David Yager: The many reasons for oilpatch optimism in 2022

 

If you’re fortunate enough to still be working in oil and gas, not only is your future secure but do your employer a favour and inquire if a few of your former co-workers would consider coming back. We need your help.

Here’s a few key areas in which the improvement are real, significant and sustainable.

The big picture is fantastic

The year-over-year improvement in the macroeconomics of the oil industry is spectacular. As this column is written, WTI is trading at about US$76.50 a barrel. In the last week of December 2020, WTI averaged only US$$47.73, nearly US$30 lower. Another way of looking at it is a 60 per cent gain in the past 52 weeks.

Wow.

Natural gas has enjoyed a similar improvement. In December of 2020, the Alberta government reported the average natural gas reference price at AECO was $2.41/GJ. For the first four weeks of December 2021 the same figure was about $3.75/GJ, 56 per cent higher. Gas is back in a big way all over the world.

As producers entered 2021, they were coming off the worst year imaginable. It was so awful nobody even imagined it in any public worst-case forecast. Starting in March, the lockdown in response to the global coronavirus pandemic drove oil prices down to previously unseen low levels. For a few weeks, cash flow from production went negative. Any company with bank debt violated their lending covenants, at least briefly.

The narrative for the rest of 2020 was, in hindsight, ridiculous. End of oil. Sunset industry. No future. The comfortably employed tall foreheads who have figured out how to make a living by telling the rest of us what to do said the best way to emerge from the pandemic was huge government spending on low-carbon, renewable energy sources.

After all, fossil fuels were doomed.

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The ’patch enters 2022 in an entirely different frame of mind. According to ARC Energy Research Institute’s weekly report on Dec. 20, cash flow from production in 2021 could reach the highest level in history, a whopping $89 billion. This is nearly three times higher than 2020 and almost one-third higher than the last high-water mark of $67 billion set in 2014. Production will average 8.2 million barrels of oil equivalent a day this year, the highest in history.

This has strengthened the industry’s balance sheets to a degree few even dreamed about a year ago.

There’s still lots of weird things going on so the industry is not behaving as it has in the past. These include punitive federal emissions caps, restricted access to capital and a broader public convinced oil is bad even though they refuse to live without it.

But as you reflect on the year that was and the year ahead, take a moment to fully grasp the enormity of the improvement.

Investment spending to increase out of necessity

On Dec. 13 consultancy Wood Mackenzie released it outlook for next year titled, “Upstream sector on the rebound – but ‘peak uncertainty’ fears weigh in 2022.”

That accurately reflects the view of many senior E&P executives who are torn between the obvious improvement and opportunity, and the powerful headwinds of a decade of pressure from multiple sources to extinguish the fossil fuel industry to save the planet from climate destruction.

Wood Mackenzie wrote, “The oil and gas sector will continue to rebound in 2022 … but the positive outlook will be tempered by concerns about its future.” It states, “The upstream sector is going into 2022 facing ‘peak uncertainty’ – with record cash flows but increasing scrutiny. At a Brent price of about US$70/bbl, oil and gas cash flows will be at near-record levels. At US$80/bbl, it would soar towards US$1 trillion (on a post-tax, post-capex, pre-financing and dividends basis). Despite this, for many stakeholders and even some chief executives, the sector’s risks outweigh its upsides. This tension will define 2022.”

If there is any uncertainty about 2022, it will be mainly about how and where to spend all the money. The really good news is that producers will certainly have a lot of money to spend. On something.

Wood Mackenzie points out that prior to the COP26 climate conference in Glasgow, some big commitments were made to continue to starve the fossil fuel industry of cash. “Financing oil and gas was getting harder before COP26, but the pressure with ratchet up in 2022. Institutions with more than US$130 trillion of capital under management have joined the Glasgow Financial Alliance for Net Zero. Watch for the pools of backers (of fossil fuels) to shrink, borrowing costs to increase and project financing for oil to get harder.”

Not mentioned is how the world is facing its first real energy shortage in decades. Nobody had that in their plans six months ago. Events in Europe and around the world are starting to change the channel on the future of fossil fuels. Because whatever we’ve all been told to do and think, the ability of renewable energy sources like wind and solar to power the economy have been horribly oversold regarding their availability, reliability and true cost.

On Dec. 28, the Wall Street Journal published an article titled, “Europe’s Industrial Firms Flash Warning on Energy Costs.” It reported how the price of electricity and natural gas have risen so high, so quickly multiple industries from metals processing to fertilizer plants to glass manufacturers were either cutting output or shutting down because they couldn’t afford to stay in business.

The energy transition was advertised as creating jobs, not destroying them.

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In the UK, one of the newspapers opined how pensioners on fixed incomes had to make choices between “heating and eating.” Government price caps have bankrupted multiple power suppliers.

As Russian gas supplies remain in doubt due to growing geopolitical tensions including a possible invasion of Ukraine, in the short term tankers of LNG are being rerouted from Asia to help take the pressure off gas and electricity prices. Three more months of winter lie ahead.

While Wood Mackenzie reports that upstream spending on new supplies in 2022 will rise above US$400 billion – a nine per cent increase over 2021 – Saudi Aramco warns this is nowhere near enough to meet projected growth in oil demand based on population growth alone.

Before Christmas, the world’s biggest crude oil producer warned about a possible 30-million-barrel-a-day oil shortfall by 2030 if the world stays on its current path. “We’re heading toward a phase that could be dangerous if there’s not enough spending on energy,” said Prince Abdulaziz bin Salman.

Saudi Arabia’s finance minister Mohammed Al-Jadaan added, “We have very serious concerns that the world could run short of energy if we are not careful in managing the transition.”

Who do you believe? Saudi Aramco or Liberal Environment Minister Steven Guilbeault?

Many major investment bankers are forecasting higher oil prices towards the end of next year when the OPEC+ surplus production will be back on the market, demand continues to recover, and years of low investment results in decreased output from natural decline rates from conventional reservoirs all over the world.

In Canada, the forecasts from the Canadian Association of Energy Contractors and the Petroleum Services Association of Canada are for increased drilling. Skilled labour shortages proved to be a cap on spending in the latter half of 2021.

Producers have the cash, conventional reservoirs are declining and production volumes are at record levels.

An outbreak of energy common sense

One of the most important and under-reported major events of 2021 was the World Petroleum Congress in Houston in early December. It was characterized by a level of honesty and candour by the world’s leading oil executives that we haven’t heard in years.

In late 2020 BP and Shell and other major oil companies were telling everyone how they were changing their business models and phasing away from their legacy business.

A year later in Houston many of captains of industry were again telling the truth about fossil fuels and how the world cannot and will not function without them.

Some nuggets included:

• OPEC – By 2045 the world must invest almost US$12 trillion in new supplies or there will be “long term scars on energy security, affecting not only producers but consumers.”
• Saudi Aramco – “I understand that publicly admitting that oil and gas will play an essential and significant role during the transition and beyond will be hard for some … but admitting this reality will be far easier than dealing with energy insecurity, rampant inflation and social unrest as the prices become intolerably high, and seeing net-zero commitments by countries start to unravel.”
• ExxonMobil – “Narrowly focusing and taking action on one aspect of the challenge could potentially lead to significant unintended consequences. The best intentions poorly executed can do more harm than good.”
• Suncor – “This is a massive, massive challenge. And everybody’s trying to solve that on the supply side and the demonization of the producers, but at what point are we going to have a real conversation?”
• Chevron – “Oil and gas continue to play a central role in meeting the world’s energy needs and we play an essential role in delivering them in a lower carbon way … Our products make the world run.”
• ConocoPhillips – “And when you get all these letters from senators and these efforts and talking about cancelling exports of oil and gas, and you talk about permitting delays and regulatory overprint. When you get all these things thrown at you … it just creates enough uncertainty that the investment is not going to be there …”
• Daniel Yergin – “Underinvesting in oil and gas before renewables and other low-carbon technologies that are ready to scale up to meet energy demand could create recurrent energy crises of the kind we saw in Asia and Europe over the last few months … creating severe economic consequences and social unrest”.

 

Many of the countries that mothballed coal-fired electricity generation are turning it back on now that natural gas prices are so high or supplies are unavailable. Coal consumption and production will reach record levels in 2022.

Even ESG investment funds that proudly signalled that they would avoid or invest less in fossil fuels are thinking things over. Larry Fink, CEO of investment giant BlackRock, is leading the pack.

An article by the Canadian Energy Centre in late November was titled, “Don’t divest from oil and gas, says BlackRock CEO Larry Fink.” It opened, “The heavy hitter at the top of the world’s largest asset management firm says it’s a ‘bad answer’ for investors to abandon oil and gas, and it won’t help solve climate change.”

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Fink said, “Nothing’s more greenwashing than divesture, because it doesn’t change the footprint of the world.”

The ESG investment phenomenon has attempted to seize the moral high ground in recent years in the name of climate change. It will be interesting to see if this advanced moral probity still applies in an era of soaring energy and food prices.

In a significant reversal, the global mining giants that previously figured the way to attract more investors was to sell their coal operations are now realizing the new owners may operate them longer or in a less emissions-responsible manner. A gain for the share price could be a net loss for the world’s atmosphere so long as there were still buyers for the product.

Which there clearly still are.

My fearless forecast

Oil price and activity forecasts are always wrong. The issue is how much and in which direction.

In 2022 and beyond, economic reality and energy poverty will drown out the chorus of voices that have been leading the charge that a global energy transition at any cost is more important than the consequences inflicted on the very people they are purporting to protect.

So my fearless prediction is that, for the first time in a long time, forecasts of oil prices and reinvestment spending for 2022 and beyond will be low.

Happy New Year.

David Yager is an oil service executive, oil writer and energy policy commentators and analyst. He is currently president and CEO of Winterhawk Casing Expansion Services which is commercializing a new way of mitigating methane emissions from surface casing vent flows. He is author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca.

 

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