- Fallout From Covid-19, Climate Change And Polar Bears
- Will Biden’s Energy Plan And EV Hype Prove A Fantasy?
- Is The Drag From LNG About To Switch To Help Gas Market?
Musings From the Oil Patch
July 28, 2020
Allen Brooks
Managing Director
Note: Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that I feel have potentially significant implications for executives operating oilfield service companies. The newsletter currently anticipates a semi-monthly publishing schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, I welcome your comments and observations. Allen Brooks
Fallout From Covid-19, Climate Change And Polar Bears (Top)
During the shutdowns in response to Covid-19, wild animals have taken back the streets of towns and cities, as well as the backyards of homes. We have been following this development via newspapers, magazines and television. We were struck by a news item a week ago citing the increase in the number of bears entering homes in Connecticut. That news got us thinking about the status of the polar bears. Our concern about those bears was raised because of all the recent narratives about global warming and the melting of the ice in the Arctic, and now new studies.
According to the Connecticut Department of Energy and Environmental Protection (DEEP), an "unprecedented" number of black bears have entered homes so far this year. Through July 8, the DEEP has received more reports of bears entering homes — 25 — than in any previous year. At this rate, Connecticut would triple the average number of home entries of 2018 and 2019. The scary issue is that the number of home entries reported this June — 17 — equaled those reported during all of 2019.
Exhibit 1. Black Bears Becoming Aggressive
Source: DEEP
DEEP officials commented about the rising number of bear home invasions. The increase in year-to-year incidents has resulted in an "unprecedented number of complaints and requests for assistance." Some of these interactions have been serious, as bears entering homes have injured both leashed and unleashed dogs, according to DEEP officials.
A photo from a homeowner in Farmington, Connecticut, shows a mama bear sitting in his backyard, after the homeowner’s dog had sent her two cubs scurrying into a tree for safety. The mama bear then proceeded to enjoy the respite from controlling her cubs and visited the homeowners’ garbage cans.
Exhibit 2. A Black Bear At Home In Back Yard
Source: Fox 61, Photo Credit: Casey Howes
We have been fascinated by the photos available on the Internet showing various wild animals taking back cities during the Covid-19 lockdowns. (The Guardian web site has an interesting collection of photos.) As an example, the nearby photo shows mountain goats roaming the streets of Llandudno, Wales, in March. They were drawn into town by the lack of people and tourists. The goat herd normally lives on the rocky, limestone headland of Great Orme, on the northwest coast of Wales, northwest of Llandudno.
Exhibit 3. Wild Animals Reclaim Towns During Virus
Source: The Guardian, Photo credit: Christopher Furlong/Getty Images
The issue of polar bears recently surfaced after the Department of the Interior moved to allow drilling in Alaska’s Arctic National Wildlife Refuge (ANWR). Holding an oil and gas lease sale in the Coastal Plain was mandated by the Tax Cuts and Jobs Act enacted in 2017. As part of the leasing process, an environmental assessment must be completed. This report (we haven’t read it) reportedly concluded that drilling activity wouldn’t harm local polar bears. This an entirely different argument than climate change is destroying the Arctic habitat of polar bears, resulting in them becoming extinct.
Democratic members of the House of Representatives’ Natural Resources Committee, wrote to the Interior Department stating that the study “makes the unsupportable conclusion that industrializing the entire Coastal Plain—including the most important terrestrial denning habitat for among the most imperiled polar bear population on the planet—will not jeopardize the survival and recovery of the species.” The letter, authored by Rep. Jared Huffman (D-Calif.), claims, “This fundamentally flawed analysis ignores the overwhelming scientific evidence that identifies devastating impacts to polar bears from oil and gas activities."
Once again, polar bears are becoming a political football. It was only a couple of years ago when National Geographic showed a video of an emaciated polar bear with the enticing title: “This is what climate change looks like.” The video reportedly had 2.5 billion views, and as of today, remains one of the most viewed videos on the magazine’s web site.
Exhibit 4. Devastating Photo Of Polar Bear
Source: National Geographic
About a year ago, Michele Moses of The New Yorker magazine wrote a story about the polar bear and why it has become the face of climate change. She told about another emaciated polar bear that showed up in Norilsk, an industrial city in Siberia known for the production of nickel, for the first time since 1977. It rummaged through garbage cans for food and rested in a local sand pit. The assumption was that the polar bear had been forced to travel hundreds of miles to reach Norilsk. Some local environmentalists speculated that the bear’s trip was due to starvation, since melting sea ice forces polar bears to seek other sources of food onshore or go hungry.
A team of specialists examined the polar bear and found that her coat was too clean to have weathered such an extended journey. They thought it possible she had been captured as a cub and raised by nearby poachers. Fearing a recent crackdown on poaching, they released her to stay out of trouble. The specialists have transferred her to a zoo, where she can be cared for and treated for the illnesses contracted by eating garbage.
In the case of the National Geographic story, some scientists accused the organization of being loose with facts. As they pointed out, there was no way of knowing that climate change was the sole cause of the animal’s starvation. The polar bear may have been merely ill or old. In response, National Geographic published an explanation, written by Christina Mittermeier, one of the video creators, titled “Starving-Polar-Bear Photographer Recalls What Went Wrong.” Included in the story was the line: “Perhaps we made a mistake in not telling the full story—that we were looking for a picture that foretold the future and that we didn’t know what had happened to this particular polar bear.” This is another example of activists with a preconceived storyline, never mind seeking the truth.
Since polar bears were placed under the protection of the Endangered Species Act in 2008 over concerns that its Arctic hunting grounds were being reduced by a warming climate, the polar bear population has been stable. In 1984, the polar bear population was estimated at 25,000. By 2008, when polar bears were designated a protected species, The New York Times noted the number remained unchanged: “There are more than 25,000 bears in the Arctic, 15,500 of which roam within Canada’s territory.”
“The State of the Polar Bear Report 2019,” authored by zoologist Dr. Susan Crockford for The Global Warming Policy Foundation, updated the polar bear count, which is complicated by the incomplete data from surveys of regions promised to be conducted by 2019 were not. The introduction begins with the following:
“The US Geological Survey estimated the global population of polar bears at 24,500 in 2005. In 2015, the IUCN Polar Bear Specialist Group estimated the population at 26,000 (range 22,000–31,000) but additional surveys published in 2015–2017 brought the total to near 28,500. How-ever, data published in 2018 brought that number to almost 29,500, with a relatively wide margin of error, and arguably as high as 39,000. This is the highest global estimate since the bears were protected by international treaty in 1973. While potential measurement error, lack of recent surveys, conflicting methodologies, and unpublished data mean it can only be said that the global population has likely been stable since 2005 (but may have increased slightly to moderately), it is far from the precipitous decline polar bear experts expected given summer sea ice levels as low as they have been in recent years.”
One of the great problems about polar bears is that population surveys are covering huge areas. As a result, not every area is surveyed consistently or frequently. This forces the governments in the Arctic to estimate the population. The good news is that the Russian government has indicated it will survey polar bears in its Arctic region in 2021 and 2022.
Exhibit 5. History Of Polar Bear Population Counts
Source: Foundation for Economic Education
A study published early this year in Ecological Applications and hyped by CNN, concluded that polar bears are getting thinner and having fewer cubs, all attributed to melting sea ice. According to the study, between 2009 and 2015, polar bears spent an average of 30 more days on land than they had in the 1991-1997 period. That is attributed to sea ice melting faster and earlier in the season than 25 years earlier.
A team of scientist led by Kristin L. Laidre tracked the movements of adult female polar bears in Baffin Bay, a body of water off the west coast of Greenland, over two periods of time in the 1990s and 2010s. The report acknowledged that the last count of polar bears in Baffin Bay was conducted between 2012 and 2013. It estimated the population at over 2,800 then, according to the IUCN Polar Bear Specialist Group. Since there hadn’t been an earlier count, it is difficult to know whether the estimated polar bear population increased or decreased. However, all earlier counts showed an increase or stability in the polar bear population.
A 2017 map by World Wide Fund for Nature (WWF), updated in October 2019, shows the 19 subpopulations of polar bears. The 2019 update stated that the population of polar bears in the Chukchi Sea region had been stable between 2008 and 2016. This was hailed as good news, although WWF also warned that the ice situation there was troubling so this population needed to be watched closely. The Baffin Bay count was for a region with insufficient data to draw any conclusion about the population trend.
Exhibit 6. Graphic Depiction Of Polar Bear Counts
Source: WWF
The WWF assessment report suggested that the number of polar bear subpopulations experiencing decreases had increased from one to four. They are noted in red on the map, and are in Canada. Then again, Canada holds 60%-80% of all the polar bears in the Arctic. The report said that the Southern Hudson Bay population dropped by 17% and the Western Hudson Bay population declined by 18% between 2011 and 2016. Given how populations are counted (estimated), we are not sure how accurate the percentage changes are, or if they are significant.
A recent article by polar bear expert Dr. Crockford addressed the health of polar bears amid melting sea ice. She wrote the following dealing with the chart in Exhibit 7 (next page).
“Assuming low summer sea ice like we’ve had for more than the minimum 8 out of the last 10 years, total eradication of Western Hudson Bay polar bears – as well as extirpation of bears in nine other subpopulations, comprising all ‘divergent’ and ‘seasonal’ sea ice ecoregions, as shown below – is what USGS polar bear researcher Steven Amstrup predicted when he and his colleagues filed their reports in 2007 to support listing polar bears as ‘threatened’ under the US Endangered Species Act (Amstrup et al. 2007; Durner et al. 2009). Eradication of those ten subpopulations, the experts said, would cause the global population to decline by 67%.”
Exhibit 7. 2007 Prediction Of Polar Bear Demise
Source: US Geophysical Service
According to Dr. Crockford, “In 2007, USGS expert Steven Amstrup predicted that all of the bears in the green and purple regions [Exhibit 7] would be wiped out if sea ice declined to low extents by 2050. However, the ice declined faster than expected – we’ve had that dreaded sea ice future since 2007, and polar bears thrived. None of those 10 subpopulations has disappeared.”
In 2017 and 2019 papers, Dr. Crockford showed the reality of melting sea ice happening well before 2050. Her graph showed the 41-year trend in sea ice extent, as well as the steepest 13-year trend and the flattest 13-year trend. Despite the dire outcome for sea ice extent, the logical conclusion would be polar bear populations would be decimated.
Exhibit 8. Melting Sea Ice Has Already Occurred
Source: Dr. Susan Crockford
According to Dr. Crockford, Western Hudson Bay has seen a decline in summer sea ice of 0.86 days per year, one of the smallest declines in sea ice of all polar bear subpopulation regions, which translates to four weeks since 1979. Polar bears in this region now spend up to 5 months onshore in the summer, up from about four months previously. However, it has been acknowledged that this change happened in a single ‘step-change’ in 1995 or 1998, depending on the data used. In other words, there has not been a steady, gradual decline in summer sea ice over time as CO2 has increased. Ice breakup dates from 1995 to 2015 were about two weeks earlier than during the 1980s, while freeze-ups were about a week later, with lots of variability. For the past few years, freeze-ups have been like the 1980s, and this year, breakup is even looking like it did in the 1980s.
Western Hudson Bay polar bear numbers declined 22% between 1987 and 2004, but has been stable since 2001 at about 1,030 bears, even as some polar bear experts continue insisting that they are suffering due to a lack of ice. Data to support claims that Western Hudson Bay polar bears are in poor health (i.e., skinnier) compared to the 1980s, or reproducing poorly have not been published according to Dr. Crockford. On July 15, one of the first bears off the ice in Western Hudson Bay was a fat female and her equally fat cub, as captured on the explore.org live-cam at Wapusk National Park south of Churchill. One of the official moderators commented: “The PBs we’ve seen so far are coming off the ice nice and fat. Seems it’s been a good hunting season for them.”
Just last week, another polar bear study was released via a paper in the journal Nature Climate Change. The conclusion of the study was that polar bears could become nearly extinct by the end of the century as a result of shrinking sea ice if global warming continues unabated. The New York Times article about the study contained the following:
“’There is very little change that polar bears would persist anywhere in the world, except perhaps in the very high Arctic in one small subpopulation’ if green-house-gas emissions continue at so-called business-as-usual levels, said Peter K, Molnar, a research at the University of /Toronto Scarborough and lead author to the study.”
There are several key points about the study and its authors worthy of note. First, the “business-as-usual” greenhouse-gas emissions scenario is the Intergovernmental Panel on Climate Change (IPCC) RCP8.5 climate scenario, which is the most extreme case and one that has been discredited as being totally implausible. Second, the study uses polar bear data collected up to 2009, and only from Western Hudson Bay, which has been acknowledged to be an outlier, to predict the response of polar bears worldwide. The ice-free period for Western Hudson Bay has not continued to decline
since 1998 but rather has remained stable (with yearly variation) at about 3 weeks longer than it was in the 1980s, as reported in a 2017 study. More recent data shows further improvement in the ice-free season for Western Hudson Bay bears as discussed above. Not utilizing more recent data raises further questions about the Molnar model. Third, Dr. Molnar is a known polar bear catastrophist, and one of his fellow authors was USGS expert Steven Amstrup, who wrote the 2007 paper (discussed above) predicting the demise of the polar bear population that proved wrong.
The battle over polar bears and melting ice due to climate change will continue. The completion of surveys underway, and hopefully the Russian surveys, will shed more light on the population of polar bears. Barring a significant decimation of one or more subpopulations of polar bears, it is difficult to see anything but a continuation of a stable count. That would appear to fly in the face of forecasts of the extinction of polar bears due to climate change. That reality, however, is likely not to dissuade the continued use of polar bear photos to popularize the climate change case.
Will Biden’s Energy Plan And EV Hype Prove A Fantasy? (Top)
Likely Democratic Presidential nominee Joe Biden has recently unveiled the energy plank of his campaign platform. The $2 trillion investment is a much more aggressive plan than the one Mr. Biden promoted during the Democratic primary season. At that time, after being pushed by his opponents to disclose his vision for energy, his plan involved only spending $1.7 trillion. Moreover, that $1.7 trillion would be spent over 10 years, rather than spending $2 trillion in four years, as he is promoting now!
The central message of both of Mr. Biden’s energy plans is driving the United States to achieve net-zero emissions by 2050. The new plan establishes a clean energy target for the power sector by 2035. The financing for the spending will come from reversing the Trump administration’s corporate tax cut by raising the tax rate to 28% from 21%, and taxing high-income earners more. We doubt those sources will come anywhere close to funding the energy plan’s spending, especially after Mr. Biden’s spokespeople said more details about funding the spending will be forthcoming after other economic plans are unveiled. Sounds suspiciously like more taxes coming.
With the new target calling for eliminating all carbon emissions from power plants by 2035, the plan is presented as an investment program driven by the need to immediately address climate change. The plan is also designed to create “good, union jobs that expand the middle class.” This commitment includes promoting union organizing efforts, with the Democrats hoping to revive union membership and its election power.
The key elements of the Biden energy plan were listed on his web site as:
- Build a Modern Infrastructure
- Position the U.S. Auto Industry to Win the 21st Century with technology invented in America
- Achieve a Carbon Pollution-Free Power Sector by 2035
- Make Dramatic Investments in Energy Efficiency in Buildings, including Completing 4 Million Retrofits and Building 1.5 Million New Affordable Homes
- Pursue a Historic Investment in Clean Energy Innovation
- Advance Sustainable Agriculture and Conservation
- Secure Environmental Justice and Equitable Economy Opportunity
Most of these goals are aligned with the Democratic Green New Deal, a plan for a carbon-free economy unveiled in January 2019. Mr. Biden’s new energy plan brings him much closer to the far-left segment of his party than where he was when campaigning during the primaries. Spending $500 billion a year for the next four years, reminds us of how rushing to back questionable clean energy investments during the Obama administration led to spectacular failures. The highest profile failure was solar panel company Solyndra, which raised $1 billion from investors and received a $525 million loan guarantee from the federal government only to fail a short time later.
What we found interesting in response to Mr. Biden’s energy plan was the number of op-eds and news articles hyping electric vehicles. One op-ed appeared in The Providence Journal, written by a columnist who once was formerly a member of the paper’s editorial board. Her past op-eds focused on social issues. This op-ed demonstrated the shallowness of her research into a business issue. For her, the issue is that the Trump administration is frustrating the move to clean energy vehicles – namely electric vehicles (EV). She touted the success of Tesla and how much it has helped California. She was relying on a report from a couple of years ago contracted by and paid for by the company. The report was designed to promote how important Tesla was to the local counties where its operations are located, as it lobbied for further tax concessions.
While the op-ed quoted the headline of an article discussing the Tesla report, which was: “Tesla says it helped create more than 50,000 jobs in California in 2017,” the facts are slightly different. The report noted that Tesla employed 20,000 workers in California,
10,000 of which were working at the Freemont auto manufacturing plant, the rest must have been associated with sales, administration and its solar panel subsidiary. The report stated that Tesla’s indirect employment effect was 31,000 jobs. This suggests that Tesla was “supporting” 51,000 jobs, not that it “created” 51,000 jobs. Maybe this is a debate over semantics, but the use of the phrase was to highlight the company’s importance when it was looking for government handouts. Would the company go away if it didn’t get that support? History shows it would consider such an action.
Looking at the company’s annual reports filed with the Securities and Exchange Commission shows that at year end 2016, Tesla had a total of 30,025 employees. That total was divided into 17,782 employed by Tesla and 12,243 working for Solar City, the solar panel company Tesla merged with that year. At year-end 2017, Tesla’s total employment was 37,543, but that year included numerous new administrative, manufacturing and warehousing facilities, plus expansion of various other facilities. Interestingly, employment peaked at 48,817 at year-end 2018, and declined by 801 employees in 2019. Remember these are worldwide totals.
We find it interesting that Tesla is looking at downsizing its California presence by building a new manufacturing plant outside of Austin, Texas. Elon Musk, Tesla’s CEO, also announced he is selling his California homes and looking to relocate elsewhere. Texas Governor Greg Abbott announced Friday on CNBC that Mr. Musk has already swapped his California drivers’ license for a Texas one. Guess that confirms the ending of his love affair with California.
While the op-ed writer focused on how forward-thinking California has been, versus the backward actions of the Trump administration, California Tesla sales are struggling. According to data compiled by carsalesbase.com, Tesla’s California sales in 2019 increased by only 0.33%, or 623 vehicles.
Exhibit 9. Tesla California Sales Barely Grew In 2019
Source: carsalesbase.com
The California EV market has become even tougher in 2020, partly due to Covid-19 and the lockdown, but also the loss of half the federal tax subsidy, as the company has exceeded the threshold for the full subsidy. Now that the company’s subsidy is shrinking further in accordance with the required phase-out, we expect further sales challenges. Recent data show that registrations in California fell by 16% in April to 6,260 new vehicles, compared to a year ago, according to Dominion’s Cross-Sell report. Registrations fell 70% to 1,447 in May. The report pointed out that industrywide, registrations in California fell by 52% in each month compared to comparable months in 2019.
While nationwide data wasn’t available at the time of The Wall Street Journal’s mid-June article, the Cross-Sell report across the 24 states it tracks showed Tesla registrations declining 33% to 14,151 for April and May compared to a year ago. The broader car industry registrations fell by 43%. Dominion says that the markets it tracks, including New York, Florida and Texas, make up 65% of the entire U.S. automobile market.
The European market is also proving challenging for Tesla. The Netherlands, Tesla’s third-largest market by revenue in 2019 after the U.S. and China, saw sales decline 57% in the first two months of the second quarter compared to a year ago. Audi’s new EV outsold Tesla in The Netherlands. The company’s fourth-largest sales market, Norway, collapsed by 94%. This market is particularly interesting for Tesla’s future, as it represents the most electrified vehicle fleet in the world. In 2019, 56% of Norway’s new cars were electric – either battery electric or plug-in hybrid. Through June of this year, that rate pushed closer to 60%. The battery electric vehicle share rose from 45% to 48% between January and June. Part of the increase is due to overall car sales declining more than 24%, while EV sales fell by only 19%. Tesla’s challenge is that other models entering the market are outselling it. Norwegians are looking forward to the introduction of VW’s first EV model. In Norway, where EVs are targeted to reach 100% of new vehicle sales by 2025 with substantial tax savings and subsidies, the more competitive landscape may not be good news for Tesla. That is certainly the hopes of auto manufacturers who are investing aggressively in EVs.
What is the role of the auto industry in the Biden clean energy plan? The plan calls for it to create one million new jobs in the “American auto industry, domestic auto supply chains, and auto infrastructure, from parts to materials to electric vehicle charging stations, positioning American auto workers and manufacturers to win the 21st century; and invest in U.S. auto workers to ensure their jobs are good jobs with a choice to join a union.” One of the problems with creating all these jobs is that EVs are less labor intensive to build.
Does anyone remember the GM strike last fall? The six-week strike, the longest in years for GM and the United Auto Workers, resulted in significant losses (over $2 billion) for the company, with only modest wage gains for the workers, including a lump sum payment to cover most of the lost wages while workers were on strike, better benefits, which had been reduced as part of the bankruptcy restructuring during the 2009 Financial Crisis, and a plan for temporary workers to transition to full-time employment. At the heart of the strike was the union’s demand to move GM vehicle manufacturing from Mexico to the U.S. in an effort to boost employment here. The union also had hoped to convince GM to reopen the Lordstown, Ohio assembly plant. That was not included in the agreement, although GM will start a battery plant near the shuttered assembly plant, but it will only employ a few hundred workers, not the 1,400 who lost their job when Lordstown closed. More significant is that GM says it wants the battery plant to be competitive, globally, meaning it will need to cut the wages of the workers.
The most important win for GM was its control over manufacturing location and employment flexibility. That is critical if EVs are to become a profitable business. Expensive batteries remain a competitive issue in the automobile market, but it is largely offset by subsidies. As the GM tax subsidy declines, lowering the battery cost will be critical for achieving profitability. But for workers, EVs are not a panacea. They are significantly easier to build, reducing the number of workers needed, something that seems to be ignored by everyone touting EVs as a manufacturing jobs driver.
According to Mark Wakefield, head of the automotive practice at consultant AlixPartners, hybrid cars, which combine electric drive hardware with a conventional, internal combustion engine, require 9.2 manhours to build compared with 6.2 hours for a typical gas-powered vehicle. A battery EV needs only 3.7 manhours, or 40% less time to assemble than a gas-powered car. What does this mean for future auto manufacturer employment?
Exhibit 10. Automakers Could Lose 40% Of Their Workers
Source: US Bureau of Labor Statistics
If we look at the latest employment data from the U.S. Bureau of Labor Statistics, employment in the motor vehicles and parts manufacturing sector in June has fallen by 124,300 jobs, or 12.4%, compared to employment in June 2019. However, last June’s employment reflected an industry that was building vehicles at an annual rate of nearly 18 million units. Last year’s vehicle manufacturing total was consistent with the annual rate for the past few years, suggesting a rate of 18 million units is the normal rate. That normal rate is reflective of the lengthening of car life, and the overall demand for vehicles, both new and used. What we don’t understand is how this normal annual new vehicle demand might change going forward following Covid-19. Will we have as many people commuting to work? Will there be mass exits from urban areas, necessitating vehicles for normal lifestyles? Will the Uberization of car traffic reduce the need for owning vehicles? How might autonomous vehicles impact the annual volume of new cars? Those are only some of the key questions that will impact the future size of the new vehicle market.
If all vehicle manufacturing were to be converted to EVs, the 40% labor differential suggests there might be jobs for only about 600,000 workers, not the one million working last year. We doubt the full labor time-savings for building EVs would translate directly into a headcount reduction, but there is little reason to see a significant increase in workers if we switched to building all EVs. If one thinks about it, auto manufacturers would be looking to minimize the number of workers needed for building EVs as a cost-savings offset to expensive batteries.
This isn’t the only employment consideration. EVs require little to no maintenance, given their fewer parts. They do not need regular oil changes or engine tune-ups. They don’t need transmission servicing, although that is a minimal servicing requirement during the life of gas-powered vehicles. Brakes will need to be serviced less frequently, as EVs use regenerative braking in which energy is recaptured and returned to a vehicle’s battery, reducing the wear on brake pads and other brake parts. According to AlixPartners, a typical dealer will lose about $1,300 in maintenance and repairs for the typical EV over a five-year ownership cycle compared to what a gas model car would need. EVs will slowly erode the profits of car dealers, who today make most of their money from their service departments and not from selling new cars. How many dealer jobs are at risk of being lost as EVs gain complete control over the automobile market?
While EV battery packs are complex, manufacturing them is largely an automated process, further reducing manpower needs. In addition, most automakers produce their own internal combustion engines, while they farm out batteries and battery packs to global suppliers, primarily based overseas. Employees that build conventional powertrains will also need to convert operations to supplying battery EV components, or risk going out of business. All of these workers are at risk of eventually losing their jobs.
As for fueling vehicles, almost all gasoline stations are self-serve today, other than in New Jersey and Oregon, although the latter experimented with allowing self-service during Covid-19. EV charging locations are self-service, so unless gasoline stations can survive financially on convenience store sales alone, they will close, reducing employment.
While there are environmental positives from EVs, it is difficult to see how they become a driver for more automobile manufacturing employment, especially of the magnitude Mr. Biden and his supporters are claiming is possible. There may be some employment for builders of EV charging units, but we suspect their assembly can be readily automated. Fantasies are always easier to sell than reality. If the reality means not only fewer jobs but higher costs, you will never hear that aspect of the EV fantasy.
Is The Drag From LNG About To Switch To Help Gas Market? (Top)
The year started well for the LNG business, as shipments were strong and gas output continued growing due to more associated gas from crude oil wells, even though the oil well count was falling. The market forces continued to depress gas prices, ensuring that the spread between wellhead prices – the cost for LNG buyers – and export prices remained profitable. Then came Covid-19 and the global economic shutdowns that sapped demand for energy, and in particular LNG. The demand for LNG was further hurt by the consecutive warm winters in Europe that swelled gas storage, reducing the need for imported supplies.
The changed global LNG market became evident in May when customers began cancelling future cargoes. The pace of cancellations escalated as we moved into the summer months. According to various sources, there were two cargoes cancelled in April, but the number ramped up sharply in June and July when 44 and 45 cargoes, respectively, were cancelled. Forty cargoes were cancelled in August, but the market looks to be improving in September with estimates of only between 15 and 26 cargoes being cancelled. Buyers are required to notify LNG producers by the 20th of the month that is two months ahead of the shipping date.
The challenge for the global gas market has been weakening demand in Asia and Europe that saw prices fall to levels close to Henry Hub prices, which destroyed the economics of shipping gas. Although a substantial volume of LNG capacity in the U.S. is tied to long-term contracts, consumers were often faced with losses on shipments and potentially no place to put the gas once it arrived. This reality was reflected in prices. In 2018, prospects for a booming LNG business in the United States were strong, as the spread between Henry Hub and Asian gas prices were $7-$9 per thousand cubic feet (Mcf).
Prices in Asia began sliding following the winter of 2018-2019, to levels that provided only a few dollars per Mcf as we headed toward the winter of 2019-2020. After the spread widened by a few dollars, prices again began to slide. The price decline appears to have bottomed recently at levels comparable to Henry Hub. Even when Henry Hub spot natural gas prices are below global spot prices, the additional costs associated with U.S. LNG exports reduces their economic viability. Gas export terminals charge anywhere from $2 to $3 per million British thermal units (MMBtu) to liquefy the gas. Tanker transportation costs to Asia from the Gulf Coast terminals range from $0.60 per MMBtu to Japan to $0.81 to China. The reported rule of thumb is that Henry Hub spot prices should be roughly $2.00/MMBtu lower than other global spot gas prices for shippers to earn a profit.
Exhibit 11. Convergence Of Global Gas Prices Hurt LNG
Source: RBN Energy
A reason why European gas prices are depressed is the state of the gas market on the continent. Recently opened pipelines are bringing more supply to market, and that capacity may grow further. However, the greatest problem is the storage situation.
Exhibit 12. High Europe Gas Storage Limits LNG Sales
Source: GIE, PPHB
To appreciate how the gas storage situation in Europe has become a barrier to U.S. LNG shipments, we point readers to the chart in Exhibit 12 (prior page). It shows the volume of gas in storage in Europe (measured in energy terms), according to data from the Gas Infrastructure Europe web site, for 2011 through to July 20, 2020. We have marked the peak storage, which occurred during the winter of 2019. The more telling message is the dotted line showing how the gas storage volume, as of July 20, 2020, compares to the peak volumes recorded in 2018 and 2017, and that it is not far away from the 2016 peak. It is likely gas storage volumes heading into the coming winter season will reach a level comparable to that experienced in 2019. Given this situation, one needs to ask: Why does Europe need more gas, especially LNG shipments?
What is encouraging LNG sellers is futures spreads showing that they are widening as we head into the fall. A chart from Timera Energy shows various gas futures prices. The chart tracks the futures prices for Henry Hub (HH) gas prices, as well those for Europe (TTF), the United Kingdom (NBP) and Asia (JKM). It shows that all gas prices are currently in the $1.50-$1.80 per MMBtu range. However, by late winter 2020-2021, gas futures prices in Europe, the U.K. and Asia range between $4-$5/MMBtu, a substantial improvement. For U.S. LNG shippers, if Henry Hub gas prices remain below $3/MMBtu, there is a positive spread, which should cover a large portion of the associated costs of shipping LNG.
Exhibit 13. International Gas Futures Offer US Hope
Source: Timera Energy
The impact of the convergence of global natural gas prices has been the cancellation of approximately 150 LNG cargoes and a resulting decline in the feedgas flow to export terminals. In April, that flow was about 8.0 billion cubic feet per day (Bcf/d), which fell to 6.4 in May and only 3.9 Bcf/d in June. Reports are that feedgas flows have remained relatively stable in July. It is possible LNG exports may fall further in July, especially if the anecdotal information about cargo cancellations proved accurate. That reported data is that for the week ending July 15, only four LNG carriers with 15 billion cubic feet (Bcf) of gas departed the Gulf Coast, the lowest weekly volume shipped since the end of 2016. If the number of LNG cargo cancellations in September is as low as suggested, then feedgas flows to export terminals should be recovering. That would be welcome news for the industry.
Exhibit 14. LNG Sales Slump Hurt U.S. Gas Market
Source: Timera Energy
A big question for U.S. LNG shippers is what happens if significantly higher natural gas prices materialize in 2021. There are numerous forecasts suggesting that rather than natural gas prices remaining below $3/MMBtu next year, the decline in associated natural gas output due to falling oil well drilling will send futures prices closer to $4/MMBtu, or possibly higher. Without higher prices in Asia and Europe than currently projected by the futures strip, U.S. LNG profitability will be squeezed. This possible scenario has likely contributed to the delays in final investment decisions for new LNG liquefaction capacity.
A forecast from GlobalData.com (next page), shows that Asia will be the most vibrant LNG market in the foreseeable future, when measured by planned increases in regional gasification capacity. The forecast, based on planned and announced capacity expansions, shows the global LNG market increasing 30% between 2020 and 2024. That growth will be led by Asia, up 42%, followed by the Middle East growing 35%.
The Asian market growth, consisting of 39 planned and 14 announced terminals, will be driven by China. China’s Tangshan II is the largest new LNG regasification terminal with a capacity of 584 Bcf by 2024, followed by Son My II with a capacity of 450 Bcf.
Although the Middle East will grow faster than Europe, it will still rank third in 2024. The Middle East in 2024 will represent 9% of the
Exhibit 15. Asia Continues To Dominate LNG Market
Source: GlobalData.com, PPHB
global LNG market compared to 10% for Europe. The Middle East has two planned projects, with a combined capacity of 1,447 Bcf. Kuwait’s Al-Zour terminal will be the largest of the two with a capacity of 1,155 Bcf by 2024. Bahrain Floating is expected to have a total capacity of 292 Bcf by the end of forecast period.
The European market will have only a 21% increase in regasification capacity. That expansion will be led by Germany’s Wilhelmshaven Floating and Brunsbuttel terminals. These will be two of the largest terminals in the region with capacities of 353 Bcf and 282 Bcf, respectively, by 2024. The region’s third largest terminal is Spain’s El Musel, with a total capacity of 247 Bcf. It is interesting that North America will show no regasification capacity expansion, showing just how much producers are convinced that the region will be self-sufficient in gas with surplus capacity available for export.
The next two years will be very interesting for the U.S. natural gas industry and LNG. If prices remain depressed, as they have been for the past year, the U.S. LNG business should prosper, as Asia, and possibly Europe, experience higher prices. On the other hand, should U.S. natural gas prices climb into the $3.00-$3.50/Bcf range, without even higher global prices, U.S. LNG shippers will find their profitability under pressure. One can build a case for each scenario. Knowing which scenario will occur is impossible to know now. From 2003 to 2009, U.S. gas prices were in the $6-$8/MMBtu range, a level that snuffed out interest in exporting gas. We needed it.
As gas supply began growing as a result of the fracking boom, suddenly prices fell to $4 and then $3/MMBtu. When the surge in associated natural gas from the shale oil drilling boom arrived, gas prices sank to $2/MMBtu. It was that supply surge that kicked off the LNG export boom, which has recently completed its first phase, and is soon expected to begin its second phase, assuming people are confident in sustained gas production well domestic gas consumption and increased exports to our North American neighbors. The Energy Information Administration (EIA) forecasts that U.S. natural gas production in 2020 will average 89.2/Bcf/d, compared to 92.2/Bcf/d output in 2019. The 3% decline between 2019 and 2020 will double to -6%, as the EIA projects production falling to 84.2/Bcf/d in 2021. They anticipate the production decline will start to reverse during the second half of 2021, in response to higher gas prices. The EIA forecasts gas prices will average $1.93 per thousand cubic feet (Mcf) this year, but jump to $3.10 in 2021. What will that do to U.S. LNG competitiveness?
The Age of Natural Gas is well underway. The recent move by Chevron to purchase Noble Energy is a statement that its executives believe natural gas will become even more important in the future than it is now. At year-end 2018, 62% of Noble’s reserves were natural gas, located primarily in Israel and Equatorial Guinea. As a cleaner burning fossil fuel, and one that can replace dirtier fossil fuels, natural gas demand should continue growing. The deal will add to Chevron’s natural gas portfolio.
We suggest people watch the U.S. natural gas market closely. What happens to supply, given low oil prices that restricts associated natural gas, will drive gas prices substantially higher. That potentially could make U.S. LNG less competitive globally. We wonder whether the U.S. LNG market is reaching its realistic capacity, at least for the foreseeable future, until the global gas surplus is absorbed by increased demand. Until that happens, it is difficult to see LNG being the main driver of the U.S. natural gas market.
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Parks Paton Hoepfl & Brown is an independent investment banking firm providing financial advisory services, including merger and acquisition and capital raising assistance, exclusively to clients in the energy service industry.
