The energy story these days is about disruption: coronavirus crippling oil demand, renewables displacing fossil fuels, the potential of a Biden presidency to upend the sector in the US.
On that theme, today’s Energy Source looks at two upstarts ploughing their own furrow.
The first is the United Arab Emirates — a surprise Opec quota-buster. Expect a dressing-down at today’s ministerial committee meeting.
Our second item looks at NextEra Energy, a rising US energy titan, and what the US election might mean for its green business.
Data Drill looks at bearish Chinese data, while Endnote examines the huge challenges still facing North Dakota’s oil sector.
UAE quota-busting tests Opec patience
The UAE has been producing far more oil than it pledged to under the Opec deal struck earlier this year, suggesting cracks have emerged between the Gulf Arab allies at the cartel’s core.
Saudi Arabia, Opec’s linchpin, is unhappy and the matter will be raised at an Opec ministerial teleconference to discuss oil policy later today. The UAE will pledge formally to compensate for its overproduction with deeper cuts in the coming months.
It will have a job on its hands, if the International Energy Agency’s numbers on UAE output are accurate. Production in July was 420,000 barrels a day higher than its 2.45m b/d quota, the agency said. In August, the UAE’s quota increased to 2.59m b/d — and output soared again, exceeding the target by 520,000 b/d.
The overproduction threatens the credibility of the deal, said analysts at UK bank Standard Chartered:
“It is difficult to see how the group could keep Nigeria, Iraq and others on board with meeting their targets if UAE compliance was uncontestably just 10 per cent.”
Some tanker-tracking companies say the UAE’s production was even higher than the IEA reported. The Opec secretariat calculates that the UAE overproduced by 184,000 b/d from May through to August, although the country — which rarely publishes oil data — reported output of just 100,000 b/d above quota.
The UAE disagrees with the IEA’s numbers and tanker-tracking data. The official line is that measures to curb the spread of coronavirus kept Emiratis at home during the summer months, spurring far greater than anticipated electricity demand that prompted higher levels of oil production for the associated gas that is burnt for power generation.
But the move by Saudi Arabia’s close Opec ally comes just as the kingdom’s energy minister has focused on quota-busting by Iraq and Nigeria, demanding they reduce production beneath their targets to compensate.
A cartel source said the total extra oil cuts now required from non-compliant companies amounted to almost 2.4m b/d.
The dispute with the UAE also comes at a difficult moment for the market. Oil prices have firmed around $40 a barrel lately thanks to storms in the US Gulf, but the wider picture looks bearish. Chinese demand is not as strong as thought; US consumption has plateaued; and coronavirus cases are rising again in many western countries. The IEA, Opec, and US Energy Information Administration this week all sharply downgraded their demand projections for 2020.
Bill Farren-Price, an Opec analyst at Enverus, said the UAE’s behaviour was surprising — and ominous.
“The UAE’s supply boost is out of character. That makes it all the more damaging for the credibility of the Opec+ cuts. The wheels have not yet come off but there is a distinct wobble now.”
(Derek Brower and Anjli Raval)
Renewables giant NextEra soars in spite of politics
As President Donald Trump was dismissing climate scientists and his US election challenger Joe Biden called him a “climate arsonist”, the leading American company in solar and wind power laid out the case for renewable energy that did not hinge on November’s election.
NextEra Energy has been a star of the stock market, with a $137bn market capitalisation that approaches Chevron’s and ExxonMobil’s. The company has two businesses: electric utilities in its home state of Florida and a wholesale business that develops and operates power plants to supply third-party customers.
The company describes the wholesale business as the world’s largest wind and solar generator, with 16GW of wind and 3GW of solar capacity in operation and another 12GW of projects on order. On Monday, NextEra raised earnings guidance and announced a four-for-one stock split, propelling its share price to a new all-time high.
Rebecca Kujawa, chief financial officer, said that economics, not policy, was driving renewables demand. Her comments came a day after Google pledged to run on carbon-free energy within a decade as wildfires raged on the US west coast. She said:
“If you think about the last four years, we’ve had a president in the White House who is not a huge fan of renewables . . . And yet we did really well in the last four years. I think we’re well positioned to do well in the next four years if there’s another, second Trump term.”
Some analysts believe that the renewable sector could do even better under Mr Biden. The Democratic contender has promised to remove carbon dioxide from electricity by 2035. It would be an enormous lift, requiring massive investment in clean energy. (In 2019, the US electric power sector emitted 1.6bn tonnes of CO2, almost entirely from burning coal and natural gas, according to the Energy Information Administration.) Coal and gas this year will account for 60 per cent of US generation.
“Their agenda is quite robust,” in terms of getting to carbon neutrality, Ms Kujawa said of the Biden proposals. “That represents a substantial amount of renewables development.” Democrats might extend tax credits for solar and wind, she said.
But she said that the partisan composition of the White House and Congress was less important than in years past.
“What’s different now versus five and certainly 10 years ago is that renewables are driven by economics, more than anything else at this point.”
As China’s lockdown lifted, the country’s refineries snapped back into action — sucking in even more crude than the previous year. “The stars aligned,” for China in terms of oil imports, said Florian Thaler, head of OilX, an oil-market data provider, as both state-owned companies and independent refineries of Shandong — the so-called teapots — ran hard. It gave the global oil market hope that a V-shaped demand recovery was under way.
But OilX’s data suggest the teapots’ appetite has waned. They react more quickly to market shifts than China’s unwieldy state-owned companies — and they slashed their crude intake this month.
Germany offered to pump €1bn into new liquid natural gas terminals to receive US exports in exchange for Washington dropping its opposition to the Nord Stream 2 gas pipeline, reports Guy Chazan.
US shale producers far outspent the cash they generated from selling oil and gas in the second quarter, reports Derek Brower
Hydrogen truck manufacturer Nikola has been forced to defend itself against allegations of fraud. Ortenca Aliaj spoke to board member Jeff Ubben.
Plans proposed by Ursula von der Leyen, the European Commission president, to slash EU emissions by at least 55 per cent by 2030 are feasible, writes the FT’s editorial board.
North Dakota’s oil production pushed back above 1m barrels a day again in July — a relief for the local industry after the price crash knocked it below that threshold for just the second time since 2014.
“We’re back in the saddle,” said Lynn Helms, the director of the state’s department of mineral resources. But things are still looking rough for the US’s second-biggest oil-producing state:
Rig count: The continued decline in operating rigs means current output will not hold. The state would need as many as 35 drilling rigs in operation and 20 frac crews to keep output around 1.25m b/d. It has 10 and five, respectively. Mr Helms expects production to decline again if these numbers do not climb quickly.
Oil price: Local oil prices have dropped down to the low $30s a barrel. For wells to return to production, prices need to be $35-$40/barrel; to bring back frac crews, $45-$50; and to justify drilling, $55-$60.
Biden: There are “serious concerns” over what might happen to the local oil industry should Mr Biden become the next US president, Mr Helms said. In fact, the prospect of a Biden win has sparked some activity on federal land, he said, adding:
“Much of that activity has been driven by concern that federal permits won’t get renewed — that if you have a federal permit in hand to drill or frac a well you’d better do it now. Even though the economics would tell you it’s not the best time.”
Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.
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