Tuesday, December 13, 2016

Big Oil In Trouble, Enters "No Man’s Land" of Collapsing Balance Sheets


A great many fracking companies are going out of business with carbon fuel prices this low, because revenue doesn't cover the cost of production. Big producers like Exxon are being affected as well, via their balance sheets (source).

by Gaius Publius

Just a reminder that there are many ways to stop the burning of carbon, in addition to negotiation and smooth, well-planned transitions. Those two are preferred, of course, but we don't seem to have those options any more, and yet we do need to stop burning carbon.

Other options include disrupting consumption and disrupting supply. Of these two, I prefer disrupting supply, since as I've noted before, if they extract it, someone will burn it. Both of these disruptions can be accomplished through legislation and/or executive action.

But one of the unique ways of disrupting supply is to disrupt (degrade, destroy) the financial health of the companies doing the extraction, for example, Exxon. Divestment campaigns — making the holding of Exxon stock morally toxic for institutional buyers like universities — are a form of disrupting supply by disrupting corporate financing. Unfortunately, though divestment campaigns do work — witness the divestment campaign against South African apartheid — they can be slow and spotty, not broad enough to effect an entire industry.

Enter the "magic of the market." If the price of oil is so cheap that it's not profitable to dig it, because it's so plentiful relative to demand, companies will collapse, go bankrupt. We've already seen that with small and mid-size U.S. fracking companies, many of which are so highly leveraged that they can't make a profit on sales and they can't finance their debt.

That method of disruption works for smaller companies, but what about the giants? There are actually two ways to financially "attack" a company like, say, Exxon. One is to attack the profit-and-loss statement by making sales unprofitable, as described above.

The other ... is to attack the balance sheet, the net worth of the company. In either case — bad balance sheet, bad earnings statement — no investor will will touch the stock until the stock price is revalued to reflect the "new realities."

What's the best way to attack the balance sheet of any company in the oil and gas industry? You make their in-the-ground assets worthless, and then make sure that until those "stranded assets" are properly revalued in the annual statement, the stock is, well, toxic.

That would disrupt any company that depends on "proven reserves" or unextracted assets for the bulk of its valuation. (That will also disrupt, as in panic, the companies' CEO classes, since generous stock grants are one of the three ways that CEO pocket the loot from companies they run.)

A pipe dream? Not at all. It's already happening. From EcoWatch and Oil Change International in October (emphasis added):
Big Oil Is in Big Trouble

Something significant happened on Friday [Oct 28] that warrants more than just a few column inches in a newspaper.

With the most divisive presidential election in U.S. history just days away from concluding, it is easy to understand why more is not being made of the news, but just to tell you something seismic happened on Friday last week.

The world's largest listed oil company, Exxon, announced that it was going to have to cut its reported proved reserves by just under a fifth—by 19 percent.

It would be the biggest reserve revision in the history of the oil industry. It is yet another sign that Big Oil is in big trouble.
The explanation why that's bad:
For years people have been warning that Big Oil's business model was fundamentally flawed and was not only putting the climate at risk, but millions of dollars of shareholders' money. ...
From the article, quoting the Chicago Tribune:
"Big oil companies have been solid investments for years, with a deceptively simple business model: Find at least as much new oil as you sell, book those barrels as future sales and reinvest in the hunt for new reserves. That made sense as long as oil prices went up, but it locked companies into a vicious cycle of replenishment, leading them to search for ever more extreme, and expensive, sources of crude oil in the Arctic and beneath the oceans. ...

"Cheap oil has stopped that business cold and the threat of climate action raises fundamental questions about whether it'll ever be viable again."
Back to the article itself:
In May this year, the London-based Chatham House warned in a report, entitled The Death of the Old Business Model, that the world's largest oil companies "Faced with the choice of managing a gentle decline by downsizing or risking a rapid collapse by trying to carry on business as usual."

Importantly, most of Exxon's de-booked reserves, about 3.6bn barrels, will be at the company's dirty Kearl oil sands project in Canada. The reduction would account for over three quarters of the reserves. Not only are tar sands very energy intensive, but they are expensive to produce.

In a low oil price, carbon-constrained world, they are stranded assets.
Notice the word "collapse" above. Collapses, like many stock market crashes, for example, often happen quickly. This one is happening slowly, for now. But still, no oil company will book more reserves than it now has on its balance sheet. Investors already believe that not all booked reserves will be sold. "Stranded assets," unsellable reserves, are a subtraction from balance sheets, and more and more assets are just waiting to be stranded. At what price point will Exxon stock cease to be an attractive investment? I think that's about to be tested.

Death by Market and What It Means for Us

We may be witnessing the "death by market" of the oil and gas industry. If so, cheer. But also, get energy lean as fast as you can, since that market will have to be replaced by something else. Renewables is the obvious choice, but that something else will just as obviously have to be in place in order to be available.

Will the Trump administration make renewable energy abundantly available before it's needed, or only after the carbon market falls terminally ill? I'm betting on the latter. The good news, however, is still the good news. We do have to get off of carbon at the fastest possible rate to keep the planet human-habitable ... and this may do it.


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At 10:57 AM, Anonymous Hone said...

Some questions come to mind. How will Trump's appointees from Exxon-Mobil be able to affect this and keep them flush? How will deals with Russia's oil czars affect this?

Should I be getting solar panels real soon?

At 4:11 PM, Anonymous Anonymous said...

If there really were true "markets", this might work.

But remember the banks in 2008?

They were *ALL* insolvent, by any and all accounting rules and standards in place.
But they didn't go away.
They were bailed out and accounting rules were changed and the Fed guaranteed their stupid bets at par.

If big oil is going tits up, you don't think the gummint wouldn't step in and bail them the fuck out? oil is a strategic resource for, you know, wars and shit. If oil ain't there, cars won't be sold... so there's another sector to go poof. oil and cars employ quite a few americans that would become job/home/hopeless (not that anyone in DC would care about that) and the economy would implode.

And that might be worldwide. How many meskins making our Fords would end up jobless and climbing drumpf's wall seeking lettuce-picking jobs? Ditto for Canadians, Japanese, Koreans and all their Chinese suppliers.

Nope. If this admin would EVER raise taxes, it might be to bail out big oil.
And then they'd declare martial law because they'd never win another election after that. probably. Voters ARE unfathomably stupid.

At 4:53 PM, Blogger Dad said...

Every rich Democrat in Washington should pledge to buy and drive EV's Exclusively. In a show of solidarity and as example in our determination to conquer Global Warming, because we know it is real we should all buy an EV. It is also to the fastest way to get the oil lobbies (Trump and Bush Administrations) out of our Government. I have solar on my home and I am going to rush my purchase of an ev after this election. EV's are superior technology and the more you scale them up, the more volume they sale, the cheaper they will get at an exponential rate. What would it take to get all the DNC politicians to do this? This will earn so much trust and respect and the momentum would be phenomenal.

And, they are so much easier and cheaper to maintain:
Chevy Bolt EV needs basically zero maintenance for first 150K miles: https://www.cnet.com/roadshow/news/chevy-bolt-maintenance-schedule/

At 4:57 PM, Blogger Dad said...

To answer the first question, Trump's appointees will drop all regulations, destroy our environment and give away public lands to lower the cost of extraction locally. They are so very desperate right now mostly because they know that renewables, solar, and EV's along with autonomous vehicles will decrease demand and speed the transition towards Stranded Assets.

At 5:12 PM, Blogger Dad said...

Remember, The stone age didn't end because we ran out of stones. Renewables are truly a superior technology whose day has come. Solar and EV's have already won the race. These clowns are desperate but all they are doing is trying to prolong the end game and profit as much and as fast they can while they still can. We need to shut them down faster as result of their latest shenanigans.
Consider these facts:

"Clean energy and electric vehicles are top job creators. They are huge economy boosters. The communities and societies that most support cleantech will most benefit economically and financially."

"Solar energy is often cheaper than coal, natural gas, and nuclear energy. (This is especially true if you take into account very real but under-acknowledged health costs — trillions of dollars in costs — but it is often true even if you don’t count the tremendous cost of cancer, heart disease, and premature death and suffering.)

Wind energy is typically cheaper than coal, natural gas, and nuclear energy. (This is especially true if you take into account very real but under-acknowledged health costs — trillions of dollars in costs — but it is often true even if you don’t count the tremendous cost of cancer, heart disease, and premature death and suffering.)

Electric vehicles are ~30 times better than gasoline or diesel vehicles. They are better in so many ways that there’s basically no good reason they won’t see this kind of exponential growth curve:

At 10:51 PM, Anonymous Anonymous said...

The link below has a graphic representation of the relative proportion each primary energy source contributes to the entire amount of energy used and the the proportion of each type consumed by these sectors: residential, commercial, industry & transportation.

Click on the "National Energy System - US" tab (above, left) and then "start the flow" at right. tinyurl.com/kgkzgqg

Virtually all oil is consumed by industry (25%) and transportation (75%). Industry is the sector that will produce our electric cars and our renewable infrastructure (IF it is ever made.) Even under the most optimistic scenario we still will have to wonder about the ultimate effect on climate disruption caused by the expenditure of fossil energy to make and install the renewable infrastructure.

All physical systems require energy to operate and the economy is "merely" another physical system. It is simple to project the demise of "big oil" but actual depletion of physical petroleum, or voluntary reduction in consumption, or both, will require an adjustment of the national psychology regarding the aims, and measures of "health," of the economy.

For a good analysis of the situation see "The End of Growth" by Richard Heinberg.

Remember that you will expend energy to get and return it to the library or to have it shipped, preferably via an online used book seller, that is, not from Amazon (dot enabler of self-appointed news censor dot Post)

John Puma

At 5:13 AM, Blogger archiebird said...

I expect tillerson to drive gas/oil prices up to save his bidness. Like cheney/bush drove prices up to $4 a gallon? this would kill economy...

At 6:24 AM, Blogger Dad said...

John Puma, I don't see your link?

" …if the United States chooses to back away from a redoubled commitment to innovation, it will be American entrepreneurs, manufacturers, and workers who will be put at competitive disadvantage in developing breakthrough technologies and creating jobs. "
~US Energy Secretary Ernest Moniz

"Coincidentally or not, several of the key partners in the new fund have already established an oppositional attitude toward PEOTUS Trump and members of his Administration, with a bonus China connection as well."

At 11:45 PM, Anonymous Anonymous said...

To Dad at 6:24 AM:

This is the link, it's a "tiny url," ie abbreviated for easy cut-and-past into your browser's address line: tinyurl.com/kgkzgqg


At 4:44 PM, Anonymous Anonymous said...

Here in Alberta (home of the Tar Sands), people still live in a business fantasy world. A world where increasing the supply of a toxic, poor-quality, costly product, in a market flooded with much better quality crude, will lead to increased demand and a higher price.

And so everyone is still quacking about pipelines to tidewater.
But the fracked oil that should have been part of Keystone XL has now found another way to market, making it even less likely to be built.
Trans-Mountain, by Kinder-Morgan, is part of a political squabble between two provinces. They don't realize that no one wants crude (no one ever did), they want clean, high-quality fuel. Better crude produces more saleable fuel, and less waste (petcoke - the dirty carbon left over from refining Tar Sands crude). So these provinces don't profit from jobs produced by a vertically integrated petrochemical industry that exports fuel.
Energy East is quietly dying of derision and contempt, as people realize it will only compete with East Coast crude of much better quality.
The Majors like Exxon, Shell, are selling out and moving back to the Permian Basin that supplied the Allies in WWII for horizontal drilling and fracking.

BYE BYE TAR SANDS - don't get me started on the rapidly decreasing price of solar and wind power (winds in southern Alberta reach sustained speeds of 40 mph for days at a time, and peak at 70 mph).


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