Winter is Coming for Oil and Gas

Winter is Coming for Oil and Gas

October 19 2021

The UK and Europe are short on natural gas, which heats homes and runs industry. The price recently shot up 5X from pandemic lows. Europe gets incremental supply from Russia, but Putin can turn the spigot on and off at his discretion. Europe also gets gas from LNG tankers from the Middle East and the US; however, LNG is double the price and new supplies take five years. We were awash with natural gas in the US last year, but it has doubled in price in recent weeks.

Plagued by blackouts, China has ordered state-owned energy companies to “do whatever it takes” to secure fuel supplies for this winter. China gets 60% of its electrical power from coal as its internal supply of oil and gas is modest. Its supplies have been crimped by a coal mine safety crackdown, cuts in Australian imports and heavy rains that flooded coal mines. US miners would have gladly filled the gap, so this is a self-inflicted misstep of central planning. China is building renewable energy supplies much faster than any other country but is forced to live with the deadly air pollution from coal to keep its economy growing.

The global energy shortage is almost entirely a fossil fuel supply chain breakdown. When the pandemic hit, demand dropped, and prices collapsed. O&G companies slashed capital spending to stay alive; many still went bankrupt. Flexing his muscles, Putin wouldn’t agree with the Saudis to cut production and crude briefly dropped below zero. Once the global economy restarted, long lead times to drill new wells limit new supply. OPEC and Russia could produce more but choose not to. Capital for new wells is increasingly scarce and expensive. The sector has been a money loser for too long. O&G has been the WORST performing sector of the S&P 500 over the past decade. Beyond the losses, many investors simply refuse to invest in the sector that causes global warming.

Fortunately, solar, wind, nuclear and hydro already produce ~30% of global electrical energy supply and are growing rapidly. We now need a lot less coal and natural gas to make electricity – mitigating current shortages. Solar and wind generation costs less and is faster to build than fossil fuel generation plants and doesn’t rely on imported oil and gas. After a 90% decline in the price of solar, wind and batteries over the last decade, prices continue to drop. There is no similar cost decline scenario for oil and gas production, especially with more countries starting to charge for CO2 emissions. Global corporations are pledging to aggressively cut fossil fuel consumption and emissions.

The oil and gas sovereigns and companies will pull out all the stops to protect their interests. They will have good and bad days on the path to eventual sharp cuts in demand. In the meantime, China, Japan and Europe will build renewable energy supplies as fast as possible to limit reliance on Russia and OPEC. The US is still very divided, but the evidence keeps mounting and public opinion is shifting toward safe, affordable clean energy.

October 9 2020

When Washington fails to act on climate, the states need to take matters into their own hands. It’s not politics, it’s economic necessity and good business. In MEMO 28 we examine the greatest example of this phenomenon: California.

February 23 2021

For environmental impact, China wins. But President Xi has committed to turn things around, so this week, we take a look at what needs to happen to reach his 2060 goal.

October 3 2020

China is responsible for 27% of yearly global greenhouse gas emissions but President Xi Jinping just proclaimed his country will reach net zero carbon emissions by 2060. In MEMO 27, we investigate whether China is for real on climate.