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Why the Current Energy Market Reminds us of ‘Tulipmania’

By Gerard Kreeft

 

 

 

 

 

 

 

Tulipmania  got its name from the Dutch tulip market bubble, which occured in the early to mid-1600s, when speculation drove the value of tulip bulbs to extremes. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person’s annual salary.

Translated otherwise: tulips sold for approximately 10,000 Dutch guilders, equal to the value of a mansion on Amsterdam’s Grand Canal. The mania and crash occured in the short period of 1636 – 1637 when contract prices collapsed abruptly and the trade of tulips ground to a sudden halt.

The Tulipmania bubble of the 17th century is an apt description of the gas and oil sector of the last 75 years. The great divide is the 2015 Paris Climate Agreement.

Post-Paris there are two very differing scenarios emerging. Scenario Renewable, as the name suggests, is a proponent of renewable energy—be that hydrogen, wind, geothermal and solar energy. Scenario Oil, also as the name suggests, is a staunch believer in oil production.

Can the two scenarios be reconciled with each other?

Scenario Renewable is playing out in various versions in Europe. Offshore- wind, solar and hydrogen projects are key ingredents for Europe’s major oil and gas companies who include BP, ENI, Equinor, Shell and TOTAL.

A key strategic question is juggling funding to ensure that both oil and gas projects and renewables can be managed and implemented. Whether both types of assets can be financed and managed successfully under one roof remains unanswered.

To date, all of Europe’s majors are playing their cards close to their chests, hoping their twin stakes—oil & gas and renewables—will ensure them the best of both worlds; a continuous stream of good margins from their oil and gas assets and stable revenues from their renewables. The makings of the energy company of the 21st century.

A competing factor are Europe’s energy companies—Iberdrola, Engie,Vattenfall, RWE, Orsted, Enel—who have already drawn up their green strategies.

Increasingly, the lines of demarcation are being drawn up.

Scenario Oil is best represented by the American oil companies ExxonMobil, Chevron, and such large independents as Occidental, Marathon and Devon Energy, whose portfolios only include oil and gas projects. Any discussions about the energy transition are confined to within the scope of oil and gas. In other words: no Plan B.

Begining this October, Chevron surpassed ExxonMobil in terms of market capitalization. Since the start of 2020, ExxonMobil has lost 50% of its market value, compared with Chevron’s 39%. ExxonMobil was also forced out of the Dow Jones Industrial Average due to its sharply diminished market capitilization.

Simon Flower, Chairman & Chief Analyst of the consultancy firm of Wood Mackenzie stated in a recent study that ExxonMobil is exposed to high-cost, low margin assets, principally oil sands and other areas including Alaska.

According to the study, ExxonMobil’s cash margins are the lowest of the majors based on $30 per barrel. ExxonMobil owns 60% of the majors’ lowest assets based on $30 barrel.

In a scathing report on ExxonMobil’s CEO Darren Woods, IEEFA (Institute for Energy Economics and Financial Analysis, based in Cleveland, Ohio, USA) has asked the Board that Woods be sacked.

IEEFA maintains that ExxonMobil defined itself as the oil industry’s  global leader which all others followed. In the short span of three years (2017-2019) Woods has presided over a significant deterioration of the company’s finances.

“By both short- and long-term financial measures, ExxonMobil has shown significant signs of slippage against past performance. Faced with the same market challenges as its peer-competitors (Shell, TOTAL, BP and Chevron), Woods’s tenure has been marked by a faster rate of decline or deeper losses in profits, cash and shareholder value. Based on actual performance, IEEFA recommends that the board of directors move to replace Woods.”

Yet Chevron should not gloat. Some 50% of its oil production comes from only two key regions, making it very vulnerable in terms of diversity of supply, as highlighted:

Tengiz in Kazakhstan which in 2018 celebrated its 25th anniversary and geared to produce up to 1MMBOPD (oil equivalent). With its highly sulfur-rich oil, Tengiz could well become an ugly duckling.

Africa: Nigeria, Angola,Republic of Congo and Egypt- having a daily net oil production for Chevron of 412,000BPD (oil equivalent). Sub-Saharia Africa could also turn sour. Angola, where Chevron is a major oil producer, once the darling of the continent, has seen its oil production continuing to slip downward, now at 1,200,000 BPD.

Yet, with both ExxonMobil and Chevron there is a complete lack of any strategic discussion as to whether renewable fuels play a role. Their entire energy transition strategy is solely done within the confines of the fossil bubble.

The Spoiler: Saudi Aramco

The spoiler in both energy scenarios could be Saudi Aramco, the state oil company of Saudi Arabia. Consider the following: Saudi Aramco has 20% of the world’s oil reserves, can produce oil for only $4.00 per barrel and can quickly increase production up to 13Million barrels per day.

Regardless how low the oil majors manage to bring down their barrel of oil production price, who can compete with production costs of only $4.00 per barrel? If you are the Minister of Energy in a petro-economy, does it not make more sense to close shop and simply import Saudi oil?

The  low oil price and COVID-19 have also impaired the US shale operators, seen by the Saudis as competition needed to be sidelined. The Deloitte study entitled “The Great Compression: Implications of  COVID-19 for the US  shale market” is forecasting impairments of up to $300Billion and that 30% of shale operators are technically insolvent.

If COVID-19 and the oil spat continue for a longer period, will the Saudis  pump more oil to ensure market share and economic gain? Even at the cost of taking a wrecking ball to OPEC and the international majors?

Saudi Aramco’s message is very simple: pump the oil while it still has economic value. In 15-20 years it could become a vast stranded asset.

Saudi Aramco also has extensive downstream ambitions: possibly investing in China’s Zhejiang refinery and petrochemicals complex south of Shanghai.

Aramco is also in talks with Reliance Industries to buy a 20% stake in its oil-to-chemical business in India.

Finally, Saudi Aramco has also unveiled its renewal strategy, launching a $500Million fund to promote energy efficiency and renewables. It aims to generate 9.5 GW of renewable energy by 2030.

Saudi Arabia’s Vision 2030 outlines the country’s three objectives wanting to create a :

Vibrant society

Thriving economy

Ambitious nation.

Expect Saudi Aramco to take an aggressive marketing stance in the coming months in order to be able to finance its domestic agenda.

Conclusions

How can Europe’s majors avert a modern version of tulipmania by continuing to fund both renewables and oil and gas projects and still be competitive?

Will we see more  spin-offs and specialization? For example, to ensure that deepwater projects can be cost effective. In the meantime, offshore wind projects are rapidly gaining due to economies of scale.

What is the role of Europe’s green energy companies?

How should the oil and gas majors co-operate with Saudi Aramco?

What will be the role of Saudi Aramco in the energy transition?

In 15-20 years will the tulip be a symbol of value or a bad memory?

Gerard Kreeft,  BA ( Calvin University ) and  MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. He writes on a regular basis for Africa Oil + Gas Report.

 

 

 

 

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