Fossil fuels in deep trouble…..

19 08 2016

Recently, a handful of Germany’s top scientists argued that “controlled implosion of fossil industries and explosive renewables development” might be able to deliver on the targets in the Paris agreement on climate change.

Even if we accept this notion at face value, and ignoring that many other factors might also be in play, the recent course of events does not offer much hope that “controlled” is the correct word to apply to the predicaments currently battering the energy sector. And while the renewable energy sector might be continuing to make progress, it is clearly not “exploding” as fast as some might wish……. Could it be, by any chance, that the ongoing collapse of the fossil fuel industries will happen at a much faster pace than the wishful explosive transition to ‘solutions’?

Let’s start with coal. The future for this bankruptcy-riddled industry dramatically worsened in July 2016. It increasingly looks as though the Chinese government’s recent retreat from coal is biting hard, and that Chinese coal peak coal production occurred in 2014. Prof Nick Stern, among others, including Chinese collaborators, argued that we are witnessing “a turning point in the climate change battle”. The latest Chinese announcement is a ban on the development of coal projects, until 2018. The staggering air pollution driving this change is proving difficult to beat… and the same is true of India.  NASA data showed toxic air choking huge areas of the Indian subcontinent, most of which the obvious result of fossil fuel combustion. In the face of all this, even Deutsche Bank has stopped financing the coal mining sector.

Investment continues to wane from fossil fuels as a result of divestment campaigns. Swedish pension fund AP4 made the biggest divestment move of any institution to date. The $35billion scheme will decarbonise its $14.7billion global equity portfolio by 2020, switching to passive investment tracking low carbon benchmarks.

Furthermore, the oil and gas industry’s hopes for a return to high oil prices have yet to occur, and as a result its already teetering state is deteriorating. A study of 365 oil and gas megaprojects by Ernst and Young shows 64% with cost overruns, and 73% behind schedule. This dismal record is combining with low oil prices to create a mortal squeeze on profitability.

US drillers have hit an all time high with junk bond defaults: $28.8 billion so far this year, according to Fitch Ratings. With $500 billion+ outstanding,  more bankruptcies can be expected. Some of these companies are even trying to buy time by paying debt interest with more debt. Desperate times require desperate actions I guess…….

Global oil breakeven costs have fallen by $19 to a current average of $51 since the oil price began falling in 2014. Trouble is, the oil price is still hovering around $40 and most of the industry’s targets are totally uneconomic.

“Oil giants find there’s nowhere to hide from doomsday market”, read a Bloomberg headline. “The industry cannot survive on current oil prices,” veteran analyst Fadel Gheit declared. The bankruptcy count so far this year stands at more than 80 companies.

So will the oil price rise, and offer some relief…? Not according to analysts. Morgan Stanley expects oil to fall to $35. (The price is around $40 as I write). The main concern is excessive production of petrol/gasoline by refineries (= less crude imported). As always, some of course disagree. Core Laboratories point to the net worldwide annual crude oil production decline rate of ~3.3%, and expect US production to continue dropping, which they hope will bring tighter supply, and rising prices.

Even if the oil price does indeed rise again, problems are not going away…… The industry faces a huge shortage of workers. 350,000 have apparently been laid off since the oil price began falling in 2014. 60% of the fracking workforce has been laid off, 70% of fracking equipment has been idled. It will be nigh impossible to turn the taps back on, as even some of the industry’s own bosses now point out. And if the price rises back above $90, the global economy will tank……

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7 responses

19 08 2016
19 08 2016
mikestasse

Brent’s always higher than west Texas crude…..

19 08 2016
ejhr2015

Send a copy to the government!

19 08 2016
Mark

I have worked in the retail, transport and pumping sides of the oil industry, never the refinery side. The last time was 16 years ago.
At that time all 4 sectors claimed to not be making any money and were in fact cutting costs and reducing investment back then.
The cost of petrol was consistently going up, but the companies were always crying poor.

Santos in the ABC online today announced a $1.4 billion loss even as costs dropped to $8.80 per barrel. Exports are up at reduced prices, yet the cost of bottled LPG, autogas and town supply to Australians are mostly stagnant or have increased.
http://www.abc.net.au/news/2016-08-19/santos-tumbles-to-1.4-billion-loss-in-first-half/7766164

This is consistent with the price shifting I saw years ago where Bass straight oil & gas were exported under cost, ZR18 ($500) tyres were exported as SR13($30) tyres by Goodyear/Dunlop and Ford sold the Capri in the US cheaper than they were made (overpriced labour & materials?) for here, yet still made a profit on each car even after including shipping etc.

Someone is making a profit, just not those involved locally, because if no one was making money then it would all collapse very quickly.

20 08 2016
Idiocracy

“Someone is making a profit, just not those involved locally, because if no one was making money then it would all collapse very quickly.”

It’s a fair/valid point you make about price shifting Mark, but I’m not sure your final statement is entirely correct.

This little thing called debt has been holding it all (and I mean IT ALL) together for quite some time now (to my continued amazement 8-P). Plus when it comes to something as vital as energy, if there ever was a sudden financial collapse of vital links (Corporations) in that chain, I reckon govt’s around the world would be writing check’s in an instant! They couldn’t afford not to… populations nowadays are too large to control without fossil fuels!

It would basically be like a GFC for the energy sector! 🙂

21 08 2016
Johnny

Fossil fuels are not in deep trouble because they have, are, and will always have the most powerful economic force in the world handing them money for the foreseeable future. Consumers who want their product.

21 08 2016
mikestasse

Johnny, the world is already in a debt crisis……… the party’s over.

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