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Transformation in the Global Oil Energy Market: Is the End Nigh?
Strategic Stream | Transformation in the Global Oil Energy Market: Is the End Nigh?
Duration: 90 mins
World oil prices have collapsed, brought on by a combined effect of the global response to COVID-19 and a short lived and disruptive OPEC production increase resulting in powerful implications for the future of global energy markets. Is this the beginning of unprecedented change in the global oil markets or just a short-lived response?
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Cameron Gingrich
Director, Strategic Energy Advisory Services
Solomon Associates
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Fernando Valle
Senior Analyst
Bloomberg Intelligence
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Michael Lynch
Senior Contributor, Forbes Magazine
President, Strategic Energy and Economic Research
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Vincent Lauerman
Senior Contributor, Petroleum Economist
President, Geopolitics Central
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Steven Kelly
Past Board Member
National Energy Board of Canada
Questions From the Session
How will Canadian Oil fit in the mix over the next few years?
FV: We don’t believe shale production recovers to the extent it had grown in prior years, the U.S. refining system already relied on Canadian crude to balance its crude diet and produce a higher diesel cut. The cut in productions should mean Canada takes more market share in the medium/heavy sour component for U.S. refiners. The key issue is that demand for distillates, diesel and jet, collapsed and inventories are climbing very quickly. This will keep demand subdued until we resume economic growth.
FV: We don’t believe shale production recovers to the extent it had grown in prior years, the U.S. refining system already relied on Canadian crude to balance its crude diet and produce a higher diesel cut. The cut in productions should mean Canada takes more market share in the medium/heavy sour component for U.S. refiners. The key issue is that demand for distillates, diesel and jet, collapsed and inventories are climbing very quickly. This will keep demand subdued until we resume economic growth.
Will OPEC+ extend supply cuts?
FV: Some rumblings that Russia and Mexico are holding firm. I believe prisoners’ dilemma kicks in for these groups as soon as there’s a bit of improvement, as it has for U.S. shale independents.
FV: Some rumblings that Russia and Mexico are holding firm. I believe prisoners’ dilemma kicks in for these groups as soon as there’s a bit of improvement, as it has for U.S. shale independents.
Drilling is at historic lows in Canada. When does drilling come back in terms of 2020 Year Quarters? Or 2021?
FV: Drilling of sustaining well pads in the oil sands should come back fairly quickly once there’s a price signal, my guess towards end of 2020, 2021. Shale plays in Canada may have a more challenging outlook, as natural gas and NGL prices remain depressed.
FV: Drilling of sustaining well pads in the oil sands should come back fairly quickly once there’s a price signal, my guess towards end of 2020, 2021. Shale plays in Canada may have a more challenging outlook, as natural gas and NGL prices remain depressed.
Shale Plays in the USA - largely funded by debt with steep production declines of the resource. So assuming many bankruptcy's follow COVID demand destruction - what does shale recovery look like in the USA?
FV: Led by large-cap/majors, unlikely at the 30-40% p.a. clip we saw. Concentration in the key basins, mostly in the Permian.
FV: Led by large-cap/majors, unlikely at the 30-40% p.a. clip we saw. Concentration in the key basins, mostly in the Permian.
What should Canada be doing better from a corporate or governance basis?
FV: Speaking solely from the oil sands companies I cover, governance tends to be aligned, certainly under new managements in several of the players. There’s a need for pipelines, even after this pandemic.
FV: Speaking solely from the oil sands companies I cover, governance tends to be aligned, certainly under new managements in several of the players. There’s a need for pipelines, even after this pandemic.
What's the panels' thoughts of Henry Hub gas price over the next year, given lower NGL pricing and gas production economics during a recessionary environment?
FV: There’s be a massive drop in activity in gas plays, both dry and wet and the drop in associated gas production in oil plays will also contribute to bringing some semblance of balance to natural gas markets. Still, the lack of LNG demand, weaker economic growth and high levels of storage likely cap the upside. Rejection of NGLs into the gas stream also reduce the volume needed (more ethane/propane in the stream gives a higher BTU count). It’s hard to be bearish on $1.80/mmbtu, but these limitations and the likelihood that Permian producers get back to completions likely caps upside.
FV: There’s be a massive drop in activity in gas plays, both dry and wet and the drop in associated gas production in oil plays will also contribute to bringing some semblance of balance to natural gas markets. Still, the lack of LNG demand, weaker economic growth and high levels of storage likely cap the upside. Rejection of NGLs into the gas stream also reduce the volume needed (more ethane/propane in the stream gives a higher BTU count). It’s hard to be bearish on $1.80/mmbtu, but these limitations and the likelihood that Permian producers get back to completions likely caps upside.
Given the fact that historical forecasts are predominantly off the mark, how should we take today's forecasts?
FV: With skepticism, always. The industry, E&Ps, Refiners and to a lesser extent midstream, are price takers. Price is less of a component than capital allocation on returns. Not taking on too much leverage and looking for the lowest cost of supply will always be the critical component in commodities, in our view. Of course, there can be cases of sunk costs, i.e. it may not make sense to build a new SAGD plant, but the go-forward cost of supply can still be very low compared to peer plays, including the cost to maintain production stable.
FV: With skepticism, always. The industry, E&Ps, Refiners and to a lesser extent midstream, are price takers. Price is less of a component than capital allocation on returns. Not taking on too much leverage and looking for the lowest cost of supply will always be the critical component in commodities, in our view. Of course, there can be cases of sunk costs, i.e. it may not make sense to build a new SAGD plant, but the go-forward cost of supply can still be very low compared to peer plays, including the cost to maintain production stable.
Can anyone of the presenters give a perspective to argentine shale production (Vaca Muerta)?
FV: Vaca Muerta is a high quality shale play, with stacked reservoirs. Unfortunately, the fiscal situation in Argentina was deteriorating throughout 2019 and was aggravated in 2020, despite successful handling of the COVID-19 pandemic to date. Price and capital controls, along with the global oil price crash are likely to keep external players from increasing their capital allocation to Vaca Muerta. YPF will need to lead the way, but with Argentina still negotiating its way out of its latest fiscal cliff, it will need to rely on internal funds or raise debt at much higher costs.
FV: Vaca Muerta is a high quality shale play, with stacked reservoirs. Unfortunately, the fiscal situation in Argentina was deteriorating throughout 2019 and was aggravated in 2020, despite successful handling of the COVID-19 pandemic to date. Price and capital controls, along with the global oil price crash are likely to keep external players from increasing their capital allocation to Vaca Muerta. YPF will need to lead the way, but with Argentina still negotiating its way out of its latest fiscal cliff, it will need to rely on internal funds or raise debt at much higher costs.
To Fernando. I agree with him that the third world won´t make a big investment in electric cars, but homeworking demands much more electricity. Does he think that generation matrix are going to change (moving from coal based generation to gas or green systems) in post pandemic times?
FV: Homeworking definitely requires more electricity from residential, but commercial is still more electricity overall than residential. During lockdowns U.S. Northeast electricity demand fell by 11% (link: https://blinks.bloomberg.com/news/stories/QAZUJFDWLU74), margins are higher in residential, but volumes are lower. The matrix has changed, but the rate of that change will slow. Prior to this, Germany, the world leader in solar installations per capita, built coal plants because of intermittency. Natural gas prices enable more coal to gas, but trade disputes likely drive China and India, two of main importers of LNG to rely more on internal sources (i.e. coal). The change in marine fuel also likely pushes more fuel oil to the energy matrix in the developed world as its price crashed.
FV: Homeworking definitely requires more electricity from residential, but commercial is still more electricity overall than residential. During lockdowns U.S. Northeast electricity demand fell by 11% (link: https://blinks.bloomberg.com/news/stories/QAZUJFDWLU74), margins are higher in residential, but volumes are lower. The matrix has changed, but the rate of that change will slow. Prior to this, Germany, the world leader in solar installations per capita, built coal plants because of intermittency. Natural gas prices enable more coal to gas, but trade disputes likely drive China and India, two of main importers of LNG to rely more on internal sources (i.e. coal). The change in marine fuel also likely pushes more fuel oil to the energy matrix in the developed world as its price crashed.
Transformation in the Global Oil Energy Market: Is the End Nigh?
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