Shell Goes Full BP

Guest “Who gives a flip about what Europe does?” by David Middleton

SEPTEMBER 21, 2020 12:47 AM UPDATED 3 DAYS AGO
Exclusive: Shell launches major cost-cutting drive to prepare for energy transition
By Ron Bousso

5 MIN READ

LONDON (Reuters) – Royal Dutch Shell is looking to slash up to 40% off the cost of producing oil and gas in a major drive to save cash so it can overhaul its business and focus more on renewable energy and power markets, sources told Reuters.

[…]

Shell is exploring ways to reduce spending on oil and gas production, its largest division known as upstream, by 30% to 40% through cuts in operating costs and capital spending on new projects, two sources involved with the review told Reuters.

Shell now wants to focus its oil and gas production on a few key hubs, including the Gulf of Mexico, Nigeria and the North Sea, the sources said.

[…]

Reuters

Firstly, leave it to a journalist to totally frack up an article.

Royal Dutch Shell is looking to slash up to 40% off the cost of producing oil and gas in a major drive to save cash so it can overhaul its business and focus more on renewable energy and power markets, sources told Reuters.

MA in History of International Relations

No. Shell is not “looking to slash up to 40% off the cost of producing oil and gas”… They are looking at slashing upstream capital expenditures by 30-40%. They are looking to produce less oil and gas in the future because of an imaginary energy transition. Surprisingly, Tsvetana Paraskova of Oil Price Dot Com got the story right, even though she relied on the Reuters article as a primary source.

Shell is looking at ways to cut costs in its biggest division currently, the upstream, by 30 percent to 40 percent via cutting operating costs and slashing capital expenditure (capex) on new oil and gas exploration and production projects, two sources involved in the cost-cutting review told Reuters. The Anglo-Dutch supermajor will aim to streamline its upstream division by focusing on just a few hubs such as the U.S. Gulf of Mexico, the North Sea, and Nigeria, according to Reuters’ sources.

[…]

With the push toward a greener portfolio, Shell joins peers such as BP, which said in its new strategy last month that it would reduce its oil and gas production by 40 percent by 2030 through active portfolio management and would not enter exploration in new countries.  

Oil Price Dot Com

My first thought was, “Fantastic!”… By going full BP, Shell would open up opportunities for real oil companies in the Gulf of Mexico… But, Shell either knows that President Trump will be reelected or that Joe Biden isn’t as retarded as he acts. Shell plans on remaining the 800 pound gorilla in the Gulf of Mexico. Shell is the top oil and gas producer in the Gulf of Mexico, by a wide margin. BP ranks second in both oil & gas production.

Top 50 Oil Producers US Gulf of Mexico

Rank Business Association Name  Gas (mcf/d)   Oil (bbl/d) 
1 Shell Offshore Inc.         649,437     457,560
2 BP Exploration & Production Inc.         242,015     324,160
3 Anadarko Petroleum Corporation         203,378     221,731
4 Chevron U.S.A. Inc.           99,349     182,467
5 Union Oil Company of California           21,526       89,994
6 Murphy Exploration & Production Company – USA         159,892       83,757
7 Hess Corporation         158,913       61,365
8 LLOG Exploration Offshore, L.L.C.           91,925       53,428
9 Fieldwood Energy LLC         158,146       52,699
10 BHP Billiton Petroleum (GOM) Inc.           21,488       48,736
11 Kosmos Energy Gulf of Mexico Operations, LLC           31,446       35,053
12 Exxon Mobil Corporation           12,968       33,576
13 Talos ERT LLC           39,465       28,834
14 Arena Offshore, LP         122,995       26,907
15 EnVen Energy Ventures, LLC           34,886       26,511
16 Walter Oil & Gas Corporation         116,806       24,258
17 Cox Operating, L.L.C.         110,910       23,956
18 Beacon Growthco Operating Company, L.L.C.           27,401       20,809
19 Talos Petroleum LLC           35,933       20,165
20 W & T Offshore, Inc.           77,966       18,172
21 Eni Petroleum Co. Inc.           38,233       14,021
22 Shell Gulf of Mexico Inc.           80,616       12,850
23 Cantium, LLC           10,896       12,300
24 GOM Shelf LLC           17,923         6,360
25 ANKOR Energy LLC           14,785         5,513
26 Renaissance Offshore, LLC           15,181         2,942
27 Byron Energy Inc.             3,825         2,524
28 Talos Energy Offshore LLC           15,985         2,057
29 Equinor USA E&P Inc.             1,546         1,829
30 Castex Offshore, Inc.           29,348         1,720
31 Marubeni Oil & Gas (USA) LLC             2,600         1,308
32 ConocoPhillips Company             2,134         1,098
33 Sanare Energy Partners, LLC           14,054         1,092
34 Helis Oil & Gas Company, L.L.C.             4,200            994
35 Energy XXI GOM, LLC             3,463            948
36 W & T Energy VI, LLC           15,648            943
37 Apache Deepwater LLC             1,278            885
38 Ridgelake Energy, Inc.                257            718
39 MC Offshore Petroleum, LLC                694            662
40 GoMex Energy Offshore, Ltd.                  15            651
41 Deepwater Abandonment Alternatives, Inc.                731            472
42 Tana Exploration Company LLC             3,280            334
43 Bois d’ Arc Exploration LLC                154            251
44 Whitney Oil & Gas, LLC                234            213
45 EPL Oil & Gas, LLC                  82            191
46 Peregrine Oil & Gas II, LLC                118            158
47 Contango Operators, Inc.           23,414            133
48 Flextrend Development Company, L.L.C.                  76              79
49 MP Gulf of Mexico, LLC                  42              26
50 Cochon Properties, LLC             3,028                5
BSEE

Most people have probably never heard of most of the companies on this list… Some companies are listed as multiple business associations, due to their corporate structures. Most of the companies that you probably never heard of, got on this list by acquiring the assets of companies that you had heard of. Shell and BP divesting Gulf of Mexico assets in the current price environment would be fracking awesome for the companies you probably never heard of. But, I digress…

Why would oil companies commit suicide?

The recent headlines have been full of stories detailing how the ChiCom-19 COVID-19 disease has brought Peak Oil back from the future and how all the oil companies are going green.

Can These 3 Oil Giants Turn Into Renewable Energy Stocks?
Don’t miss out on the transformation of a lifetime.

Daniel Foelber
Aug 22, 2020

The energy transition is well under way as renewable electricity capacity continues to grow around the world. Unbeknownst to many is the role that oil and gas companies are playing in this transition, a handful of which have recently upped the ante considerably.

Let’s look at three oil majors that are aggressively targeting renewable investments to determine if they can transform themselves into renewable energy stocks over the coming decades.

Renewables are skyrocketing
From 2010 to 2019, over 1,400 GW of renewable energy capacity was added throughout the world.

[…]

Shell
First on this list is Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), the largest European oil major by market capitalization. According to Bloomberg, Shell is leading its European peers: “European majors closed seven times as many deals with renewable-electricity and storage companies as their U.S. counterparts since 2010.”

[…]

BP
BP (NYSE:BP) doesn’t just want to increase its renewable portfolio, it wants to downright dominate renewable energy.

[…]

Equinor
Equinor ASA (NYSE:EQNR) is Norway’s largest oil and gas company. With the government and Norway’s national pension fund owning 70% of the company, Equinor’s interests and strategical shifts are naturally going to be somewhat aligned with Norway’s agenda, renewable energy focus, and long-term support of the Paris Agreement.

[…]

The Motley Fool

After a lot of babbling about “skyrocketing” renewables, the mythical “energy transition” and Euro-virtue signaling, young Mr. Foelber actually hits the nail on the head.

In April, Shell and Equinor cut their dividends by two thirds. In early August, BP cut its dividend in half. Even with the cuts, Shell still yields a respectable 4.1%, BP yields 5.5%, and Equinor yields 2.2%. Meanwhile, ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) haven’t cut their payouts, and yield 8.2% and 5.7%, respectively.

Shell, BP, and Equinor also have some of the weakest balance sheets of the oil majors, and sport higher debt to capital ratios and debt to equity ratios compared to their American counterparts.

And although shares of Equinor are down the least of all the oil majors, BP and Shell are both down over 40% year-to-date (YTD), the worst of the cohort. 

A long road ahead

Exxon’s long-term dedication to oil and gas and Chevron’s current status as arguably the best oil stock make it unlikely either company will be a strong renewable force in the coming decades. However, the impacts of the COVID-19 pandemic seem to have accelerated the energy transition for Shell, BP, and Equinor. All three businesses are struggling, and are likely exhausted by the volatility and low prices of oil and gas right now.

Shell remains a natural gas powerhouse, and it was just last year when the company had the best free cash flow of all the oil majors. Therefore, Shell probably won’t undergo a full-on transformation. However, BP and Equinor seem determined to transform into renewable energy stocks. Crippled by a weak balance sheet, the only thing surprising about BP’s dividend cut and renewable push is that they didn’t happen sooner. As for Equinor, the company’s expertise in offshore exploration and production, government interest, depleting offshore oil and gas assets, shallow coastline, and first-mover advantage into one of the highest growing subcategories of renewable energy make it ideally positioned to dominate offshore wind.

[…]

The Motley Fool

This is worth repeating:

However, the impacts of the COVID-19 pandemic seem to have accelerated the energy transition for Shell, BP, and Equinor. All three businesses are struggling, and are likely exhausted by the volatility and low prices of oil and gas right now.

Worth repeating

Mr. Foelber also provided a couple of really good charts:

Figure 1. Debt to capital and debt to equity for failed European oil companies and American oil companies. The Motley Fool

The European oil majors are financially hurting, are being strangled by their own governments and expecting the strangulation to worsen unless they stop being oil companies. If BP, Shell and Equinor truly don’t want to remain oil companies, I have two words for them…

And Equinor really ceased to be an oil company a long time ago…

“The energy transition is well under way”

Horst schist!

In 2019, the world consumed more fossil fuel energy (492.3 exajoules) than the total primary energy it consumed as recently as 2009 (480.6 exajoules). There is no energy transition “underway”…

Figure 2. It’s a fossil fueled world. BP Statistical Review of World Energy

For that matter, there has never been an “energy transition.” We currently consume more biomass for energy than we did before we started burning coal.

Figure 3. No energy transitions for you! “There Has Never Been An Energy Transition

The second quarter of 2019 was a global economic catastrophe. It was caused by a Chinese Communist virus and governmental overreaction to that virus. It resulted in a sharp drop in energy consumption, comparable to a deep recession. It did not herald in a new era of people willingly staying home and freezing in the dark.

ChiCom-19 COVID-19 forced many of us to work from home for most, if not all, of the past six months. No one in the real world views this as the “new normal”… It’s more like a prolonged hurricane evacuation.

Returning to the real normal

Commuting Patterns During COVID-19 Endure; Minorities Less Likely to Work from Home

Alexander Bick, Adam Blandin and Karel Mertens September 01, 2020

COVID-19 forced many businesses to scale back or cease operations in their regular workplaces because of government-mandated closures, concern for employee health or lack of customers.

Some workers transitioned to working from home relatively easily. In many jobs, however, performing regular work activities from home is impossible, forcing many individuals to become inactive or look for a new job.

In earlier research based on data from the Real Time Population Survey, a novel online labor survey of households, we found that 35.2 percent of those employed in May worked entirely from home, up sharply from 8.2 percent of those employed in February. Subsequently, we find a bounce-back since May in employment growth within the previously low work-from-home sectors.

Many Continue Working from Home Daily

Chart 1 compares the February commuting behavior of the workforce (ages 18 to 64) with commuting behavior in subsequent months. Changes in commuting patterns during the pandemic are the combined effect of increases in working from home and decreases in employment.To better distinguish between the role of home-based work and declines in employment, all numbers in Chart 1are expressed as fractions of February employment rather than as of the workforce in the current month.

In May, only 37.8 percent of the pre-pandemic workforce commuted on a daily basis, compared with 73.8 percent in February. At the same time, the share working entirely from home rose from 8.2 percent in February to 26.0 percent in May (both as a fraction of February employment). Moreover, 26.1 percent of workers were no longer employed in May.

Since May, the number of daily commuters (as a fraction of pre-pandemic employment) rose gradually to 49.0 percent in August—still well below pre-pandemic levels. Over the same time period, the share of nonemployed decreased to 16.0 percent of February employment.

The fraction of entirely home-based workers declined slightly in August relative to earlier in the pandemic but remained very high at 20.3 percent. As a ratio of actual employment rather than pre-pandemic employment, 24.2 percent of workers ages 18 to 64 worked entirely from home in August, down from 35.2 percent in May.

[…]

Federal Reserve Bank of Dallas

Figure 4. Commuting rate. Federal Reserve Bank of Dallas

Many companies began returning to work in May, as states began reopening their economies. The reopening led to a sharp recovery in gasoline demand and partial recovery of oil prices. The reopening and return to commuting slowed and was partially reversed when some states experienced a brief resurgence in COVID-19 cases.

Figure 5. US gasoline demand. EIA This Week in Petroleum

Despite the stalled return to commuting, gasoline stocks are back in the normal range for this time of year.

Figure 6. US gasoline stocks. EIA This Week in Petroleum

Crude oil stocks are on a trajectory to soon be back into the normal range.

Figure 7. US crude oil stocks. EIA This Week in Petroleum

Goldman Sachs now expects oil prices to rally to $55-65/bbl by the third quarter of 2021.

Analysts at the bank forecast international benchmark Brent will rally to $65 per barrel from $45 per barrel by the third quarter of 2021 and settle at $58 by end-2021. West Texas Intermediate crude is now forecast to hit $55.88 from $51.38 next year.

“Key to the resilience of spot prices, despite stalling inventory draws this summer, has been the steady rally in long-dated prices,” Goldman Sachs said in a note dated August 30.

Going long on deferred Brent prices would result in an improved risk-reward for investors looking towards an “effective portfolio hedge” against uncertainty, analysts said in the note.

“There is a growing likelihood that vaccines will become widely available starting next spring, helping support global growth and oil demand, especially jet,” the note said.

Business Insider

In an even more bullish “forecast,” the CEO of Russia’s Gazprom Neft expects crude oil demand to fully recover to pre-pandemic levels by the second half of 2021.

When will US oil production begin to rise again?

Next year, if Goldman Sachs’ forecast comes to fruition. Since 2009, US oil production has increased when the benchmark US oil price, West Texas Intermediate (WTI), has been above $45/bbl.

Figure 8. US crude oil production and WTI price. (EIA)

The red boxes outline periods when oil prices were steadily above $45/bbl and production was rising. When oil was steadily lower than $45/bbl, production declined. When oil prices rise above $45/bbl in a sustained manner, we can expect to see drilling activity pick up again.

This analysis was published in December 2019:

Oil And Gas Production Forecast: 2020 And Beyond
Growth slows in 2020, hinging on global demand and the market’s ability to support continually increasing output.

Rob McBride, Jesse Mercer and Brendan Nealon, Enverus Energy

Mon, 12/02/2019

[…]

Although market conditions today do not portend outright production declines as witnessed in 2015-2016, it does appear to be the case that the slowdown in global economic activity will diminish the outlook for petroleum liquids consumption and, therefore, will have a cooling effect on outright crude oil prices. The question on most people’s minds today is what will happen to U.S. tight oil production in the aggregate if the price of WTI continues to linger in the low $50s. Would producers further reduce capex at these low prices, and what price level would be required to convince producers to increase capex again so that the recent slowdown in production growth can be reversed?

Figure 15 summarizes the impact on total U.S. crude and condensate production amid various price environments for WTI crude starting in January 2020 (for the balance of 2019, Enverus assumes operators will hold true to their annual production guidance estimates). Given the breakeven analysis presented earlier, it should be no surprise that $50/bbl is the level that keeps U.S. crude and condensate production growing. In fact, it would not take too much of a decrease in prices below $50/bbl WTI to send production into an outright decline in 2020. Note the white space between the lines; starting at $50/bbl production rises modestly with each $5/bbl increase in the price of WTI. Contrast that with the drop in output over the next year when the industry takes the price of WTI down from $50/bbl to $45/bbl.

[…]

Hart Energy

Clearly, no one was expecting the one-two punch of COVID-19 and the Soviet-Saudi price war at the time it was written, but the $45-50/bbl threshold for growth was clearly laid out.

Figure 8. (Hart Energy Figure 15) US crude oil price sensitivity. (Enervus/Hart Energy)

Companies will start layering on hedges and production will start growing again, starting with the Permian Basin.

As prices climb toward $50/bbl, other tight oil plays should see a resumption in growth.

Figure 9. Crude oil price sensitivity by basin. (Enervus/Hart Energy)

Unlike 2016, US operators had already begun to trim CapEx prior to the crash due to softness in oil prices. When the bottom fell out in March, the industry rapidly slashed CapEx and, in many cases, even shut in production.

Figure 10. Quarterly CapEx 2016-2019. (EIA Financial Review: Second-Quarter 2020)

Most of the shut in production has been brought back on, but growth won’t ensue until prices recover a bit more.

“Déjà vu all over again” or is it?

Back in November 2014, OPEC declared war on US “shale” producers. US crude oil stocks immediately shot through the roof and it took nearly 3 years to work off the glut. 2020 looks very different.

Figure 11. US crude oil stocks, thousands of barrels. (EIA)

Since 2014, the industry has adjusted to lower prices and was clearly more prepared for this price shock than the last one. Oil’s well that ends well.

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September 25, 2020 at 04:23AM

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