Witnessing History Happening

On April 8th – two weeks ago, SpaceX landed the Falcon 9 rocket on their drone ship out at sea.   This is a huge landmark in space travel – probably bigger than anything since the moon landings.   It is worth watching the video also – this was no benign bit of sea either (OK so its not the North Sea in winter), but there is clearly some swell and some strong cross-wind…  (obviously this is not an easy exercise)

But why all the hyperbole about this landing – after all the space shuttle landed many times?

Continue reading “Witnessing History Happening”

Petrodollars, deflation and your pension

Low oil prices put more money in the pockets of consumers but there is a hidden cost to your savings and ultimately your retirement.

In January I attended a Fund Managers conference in Geneva – clearly not my ‘metier’, but I’d  strongly recommend (and this will be the subject of a future post) going to events outside your own industry – you’ll be surprised, always, by what you learn.

 Anatole Kaletsky of Gavkal presented a macro view and noted that the decline in oil prices is causing a massive redistribution of petrodollars from producers to consumers. He suggested that the figure is in the order of 2.2 Trillion dollars annually.  

This is a big number but the figure is quite easy to get to.  Solving for 96 million bbls/day global production, 365 days a year and oil declining from $110/bbl to $35/bbl, one gets to $2.6Tn.  Not all of the produced oil is sold, and one can argue about the price end-points used, but as an order or magnitude it looks about right.

Continue reading “Petrodollars, deflation and your pension”

Why Tesla will make the Taxi vs. Uber confrontation obsolete.

I recently watched “Made in Dagenham” – a feel-good film of how a small group of women fought the Ford corporation and the male-dominated unions that were supposed to represent them.  As much as the film is good and the subject (equal pay for women) is important, you couldn’t hope but noticing that the Dagenham factory that employed 57,000 workers in 1970, now employs zero workers… (at least not in the UK, and probably not anywhere).   

Last month we saw again, Parisian taxi drivers out on road-blocking go-slows to protest the non-taxi competition.   Whilst they may have a reasonable case that it is unfair competition (licence fees, regulations, tax and social charges etc), you have to love the irony that the founding story of Uber is of Travis Kalanick not being able to get a regular taxi in Paris one evening and thinking… hmm there has to be a better way of doing this.   If you’ve ever tried to get a taxi in Paris you’ll understand his frustration.

Continue reading “Why Tesla will make the Taxi vs. Uber confrontation obsolete.”

Financing “Oil 2.0” will be more expensive. What is the WACC for your next Frac?

Just when revenues are hitting decade old lows, the cost of financing for your favourite oil company is going up…

The oil industry is all about boom and bust.  We live with inherently long investment cycles and have global macro-cycles layered on top.   I have speculated about the ability (or rather, inability) of the financial markets to respond to a second coming of the US shale industry in a previous post.  What is significant for all players is that the cost of capital is increasing across the board.

Typically companies finance themselves with a combination of debt and equity.   We may hear all sorts of nomenclature with term loans, revolvers, RBLs, mezzanine, bonds, kickers, warrants etc, but it is all either debt or equity in some form.  The average cost of financing a company can be simplified to the Weighted Average Cost of Capital (WACC) – where the cost of each component is weighted by its relative proportion in the mix:

WACC =   (%debt  *  cost of debt)  +  (%equity  *  cost of equity)

Importantly the %equity term should be thought of as 1-%debt, because when debt is not available, equity has to make up the delta.  The obvious case of this is exploration companies who have no access to debt are 100% equity funded. 

Continue reading “Financing “Oil 2.0” will be more expensive. What is the WACC for your next Frac?”

Could the “Green Revolution” in energy lead to instability, real revolution and war?

OK so that is a classic LinkedIn banner headline designed as click-bait… 🙂  the original was going to be “Why oil will go to $20/bbl and why it won’t stay there..”, but since I started writing this in mid-December 2015 procrastination has now made the old headline a bit mainstream…  

Despite this, the core argument remains – not that oil will go to $20/bbl in the short-term (it may well…) but that the long-term price of oil should be $20 or below.   “Should” is only relevant from supply and demand perspective – the geopolitics of $20/bbl oil mean that it is unlikely to stay there.  Could the “Green revolution” in energy lead to war?

The conventional wisdom on oil as a resources has been that of oil as a finite resource leading to Peak Oil panic – which was widely commented in mainstream media and widely dismissed within the industry.  Probably the best antidote to Peak Oil Panic I heard (and I apologise as I don’t know the source) was “when you can talk about Peak Technology, then we can talk about Peak Oil…”.  With a bit of hindsight this has proven to be very true at the current time.  US oil shale has been a technology driven source of new supplies.

In 1968 Garrett Hardin published the influential paper in Science “The tragedy of the commons” – which was a amongst other things, a call to abandon the cold-war arms race.  Above and beyond the main argument that humans would act in a rational-but-selfish manner to the detriment of shared resources (the “commons”), he also argued that there was a class of problems that had no technological solution.  The arms race being one.

The use of finite resources may also be seen as a member of this set.   Technology in the oil industry has caused a temporary supply side excess, and indeed I think most people in the industry can see that a combination of technology and price could keep us supplied for generations, even if it does not alter the fact that fossil based hydrocarbons are a finite resource.  Technology can’t change the fact that fossil fuels are finite – although it may well render them obsolete.

The finite nature of oil has led to a generally accepted view that oil prices will inevitably rise over time as scarcity sets in and F&D costs increase.  This was very much the driver of the Peak Oil debate mid last decade.  However, it now seems likely that the opposite is becoming a reality – demand will decline before scarcity of resources becomes an issue.  In this brave new world, permanent over-supply and consequent low prices may be the main theme.

Continue reading “Could the “Green Revolution” in energy lead to instability, real revolution and war?”

What connects LNG to 4G and the M25…?

Having commented on oil in recent posts, the recent  announcement of a giant 30tcf gas discovery offshore Egypt by ENI is a great segue to thoughts on gas.

It will have been hard to miss the Shell-BG merger announced earlier this year.  This deal was seen by many in the immediate aftermath of the announcement as a read-across that Shell was betting on a high ($85) future oil-price.  Many took comfort from this.   This view was however generally quite short-lived, with the significant synergies in the BG and Shell gas businesses, both upstream and mid-stream; it looks much more probable that Shell have in fact taken a strategic view that gas is the fuel of the future.  More recently the Woodside-Oil Search potential merger is largely about gas also.

As if to ensure we get the picture, Shell recently suggested dropping “oil” from its usual name “Shell Oil” (admittedly from the US subsidiary only).  And the industry/finance interface The Oil Council has rebranded itself the  Oil & Gas Council.   Is there a hidden message here somewhere?

Whilst this gas-driven M&A and re-branding activity was going on, Kosmos announced a very significant gas discovery offshore Mauritania (probably spilling across the border into Senegal).  Based on the discovery well, resources were being quoted as 5 tcf, 12 tcf and in some cases 20 tcf.   Even the low end of this is a sizeable gas discovery, and it is located relatively  close to the European market.  So how did the market react?   Well, a nice 10% spike on the announcement followed by a decline to pre-discovery levels within a couple of weeks.  A huge shrug and a sigh.   Ho Hum, more gas.

So some pretty conflicting messages then.

The origin of the market apathy is actually quite easy to see; just as with oil, it looks like over-supply coupled with a stagnation in demand.   

Continue reading “What connects LNG to 4G and the M25…?”

OMG where’s my SWF?

I’m not going to write anything original here; but every so often I hear cheap-shot comments about the Nigerian (and more rarely the Angolan) Sovereign Wealth Funds.  

Nigeria has a $1.4 bn fund where as Angola has some $5 bn.  Sounds like a lot of money until you compare to peers:  Norway has about $890 bn, Kuwait $600 bn etc.  But before any jokes about African financial (mis)-management here is my list:

  • Norway:  $890 bn
  • Nigeria: $1.4 bn
  • UK,.. er,  well, lets see…. check down the back of the sofa… oh yes, now I remember – there is no UK SWF, despite 50 years of production from the UKCS, and some cumulative 26 bn bbls of oil and 14 bn boe of gas (data up to 2010

Singapore, with no oil wealth at all, and less than 100 years of existence has not one, but two SWFs, with a total of $540 bn, built whilst being a net importer of hydrocarbons

Clearly there has to have been a huge dividend to the UK in terms of infrastructure and services…. again, better check down the back of the sofa and see if we can find any evidence of this.  Nope. 

Apparently not – looks like it all went into the house price bubble…   hmm…

Wisdom of the Crowds

Probably the best news in the current oil price slump is that there is now almost a “consensus view” that we are in conspicuous over-supply.    

My previous posts (Sunset in the Desert and Oil’s Kodak Moment) have discussed my decade-scale view on the oil supply-demand balance.  This post considers the shorter-term view, measured in months and years.   The only guarantee in these musings is that I’ll be wrong.

So lets look for some Bright Spots – not easy with stock markets and commodities tanking all around.

Continue reading “Wisdom of the Crowds”

Oil’s “Kodak Moment”?

Calais – August 2015,  Eurotunnel Tesla super-charger station

As noted in previous posts, I believe the Oil and Gas industries are going to go through a fundamental change in the next decade.   This is a combination of environmental concern, social pressure etc, but fundamentally by technological innovation.  The driving force for the oil industry is the price of oil; this in turn is dictated (outside of various conspiracy theories) by supply and demand economics.  The key point here is that of the c. 93million barrels of oil used daily, only 1 or 2 million of those affect the price – these are the excess or missing barrels that flip us into glut or scarcity.

Of these c.93 million barrels, roughly half goes into vehicular transport – and the majority of that is cars (autos).  So if you remove just some of the demand from the equation, you could create over-supply.  As most readers will be aware, this is not what happened in 2014; that was a supply-side bust, driven (if you’ll excuse the pun) by the success of the US unconventional oil industry.  But in the near future, it may well also be demand driven.

Continue reading “Oil’s “Kodak Moment”?”

Sunset in the Desert

Not so many years ago, the Peak Oil media bonfire was in part ignited by Matthew Simmons book “Twilight in the Desert”.   Huge middle-eastern oil fields soon to water-out, extreme secrecy around the data on those fields – a ticking time-bomb for a world ‘addicted to oil’.  So far as I know, there may be merit in many of the arguments.  However, the world has changed.

 In my post on Blind Spots, I discussed briefly how we all missed the oil price crash of 2014.  One part of the equation I glossed over was the highly significant decision in November 2014 of OPEC, and in particular Saudi Arabia, to maintain production levels in face of declining prices.

As the historical price setter and swing-producer, Saudi was faced with a conundrum.  

  • If they cut production to help keep prices high, the US shale-oil juggernaut would have just kept going, leading to further oversupply – eventually lower prices, and reduced market-share (and consequent waning influence for OPEC).  
  • Conversely, maintaining or increasing production would protect market share, but inevitably drive prices down, handing the role of swing-producer to the US shale.  

So heads was lower revenues, and tails it was lower revenues.   Commentators are now generally agreed that over-supply caused the crash of 2014 and it is most similar to the mid 1980s.  Back then, various conflicts in the Middle East had resulted in very high oil prices, which had driven supply substitution.  OPEC had seen its market share and influence diminish as GOM, North Sea and Alaskan crude came onto the market.  Over supply led to a decade long period of stagnant, low oil prices.

Yes, the challenge posed by US oil shale was new, but was this just another business-as-usual adjustment of policy to the classic boom and bust of the oil industry?

I’d suggest yes, but this view might be hiding a potentially a bigger concern.  

Continue reading “Sunset in the Desert”