Apr 27, 2020

Axios Generate

Good morning, hope you're staying well.

🎬 Tonight "Axios on HBO” returns at a new time! New York Gov. Andrew Cuomo reflects on the early days of the coronavirus and what could have been done differently (clip).

  • There's also an in-depth interview with Walmart CEO Doug McMillon on the pandemic's impact (clip), and much more. 
  • Catch the show at 11pm ET/PT on all HBO platforms. 

My latest column is a long view on the current oil turmoil. I'll share a glimpse of that, and then Ben Geman will get you up to speed on other news. Today's Smart Brevity count: 1,265 words, < 5 minutes.

1 big thing: Oil sector's bounce back

Illustration: Aïda Amer/Axios

The reports of the death of the oil industry are, to quote Mark Twain, greatly exaggerated.

Driving the news: Progressive leaders are pouncing on the current collapse in the oil sector as a sign this is the beginning of its end and a turning point for the climate-change movement. Not so fast.

The big picture: Yes, the coronavirus is throwing the industry into its worst crisis ever. Thousands of workers and possibly hundreds of companies could go bankrupt in the coming months and years.

  • But no, our society’s structural foundations that run on oil have not changed — and that will become clear in the long term, after the crisis is over.

Where it stands: A lot of potential factors could make this moment in history the beginning of the end for the oil industry, but both history and experts suggest that absent explicit actions by governments, the long-term outlook for the oil industry is at least neutral, and even possibly positive.

Let’s look first at three factors suggesting the outlook will be positive for the industry, and then three that could change things.

Three industry positives:

1. Recessions put environmental concerns on the back burner.

  • “What I worry about most is history suggests when the economy is suffering, the pace of environmental policy ambition wanes,” said Jason Bordoff, a former Obama energy official now leading Columbia University’s Center on Global Energy Policy.

2. Economic growth = oil demand growth

  • Oil demand tracks closely with economic growth. It may not feel this way now, but history suggests the economy will eventually get better.

3. Unchanged government policies

  • Why don’t you just stop eating if you want to lose weight? The ridiculousness of that question explains why the extreme drop-off in oil demand is not a successful strategy to get off oil.
  • Much like a successful diet is achieved through time and gradual change to healthier foods and fewer calories, so too is getting off oil and transitioning to cleaner sources.

Three industry variables:

1. Coronavirus-fueled changes in society

  • This pandemic could change our society for the long haul, with potential trends to increase our oil consumption (using more plastic) or decrease it (flying less). Regardless, they’re all tinkering around the edges of a massive oil market.

2. Stimulus plans

  • If — this is a big if — countries around the world seek to infuse their economic stimulus plans with clean-energy policies that could create more long-term pressure on the battered industry.

3. Presidential election

  • The most immediate and obvious impact of Joe Biden winning would be that he would likely infuse clean energy into any additional stimulus measures still needed by then.

The bottom line: We might not be going anywhere right now, but neither is the oil industry.

Read more

2. The oil sector's downturn intensifies
Expand chart
Data: Baker Hughes; Chart: Axios Visuals

Projections of deep pain in the oil sector are increasingly materializing on the ground amid the pandemic-fueled collapse in oil prices and consumption.

Where it stands: Oil prices are falling again Monday “as producers scrambled to shut down wells before the world’s crude storage capacity reached its limit,” the Wall Street Journal reports.

  • Meanwhile, Diamond Offshore Drilling, a big Houston-based contracting company, filed for Chapter 11 bankruptcy protection Sunday, citing "unprecedented" price and pandemic developments.

Why it matters: The bankruptcy is a fresh sign of what's now an ongoing decline in production — and a drilling pullback — in the U.S. and elsewhere that is battering companies and their workforce.

"The great Texas oil shutdown has begun," the Houston Chronicle reports.

  • Drilling rigs operating in the U.S. plummeted by 60 to 387 last week, the oilfield services company Baker Hughes said in its weekly tally. That's down from 805 active rigs a year ago, a decline that foreshadows expected steep declines in U.S. output.
  • The Energy Department's statistical arm forecast early this month that production would fall by roughly 2 million barrels per day, but DOE Secretary Dan Brouillette and outside analysts see potentially much steeper drops.

The big picture: It has been clear for weeks that the price and demand collapse would start pushing output lower both in the U.S. and elsewhere.

  • But Ben Luckock of commodity trading giant Trafigura Group tells Bloomberg that last Monday's plunge of U.S. oil futures into negative terrain "really focused people’s minds that production needs to slow down."
  • “It’s the smack in the face the market needed to realize this is serious," he said.

By the numbers: The BW Research Partnership estimates that nearly 50,000 U.S. workers in oil and gas fields lost jobs in March. Their report on energy sector job losses calls their estimates "conservative" and projects they'll be worse in April.

Bonus: The oil storage crisis

Lower demand and prices are not the only forces behind production cutbacks — there's literally fewer places for it to go.

What they're saying: "Neither an earlier start of production curtailments by Saudi Aramco and Kuwait Petroleum Corporation, nor a historically large 500,000 bpd monthly U.S. oil production decline in May–June, will remove enough oil supply to avoid filling the world’s crude storage during May," Rystad Energy analyst Bjørnar Tonhaugen said in a note this morning.

  • "The storage clock is ticking for producers and we are approaching the final countdown if no further action is taken," he said.

Threat level: In the U.S. specifically, Reuters notes that "Cushing, the delivery point for WTI, was 70% full as of mid-April, although traders said all available space was already leased."

3. Pondering a green recovery

"Planned European Union rules requiring investments to be in line with climate policy should be used to guide economic recovery measures after the coronavirus pandemic, despite not yet being law, the bloc’s expert advisers said on Monday," Reuters reports.

Why it matters: It's the latest wrinkle in growing calls to orient huge financial recovery packages in Europe and elsewhere toward low-carbon industries.

  • On Friday, the International Energy Agency and Denmark hosted a virtual meeting on the topic that included officials from European nations, India, Canada, Indonesia and elsewhere.
  • And this week, an annual meeting of environment ministers from over 30 countries, called the Petersberg Climate Dialogue, will focus on "how to organise a 'green' economic recovery after the acute phase of the pandemic is over," the BBC reports.

But, but, but: In the U.S., GOP lawmakers and President Trump have pushed back against some Democrats' efforts to include provisions in the coronavirus response packages that would help shore up jeopardized renewables projects.

  • However, if brewing administration plans to aid distressed oil companies contain provisions that require congressional approval, there could be openings for a compromise on the topics.
4. What we're watching: earnings in the crisis

Several of the world's largest oil-and-gas companies will post first-quarter earnings this week, with BP reporting tomorrow, followed by Shell on Thursday and U.S. giants ExxonMobil and Chevron on Friday.

Why it matters: It will be the first — but not the last — detailed look at how the price collapse and pandemic will affect the companies' finances.

  • Oil-and-gas companies of all sizes have already been announcing cutbacks.
  • "They are all expected to detail additional spending cuts, and investors will be watching closely for how those companies plan to manage dividends," Reuters reports of the major' upcoming Q1 results.

Separately, another announcement we'll be watching comes Wednesday after markets close, when Tesla posts its results.

5. The latest hurdle for Arctic oil: banks

Banking giant Morgan Stanley updated its environmental policy late last week, vowing that it will not "directly finance new oil and gas exploration and development in the Arctic."

Why it matters: Per Bloomberg, they're now the fifth major U.S. bank to say they will not back drilling in the region.

  • It's yet another problem for the Trump administration's efforts to open up the Arctic National Wildlife Refuge to oil-and-gas development, though industry interest in the expensive region is already deeply uncertain.

But, but, but: "There’s a limit to the bank vows, which generally only rule out financing tied to individual projects — such as underwriting a specific Arctic drilling venture. The pledges wouldn’t get in the way of a bank providing broad financing to oil companies that operate mostly in Alaska or the Arctic," the Bloomberg piece notes.