Listen: Bonus episode: At CERAWeek, oil producers seek incentives for energy transition

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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 our takeaways from this year's CERAWeek Energy Conference.

I'm Jeff Mower, Director of Americas Oil News, and I'm joined today in our Houston studio by Dave Ernsberger, S&P Global's Head of Market Reporting and Trading Solutions, and Richard Swann, our Global Director of Clean Refined Products. It's great to see you guys in person. We were all at CERAWeek this week. I don't think we saw each other that much except in passing, so it was such a huge event and there were so many topics discussed. I really focused on oil production and demand, but mostly production. What about you two? What did you focus on mostly?

Dave Ernsberger:

Personally CERAWeek features more and more of a conversation around markets and trading, so I spent much more of my time this year not just engaged with the crude and energy transition themes that were going on between the Executive Conference and the Agora, but also digging in to what's happening with today's markets right now, which was a dynamic conversation, especially once you get under the surface of that.

And then also exploring what the markets are that are right over the horizon in the next 24 months to next 5 years. There's some interesting themes going on there too.

Richard Swann:

Well, as we were all there and lots of our listeners probably haven't been to CERAWeek, it is an incredibly large event. The scale of it is quite bewildering sometimes, but at its core there's an incredibly interesting conversation going on at what we call the Executive Conference, which I think obviously often more the traditional hydrocarbon kind of C-suite, government ministers talking, laying out their company plans and strategies, policies being discussed. There's a lot going on there.

Then there was an enormous world of innovation generally speaking related to climate, carbon, hydrogen, these kind of energy transition topics. With literally hundreds of companies talking in free flowing panel discussions in an adjoining conference center. I spent my time running between the two, and trying to sort of marry up the two worlds. I don't think we can talk about oil without talking about the energy transition.

Jeff Mower:

I agree.

Richard Swann:

Coming from CERAWeek.

Jeff Mower:

I agree.

Richard Swann:

I don't know what you felt about this, Dave, but I felt this year, the kind of disruptions we've had around Russia, they haven't gone away, right? The markets sort of normalized that a little bit. And front and center the conventional oil industry, the conversation is about the transition again. How is it going to play out? It brings you back to decarbonization, if you like, or there's a myriad different things there. But there were so many elements woven in to the conventional oil conversation that are all talking about the same end goal of reducing carbon.

Jeff Mower:

Yeah, we're hearing a lot about growth. We're hearing about, to varying degrees, you had ConocoPhillips come out and say, "Hey, we're only seeing 300 or 400,000 barrels a day in U.S. production growth this year." That's slowing down from 900,000 or a million barrels a day last year. Although I'm still very curious about how that's going to play out considering all of the private companies that ... I mean there are thousands of them, right? That all add up to a certain amount of growth in the U.S. But there are kind of limits to that, right? There are limits because of the decarbonization. How do you get funding when you're facing those decarbonization efforts?

Dave Ernsberger:

Well, I think we were all in different rooms literally and metaphorically, I think, because I heard a lot of punchy talk about oil's back, baby. And this is my third CERAWeek in the modern era. I came to the 2022 event, last year, and now this year. And in 2022, the oil industry kind of felt like it was on the defensive at CERAWeek, and there was a lot of, okay, well, hydrogen is the new thing and decarbonization is the imperative and demand peak is nigh. Last year it was a little more mixed in.

This year, of course, we started off with Amin Nasser's declaration that transition is a fantasy land or something along those lines. And I think that set the tone for a lot of the rooms that I was in. Not a literal translation of that bravado into every meeting and every discussion, but there's definitely a perspective that I was picking up on, both in the rooms and in the conversations in the hallways, that this year's CERAWeek felt very much like, hey, buckle up because oil and gas are going to be the story for the next 15 years.

Richard Swann:

Yeah, I did hear that. I didn't want to give the impression that I didn't. But I would say I heard playback from some very traditional oil companies, especially in the downstream, some of the refiners, they did pick up on some of that message from the Aramco head. But they picked up on another part as well, that is oil and gas is part of the mix and it's going to stay part of the mix for a while. But if you want to have this transition it's going to be expensive.

Dave Ernsberger:

Yeah, for sure.

Richard Swann:

We're at the point now where decarbonization ... Someone put it this way to me yesterday and it was a really good way of putting it, I thought, that oil companies would say they've been decarbonizing for years if not decades. And to a degree this is true, they've reduced their carbon footprint. But some of that work is things like reducing flaring. And that just makes economic sense. You can monetize the gas or use it for EOR projects to boost your oil output in the reservoirs. So, it worked in itself. It self-financed essentially.

But that doesn't apply here. Decarbonization at this point is now cost.

Jeff Mower:

Carbon capture. How do you pay for something like that?

Richard Swann:

You're investing in slightly unproven technologies that you don't know what return you're going to get here.

Dave Ernsberger:

Sure, and I was interviewing with Torbjörn Törnqvist from Gunvor in one of my sessions, and he just said, "Well, we tried green hydrogen and it was too expensive, and we shut it down." And then he followed that up by saying, "When the hydrogen market emerges, we'll just start trading it." So, definitely the message was the transition components right now are expensive and good luck for whoever wants to pay for that.

Which reminds me there was a lot of discussion at CERAWeek this year around carrots and sticks. I don't know if you all picked up on that, but in most of the conversations I was in there was a big debate about is it the sticks of Europe or the carrots of the U.S. Is it CBAM or is the Inflation Reduction Act? And I think there's a huge debate about whether you can do it with sticks alone or carrots alone. There didn't seem to be any conversation about doing it at the same time, which is interesting. But certainly that was a big debate I thought.

Richard Swann:

Yeah, it was big. Industry not surprisingly likes carrots. No surprise there. But more than just being given money to spend, it's almost like the carrot approach in the form of the IRA, one things it's done though is allow the different industries that are kind of coalescing around the transition here to find the solutions. It's not prescriptive. It's just essentially chucking money everywhere to a degree.

If you go down the stick approach and you start to go down some of the European approach, it kind of is picking the winners without a whole lot of history behind that.

Dave Ernsberger:

Yeah, I think that's fair. But I'll be a little controversial and say I think the industry also likes sticks because it's the old greed in fear type of thing. Not to be ... It's the classic phrase, of course, in the industry, but there will be those who effectively chase the carrots and get them. Whether that's money well spent or not, to your point, Rich, is a big debate. But there are also those who are fearful of taking that leading role, whether they get some carrots for that or not, and then other people eating their breakfast in the meantime who aren't actually raising their standards, who aren't actually decarbonizing.

And I met with some folks who were spending a lot of time on either decarbonizing their actual hydrocarbons production or offsetting elements of it as well, and one of their biggest grumbles was, well, but nobody else seems to be doing this and we're not getting rewarded by shareholders or the market by the way. So, now I want to see some sticks coming out.

Richard Swann:

Makes sense.

Dave Ernsberger:

There's a little bit of I'd like to have some carrots please, and I'd like you to get hit with a stick.

Jeff Mower:

But are they happy with the carrots, like the $85-a-ton carrot for carbon in the IRA was criticized by a few panelists. It's not enough. Or is that just the industry saying, "It's never enough?"

Dave Ernsberger:

I think there's an absolute sense that the carrots aren't big enough either, which is an interesting point, Jeff. How big do the carrots need to be? Well, turns out more than the IRA. Which is an interesting learning as well actually. And it's a good amount of money for a good amount of time. The states will take it. The recipients of the investment community will take it. But there's definitely a sense that it's not enough and legitimately not enough. How much does it cost to build a whole new energy industry? Trillions probably.

Richard Swann:

I know what you mean about sticks actually. I heard one panel yesterday, and they were giving different flavors of how conventional oil companies are decarbonizing. There were some different viewpoints being made. And the moderator did a great job of summarizing, to say, "I think you're all saying," speaking to conventional oil, "you all really want a carbon tax. You really want it."

And they all agree. They all said, "Yes."

And it's like, "This wouldn't have happened a few years ago."

Dave Ernsberger:

That was quite the magician on stage there. I think they are saying that. I agree.

Richard Swann:

The point is they want the predictability. They want some kind of convergence of these different mechanisms for decarbonization to be consistent. Whether that's joining up the voluntary and the mandatory emissions reduction productions or whether it's a way of ... In other ways quantifying the carbon intensity of the products they're selling.

Jeff Mower:

Yeah, so that's something that when you're talking about carrots and sticks, that's something that the Canadian oil industry wants for the, or at least Pathways Alliance, which has six huge producers, says they need. They want that assurance. They want that assurance that what's the carbon price going to be not just now, but what's it going to be years and years from now considering the amount of time and money it's going to take to build these carbon capture projects.

There's a lot of hope that these things are going to get built. I was covering a panel where Alberta's Energy Minster, Brian Jean, he was speaking and he's very exuberant about Canadian production growth, especially because of the Trans Mountain Pipeline expansion is coming onstream. And he said something like, "We could double Canadian crude production. We're going to 6 million barrels a day." And then later in the panel he's like, "8 million barrels a day."

I was like, "Where are we going with this?" That was quick. That was a lot of production growth within an hour as far as the forecast.

All that seems to hinge -- Canadian crude, so it's super high carbon, right? -- all that hinges on this huge carbon capture project.

Dave Ernsberger:

There's certainly bullishness around Canadian oil was a big theme this year. Because, of course, TMX Pipeline is starting its new capacity sometime in the second quarter of the year and I had a similar conversation with somebody who said, "Yeah, the pipeline's going to start up sometime in Q2, and we're going to fill it up in the first 90 days, and then we're going to build another one."

I was like, "Wow, Canada's really going for it."

Jeff Mower:

That was a question I had for TMX too was, okay, great, you've got this pipeline, and the crude differential is coming in. So, we've noticed the WCS discount to WTI has narrowed to around $13, $14. Which is considered kind of normal, that's sort of the "normal" price from around $25 a couple months ago. But my question is how long does it take for that sprint to blow back out? It doesn't take that long.

Dave Ernsberger:

No, it doesn't take long.

Jeff Mower:

And it really just takes the marginal barrels. So-

Dave Ernsberger:

It leads me to a question for you actually, if I may.

Jeff Mower:

Sure.

Dave Ernsberger:

If this gets back to a hardcore oil markets question from CERAWeek, at what point do you think Saudi Arabia says, "Enough?" Because they've already incentivized 13 million barrels a day of US. crude production. The Guyanese are already producing close to a million, a little bit more.

Is it when the Canadians say, "Oh my, I have all this oil to sell, I need another pipeline through the Rockies and another one?"

At what point do the Saudis say, "Enough here?" Surely this is the point where if the Canadians are going to unlock all these stranded assets, the time has come to-

Richard Swann:

Especially if they take Eastern markets.

Dave Ernsberger:

Right, exactly. Which is another interesting-

Richard Swann:

But it's challenged though. TMX-

Dave Ernsberger:

Everybody I talked to from Canada said, "Don't worry, it's going to California."

I was like, "I'm not the one worried about it."

Jeff Mower:

How much is going to go to California? Because TMX is saying, "Well, it's going to go to the Pacific."

But the other point is, well, yeah, if you want to expand the pipeline you better start doing it now because TMX took 12 years, and Keystone took 10 years, and they never got anywhere with the expansion. How do you start planning that?

Dave Ernsberger:

Would it take that long to build another expansion? It didn't sound like it when I was in the room with some of the folks planning the project. Once you've got this ... Look, I'm not geologist obviously. I'm joining you on a podcast. That's what we're doing here. But they get faster and faster the more you do them.

Here's the other thing, the theme of 2024 for me is, boy, the markets' got swagger when there's 5 million barrels a day plus capacity. Red Sea disruptions? No problem. Panama Canal issues? No problem. Canadian oil coming? No problem. But the swagger that it has now is really interesting actually. It's all that extra supply capacity that mostly the Saudis are holding off. But the Saudis could turn that on its head overnight.

Jeff Mower:

Yeah, it could.

Dave Ernsberger:

But nobody seems to think it's going to happen. Because it's definitely, definitely going to happen. That's what that means. At some point.

Jeff Mower:

What's the trigger for that? What's the trigger? When they see U.S. production go to what? If U.S. production surprises to the upside again, they did it before.

Dave Ernsberger:

I would have said 13, but we're already there.

Jeff Mower:

Yeah.

Dave Ernsberger:

I feel like there's a big storm coming here. Always when people are this confident, something's about to happen.

Jeff Mower:

Yup.

Richard Swann:

There's a cyclicality to the decision. It's a terrible situation you find yourself in actually if you are the swing producer in that situation because what do you do? Defend price? Sure, everyone's comfortable with the price. No one's really grumbling about this low 80's oil price environment seems to be about right for people on both sides. But if the only way you sustain it is by artificially restricting your production, allowing other people to fill the void, and keep on doing it, and taking incremental growth each year.

Jeff Mower:

So, we're seeing growth elsewhere? Obviously Guyana, Brazil, Argentina was talking up production growth. And even, I thought this was interesting, Harbour Energy, which has some assets and interest in the Zama oil field in Mexico, Harbour came out and said, "Mexico could turn the other way following this year's election, not completely." The idea is that Claudia Sheinbaum will likely win the presidential election this year, but she's part of the Moreno Party or she's a member of the Moreno Party, López Obrador's party. And the conventional thinking is she's not going to change anything. She'll stick with the party line, but I don't know. My question was, why does she have to? She's going to be president. Why wouldn't she want to make a name for herself?

And Harbour Energy, the official I spoke with, said he sees enough pragmatism there. He sees enough pragmatism. There's enough growth throughout the region. I can't help thinking that some of these other countries are going to see that growth in Guyana, see that growth in Brazil, and go, "Hey, we want some of that revenue."

Dave Ernsberger:

I think the thing that will change the picture here, and interesting thoughts around the model in Guyana and elsewhere, from some of the conversations I was involved in, it'll be any move towards peace talks in Ukraine will be the big trigger here for change. There's a lot of interest in the upcoming U.S. election. One thing I heard a lot about this week is, yes, okay, more than half the world's population live in countries subject to elections in 2024, big talking point in January. Turns out almost all those elections are entirely predictable and half of them aren't even democratic or at least some number aren't even democratic.

The one big wildcard there is the U.S. election and the sense that if Trump wins and the new administration comes in, and that forces peace talks in Ukraine, I think in that scenario that's the trigger for the Saudis to say, "Enough." Because you can imagine the peace dividend that comes along with that. As a complicated complex situation, that entire thing. But typically you might see energy markets start to fall, gas markets start to fall. I think for me that's the point where the Saudis throw in the cards and say, "All right, we're coming back to the market now."

Jeff Mower:

Were any producers hopeful? Did you get a sense that they were predicting the outcome of the U.S. election? Or explicitly stating ... Sometimes they're very careful about this. What happens under Biden continuing with another four years? What happens with Trump getting in to office?

Dave Ernsberger:

Yeah, I heard a lot of people trying to make the case that no matter who wins the election, policy stays the same. Which I thought was a little peculiar. Everything from the IRAs too well embedded to be wound back at this point to obviously international relations will be the biggest thing changing under a change of administration. People didn't really deny that. But in terms of economic policy, domestic agenda, there seemed to be some sort of sense that it wouldn't change under either, which my perception was that people did not want to talk about Trump or Biden on stage. I very much got that sense.

Jeff Mower:

I can't imagine if Trump got into office there would definitely be an impact on offshore leasing.

Dave Ernsberger:

Right.

Richard Swann:

Yeah, probably climate policy too. But I think you're right. There wasn't a lot of overt political comment going on. It's a close one. And you can see why. Sometimes if you look at an election, they do refer to the fact that some of the large democracies this year are having elections, there's a strong likelihood of the winner, we can predict it now based on other people's predictions basically. But this one's close here in the US. It's tough to put your money on something.

Jeff Mower:

Definitely. Well, I think that's all the time we have for today. This was really fun, let's do it again next year. Thank you, Dave and Richard. And to our listeners, thank you for joining us. If you want to check out some of our coverage highlights from CERAWeek, which expands far beyond what we were discussing here, hit the link in our show notes, which will take you to the CERAWeek topic page at platts.com.

Of course our subscribers can find all of our CERAWeek content and much, much more on Platts Connect. This Oil Markets episode was produced by Jennifer Pedrick in Houston.