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THE PERMIAN PAIN FROM OIL PRICE CRASH: The steep drop in oil prices is bad news for the Permian Basin.
Oil producers in the region, which have driven U.S. production growth in recent years, need prices of at least $47 per barrel to turn a profit, according to new analysis from BloombergNEF. At $35 per barrel, nearly the entire Permian can’t make a profit, and no one can at $30 a barrel, BNEF analysts find.
Prices have fallen dramatically in recent weeks, amid an oil price war between Saudi Arabia and Russia and as the oil industry is dealing with falling demand due to the coronavirus pandemic. The Trump administration has begun to take steps to try to stabilize the oil markets.
On Friday, President Trump directed the Energy Department to buy cheap oil to restock the country’s Strategic Petroleum Reserve. But that isn’t enough to stop prices from falling.
Permian producers already operate on challenging profit margins: As BNEF notes, investors have been putting pressure on shale producers to start generating positive cash flows.
But that’s going to be a tough feat if oil prices stay low, and it may require producers to slash dividends and reduce capital expenditures, the latter of which BNEF says is “detrimental” to companies’ production growth.
U.S. production could take a big hit: Production in the four biggest U.S. oil regions could fall by more than 1 million barrels a day by the end of 2020 if prices stay low (around $30 per barrel), BNEF estimates. That’s equivalent to a 13% drop in production.
That type of decline could do damage to the U.S. path to be a net energy exporter, an achievement Trump and his administration officials often tout as a key feature of the White House’s energy dominance agenda.
Prices have fallen this low before: In 2016, prices fell to $26 per barrel, prompting a similar decline in U.S. production of just more than 1 million barrels per day.
But BNEF cautions the U.S. shale industry is different structurally now than it was in 2016, when it was able to rebound within a few months. In part, producers are a victim of their own success, leaving them with ever-smaller profit margins.
Shale producers could also face some trouble attracting investment, according to BNEF, which notes Wall Street is reluctant “after years of overspending and low returns.”
“Today producers are lean and have little room to improve their operations and significantly reduce costs,” BNEF says.
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EXXON TO MAKE ‘SIGNIFICANT’ SPENDING CUTS: Oil and gas majors cannot escape the crude price crash. Exxon Mobil announced Monday it will make “significant” spending cuts in the face of falling demand from the coronavirus and unleashed production from Saudi Arabia and Russia.
“We are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term,” Exxon CEO Darren Woods said in a statement.
As recently as two weeks ago, Exxon had pledged to “lean in” and maintain spending in the belief oil demand would rise in the long run, notes Reuters.
Exxon, the largest U.S. oil producer, saw its shares fall to a 17-year-low on Monday.
Other oil and gas majors Chevron and BP have also promised unspecified spending cuts.
GOP SENATORS’ REQUEST TO SAUDI ARABIA: They’re urging Saudi leaders to back off their intent to flood the oil markets, a pledge that’s sparked a price war amid already tough market conditions due to the coronavirus pandemic.
“We urge the Kingdom to assert constructive leadership in stabilizing the world economy by calming economic anxiety in the oil and gas sector at at time when countries around the world are addressing the pandemic,” reads the letter from 13 GOP senators, led by Alaska Senator Dan Sullivan and including Energy Committee Chairman Lisa Murkowski and Environment Committee Chairman John Barrasso.
The senators say Saudi Arabia’s actions have helped cause a disruption in global oil prices “on top of already hard-hit financial markets.” And the senators indicate they’re meeting soon with Saudi Arabia’s ambassador to the U.S. to discuss the issue.
Some advocates quickly noted the letter doesn’t exactly exude confidence in U.S. energy independence: “While the United States is the world’s largest oil producer, continued reliance on a commodity whose price can be tanked worldwide by two squabbling countries with middling economies is definitely not energy dominance, let alone energy independence,” said Robbie Diamond, president and CEO of Securing America’s Future Energy, in a statement. He urged a focus on consumption, too, to further diversify U.S. fuel choices.
SOLAR SHINED BRIGHT IN 2019: It was a record-breaking year in a number of aspects, according to a new report from the Solar Energy Industries Association and Wood Mackenzie. In 2019, solar accounted for its highest-ever share of new electric capacity (40%) and saw the biggest total of residential solar installations.
Overall, the U.S. solar market grew by 23% from 2018 to 2019, according to the report. In total, 13.3 gigawatts of new solar capacity were installed in 2019, more than any other electricity source, the report finds.
The report expects growth to continue: The groups project nearly 20 GW of new solar PV installations by the end of 2020, a 47% increase. The solar energy industry had been expected to see its largest on-record growth in each of the next two years, the report added.
An important caveat: The report, released Tuesday, doesn’t account for the impacts of the coronavirus pandemic. Some energy analysts have already revised down their estimates for solar buildout in 2020 because of the pandemic. BloombergNEF, for example, cut its estimates by 8%, driven in large part by a slash in demand from 121-152 GW to 108-143 GW.
“We know anecdotally that the COVID-19 pandemic is affecting delivery schedules and our ability to meet project completion dates based partly on new labor shortages,” said Abigail Ross Hopper, president and CEO of the solar industry group, in a statement. She added the pandemic is “testing our industry’s resilience” but she expects the industry can continue to grow market share in the long term.
SO WHAT IMPACT IS CORONAVIRUS HAVING ON RENEWABLES? The pandemic is disrupting the industry’s global supply chain, and U.S. producers are starting to worry it could affect their ability to take full advantage of federal tax credits.
That’s because those tax credits have hard deadlines that are reaching their expiration date.
“There are very real concerns about the ability to get critically important parts of the supply chain in a timely fashion, and that’s particularly important for our sector because a critical piece of the financing are tax credits,” said Greg Wetstone, CEO of the American Council on Renewable Energy.
Take a deep dive into the concerns with Abby’s story for this week’s Washington Examiner magazine.
THE RENEWABLE REVOLUTION’S ‘INCONVENIENT TRUTH’ ABOUT MINING: The State Department’s top energy official says the renewable energy industry must come to grips with “dirty environmental practices” and “atrocious labor violations” in its supply chain to see continued growth.
Francis Fannon, the U.S. assistant secretary of state for energy resources, tries to draw attention to this problem in a new op-ed in the Financial Times, where he notes that the largest reserves of metals and minerals for renewable technologies, such as lithium ion batteries, are found in weak states with poor governance records.
Fannon is promoting a new online toolkit created by the Energy Resource Governance Initiative, a multi-country cooperative that the U.S. belongs to, that seeks to provide advice for countries on best practices for handling key energy minerals. The toolkit shows countries how to set up conditions to improve the safety of mining.
“We should all consider how and where minerals are sourced when making purchasing decisions in the energy sector,” Fannon writes. “Because the environmental and societal harms from mining done poorly are serious and near term.”
HEADS UP, CARBON CAPTURE WATCHERS: The White House is now reviewing a proposal by the Department of Treasury that would lay out the most critical pieces of guidance for the 45Q federal tax credits.
It’s been two years in the making. Congress passed bipartisan legislation to expand and extend the carbon capture incentives in a bipartisan budget bill in February 2018, but investors and technology developers haven’t been able to take advantage of them because they’ve been waiting on the Internal Revenue Service to say how it will implement the program.
Last month, IRS finally released some guidance, but it left some of the toughest questions unresolved — including how companies must demonstrate they are securely storing carbon underground and in what situations the government can reclaim the tax incentive if projects fall short of requirements.
DEVELOPING COUNTRIES WILL BE HIT HARDEST BY OIL PRICE DIVE: Developing countries that depend heavily on fossil fuel revenues could see their income from oil and gas fall by 50% to 85% in 2020, reaching the lowest levels in more than two decades, according to analysis from the International Energy Association on Monday.
The IEA notes that when prices fall, countries with dependence on production and exports of oil and gas often trim their spending, cut salaries for public sector employees, and cancel or delay large capital projects.
“Today, many countries are as dependent on hydrocarbon revenues as they were several decades ago,” IEA warns. “In many producer economies, public finances are in worse shape today than they were five years ago, leaving them even less able to absorb the shock.”
IEA mentions Nigeria, Iraq, Oman, and Ecuador as vulnerable countries.
CORONAVIRUS FORCES DELAY OF SELECT CLIMATE COMMITTEE REPORT: The House’s special climate change committee is delaying the release of its widely anticipated climate action plan because of the coronavirus.
Chairwoman Kathy Castor of Florida said the plan would be released “when appropriate.”
The Rundown
Bloomberg Biden faces skeptical oil workers in swing states like Ohio
Reuters Shale gas pioneer Chesapeake Energy taps restructuring advisers
Los Angeles Times Lithium startup backed by Bill Gates seeks a breakthrough at the Salton Sea
Bloomberg Plastics had been falling out of favor. Then came the virus
Calendar
WEDNESDAY | MARCH 18
House is out. Senate is considering coronavirus legislation.
