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Survival in the harsh conditions of the oil downturn


By Ed Crooks: October 21, 2016

The mood at the Oil and Money conference in London, the big energy event of the week, was a case of mixed emotions: cheer over signs of a near-term pick-up in the market, and concern over longer-term threats to demand.

The headlines were made on Wednesday by a clash between two of the biggest names in energy: Khalid al-Falih, energy minister of Saudi Arabia, and Rex Tillerson, chief executive of ExxonMobil. In his keynote speech, Mr al-Falih warned of the risk of “a shortage of supply” in future years because of plunging investment in oil production. Speaking minutes later, Mr Tillerson suggested he did not expect a collapse in supplies, because US shale provided “enormous spare capacity” to meet rising demand.

Beyond that difference of opinion, though, there was broad agreement that tightening oil markets mean the worst is over for producers. Opec officials and ministers are still working out how to deliver the output cuts that they agreed in Algiers, but even if they fail to carry out their plan, world oil markets are still tightening. If the oil price war has been like Napoleon’s march on Moscow, Algiers marked the point where the cartel turned and started to retreat.

Arguably the single most important factor in the battle for survival in the harsh conditions of the oil downturn has been the depth of US capital markets, which have kept North American producers in business even when their cash flows were too low to cover their capital spending. In another sign of American investors’ rising enthusiasm for energy, Double Eagle Energy Permian, an exploration and production company with assets in the in-demand Permian basin of west Texas, is heading for an IPO with an estimated value of nearly $3bn.

Saudi Arabia, meanwhile, is also tapping the capital markets, raising $17.5bn from a sovereign debt issue for international investors who were impressed by its plans for economic reform. The best read of the week came from the FT’s Arash Massoudi, Kara Inagaki and Simeon Kerr, who went behind the scenes of Saudi Arabia’s $100bn partnership with SoftBank of Japan, and shed light on deputy crown prince Mohammed bin Salman’s vision of the kingdom’s future.

Another reason for Saudi Arabia to want to diversify its economy faster is the risk that climate policies will hit demand for oil. Even Mr Tillerson spoke out in favour of “serious action” on climate in his speech to Oil and Money. Eldar Saetre, chief executive of Statoil, suggested oil demand would peak in the 2020s, and the world would then shift to electric vehicles. Fitch, the credit rating agency, warned that the oil industry faced a “serious threat” from the widespread adoption of battery-powered vehicles. However, Daniel Yergin, the great energy historian and analyst, this week argued that climate policies did not pose an imminent threat to oil and gas companies, and hence to the financial system, because the transition would take decades.

US carbon dioxide emissions from power generation have been falling because of the shift away from coal-fired power towards gas and renewables, but John Kemp at Reuters pointed out there have been signs of a modest upturn in the US coal industry. The larger issue for global carbon dioxide emissions, however, will be new coal plants built in Asia. Energy Transition Advisors, a consultancy, published ananalysis arguing that, unless carbon capture technology can be deployed at scale, “China and eventually India will require equally urgent and radical action” to keep the rise in global temperatures to 2°C.

One of the most contentious issues in debates over controlling greenhouse gas emissions is the role for nuclear power: an conflict now being played out in California.

Solar Roadways, a company developing panels that could, perhaps, be used to generate power from roads, parking lots and other outdoor surfaces, had an underwhelming launch of its first public installation. Frank Andorka at pv magazine suggested the lesson was that solar roads were “still not a thing.

The developers of solar roadways might want to take a look at the US Department of Energy’s excellent interactive timeline of the history of wind power. Energy innovation can be a long and difficult business.

Book of the week

Out of the Desert, the autobiography of Ali Al-Naimi, Saudi Arabia’s oil minister from 1995 until May of this year, will be a must-read for anyone interested in the history of the kingdom’s oil industry. It is also an extraordinary personal story of his rise from shepherd boy to “the most important man you’ve never heard of”.  If you don’t mind spoilers, you can read Javier Blas picking out some of the most newsworthy nuggets.

Quote of the week

“At ExxonMobil, we share the view that the risks of climate change are serious and warrant thoughtful action… We have long supported a carbon tax as the best policy of those being considered” – Rex Tillerson, ExxonMobil chief executive, in a speech at the Oil and Money conference in London.

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