Friday 24 January 2020

Evans-Pritchard on Oil & Commercial Revolution

AE-P seems to be a bit of a cult fugure for some, and here he is on the propects for "Negative Oil" (meaning negative CO2 emissions) and "negative aluminium" (ditto, mutatis mutandis) - and he doesn't seem to be behind the usual DTel paywall.  What does Negative Oil mean?  It seems that "emblematic" oil compay Occidental intends to "become net carbon negative on all its operations and the oil it sells in order to insulate itself against the enveloping climate backlash".

Before getting stuck into this very interesting subject, we do need to enter several caveats.
  • the very fact it's not behind a paywall means that it's being sponsored - presumably by Oxy
  • the definitions of "negative oil" that we encounter as we go along are pretty weasely - at one point it's as unimpressive as "you can have net negative reservoirs", which has been true for a very long time - in certain very specific and non-typical circumstances
  • the "negative aluminium" stuff comes from "Russian owned EN+" (Deripaska), fronted on this occasion as on many others by "Lord" Greg Barker, a notorious BS merchant 
Putting that important dollop of skepticism to one side, there are a couple of significant takeaways.  The first is the very real prospect of investors turning sour on "traditional" hydrocarbon companies, the brighter ones among which are rushing towards both the buckets of greenwash and, with the longer-term picture in mind, the strategic corporate restructuring advisers (statement of personal interest here, *ahem*).  The prospects of (a) some seriously stranded assets and consequent balance-sheet impairments; and (b) increasing cost of capital, are very serious indeed for these most capital-intensive of businesses.  Public opinion is fickle, and clamour for divestment can really rattle institutions.  When it becomes a run on the bank, it's a self-fulfilling prophesy, as a lot of green activists are fervently hoping and striving for.

On the other hand.  The actual demand for oil & coal (as opposed to demand for oil shares and coal shares) isn't going to fall precipitously: it can't, while China still breathes**.  It's all a bit reminiscent of the tobacco industry a decade or so ago.

What can easily happen, though, is that even with stable-ish demand, the cost of capital rises (due to unpopularity with investors).  We're talking about western companies here, of course - there are loads of NOCs who don't care, and may be looking forward to stepping into the breach, picking up distressed assets and market share.  But they ain't necessarily very good at production technology (or indeed finance), even if they plan to hire a bunch of mercenary engineers to help them along.  (And there may not be so many of those; because the big players retreating from oil are piling into other energy tech, and will have jobs for many engineers - even if not always the same ones.)

So, while there'll be no shortage of oil, on both counts (cost of capital and engineering efficiency) production costs are going to rise. 

One question, then, is: does this wash through into the price of oil?  It's an important fact that in the short and medium term, production cost has bugger all to do with price except at the very sensitive margins.  (Plenty of people will tell you there is $2 oil available in large amounts in Iraq; but ...) 

Another question is: WTF happens to the pension funds of the western world while the IOCs are busily and expensively redefining themselves?

And I'm sure there are more such fundamental issues to ponder, when we're at such a remarkable turning-point.  Have at it in the comments, C@W-ers. 

** not intended as a pun or off-colour comment: but there is a point there


Sebastian Weetabix said...

I find AEP to be a fairly reliable contra-indicator. And on matters Green he is just demented.

Matt said...

While the woke pension funds lose money for their members by shunning energy companies, I suspect their will be many like me who will pickup their corporate bonds with healthy coupons. I doubt they'll have a funding crisis.

Anonymous said...

Interesting analysis. I was going to buy BP shares next week with a view to hold for the long term. Maybe I also need to focus on my pension holding exposure before I commit. Cheers.

DJK said...

AE-P has been talking about stranded assets in relation to oil companies for some years now. Like the stopped clock, he will be right some day.

iOpener said...

The real problem is that the long march through the institutions continues.

All large corporations ar still being enmoled by commies, especially energy related corporations which are especially hated by the left.

The moles are busy and content destroying their employers financially safe in the knowledge that their fellow travelers in other corporations and government will look after them financially.

I just got the following from Dow Chemical, in which I have a substantial shareholding: "Dow named 2020 Best Place to Work for LGBTQ+ Equality by Human Rights Campaign Foundation"

Jesus H. Christ.

Nick Drew said...

iO - welcome. Don't know if you've been around C@W before; but a blog I read daily, and periodically cite, is that of the US professional philosopher Brian Leiter

Leiter is an avowed left-socialist, almost marxist - but scrupulously rational (what he calls "intellectual hygiene"), and viciously hostile to BS. (so his marxism is technical, like Chris Dillow's, not snowflake emotional)

To the point: Leiter identifies the whole diversity thing (which underpins the baleful "intersectionality" movement) as a product of the US HR "profession" which has held corporate America to ransom for a couple of decades ("we have to do this / that / the other, Madam CEO, or there will be lawsuits")

Leiter is currently promoting a legal action against universities that run a "diversity test" on new faculty hires (he's a stroppy bugger, and hyper-active: his technical philosophy output is prodigious as well - and top quality. He's a big hate figure amongst the woke in US academia)

dearieme said...

I've always enjoyed the smell of petrochemical plants and oil refineries. I'd find it an aesthetic loss if they all had to close.

Green crusties smell of piss and shit and really should be fire-hosed.

computerengineer said...

its an interesting question
personally i think the price of oil will be flat over the next 10 years. a bit up. a bit down. events will always make short term noise.

why ? alternatives are no longer more expensive.
looking at the latest renewable coming online, they are getting cheaper and bigger. some serious scale.
pv. is getting cheaper as we learn howto get power from both sides. cheap trackers to follow the sun, bigger panels so less frames to put in. makes a few panels on the roof look a like small beer.
wind in the north sea. 10gw more is committed to. that brings an income stream of 2bn per year at about 10% payback for the developers. thats enough to get the _big_ players interested. warren b. has got a lot of wind turbines across the plains these days.

why does this affect oil and gas. this will start to displace demand, as you say its not going to drop off quickly. in 5 years time perhaps the eu will have 50% of new cars with some form of electricity power, and by then there will be a few truck options.
doesn't really touch shipping or planes. but using the grid will displacing a fair % of additional oil in china + eu. so grown in oil demand i think will curtailed and hence prices going nowhere fast.
if you can pump it and survive at 50-80 a barrel then no problems someone will buy it.

some back of envelope guestimates for the uk.
according to the internet the uk drives about 300bn miles a year. the government takes revenue on about 45bn litres of fuel. thats about 30mpg so sounds plausiblish.
teslas draw about .3kwh per mile. imagine in 10 years 50% of cars are electric (not plausible, but imagine) thats about 45twh of additional electricity a year for half the cars and trucks to drop 20bn litres of refined fuel.
the uk generated 260twh electricity in 2019. the dogger bank offshore scheme which just started construction with nameplate of 3.6gw should generate about 15twh a year.
so 3 of those at about £30-40bn capital and nominal running costs to replace about 150m barrels of oil annually.
so yes 'rich' countries can do this. but relies on us buying nice new shiny cars and building a charging infra. none of this is easy or cheap, and will be disruptive.

so i think germany/uk/japan and maybe china will not have much additional demand, but will be offset by plenty of other places. hence oil will be flat and plenty of it will be pumped, but dont think we will ever see $100 oil again.