Apr 2, 2020

Axios Generate

Good morning. Today's Smart Brevity count: 1,310 words, 5 minutes.

🎵Saturday will mark the 1972 release date of ZZ Top's "Rio Grande Mud," so enjoy the amazing guitar riffs in today's intro tune...

1 big thing: Making sense of the UN's climate delay

Illustration: Sarah Grillo/Axios

The scuttling of November's pivotal UN climate conference is the starkest sign yet of how COVID-19 is throwing a wrench into efforts to combat global warming.

  • But like the wider relationship between the coronavirus and climate initiatives, the ramifications are ... complicated.

Driving the news: UN officials announced Wednesday that the annual summit to be held in Glasgow, Scotland, is postponed until some unknown time next year.

Why it matters: Axios' Amy Harder reported yesterday that this isn't just another major convention scuttled by coronavirus.

  • The event was to be a make-or-break moment for countries to increase their emissions-cutting ambitions — the most important annual climate conference since the Paris Agreement was struck in 2015.

The intrigue: The conference was to start just days after the U.S. presidential election, a contest that will be immensely important for global climate diplomacy.

  • President Trump is pulling the U.S. out of Paris. Rival Joe Biden is vowing to not only remain in, but toughen U.S. policies and and convene talks to boost other nations' ambitions.

What they're saying: "The current situation is awful, but it unintentionally creates some needed distance between the U.S. election and the [UN conference], which had been scheduled to start six days later," said Andrew Light, who was a senior climate aide in Obama's state department.

  • "I’m not even sure we’ll know the results of the election by then. It’s no secret some countries had been looking at various options for how they would position themselves in part responding to the results of our election," he tells me.

Another veteran of global climate talks agrees with that sentiment and also suggests other reasons why the delay, occurring for tragic reasons, could be tactically helpful.

  • “I don’t think a lot of countries are in a great place to increase their ambition this year,” the source tells me, adding that the economic and human consequences of COVID-19 will be better known.

The big picture: Amy notes that some advocates, including the International Energy Agency, are calling on governments to incorporate policies into economic recovery plans that are more supportive of clean energy and action on climate change.

  • “Soon, economies will restart. This is a chance for nations to recover better, to include the most vulnerable in those plans, and a chance to shape the 21st century economy in ways that are clean, green, healthy, just, safe and more resilient," Patricia Espinosa, the top UN climate official, said in announcing the delay.

But, but, but: Those opportunities aside, the delay comes as many nations' efforts to transform the goal of Paris — to keep global temperature rise below 2 degrees Celsius — into concrete steps were already faltering, Amy writes.

  • The Guardian adds that "several prominent climate experts had feared that delaying the talks would mean governments eased off on pursuing stronger commitments to fulfill the Paris goals."
2. Trump's hopes and plans

Oil prices are climbing this morning and, per the Financial Times, traders are responding to President Trump's comments yesterday evening that Russia and Saudi Arabia could soon mend fences on oil supply policy.

  • Bloomberg also notes that the market is responding to China's plans to start buying oil for its strategic reserves.

Driving the news: Trump told reporters that he believes, based on his recent calls with Russian President Vladimir Putin and the Saudi crown prince, that "they will work it out over the next few days."

Reality check: A note yesterday from Rapidan Energy Group says, "At present we do not expect Riyadh to change course."

  • Their "base case" sees deeper and sustained crude price drops as COVID-19's effects continue hitting demand.
  • They see prices under $20-per-barrel and the "bleak" economic outlook leading to OPEC+ resuming negotiations by early summer, leading to a deal that revives previous quotas and imposes some additional cuts.

What's next: Trump is slated to meet Friday with top executives of large oil companies to discuss potential ways to help the sector that's facing strong economic headwinds as prices and demand have collapsed.

  • The meeting is slated to include CEOs of ExxonMobil and Chevron, as well as big independent producers Occidental and Devon Energy, among others.
  • The prospect of efforts to help the sector is also putting some upward pressure on prices, per multiple reports.

But, but, but: The Wall Street Journal, which first reported the meeting, points out...

"[T]he options are limited for Washington to help beleaguered U.S. oil-and- gas producers, and there are strong differences between major oil companies and some independent shale drillers about whether aggressive government actions are even necessary, making the prospect of any agreement challenging."
3. Visualizing oil's daunting landscape
Adapted from IEA; Chart: Andrew Witherspoon/Axios

The IEA didn't mince words with the headline on yesterday's explainer about the upended market: "The global oil industry is experiencing a shock like no other in its history."

Where it stands: It explores the biggest force, which is the utter collapse in demand as COVID-19 freezes much transportation and economic activity, plus the supply shock from the end of the OPEC-Russia restraints.

  • The massive lockdowns mean one of the "traditional stabilizers" — more consumer activity from low prices — is missing.
  • "Instead, a rapid build-up of oil stocks is starting to saturate available storage capacity, pushing down prices further."

What they found: One piece of their analysis, shown in the chart above, looks at the daunting economics and hard choices facing producers.

  • "At the moment, about 5 million barrels of oil produced worldwide each day is not fetching high enough prices to cover the costs of getting it out of the ground. ... These operations are now losing money on every barrel they produce."
  • (That 5 million figure is based on Brent crude at $25 per barrel; this morning it's at around $27.34.)

The intrigue: As you can see from the chart, differences in extraction costs mean that lower price hit the economics of North American production harder than fields in the Middle East and Russia.

But, but, but: While a substantial amount of global output will likely stop (IHS Markit sees 10 million bpd cut or shut-in from April to June), the IEA cautions: "The economics of getting oil out of the ground are not necessarily a good guide to which operations will actually halt production."

  • They note that some producers will consider how long they estimate the crisis will last and balance that against the costs of shutdowns and possible restarts.
  • "Moreover, some producers may opt to wait and see if weaker rivals go out of business, which would improve the environment for those who stay in the game."
4. Fallout from the price collapse gets real

This week is bringing concrete signs of how the collapse in oil prices and demand is beginning to erode the viability of some energy companies.

Driving the news: Whiting Petroleum, a substantial producer in North Dakota's prolific shale region, said Wednesday that it filed for Chapter 11 bankruptcy protection.

  • The company cited the "severe downturn" in prices stemming from the pandemic and the Saudi-Russia price war.

The big picture: Expect more independent companies to go into crisis mode and some — maybe a lot — to go under as the market's sharp downturn worsens the outlook for a number of already stressed players.

What's happening: Prices have been 0n a steep downslope all year and have fallen recently to their lowest levels in roughly two decades (although they've regained some ground over the last day).

  • Reuters reported yesterday that Callon Petroleum has hired advisers to restructure its more than $3 billion in debt.
  • "As many as 40% of U.S. oil and gas companies could crater into bankruptcy or distress over the next two years as they grapple with a market crash and the coronavirus outbreak, according to asset manager Pickering Energy Partners LP," per Bloomberg.

Where it stands: Whiting, among the companies already under financial strain before the price collapse, announced a proposed restructuring that includes giving certain creditors a 97% stake in the company in exchange for relief on $2.2 billion in debt.

  • Whiting produced roughly 125,000 bpd of oil-equivalent in 2019. It has assets in North Dakota, Montana and Colorado.