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JSE (Jadestone Energy) rising off a bottom. Whilst mainly an oil producer in SE Asia now, it will significantly increase its gas production in the first half of this decade. This company has made some great (cheap) deals over the years and continues to do so.
DEC (Diversified Energy Company) 11% yield, recently oversold and rising off a bottom. Purchases declining / marginal gas assets in the USA.
Apologies for posting about other companies (but we are suspended...)
Shell has already cut spending dramatically over the last decade. After having peaked at $39 bn in 2013, upstream capital spending fell to only $17 bn in 2020 – a drop of nearly 60%. Spending has barely recovered in the three quarters of 2021. A lack of spending has already impacted production. Proforma for the 2016 acquisition of BG Group, Shell’s total production has fallen 13% since capital spending peaked in 2013. These trends are accelerating: Shell’s production over the first nine months of 2021 have fallen 7% compared with the same period last year.
If Royal Dutch Shell’s upstream capital spending remains at today’s depressed levels, we estimate the company will only be able to replace 30% of production with new reserves and that production will fall 40% over the next nine years. If spending is further curtailed (as is being proposed), Shell’s oil and natural gas production would collapse – something that may have already started.
As we have outlined many times in these letters, we believe growth in non-OPEC+ oil supply will turn negative this decade. The issues faced by the super-majors are a great example of pressures exerted on the energy industry as a whole.
As non-OPEC+ production declines, OPEC will gain ever more market share and pricing power. The first oil crisis of the 21st century is now upon us. You have to look no further than the plight of the super-majors to see why.
What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam as project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects.
According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.
Vietnam’s electricity generation is 50% coal-based while only 8% comes from natural gas. The country has stated its long-term goal is to have 80% of its electricity come from natural gas. If Vietnam is successful in its ambitious goal, it would reduce carbon emissions by nearly 30%. The development of the Ca Voi Xanh field is a critical part of this plan.
Similarly, large volumes of Rovuma LNG will likely go to displacing coal in India. Only 7% of all Indian electricity comes from natural gas while coal represents 55%. India wants natural gas to represent 15% of its energy mix by 2030. Cancelling the Rovuma LNG project would certainly complicate this goal with large implications for CO2 reduction.
A global natural gas shortage has already developed and we believe this is only the beginning of a long period of structural deficit. The world desperately needs the development of massive natural gas fields like Ca Voi Xanh and Rovuma to meet demand going forward.
Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Royal Dutch Shell must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”
http://gorozen.com/research/commentaries/3Q2021_Commentary
The super-majors’ problems continue to mount. Last quarter in “The Incredible Shrinking Oil Majors,” we discussed their inability to replace production with new reserves and how production of both oil and gas would significantly disappoint as we progressed through this decade -- especially considering the collapse of upstream capital spending budgets last year. We also discussed the forces now being applied to the companies by various ESG groups, both shareholders with de minimis ownership and various court systems, and how these forces would only exacerbate the reserve replacement and production problems being faced by these companies today.
A number of recent developments merit discussion. Both capital spending and production of oil and natural gas continue to fall for the four super-majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). In 2019, upstream capital expenditures averaged $15 bn per quarter for these four companies. Upstream spending collapsed in tandem with oil prices in 2020; by 1Q21 it had fallen by over 50%. Even though oil prices have rebounded, capital spending has lagged far behind, trending upward in 2021 off last year’s low, but still well below 2019 levels.
The large drop in capital spending has already put notable pressure on oil and gas production across the four super-majors. The surge in finding and development costs over the previous decade, combined with any extended drop in upstream capital spending, will produce large drops in reserve replacement and production going forward.
Our models originally suggested hydrocarbon reserve replacement will fall to only 40% while production itself will fall over 30% by 2030 unless capital spending trends move much higher. It now looks like the severe drop (and weak subsequent rebound) in capital spending over the past 20 months is already pressuring oil and natural gas production. Super-major production has now fallen over 10% since the beginning of 2019.
Three out of the four super-majors face intense ESG-related scrutiny. (2 very interesting graphs follow)
After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
Shell has already cut spending dramatically over the last decade. After having peaked at $39 bn in 2013, upstream capital spending fell to only $17 bn in 2020 – a drop of nearly 60%. Spending has barely recovered in the three quarters of 2021. A lack of spending has already impacted production. Proforma for the 2016 acquisition of BG Group, Shell’s total production has fallen 13% since capital spending peaked in 2013. These trends are accelerating: Shell’s production over the first nine months of 2021 have fallen 7% compared with the same period last year.
If Royal Dutch Shell’s upstream capital spending remains at today’s depressed levels, we estimate the company will only be able to replace 30% of production with new reserves and that production will fall 40% over the next nine years. If spending is further curtailed (as is being proposed), Shell’s oil and natural gas production would collapse – something that may have already started.
As we have outlined many times in these letters, we believe growth in non-OPEC+ oil supply will turn negative this decade. The issues faced by the super-majors are a great example of pressures exerted on the energy industry as a whole.
As non-OPEC+ production declines, OPEC will gain ever more market share and pricing power. The first oil crisis of the 21st century is now upon us. You have to look no further than the plight of the super-majors to see why.
What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam as project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects.
According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.
Vietnam’s electricity generation is 50% coal-based while only 8% comes from natural gas. The country has stated its long-term goal is to have 80% of its electricity come from natural gas. If Vietnam is successful in its ambitious goal, it would reduce carbon emissions by nearly 30%. The development of the Ca Voi Xanh field is a critical part of this plan.
Similarly, large volumes of Rovuma LNG will likely go to displacing coal in India. Only 7% of all Indian electricity comes from natural gas while coal represents 55%. India wants natural gas to represent 15% of its energy mix by 2030. Cancelling the Rovuma LNG project would certainly complicate this goal with large implications for CO2 reduction.
A global natural gas shortage has already developed and we believe this is only the beginning of a long period of structural deficit. The world desperately needs the development of massive natural gas fields like Ca Voi Xanh and Rovuma to meet demand going forward.
Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Royal Dutch Shell must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”
http://gorozen.com/research/commentaries/3Q2021_Commentary
The super-majors’ problems continue to mount. Last quarter in “The Incredible Shrinking Oil Majors,” we discussed their inability to replace production with new reserves and how production of both oil and gas would significantly disappoint as we progressed through this decade -- especially considering the collapse of upstream capital spending budgets last year. We also discussed the forces now being applied to the companies by various ESG groups, both shareholders with de minimis ownership and various court systems, and how these forces would only exacerbate the reserve replacement and production problems being faced by these companies today.
A number of recent developments merit discussion. Both capital spending and production of oil and natural gas continue to fall for the four super-majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). In 2019, upstream capital expenditures averaged $15 bn per quarter for these four companies. Upstream spending collapsed in tandem with oil prices in 2020; by 1Q21 it had fallen by over 50%. Even though oil prices have rebounded, capital spending has lagged far behind, trending upward in 2021 off last year’s low, but still well below 2019 levels.
The large drop in capital spending has already put notable pressure on oil and gas production across the four super-majors. The surge in finding and development costs over the previous decade, combined with any extended drop in upstream capital spending, will produce large drops in reserve replacement and production going forward.
Our models originally suggested hydrocarbon reserve replacement will fall to only 40% while production itself will fall over 30% by 2030 unless capital spending trends move much higher. It now looks like the severe drop (and weak subsequent rebound) in capital spending over the past 20 months is already pressuring oil and natural gas production. Super-major production has now fallen over 10% since the beginning of 2019.
Three out of the four super-majors face intense ESG-related scrutiny. (2 very interesting graphs follow)
After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
Shell has already cut spending dramatically over the last decade. After having peaked at $39 bn in 2013, upstream capital spending fell to only $17 bn in 2020 – a drop of nearly 60%. Spending has barely recovered in the three quarters of 2021. A lack of spending has already impacted production. Proforma for the 2016 acquisition of BG Group, Shell’s total production has fallen 13% since capital spending peaked in 2013. These trends are accelerating: Shell’s production over the first nine months of 2021 have fallen 7% compared with the same period last year.
If Royal Dutch Shell’s upstream capital spending remains at today’s depressed levels, we estimate the company will only be able to replace 30% of production with new reserves and that production will fall 40% over the next nine years. If spending is further curtailed (as is being proposed), Shell’s oil and natural gas production would collapse – something that may have already started.
As we have outlined many times in these letters, we believe growth in non-OPEC+ oil supply will turn negative this decade. The issues faced by the super-majors are a great example of pressures exerted on the energy industry as a whole.
As non-OPEC+ production declines, OPEC will gain ever more market share and pricing power. The first oil crisis of the 21st century is now upon us. You have to look no further than the plight of the super-majors to see why.
What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam as project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects.
According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.
Vietnam’s electricity generation is 50% coal-based while only 8% comes from natural gas. The country has stated its long-term goal is to have 80% of its electricity come from natural gas. If Vietnam is successful in its ambitious goal, it would reduce carbon emissions by nearly 30%. The development of the Ca Voi Xanh field is a critical part of this plan.
Similarly, large volumes of Rovuma LNG will likely go to displacing coal in India. Only 7% of all Indian electricity comes from natural gas while coal represents 55%. India wants natural gas to represent 15% of its energy mix by 2030. Cancelling the Rovuma LNG project would certainly complicate this goal with large implications for CO2 reduction.
A global natural gas shortage has already developed and we believe this is only the beginning of a long period of structural deficit. The world desperately needs the development of massive natural gas fields like Ca Voi Xanh and Rovuma to meet demand going forward.
Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Royal Dutch Shell must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”
http://gorozen.com/research/commentaries/3Q2021_Commentary
The super-majors’ problems continue to mount. Last quarter in “The Incredible Shrinking Oil Majors,” we discussed their inability to replace production with new reserves and how production of both oil and gas would significantly disappoint as we progressed through this decade -- especially considering the collapse of upstream capital spending budgets last year. We also discussed the forces now being applied to the companies by various ESG groups, both shareholders with de minimis ownership and various court systems, and how these forces would only exacerbate the reserve replacement and production problems being faced by these companies today.
A number of recent developments merit discussion. Both capital spending and production of oil and natural gas continue to fall for the four super-majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). In 2019, upstream capital expenditures averaged $15 bn per quarter for these four companies. Upstream spending collapsed in tandem with oil prices in 2020; by 1Q21 it had fallen by over 50%. Even though oil prices have rebounded, capital spending has lagged far behind, trending upward in 2021 off last year’s low, but still well below 2019 levels.
The large drop in capital spending has already put notable pressure on oil and gas production across the four super-majors. The surge in finding and development costs over the previous decade, combined with any extended drop in upstream capital spending, will produce large drops in reserve replacement and production going forward.
Our models originally suggested hydrocarbon reserve replacement will fall to only 40% while production itself will fall over 30% by 2030 unless capital spending trends move much higher. It now looks like the severe drop (and weak subsequent rebound) in capital spending over the past 20 months is already pressuring oil and natural gas production. Super-major production has now fallen over 10% since the beginning of 2019.
Three out of the four super-majors face intense ESG-related scrutiny. (2 very interesting graphs follow)
After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
Shell has already cut spending dramatically over the last decade. After having peaked at $39 bn in 2013, upstream capital spending fell to only $17 bn in 2020 – a drop of nearly 60%. Spending has barely recovered in the three quarters of 2021. A lack of spending has already impacted production. Proforma for the 2016 acquisition of BG Group, Shell’s total production has fallen 13% since capital spending peaked in 2013. These trends are accelerating: Shell’s production over the first nine months of 2021 have fallen 7% compared with the same period last year.
If Royal Dutch Shell’s upstream capital spending remains at today’s depressed levels, we estimate the company will only be able to replace 30% of production with new reserves and that production will fall 40% over the next nine years. If spending is further curtailed (as is being proposed), Shell’s oil and natural gas production would collapse – something that may have already started.
As we have outlined many times in these letters, we believe growth in non-OPEC+ oil supply will turn negative this decade. The issues faced by the super-majors are a great example of pressures exerted on the energy industry as a whole.
As non-OPEC+ production declines, OPEC will gain ever more market share and pricing power. The first oil crisis of the 21st century is now upon us. You have to look no further than the plight of the super-majors to see why.
What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam as project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects.
According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.
Vietnam’s electricity generation is 50% coal-based while only 8% comes from natural gas. The country has stated its long-term goal is to have 80% of its electricity come from natural gas. If Vietnam is successful in its ambitious goal, it would reduce carbon emissions by nearly 30%. The development of the Ca Voi Xanh field is a critical part of this plan.
Similarly, large volumes of Rovuma LNG will likely go to displacing coal in India. Only 7% of all Indian electricity comes from natural gas while coal represents 55%. India wants natural gas to represent 15% of its energy mix by 2030. Cancelling the Rovuma LNG project would certainly complicate this goal with large implications for CO2 reduction.
A global natural gas shortage has already developed and we believe this is only the beginning of a long period of structural deficit. The world desperately needs the development of massive natural gas fields like Ca Voi Xanh and Rovuma to meet demand going forward.
Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Royal Dutch Shell must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”
http://gorozen.com/research/commentaries/3Q2021_Commentary
The super-majors’ problems continue to mount. Last quarter in “The Incredible Shrinking Oil Majors,” we discussed their inability to replace production with new reserves and how production of both oil and gas would significantly disappoint as we progressed through this decade -- especially considering the collapse of upstream capital spending budgets last year. We also discussed the forces now being applied to the companies by various ESG groups, both shareholders with de minimis ownership and various court systems, and how these forces would only exacerbate the reserve replacement and production problems being faced by these companies today.
A number of recent developments merit discussion. Both capital spending and production of oil and natural gas continue to fall for the four super-majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). In 2019, upstream capital expenditures averaged $15 bn per quarter for these four companies. Upstream spending collapsed in tandem with oil prices in 2020; by 1Q21 it had fallen by over 50%. Even though oil prices have rebounded, capital spending has lagged far behind, trending upward in 2021 off last year’s low, but still well below 2019 levels.
The large drop in capital spending has already put notable pressure on oil and gas production across the four super-majors. The surge in finding and development costs over the previous decade, combined with any extended drop in upstream capital spending, will produce large drops in reserve replacement and production going forward.
Our models originally suggested hydrocarbon reserve replacement will fall to only 40% while production itself will fall over 30% by 2030 unless capital spending trends move much higher. It now looks like the severe drop (and weak subsequent rebound) in capital spending over the past 20 months is already pressuring oil and natural gas production. Super-major production has now fallen over 10% since the beginning of 2019.
Three out of the four super-majors face intense ESG-related scrutiny. (2 very interesting graphs follow)
After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
Shell has already cut spending dramatically over the last decade. After having peaked at $39 bn in 2013, upstream capital spending fell to only $17 bn in 2020 – a drop of nearly 60%. Spending has barely recovered in the three quarters of 2021. A lack of spending has already impacted production. Proforma for the 2016 acquisition of BG Group, Shell’s total production has fallen 13% since capital spending peaked in 2013. These trends are accelerating: Shell’s production over the first nine months of 2021 have fallen 7% compared with the same period last year.
If Royal Dutch Shell’s upstream capital spending remains at today’s depressed levels, we estimate the company will only be able to replace 30% of production with new reserves and that production will fall 40% over the next nine years. If spending is further curtailed (as is being proposed), Shell’s oil and natural gas production would collapse – something that may have already started.
As we have outlined many times in these letters, we believe growth in non-OPEC+ oil supply will turn negative this decade. The issues faced by the super-majors are a great example of pressures exerted on the energy industry as a whole.
As non-OPEC+ production declines, OPEC will gain ever more market share and pricing power. The first oil crisis of the 21st century is now upon us. You have to look no further than the plight of the super-majors to see why.
What should Chevron expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam as project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects.
According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.
Vietnam’s electricity generation is 50% coal-based while only 8% comes from natural gas. The country has stated its long-term goal is to have 80% of its electricity come from natural gas. If Vietnam is successful in its ambitious goal, it would reduce carbon emissions by nearly 30%. The development of the Ca Voi Xanh field is a critical part of this plan.
Similarly, large volumes of Rovuma LNG will likely go to displacing coal in India. Only 7% of all Indian electricity comes from natural gas while coal represents 55%. India wants natural gas to represent 15% of its energy mix by 2030. Cancelling the Rovuma LNG project would certainly complicate this goal with large implications for CO2 reduction.
A global natural gas shortage has already developed and we believe this is only the beginning of a long period of structural deficit. The world desperately needs the development of massive natural gas fields like Ca Voi Xanh and Rovuma to meet demand going forward.
Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Royal Dutch Shell must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”
http://gorozen.com/research/commentaries/3Q2021_Commentary
The super-majors’ problems continue to mount. Last quarter in “The Incredible Shrinking Oil Majors,” we discussed their inability to replace production with new reserves and how production of both oil and gas would significantly disappoint as we progressed through this decade -- especially considering the collapse of upstream capital spending budgets last year. We also discussed the forces now being applied to the companies by various ESG groups, both shareholders with de minimis ownership and various court systems, and how these forces would only exacerbate the reserve replacement and production problems being faced by these companies today.
A number of recent developments merit discussion. Both capital spending and production of oil and natural gas continue to fall for the four super-majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). In 2019, upstream capital expenditures averaged $15 bn per quarter for these four companies. Upstream spending collapsed in tandem with oil prices in 2020; by 1Q21 it had fallen by over 50%. Even though oil prices have rebounded, capital spending has lagged far behind, trending upward in 2021 off last year’s low, but still well below 2019 levels.
The large drop in capital spending has already put notable pressure on oil and gas production across the four super-majors. The surge in finding and development costs over the previous decade, combined with any extended drop in upstream capital spending, will produce large drops in reserve replacement and production going forward.
Our models originally suggested hydrocarbon reserve replacement will fall to only 40% while production itself will fall over 30% by 2030 unless capital spending trends move much higher. It now looks like the severe drop (and weak subsequent rebound) in capital spending over the past 20 months is already pressuring oil and natural gas production. Super-major production has now fallen over 10% since the beginning of 2019.
Three out of the four super-majors face intense ESG-related scrutiny. (2 very interesting graphs follow)
After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
Oil markets will likely be the next to undergo severe stress. Inventories have drawn at a record pace and now stand well below normal. Non-OPEC production growth has disappointed while strong demand continues to surprise.
Last quarter, we discussed the International Energy Agency’s latest climate policies and how they would produce unintended consequences. One consequence that has emerged even faster than we had expected: OPEC’s regain of market share and pricing power.
Despite having aggressively promoted legislation that echoed the IEA and discouraged domestic oil production, on August 11th 2021 the Biden administration called on OPEC to increase production to help ease high prices. OPEC rejected Biden’s request and crude prices having rallied over 20% since.
The energy crisis has just started. Over the next decade, this new cycle will unfold with many unanticipated twists and turns. The investment implications and opportunities remain incredibly large. In an ironic twist, institutional investors have little to no exposure to energy stocks. We would not be surprised if energy ended up representing investors’ single largest exposure at some point before the decade is over.
http://gorozen.com/research/commentaries/3Q2021_Commentary
The energy crisis unfolding across Europe, Asia, and South America caught almost everybody by surprise – but not our readers, we hope. Our 2Q20 Natural Resource Market Commentary was titled “On the Verge of an Energy Crisis.” Fast forward 14 months: the energy crisis we predicted has arrived with a vengeance...
We thought extremely strong oil demand, coupled with a feeble rebound in non-OPEC production, would lead to a situation never seen in 160 years of crude history: demand would actually surpass global pumping capability by the end of 2022. Even during the two energy crises of the 1970s (the Arab oil embargo of 1973 and the Iranian hostage crisis of 1979), crude demand did not come close to exceeding global pumping capability. Recent data strongly suggests our modelling was correct: demand will exceed pumping capacity by the end of next year...
Investors need to recognize how interlocked energy markets have become. A crisis in one market is all but certain to spill over into another. European utilities are desperately switching from burning expensive natural gas to much less expensive crude oil, increasing demand by over 500,000 b/d. This additional source of demand has introduced even more tightness into an oil market that is already undersupplied. The oil crisis we had originally expected to emerge in 4Q22 will now likely come even sooner. As the natural gas shortage did, the coming oil crisis will seemingly come out of nowhere, taking much of the investment community by surprise...
How did this energy crisis emerge so quickly and unexpectedly? The most important cause has been the ongoing underestimation of global energy demand. In turn, this resulted in dramatic underinvestment in oil and gas development.
Over the last 20 years, there has been a surge of energy demand, a phenomenon we call the “S-Curve.” As a country gets richer, energy demand grows faster than economic activity for a period of time. We estimate that in 1995 approximately 700 mm people were in the midst of their “S-Curve.” Today, there are almost 4 billion people in this category – the most in history.
Coinciding with the explosion of energy-hungry consumers is the misguided focus on renewable energy over the last 10 years. Mounting ESG pressures forced energy companies to significantly reduce their traditional hydrocarbon investment while dramatically increasing commitments to renewable energy projects. Wind and solar have a fundamental problem: they are intermittent and therefore unsuited for baseload power.
We have argued that surging demand from the S-Curve combined with a reduction of traditional energy capital spending would prove unsustainable. The result is the energy crisis unfolding today. We are still in the very early innings of this new cycle...
Oil markets will likely be the next to undergo severe stress. Inventories have drawn at a record pace and now stand well below normal. Non-OPEC production growth has disappointed while strong demand continues to surprise.
Last quarter, we discussed the International Energy Agency’s latest climate policies and how they would produce unintended consequences. One consequence that has emerged even faster than we had expected: OPEC’s regain of market share and pricing power.
Despite having aggressively promoted legislation that echoed the IEA and discouraged domestic oil production, on August 11th 2021 the Biden administration called on OPEC to increase production to help ease high prices. OPEC rejected Biden’s request and crude prices having rallied over 20% since.
The energy crisis has just started. Over the next decade, this new cycle will unfold with many unanticipated twists and turns. The investment implications and opportunities remain incredibly large. In an ironic twist, institutional investors have little to no exposure to energy stocks. We would not be surprised if energy ended up representing investors’ single largest exposure at some point before the decade is over.
http://gorozen.com/research/commentaries/3Q2021_Commentary
The energy crisis unfolding across Europe, Asia, and South America caught almost everybody by surprise – but not our readers, we hope. Our 2Q20 Natural Resource Market Commentary was titled “On the Verge of an Energy Crisis.” Fast forward 14 months: the energy crisis we predicted has arrived with a vengeance...
We thought extremely strong oil demand, coupled with a feeble rebound in non-OPEC production, would lead to a situation never seen in 160 years of crude history: demand would actually surpass global pumping capability by the end of 2022. Even during the two energy crises of the 1970s (the Arab oil embargo of 1973 and the Iranian hostage crisis of 1979), crude demand did not come close to exceeding global pumping capability. Recent data strongly suggests our modelling was correct: demand will exceed pumping capacity by the end of next year...
Investors need to recognize how interlocked energy markets have become. A crisis in one market is all but certain to spill over into another. European utilities are desperately switching from burning expensive natural gas to much less expensive crude oil, increasing demand by over 500,000 b/d. This additional source of demand has introduced even more tightness into an oil market that is already undersupplied. The oil crisis we had originally expected to emerge in 4Q22 will now likely come even sooner. As the natural gas shortage did, the coming oil crisis will seemingly come out of nowhere, taking much of the investment community by surprise...
How did this energy crisis emerge so quickly and unexpectedly? The most important cause has been the ongoing underestimation of global energy demand. In turn, this resulted in dramatic underinvestment in oil and gas development.
Over the last 20 years, there has been a surge of energy demand, a phenomenon we call the “S-Curve.” As a country gets richer, energy demand grows faster than economic activity for a period of time. We estimate that in 1995 approximately 700 mm people were in the midst of their “S-Curve.” Today, there are almost 4 billion people in this category – the most in history.
Coinciding with the explosion of energy-hungry consumers is the misguided focus on renewable energy over the last 10 years. Mounting ESG pressures forced energy companies to significantly reduce their traditional hydrocarbon investment while dramatically increasing commitments to renewable energy projects. Wind and solar have a fundamental problem: they are intermittent and therefore unsuited for baseload power.
We have argued that surging demand from the S-Curve combined with a reduction of traditional energy capital spending would prove unsustainable. The result is the energy crisis unfolding today. We are still in the very early innings of this new cycle...