Shell divesting almost $10B in Permian, solar going through the roof rather than on, and high production costs in Europe.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO brining you your regularly scheduled episode of Monday Madness on September 27, 2021. Folks, we got a little news for ya. This will likely be the last episode of Monday Madness that is filmed in Colorado for a little while. I’ll still be delivering weekly episodes but from California! Your boy is getting shipped out to pick up a little field experience because, at the end of the day, this company does it all. Media is definitely something we are proud to work on, but we have work in engineering, technology, and business development that keeps everyone on their toes. If this is news to you, I encourage you to go to www.RAREPETRO.com so that you can see all of the professional services we offer. We’d love to work with you and yours to modernize the oilfield. But I know you didn’t come here to listen to a young engineer chase his dreams, you came for the best news in oil and gas and the respective data. Let’s do it!
WTI is having a hell of a week so far. I know it’s only Monday, but the prices are $75.36 at the time of recording this podcast. Last Tuesday we saw it dip as low as $69.67, but it spent almost no time below $70 and popped right back up in just a couple of hours. From there it climbed to $74 to Friday. I don’t want to jinx anything, but I really believe that $70 has become the new floor with $75 as the new ceiling. While the price is currently above $75, Mondays tend to introduce lots of volatility, so it could end up dropping as low as $72 or even $70. Still, there’s plenty of reason to believe that it could go even higher, you can just go back and listen to the more recent episodes of Monday Madness to find at least a dozen factors providing strong upward pressure on price action. Next, I’d like to take a little time to look at natural gas prices. Right now they are sitting at $5.544, about as high as they peaked back almost 2 weeks ago. Plenty of people said, “Oh it couldn’t go much higher than that. 5 and a half must have been the ceiling!” We at RARE PETRO are skeptical of that argument. Natural gas prices went up so quickly due to low rates of storage and continued high demand. It was to be expected that it encountered some resistance sooner or later. Now that it has had a little time to cool off, it is looking primed for boiling over once again. Folks, this winter your energy bill is likely going to get very expensive. We need the gas here, but even Europe is continuing to import it to service their needs as wind energy fails to deliver. We didn’t spend a whole lot of time storing gas through this past half-year, so keep your eye on this commodity as it could get pricey.
The rig count was nice to us this week as we saw another 9 rigs go up in the states. This leaves us with a total of 521 rigs which is 2 times as much as we had this time last year. As far as basins go the Permian, Eagle Ford, Cana Woodford, and Arkoma Woodford each saw a gain of 1. The Granite Wash and Marcellus each lost one. It’s easier to see who led the pack in terms of gains state by state. Louisiana and Oklahoma absolutely dominated putting up 2 rigs each. Texas followed closely with 3 and Utah was the biggest loser down 1. 10 of these rigs are targeting oil while 1 fewer is targetting gas. A healthy mix of horizontal, directional, and vertical are being drilled. The Gulf of Mexico is likely responsible for Lousiaanas success as the rig count doubled in a week alone from 4 to 8. Pretty standard explainable stuff here, and I’m glad that there are at least some companies down there who are able to put their capital towards drilling rather than debt.
Lastly, the inventory report was covered in last week’s Thirsty Thursday. If you missed it… first I feel bad for you as it’s a lot of fun. Second, I’ll do my best to fill you in:
We’ve now witnessed a couple of weeks with some significant drawdowns. Inventories are getting exceptionally tight, and the EIA estimates that Cushing’s inventories are 26% lower than the past 5 years. The EIA’s most recent prediction was a 2.4 million barrel drawdown, but it was actually closer to 3.5 million. The API seems to have looked towards its neighbor before making an almost identical prediction. They too were shy of the actual result, but by much much more as the drawdown was much closer to 6.1 million barrels. We have only seen 2 builds of more than 2 million barrels in the past 26 weeks, so things are going incredibly well. Gasoline inventories looked relatively close to falling even lower last week. Instead, we witness a 3.5 million barrel build of the stuff. Although this is good news for consumers, a trendline through the fall since July would show that we are not in the clear yet. Yes, this is a significant build, but it is totally possible that we witness just as dramatic of a drawdown by the next report. So what does this mean for gas prices? Steadiness. Last week’s average was only 2 tenths of a cent higher than the current average. It seems that even gas stations don’t feel like they are in the clear yet. If we want to see lower gas prices it could take a week of significant inventory builds, so don’t celebrate the new 3.5 million barrels just yet. While the US struggles to find enough drivers to deliver most anything, the UK finds itself in a similar position and BP just might ration gasoline deliveries. Travel a little to the east and you will see Iran reducing its gasoline exports. Perhaps to build up its own reserves before a global shortage presents itself? We will just have to wait and see.
But that is it for the statistics. Time to have a look at current events. While I would like to take more time talking about the 10-year shortage of natural gas in sections of the UK and Europe, I think we beat that horse enough last episode. I would like to talk about one of the biggest deals in energy right now though. If you haven’t heard, Shell is jumping ship on the Permian of all places, and ConocoPhillips is hoping to pick up what they are leaving for about $9.5B. This encapsulates 225,000 net acres producing about 175,000 boe per day. While not every Shell employee in the Permian will be joining ConocoPhillips for the ride, they did mention that they would extend offers to most of the current staff. Shell plans to use the money for shareholder distributions and further strengthening its balance sheet. How they plan to strengthen their balance sheet is up in the air right now. It could mean positions in newer fields, or it could mean investing in more renewable energy projects. At this point, I’m wondering if Shell is just pulling an “Atlas Shrugged” maneuver. What I mean is that Shell landed in lots of hot water in a Netherland court earlier this year. They were ordered to reduce net emissions by 45% by the end of the decade. Sure, they do plan to appeal the decision, but now they have billions wrapped up in solar, wind, and other projects. Even so, they still aren’t welcome to the United Nations Climate Change Conference. I know it’s a stretch, but could it be possible that they are the first company fully pivoting to renewable energy just to show the world that the company will be ruined and people dependant on its oil will pay more for the goods they’ve become accustomed to? Okay, okay, I’ll remove my tinfoil hat and calm down, but the whole situation is just very odd to me. At the end of the day, you can’t call Shell’s business decisions boring, so I really am excited to see how this all plays out.
Next, I’d like to talk about solar. You often read headlines that will say, “Solar is now just as efficient as oil and gas!” or “In-home electricity from natural gas costs just as much as residential solar plans.” Usually, there’s lots of goalpost shifting to support these arguments, but they have become especially popular ways of convincing homes and businesses to incorporate solar into their power consumption portfolio. Well, folks, I’ve got bad news. Solar prices had a pretty significant jump in the second quarter of this year as raw materials become more expensive due to supply chain interruptions. In fact, residential, commercial, and utility solar costs all increased which hasn’t happened since Wood Mackenzie began tracking prices in 2014. While many companies have enough aluminum, steel, and cells on hand to be able to avoid purchasing more materials at their pricing peak, they have to run out eventually, and it is estimated that solar could get even more expensive through 2022. On top of this, there are plenty of trade issues brewing. US Customs and Border Protection issued a Withhold Release Order on Chinese silica products which basically prevents the US from importing any tech-related item (especially photovoltaic cells) on concerns of forced labor. Not only that, but several industry groups are lobbying the government to ban importing solar-related infrastructure from Malaysia, Vietnam, and Thailand. All of this will just push the cost for solar energy higher and higher. Still, solar has its respective strengths. All energy is good energy, it’s just possible that all energy will become expensive energy.
While we are on the subject of increased material costs, I’d like to quickly visit an article that snagged my attention with the headline alone. It reads “50-Fold Jump In Power Rates Hits UK Metal, Mining Sector” and was an article that I found on oilprice.com. As many companies are being pushed to reduce their carbon footprints, they turn to solutions that electrify some of their processes. Unfortunately, electricity rates are absurd thanks to the European gas shortage. This is absolutely destroying the profit margins of steelmakers and other industrial producers. Rather than continuing to produce chemicals, food, and raw materials at a loss, more companies are curtailing their production. They are just trying to the minimum demands to satisfy contracts and float through this period of priceyness. Ladies and gentlemen, the world is approaching a phase of shortages that are not driven by the lack of business and willingness to operate in a pandemic, but rather the lack of cheap and abundant energy. If we don’t get legislation that supports the extraction of natural earth commodities like oil and gas, things could get a whole lot worse. By no means am I standing on top of an apple box shouting, “THE END IS NIGH.” I’m just trying to highlight the issues that crop up when hydrocarbons fall out of favor of the public eye. Keep an ear to the ground as it is likely going to be more than just a toilet paper shortage should stuff hit the fan once again.
But that is all we’ve got for the podcast today. Strange stories with somber undertones, maybe, but we are doing our best to deliver the news to you and stimulate some discussion. If you noticed that we said something that was flat-out wrong, please email us at podcast@rarepetro.com to point out what exactly I messed up. If you do end up catching something, we will send a little RP swag your way as thanks. Other than that, you can go to www.RAREPETRO.com to find even more content that we have been producing for almost 2 years now. I think this podcast has a birthday coming up in a few weeks, so be sure to frac that producing area known as the follow button. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care, everybody!