Sunday, March 06, 2016

Ready for more punishment: Investors load up on oil share offerings

The $9.2 billion investors paid to snap up new equity offerings from U.S. oil companies in 2016 proves those investors are indeed ready for more punishment.

The amount is in line with the pace of such equity offerings in 2015 even as the mood in the oil markets has grown more dour. In June of last year I wrote:

New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC's work is not done and accounts in part for the decision to leave production quotas unchanged. OPEC's next task is to convince those making new investments in oil that rather than catching a bottom in oil prices, they have caught a falling knife.

A lot of investors did end up catching a falling knife as oil careened downward from about $60 a barrel last summer to Friday's close of about $36. Investors this year may still find that the knife is falling, though it admittedly doesn't have as far to fall this time around. Still, it seems they misunderstand OPEC's strategy or believe that that strategy will fail. As I said in the same piece:

The cartel must dampen enthusiasm for investment for the long term if the organization's members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won't simply lead to a stampede back into U.S. shale deposits.

It seems that the oil industry still has friends in the investment world and that OPEC's work is therefore not yet done. The big question then is: Will OPEC stay the course or relent with a production cut this year to raise prices?

I doubt that OPEC will relent. As bad as the OPEC countries including Saudi Arabia are hurting, to give up at this point would make all the previous suffering pointless. Saudi Arabia is really the linchpin in OPEC. No member can resist the will of the Saudis because they control such huge and flexible oil flows.

I have posited a speculative, but nevertheless plausible reason for why Saudi Arabia may not give up on its strategy any time soon: The kingdom may be at or near its all-time maximum rate of production, a rate it may only be able to maintain for the next decade or so. Naturally, the Saudis want to maximize their revenues during this period of peak production. They can't do that if U.S. oil companies keep overproducing.

If the Saudis can neutralize those companies by bankrupting them or forcing widespread lease sales, this will allow major international oil companies to buy up much of these distressed assets. The majors will develop these properties more slowly than the independents did because 1) the majors do not have to worry about their ability to meet debt payments and 2) the majors do not want to crater the price of oil which would only undermine the value of their newly acquired leases.

It is hard to imagine that the Saudis launched their low-price strategy on a wing and a prayer without thinking through how long it would take to force other producers to stop overproducing. But, investors keep hoping that the Saudis don't really know what they are doing. So far the Saudis appear to have the upper hand, and I'm guessing that those buying newly issued oil company shares these days are miscalculating once again. After all, the funding derived from these share offerings will only serve to encourage continued overproduction by making it possible for producers to hang on that much longer in hopes of an upturn.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


Sandy Lawrence said...

Last month had an article by ZeroHedge discussing the fact that "Russian crude and condensate production just set a new post-Soviet daily record of 10.92 Mbpd", consistent with both their desperate need to collect some export earnings but also suggesting some degree of cooperation with the aims of the Gulf State members of OPEC.
Also in February, the Wall Street Journal featured the headline, "Exxon Fails to Replace Oil, Gas Production for First Time in 22 Years" raising the reasonable question of whether the majors' acquisition of distressed tight oil properties might not fully constrain overproduction and moderate the market, given that these corporations are highly motivated to demonstrate earnings and financial viability.

Final comment: all too often commentators suggest that the swoon in oil prices should suppress the rollout of renewable energy supply in the United States and the world, where Amory Lovins in a recent piece made the salient point that petroleum [typically in the form of diesel] is reponsible for less than 1% of American electricity generation and less than 4% of global production. Really two nearly exclusive arenas.

Yanzibit said...

They are not mutually exclusive as the demand for electric vehicles will be dampened by low oil prices. This in turn will mean less demand for renewable sources of power generation to power electric vehicles. In fact, low oil prices could even mean more oil fueled power generation, worries about climate change aside.

Robert Rapier said...

"Naturally, the Saudis want to maximize their revenues during this period of peak production."

If they think they are near peak production and will soon be in decline, they are doing the exact opposite of maximizing their revenues. It would be much better to take 2 million bpd offline to keep prices propped up, and only bring more online when prices support that. The only way that strategy doesn't work is if U.S. shale oil production can keep expanding for years -- something I deem unlikely. 9 million bpd at $70/bbl is a whole lot more revenue than 11 million bpd at $30/bbl.

CrocodileChuck said...

What Robert Rapier said.

Kurt Cobb said...

Thanks for the thoughtful comments.

Robert Rapier is right given his assumptions. We, of course, cannot know what the Saudis think about the durability of shale oil production in the United States. Under my scenario they would have to believe that U.S. production would at least be maintained or grow slightly for another decade or so which is longer than both Rapier and I believe could happen even under a high-price scenario. I am positing that the Saudis can maintain peak production only for about another decade, after which they fear that greenhouse gas emission regulations, electric vehicles, energy efficiency and substitute liquid fuels would significantly undermine demand for oil and thus reduce the price. I don't necessarily believe this will happen, but they might.

So, this would explain their desire to vanquish U.S. shale and Canadian tar sands producers now instead of taking a gradualist approach which might result in leaving a lot of money on the table should demand and thus price later on be significantly reduced. Much of this I explain in my linked piece above. All this would imply that the Saudis must act now because there is an unclear, but nevertheless real deadline after which factors out of their control will significantly reduce revenues. Better to spend a couple of year vanquishing the competition now in order to reap as much money as possible for the next eight years before those factors wrest control of oil prices from the Saudis. Naturally, this all remains speculative. No member of the Saudi royal family is speaking to me about it.

Sandy Lawrence makes a good point about the momentum of renewable energy in electricity generation which is the focus for renewables right now. Regarding the oil majors rushing to drill the shale properties, he cites the inability of majors, in this case Exxon, to replace its reserves. The WSJ Journal headline is deceptive since Exxon is now reporting barrels of oil equivalent, lumping oil in with natural gas. Exxon has actually been having trouble replacing its oil reserves for many years as have other majors. This should solidify his case for the idea that the majors will be quick to drill the leases. My guess is that they won't because in many cases the reserves are already known. They can simply add those reserves to their reported reserves without additional drilling. They will only produce when this maximizes (in their opinion) their revenues since they don't suffer under debt obligations that require them to drill to get cash flow.

Yanzbit is right that low oil prices will likely dampen enthusiasm for electric vehicles. But the load of electric vehicles on the grid is tiny and not that influential in how utilities are making their decisions. I do think he's right that cheap oil will only encourage the burning of it for electricity, a shameful waste.

Yanzibit said...

Renewables require large subsidies as it is. With low oil prices, even if carbon taxes are slapped on, they will still be a cheaper source of energy generation. And there isn't a chance in hell electric vehicles will make any headway to take us off the dominance of the combustion engine.

Sandy Lawrence said...

I think that the subsidies for the non-hydro renewables wind and solar should be put in context. First of all, as in my first comment above, renewables are not in any significant way competing with crude and condensate, only with coal and natural gas and nuclear as far as electricity is concerned.

The oil industry has been a going concern in this country since Colonel Drake's strike in Pennsylvania in 1859, over a century and a half ago. Yet it still benefits from multiple subsidies including the infamous oil depletion allowance. Next consider the commercial nuclear industy, also getting its start in Pennsylvania [nearly a century later] at Shipppingport in 1957, but now almost six decades later still receiving robust federal subsidies estimated at 5.5 cents per kWh, more than any other form of electricity. The Price-Anderson Act as it has been modified and continued over the years, providing indemnification and limitation of liability, is a key component of these nuclear subsidies.

Contrast these subsidies with the much younger American commercial wind industry that has had to fight hard to get even intermitant federal support, now primarily the Production Tax Credit or PTC of about 2 cents per kWh, scheduled to be phased out over the next 5 years.

Any economist can tell you that subsidies are politically much more difficult to eliminate than to initiate. Frankly, I would love to take away all the subsidies to all the energy industries in one fell swoop. The reason is simple...unsupported wind energy would now be cheaper than unsubsidized coal, oil, natural gas, nuclear or photovoltaic for electricity production. But solar PV is following a virtuous cost curve and is catching up fast to wind. Since 1977 solar modules have dropped in price per kWh nameplate rating by 99%.

I don't think that these data support Yanzibit's contention that 'renewables require large subsidies'. I would love to see the playing field leveled, and then watch as wind's 5% share and solar PV's 1% share of U.S. electricity generation skyrocket.

Yanzibit said...

Sandy, it would be great if wind and solar can increase share of power generation. Low prices are not just in oil currently but all fossil fuels, coal included. I contend it is still cheaper to burn coal for power than harnessing wind, with the added advantage that it is available 24/7 compared to intermittent supply and dispersed source that require advances in electricity storage and transmission technology. These add to the cost of renewables vs fossil fuels.

Sandy Lawrence said...

Yanzibit, I am so glad that this string has been both thoughful and respectful. But instead of responding to your contention, may I ask out of real intellectual curiosity how you would deal with climate change?

Last October was the warmest month for global mean surface temperature since 1880. Not just the warmest October, the actual warmest month of all since that year, and that represents more than 1600 months. Then January of this year beat last year's October. To top it off, February then is seriously likely to have been warmer than January. The full compilation of data by NASA, NOAA, the British Meteorological Office [known as the British Met], the Japan Meteorlogical Agency and other institutions will be out middle of this month, but the preliminary datasets are essentially unequivocal.

Carbon capture and sequestration or CCS is not proving practical. The Norwegians pulled the plug on their Monstad project in 2013 for example. Estimates suggest that adding on CCS to coal burners would increase the cost of their electricity as much as 30%...when they are already failing to compete even before carbon taxes are instituted. Good article in reference from NYT:

While I worked for most of my medical career as an associate professor of medicine, I will be happy to leave out of the discussion on such topics as the health risks of particulates in the PM 2.5 range. Perhaps though I should suggest an article in Scientific American from February issue of 2015, entitled, "How Coal Kills".

The electric grid has always involved balancing inputs from many different generators simultaneously. Very little storage would be required with a smart grid. Check out the wealth of data from Amory Lovins' Rocky Mountain Institute, or multiple articles from David Roberts on, all of which support this point.

So, let me respectfully reiterate my would you meet the challenge of climate change? Thanks, Yanzibit.

Yanzibit said...

Sandy, it is not my intention to come up with solutions to deal with climate change. I believe like many people who follow Kurt, that Peak Oil is an equally critical if not more critical issue. In Limits to Growth, there are two factors that will end growth and industrial civilization. Either we 'run out' of resources, or over pollute the Earth such that it cannot absorb our wastes quick enough. The overloading of CO2 is a manifestation of the latter, while decline in oil production represents the former.

In this two horse race to devastation, it is my believe that Peak Oil will come first. Though it won't happen quickly enough to stop temperatures from rising beyond 2-4 degrees celsius I think it is probably the only way mankind will be forced to stop CO2 emissions in the long run.

As for CCS, I always think any solution does not lie with more technology. I am no techno-utopian. Meeting the challenge will require a sea change (forgive the pun) in cultural and moral values of society such that people demand less material wealth and willingly put the brakes on our insane growth trajectory. Plants are the already the best way to capture and sequester carbon btw and we should respectfully get out of the way and let them heal the damage!

Sandy Lawrence said...

We are consuming petroleum reserves approximately a million times faster than geologic processes are replacing them.
Peak oil is inevitable.

Conventional peak oil analysis suggested that a negative supply shock will ensue, + in fact should be the final phase.
Current peak result instead instead result of a negative demand shock.
Peak oil is proximate [conventional crude + condensate probably already at final undulating plateau].

Leaving some 80% of fossil fuels in the ground is of paramount importance, based on the IPCC fifth assessment report.
Coal is absolutely the worst culprit in terms of its array of environmental effects.
Peak oil is thus highly desirable, however disruptive.

We have at most a decade or two within which to accomplish major decarbonization, denuclearization, rapid deployment of energy efficiency in all its guises [really 4 varieties of efficiency, perhaps a later post] plus limitation, mitigation + adaptation to climate change.
Renewables are not the best answer, they are the only answer.

Peak fossil fuels is the broader, critical challenge to a generation..

Andy Nest said...

It appears that the Eroei numbers for utility scale solar PV might be lower than expected:

"Our study concluded that, when analyzed what we called “extended boundaries energy inputs”, about 2/3 of the total energy inputs were other than those of the modules+inverters+metallic infrastructure to tilt and orient the modules."

And PV hardware manufacturing is not exactly green or renewable: