK’s last day as a member of the 28-country bloc. With the details of the future trading terms all still to be agreed, quite how it will even continue to keep its oil and gas rigs manned and maintained is not clear. The Bank of England has predicted this year’s economic growth will be the slowest in a decade.
So for all these and other reasons, energy prices are back in the doldrums again, and even spot gas prices will not alleviate the depressing effects of Brent indexation on term sales. At a generous 12% discount against Brent, Asian LNG is still only $7/mn Btu at today’s $58/barrel; and spot prices are much lower. The one bright – or perhaps the least dim – spot for US LNG capacity holders is that Henry Hub prices at least are also low.
With the weather unseasonably mild, the benchmark contract has been trading sustainably at under $2.00/mn Btu in the week to January 29. The whole year from March-February was only a little above $2.00/mn Btu.
This then is the discouraging state of play as Europe plans its highly expensive Green Deal and other regions of the globe consider what the energy transition means for their societies. As NGW always points out, this is the golden opportunity for gas: and once the pipelines and terminals are in place, they will continue to be used even when the prices rise. Then again, a number of projects close to but not at the final investment decision stage will find that the time is not yet ripe. They will have to form the third wave.
Could it be a good thing, this economic down-turn, in that very limited respect? Something must be produced at ever lower prices that can generate revenues and provide heat and fuel but not particulates and today that means methane. Biogas has the beauty of being carbon negative; but who has the appetite for synthesising hydrogen at this stage in the economic cycle? Its time will come but when there is so much relatively low-carbon gas around ready to be used in power generation and transport sectors, it is an extravagance.
And prices can fall further without damaging producers’ returns. No longer are banks of geologists needed to ponder seismic images: AI can crunch all the probabilities, slashing the overhead and all but eliminating dry wells; while from deserted docksides unmanned electric vessels are loaded with spare parts and directed to remote wind-powered rigs, in response to automated commands. We are always fighting the last battle but the technology has moved on, and we are not going to renounce oil and gas just yet.
NGW