Listen: Oil at CERAWeek: Production and export challenges compound on rising demand

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Jeff Mower:

Hello and welcome to the Platts Oil Markets Podcast by S&P Global Commodity Insights, where today we'll be talking about some of the more oily themes coming out of the CERAWeek by S&P Global Conference that was held in Houston this week.

I'm Jeff Mower, Director of Americas Oil News. And I'm sitting down with Dave Ernsberger, Global Head of Market Reporting and Trading Solutions, and America's Oil News reporter, Binish Azhar. One theme that came out of CERAWeek that I thought was really very dramatic, was when Scott Sheffield at Pioneer said in an interview, he didn't think US crude production would ever reach a record high again. Which is a very dramatic thing to say. I have to say, having been covering this industry for such a long time, not to diminish his expertise, but the amount of times we've heard something like that. "Well, we're going to see peak oil." Or, "We're going to see oil prices remain below 50." I start questioning that immediately, but I see where he's coming from. And we hear a lot from people at the industry, from attendees at the industry, about the sort of restrictions on supply. And it makes me wonder if that's what he's kind of getting at, drawing that attention to the US oil industry.

Maybe that's a way of saying, "Hey, we need some restrictions lifted." Or, "We need more leasing. We need ways to kind of boost this production." Maybe that's his way of saying that. Production now is, according to the EIA, something like 12.2, 12.3 million barrels a day. And S&P Global Commodity Insights sees that rising to roughly 13 million barrels a day, fairly soon. But that's a very short-term forecast. That's within a few years. Rig activity is fairly sluggish. So it's not outside of the realm of possibility that yeah, we've peaked. We'll never reach those heights again.

Dave Ernsberger:

I would reflect on that in two ways really. Firstly, most of the presenters from core energy industries, classic energy markets, whether they were supplying crude or gas or coal or anything else, the number one message they had... And you heard this through all the discussions, not just Pioneer, was, "Hey, it's great. The world realizes that it needs us again. We may need to be carbon offset, carbon managed, carbon accounted. But the big change from 2022 is, in 2023, there's an appreciation that the world needs us." But part of that message, and this kind of gets to the second part of the reflection, is there's a message that goes along with that which is to say, "Oh, and by the way, we don't have enough capital to continue to expand. We don't have enough investment to grow. We don't have enough support in the population, the electorate, the policymakers, and more to keep going. So by the way, not only does the world know that it needs us now. For better or worse, however you want to think about that, the acceptance of the need is there."

But there's a kind of cry for support and funding and permissioning, to your point, to try and push on to greater heights from here. So we heard John Hess talking about how the energy markets, particularly to the oil markets, are now structurally short markets. And what that meant I think was, there's not enough capital, not enough funding, and not enough permission to grow from here. I mean, look, the US oil industry has gone from 5 million barrels a day to the numbers you were just talking about, closer to 13, over what, seven or eight years. That's explosive growth. I don't know how much more headroom there really is beyond that. But I think that was part of the message, which is, "You need us. Now, give us some funding."

Jeff Mower:

We are seeing that in US crude export numbers, that the world outside the US is really dependent on US crude. Increasingly so. We've seen US crude exports reach another record high. It was like 5.6 million barrels a day recently. And we're seeing this huge increase in VLCC shipments to China. Something like 23 million barrels is expected to be shipped to China in March. And that's up from 6 million barrels last month. And we don't know if that trend's going to continue. It could be, there's some speculation, maybe China is just planning for this rebound later in the year. But definitely with the Russian invasion of Ukraine and the sanctions placed on Russian crude, we're seeing a shift in flows and this increased need for US barrels. So I could definitely see the argument there.

And I also thought it was interesting. One of the speakers was Senator Dan Sullivan, a US Senator in Alaska. And he was griping about this Willow project at Alaska. It was a similar kind of theme. "We've got this ConocoPhillips Willow project that we're still waiting for approval on. We're waiting for the Biden Administration to approve this thing. It's supposed to give us another 200,000 barrels a day or so. And it's gone through this environmental impact statement. It's been approved, but now it looks like it might get shot down for political reasons." That's what he's saying. And his argument, he gave this very sort of passionate speech about, why are we shutting down that project in Alaska when we're loosening sanctions in say, Venezuela, where the environmental record is not nearly as environmental, what do you want to call it? Policies are not nearly as strict as what you would see in the US.

Binish Azhar:

Definitely. And in light of recent crude exports demand rising and production challenges, as these panelists have discussed. As Jennifer Granholm, secretary of Energy, prioritized that permitting, is a huge conversation. And that was a huge through line through at the panels that we saw recently at CERAWeek. And this pushback that we're seeing with production, definitely we're seeing that in Texas with recent terminals pending approval. The Seaport terminal that has recently been approved, but as well as Bluewater Texas, Blue Marlin and the Texas GulfLink, which are seeing major challenges in proceeding with those developments.

Jeff Mower:

Oh, that's right, because you covered a panel where these sort of midstream players were talking about, "Yeah, crude exports are going well." But there are some challenges there, right?

Binish Azhar: Yeah. With demand on the rise, like you mentioned, reaching record highs, there's a huge push for these terminals to go into development to meet that demand. And these terminals are specifically being developed to answer that question, can production meet export demand? But we're definitely seeing pushback from environmentalists. Although the Seaport terminal has been approved with support from the environmental protection agency with caveats to protect the population. The following terminals are still facing challenges for development.

Dave Ernsberger:

You know, I think that's right Binish. And one thing I'd add into that is, I did a city mayors panel that had four mayors on it. Calgary, Houston, Esbjerg in Denmark, and Perth. And one of the things that we were talking about in that panel was, if you're running a jurisdiction, a city, a port, what have you. You have to make tough choices about, well, what's the next expansion going to be? Is it going to be hydrocarbons? Is it going to be energy transition? Is it going to be something to do with hydrogen and photovoltaics? Or is it going to be something to do with exporting crude oil? Now, not every location is choosing between building an oil export jetty and hydrogen plant. But one of the realities of what we were hearing this year is, not only are there all the problems you were just talking about with permitting and approvals and public support and everything else. Is literally also competition for space in some of these places to put these assets in place.

And then there's competition for funding and investment as well from the financial markets. So it's a lot more crowded as a space than it used to be for these companies that are trying to find their way to build the components to support expanded production. Competition for time, space, money, and everything else on top of what you were just talking about.

Binish Azhar:

Definitely. Corey Prologo, Head of North American Trading at Trafigura mentioned the exact same thing with export capacity being a main priority for a lot of producers. He warned that it would be stunted by a lack of investment and supporting infrastructure, and lengthy regulatory requirements, definitely. And this push for energy transition.

Dave Ernsberger:

I can't remember the last time I heard the way I heard this year that companies are self-funding their own expansions off their own balance sheets, which also slows everything down. Some companies are self-funding expansion just to stay in the game and keep producing whatever it is they're producing. But I haven't heard a lack of capital investment opportunities being talked about quite as passionately as it was this year. There's clearly a lack of money available for everything.

Jeff Mower:

Before we go any further, I'd like to invite listeners to the World Petrochemical Conference by S&P Global, which will be held on March 20th to the 24th in Houston. For all of our listeners interested in oil, we'll be offering several full day training courses at the conference. Including a refineries of the future course and an oil markets in the age of Energy transition training course. We'll put a link for the registration in the show notes. Dave, you also covered a panel where the participants talked about the sort of difficulty with margin costs recently, and the sort of impact on hedging going forward. Can you explain what was going on there?

Dave Ernsberger:

Yeah, this goes a little bit hand in hand with what we were just talking about around funding, financing, financial management, and everything else. I don't think that people have really fully understood... I know I didn't fully understand before this week, quite how many companies are turning their back on hedging. And that might sound like a specialist interest topic for this podcast. But when companies turn their backs on hedging, that only adds further pressure to the ability to raise financing and funding for whatever work you're doing. Because effectively, you're no longer managing your exposure to future price movements. Now, the reason that caught me by surprise, and I've heard this from many, many companies this week... Sometimes on stage, sometimes just talking at the event on the sidelines is, in 2022, because prices rallied so quickly in March and April and in some cases collapsed fairly quickly in May and June.

Not every market followed that shape. But if it wasn't at that time, those kinds of movements happened at some time for most markets last year. Whether you were longer or short, whether you were hedging a move to the upper or hedging a move to the downside, at some point a bank probably called you and asked for a hundred million dollars or more in margin calls and collateral requirements. At some point. Most people are hedging at a scale that will bring a hundred million dollar margin call. And that is the kind of financial ask that can actually create a liquidity issue for even the most well run organization that's managing its assets, managing its exposures, and hedging what I would call "properly", using my air quotes here. So there's a crisis of confidence that's emerging in hedging. Whether it's using features instruments or financially cleared swaps through exchanges, clearing houses, but off exchange, if you like. Because of the nasty sticker shock people got last year around margin calls.

So I think that's something that's going to play out pretty dramatically in the next six to 18 months, as we learn through company reporting and filings that more and more companies are going naked into these markets, at the risk of sounding saucy on this podcast. That's going to generate a whole lot of volatility down the road, and we haven't even begun to understand what that impact's going to be. But I think that's something to watch out for. It affects the ability to keep funding expansions, it affects the ability to keep even surviving, I would say.

Jeff Mower:

So what do you think would pull them back in? I mean, because when I look at oil prices now, they've been rangebound... I know we talked about volatility, and I understand that the past few years, but oil prices have been stuck in a $10 range since early December. In fact, it's really tight lately, and we're really just sort of waiting to see, it's this big waiting game in the market now. Where's China's demand? What's the Fed going to do with interest rates? It's just these two narratives going on.

Dave Ernsberger:

Yeah, it's an interesting thing to think about Jeff. Because with markets being fairly stable at the moment, and if you look across the board they sort of are. I think companies can afford to take a step back and say, " Okay, I'm not going to hedge anymore." But I think if we do start to see these markets move around a little more, that could be an incentive to come back in as this people begin to calm down a little bit. But unfortunately, I think what it's really going to take us for a few companies to go bankrupt, because they haven't hedged properly. Which is of course the story of the 90s and the 2000s. And then we might start to see those companies come back to hedge again.

Jeff Mower: Excellent. Well, thanks very much Dave and Binish for joining me in this conversation. And thank you to our listeners for tuning in. This Oil Markets episode was produced by Jennifer Pedrick in Houston.