Shorting Oil, Hedging Tesla

[jhm]

Oil Needs To Be Below $20 To Compete With Electric Cars | OilPrice.com

This BNP Paribas analysis is making the rounds. Judging by the comments at oilprice.com, I'd say it's getting under oilhead skin. The Dr Mamdouh Salameh is so incensed, he writes this nonsense, "If the conclusion is wrong then we can easily assume that the assumptions are faulty." He then proceed to invoke his article of faith that "Oil will continue to reign supreme all through particularly [sic] in global transport system."

What the professor of economics refuses to countenance is that investors will seek the best return on investment and consumers will gravitate to lower cost higher value forms of transport. So the assumption he wishes to dismiss out of hand is that EVs and renewables can deliver more mobility at on fifth the level of investment. This is irresistible for both investors and consumers. Therefore, capital will increasingly flow into the EV space. It matters little whether "oil will reign supreme." What matters is that capital will flow into EVs. Moreover, for every dollar of capital flowing into EV, multiple dollars, perhaps $5 or $6, will not need to flow into oil. Either capital flow to oil will dry up by this amount, or the industry will suffer chronic oversupply problems.

The logic is quite straightforward here. The professor had better examine the assumptions very closely. To "easily assume the assumptions are faulty" is a refusal to deal with reality.

 

[jhm]

This is the thing about buying up distressed assets before a bottom is found (how do you know you've found the bottom anyway) - there's always a LOT lower that things can, in theory, go. Whenever I forget that, I remind myself of Mr. Peterson, of the company with the 700,000 for 1 reverse split, that moved the stock price from 1 penny to .. 1 penny.

The idea that somebody might be consciously buying up assets for cheap, for the purpose of propping up confidence - that hadn't occurred to me. Good luck with that . (Not you @jhm of course)

Good point. Not caring where the bottom is actually strengthens the idea that this is motivated by more than bargin basement opportunism. Let's see if we can out a finer point on the alternatives. How about this?

Wildcats and independent producers can be a real problem for oil majors (and OPEC). They can push prices down to competitive market prices. Buying up some of the assets of independents can give oil major control over these asset. They can slow the pace of exploitation. The price of oil is so cheap and exploration is so costly, that there is little investment in exploration. So the oil majors are able to fill replenish their reserves with these assets too. This gives them more market power and limits how much competition independents can muster.

Simply put this could merely be part of a consolidation in the industry in anticipation of a contraction in production growth. Dominant players don't need to wait for prices to hit rock bottom. Indeed they have much more to lose by waiting for oil prices to get that low.

Is this a better theory?

 

[adiggs]

Good point. Not caring where the bottom is actually strengthens the idea that this is motivated by more than bargin basement opportunism. Let's see if we can out a finer point on the alternatives. How about this?

Wildcats and independent producers can be a real problem for oil majors (and OPEC). They can push prices down to competitive market prices. Buying up some of the assets of independents can give oil major control over these asset. They can slow the pace of exploitation. The price of oil is so cheap and exploration is so costly, that there is little investment in exploration. So the oil majors are able to fill replenish their reserves with these assets too. This gives them more market power and limits how much competition independents can muster.

Simply put this could merely be part of a consolidation in the industry in anticipation of a contraction in production growth. Dominant players don't need to wait for prices to hit rock bottom. Indeed they have much more to lose by waiting for oil prices to get that low.

Is this a better theory?

It IS a better theory (in my completely uneducated opinion ), especially if I go with the motivation on the part of the oil majors that they can buy reserves directly for less than they can explore for them, with the side benefit that they simultaneously reduce the competition that drives the marginal price down.

I have a hard time believing that the oil majors are primarily doing the second half of that, and getting reserves as a side benefit (I just don't think they've got that much foresight). They get to the same end result either way.

 

[adiggs]

The Threat That Will Send Oil Down To $10 | OilPrice.com

More ink being spilled over the BNP Paribas report / analysis. I like the metric they've coined having to do with the relationship between capital invested, and mobility produced (more precisely - energy usable for mobility).

They're backing their words with actions - the bank has been a big energy investor (or so they say). They've also stopped investing in shale or tar sands, previously stopped investing in coal. And not just the extraction - exploration, distribution, burning (in the case of coal) for electricity.


I've been hunting for the actual report, and I'm not only not finding it - I'm not even finding a paywalled link to the report. As best I can tell right now, it's not a report - it's an announcement by BNP Paribas accompanied by a press / interview tour by them. If anybody's been able to find the actual report, I'm interested in reading the details of their methodology, findings, etc..

EDIT: Found it.
https://docfinder.bnpparibas-am.com/api/files/1094E5B9-2FAA-47A3-805D-EF65EAD09A7F

There was a link to it in the article @jhm linked above.

 

[adiggs]

Still reading the detailed report - one immediate and quick outcome from reading it is that the assumptions are pretty strongly favorable to oil throughout. The one that stands out is

break-even costs for new onshore-wind, offshore-wind, and solar-PV projects of $60/MWh, $70/MWh, and $65/MWh respectively

My reading that is more specifically on this topic, is that builders of these kinds of projects today would feel like they'd died and gone to heaven if they could get those prices for utility scale projects.

This report also assumes that these prices carry forward for the next 25 years (something they call out as in the report as .. highly unlikely).

 

[Doggydogworld]

Still reading the detailed report - one immediate and quick outcome from reading it is that the assumptions are pretty strongly favorable to oil throughout. The one that stands out is

My reading that is more specifically on this topic, is that builders of these kinds of projects today would feel like they'd died and gone to heaven if they could get those prices for utility scale projects.

This report also assumes that these prices carry forward for the next 25 years (something they call out as in the report as .. highly unlikely).

They used $1.80/W upfront cost for offshore wind. I haven't seen anything close to that. I've seen offshore US at $6-10. It's less in Europe, but not 75% less.

Onshore wind, though, is a ridiculously cheap way to fuel cars. And EVs solve the intermittency issue. I've been preaching this for 15 years. Solar is now close to the same price in sunny places like the SW US.

 

[renim]

Oil has not been compeitive with wind, water or coal for the last 50 years.

The issue is not the cost through the grid. The issue is at the car, can it be cheap enough and good enough to be fit for purpose?

 

[TheTalkingMule]

Amazing there would be any interest in 30yr bonds from a US oil services company, let alone rabid oversubscription.

Investors flock to Occidental jumbo-bond sale

I guess investors are a long way from giving up on US fracking. This should be an easy long short, no?

 

[generalenthu]

Amazing there would be any interest in 30yr bonds from a US oil services company, let alone rabid oversubscription.

Investors flock to Occidental jumbo-bond sale

I guess investors are a long way from giving up on US fracking. This should be an easy long short, no?

Lemmings led by Buffett

 

[TheTalkingMule]

They're saying this deal adds $40B in debt to Oxy. Insane. Hopefully POTUS gives in on China to gain a "victory" and juice the markets before the election. Then we can short this nonsense in 2021.

 

[jhm]

Still reading the detailed report - one immediate and quick outcome from reading it is that the assumptions are pretty strongly favorable to oil throughout. The one that stands out is

My reading that is more specifically on this topic, is that builders of these kinds of projects today would feel like they'd died and gone to heaven if they could get those prices for utility scale projects.

This report also assumes that these prices carry forward for the next 25 years (something they call out as in the report as .. highly unlikely).

Yeah, the assumptions are so generous to fossil interests I did bother to look at them closely. What's funny is that if porfossil person wanted to argue about the assumptions, their opponents could easily point out just ridiculous they are and show that oil is at an even bigger disadvantage. I think this is why the oil economics professor wanted to hand wave the assumptions to shame rather than to dispute any one of them specifically.

 

[jhm]

This is what I’m talkin’bout.


Why Hydrogen Could Improve the Value of Renewable Energy

https://madoc.bib.uni-mannheim.de/48755/1/Nature_Energy.pdf


Very much in line with my own thinking. However, the authors limit themselves to using excess wind power generated within the hybrid (wind x electrolyzer) plant. The alternative I like is to have the electrolyzer participate in the wholesale power market as a buyer of whatever power is produced most cheaply at the time. This centralized electrolyzer then would soak up low prices for this whole grid, not just a single producer. I believe this would be more capital efficient.


But the advantage of the independent hybrid approach it wrestles with getting the right ratio of wind to electrolyzer capacity. A consequence here is that the authors are able to anticipate that wind LCOE will drive the average power price going forward. That is, the optimal balance with electrolyzer capacity will soak up any surplus wind while the average power price if lower than wind LCOE will attract more wind capacity to the grid. So in the equilibrium the average price that wind fetches converges to the LCOE of new wind capacity. Basically, electrolyzers assure that value erosion will halt the growth in wind production until the hydrogen market is dried up. Thus, wind will keep pressing natural gas (and coal and nuclear too) out of the power generation market until electrolyzers also push natural gas out of the hydrogen market.


The authors also model price changes in the cost declines of wind and electrolyzers and conclude that these wind-electrolyzer hybrids “become cost competitive with large scale fossil hydrogen supply with the next decade.” So the gives wind a floor on value erosion by 2030. Wind will be able to more aggressively take market share from fossil generators in the 2030s. I suspect Europe will experience this earlier than the US because one is a net importer of natural gas while the other is a net exporter. If the marginal price of NG in Europe is set at LNG import prices, this is more expensive for both power generation and hydrogen generation than it would be in the US.


So I am warming up to this hybrid approach. It is a little more conservative than looking at where low grid prices can be exploited, but it gives us better intuition about where market prices could be going. It would be nice to see this taken further to optimize a hybrid plant that integrates wind, solar, batteries and electrolyzers. The optimization is much more complex and more locally specific, but it would reveal how close electrolyzers are to competing with large-scale fossil hydrogen generation. Also battery and solar prices are falling faster than wind (and the electrolyzer may be able to share the inverter capacity with the battery and solar), so I rather suspect that we reach some critical thresholds much sooner that the authors envision with the wind-electrolyzer hybrid. So maybe we’re looking at 2025 rather than 2030.

 

[mspohr]

The simple math is that their oil is very expensive, and it's hard to compete with free.

Smart money should be investing in renewables, not fossil fuels

Those commies and treehuggers at the Financial Times and BNP Paribas Asset Management are at it again, suggesting that investing in oil and gas is a bad idea, and that renewables are where the smart money is going. Mark Lewis, BMP Paribas Head of Sustainability Research, writes in a post titled Renewable energy is good money, not just good for the earth:

The reason why wind and solar energy pose such a threat to the energy system established over the past 100 years is simple: they have a short-run marginal cost of zero. In other words, when the wind blows and the sun shines, the energy itself arrives for free.

The costs of wind and solar are all upfront, and they have been going down every year. That's not the case with oil and gas, which needs continuous investment. Much of the action in oil and gas these days is in fracking, and it turns out that many of the drillers are in trouble. One major driller is slowing down because it is going way over budget. According to Bloomberg, "It’s the latest sign that companies in the vanguard of the U.S. shale boom face fundamental issues with their business model. With shale-well output falling off by as much as 70% in the first year, drillers need to pedal faster and faster just to maintain output."

 

[mblakele]

Shale sale
Investors flee the Permian
Earnings of energy producers reliant on shale take a tumble

Excerpts:

[...]

The shale industry, whose shares prices used to track that of oil, down by 18% since April, now looks untethered (see chart). “Investors have decided it’s too volatile,” says Bob Brackett of Bernstein, a research firm. So they are diverting capital elsewhere. Occidental’s massively oversubscribed $13bn bond offering on August 6th shows fixed-income investors’ thirst for yield rather than an appetite for shale.

[...]​

​

 

[dc_h]

The Threat That Will Send Oil Down To $10 | OilPrice.com

More ink being spilled over the BNP Paribas report / analysis. I like the metric they've coined having to do with the relationship between capital invested, and mobility produced (more precisely - energy usable for mobility).

They're backing their words with actions - the bank has been a big energy investor (or so they say). They've also stopped investing in shale or tar sands, previously stopped investing in coal. And not just the extraction - exploration, distribution, burning (in the case of coal) for electricity.


I've been hunting for the actual report, and I'm not only not finding it - I'm not even finding a paywalled link to the report. As best I can tell right now, it's not a report - it's an announcement by BNP Paribas accompanied by a press / interview tour by them. If anybody's been able to find the actual report, I'm interested in reading the details of their methodology, findings, etc..

EDIT: Found it.
https://docfinder.bnpparibas-am.com/api/files/1094E5B9-2FAA-47A3-805D-EF65EAD09A7F

There was a link to it in the article @jhm linked above.

Meanwhile, back at the Manhattan Institute and WSJ op ed counterfactual rear guard battle to slow down the relentless advance of solar, wind and batteries. This and the Trump admin slowing approval of offshore wind, to ostensibly protect fishing habitats. Remember when the oil industry told us how fish loved oil platforms?

Manhattan Institute on Twitter

Apologies if already posted.

 

[jhm]

Meanwhile, back at the Manhattan Institute and WSJ op ed counterfactual rear guard battle to slow down the relentless advance of solar, wind and batteries. This and the Trump admin slowing approval of offshore wind, to ostensibly protect fishing habitats. Remember when the oil industry told us how fish loved oil platforms?

Manhattan Institute on Twitter

Apologies if already posted.

When was the last time capitalists objected to pulling stuff out of the ground and selling it? If renewables and EVs were actually driving a massive expansion of mining opportunities, greedy capitalists would be all up in that.

On the other hand, if renewables and EVs are substantially lower capital way to deliver usable energy, then there may well be a net decline in demand for all extractive resources. Keep in mind that the oil and gas industries are huge consumers of steel and other metals. Think about drilling rigs, drilling pipes, pipelines, train cars, refinery equipment, and so on. What happens to miners when the oil and gas industry stops expanding? Sure renewables and EVs need materials from miners, but is that anywhere close to replacing demand lost from the massive O&G industry? If these are truly more capital efficient, they will not.

So when greedy capitalists smear renewables and EVs for needing mineral resources too, beneath the projection of hypocrisy is a fear that these resources won't be needed nearly enough.

 

[dc_h]

When was the last time capitalists objected to pulling stuff out of the ground and selling it? If renewables and EVs were actually driving a massive expansion of mining opportunities, greedy capitalists would be all up in that.

On the other hand, if renewables and EVs are substantially lower capital way to deliver usable energy, then there may well be a net decline in demand for all extractive resources. Keep in mind that the oil and gas industries are huge consumers of steel and other metals. Think about drilling rigs, drilling pipes, pipelines, train cars, refinery equipment, and so on. What happens to miners when the oil and gas industry stops expanding? Sure renewables and EVs need materials from miners, but is that anywhere close to replacing demand lost from the massive O&G industry? If these are truly more capital efficient, they will not.

So when greedy capitalists smear renewables and EVs for needing mineral resources too, beneath the projection of hypocrisy is a fear that these resources won't be needed nearly enough.

Long term there’s no limit to the demand for power. If renewables drive down energy costs by 50% the next decade, we’ll see new demand. Normal demand curve would probably result in double the electricity demand. By the time the laggards realize the opportunity it will likely be too late.

 

[jhm]

Will Shale Rise From The Dead? | OilPrice.com
Ouch!

 

[jhm]

Long term there’s no limit to the demand for power. If renewables drive down energy costs by 50% the next decade, we’ll see new demand. Normal demand curve would probably result in double the electricity demand. By the time the laggards realize the opportunity it will likely be too late.

That's true. I envision that power generation will double to balance the grid, generate gases and charge vehicles. But this may be another 20 to 30 year off.

 

[jhm]

BTW. Did I ever share the calculation about oil&gas making the tradeoff between gasoline to power a car versus natural gas to generate a charge for EVs. I figure that 1 barrel (42 gallons) of gasoline can via EVs be replaced with 3 mmBtu of natural gas. At today's wholesale market prices of $1.664/gal gasoline and $2.109/mmBtu, this is a revenue difference of $69.89 versus $6.33, a 91% reduction in revenue.

So O&G folks can talk all they want about how natural gas they'll sell to keep EVs changed up, but retaining 9% of the value chain in fueling motor vehicles is bitter consolation.