Shorting Oil, Hedging Tesla

[jhm]

Why Big Oil Is Unprepared For The Coming Energy War | OilPrice.com

See my comments to this article. Perhaps we can discus the oil reserve value of a Gigafactory. I estimate that 150 GWh/yr productive capacity is worth at least 10 B barrels of oil and gas reserves at an "exploration" cost of less than $1.50/b. Meanwhile the industry spends about $10/b to replace reserves. There are some really big implications here.

 

[Dwdnjck]

Why Big Oil Is Unprepared For The Coming Energy War | OilPrice.com

See my comments to this article. Perhaps we can discus the oil reserve value of a Gigafactory. I estimate that 150 GWh/yr productive capacity is worth at least 10 B barrels of oil and gas reserves at an "exploration" cost of less than $1.50/b. Meanwhile the industry spends about $10/b to replace reserves. There are some really big implications here.[/QUOT

Great article and comments.

 

[TheTalkingMule]

Why Big Oil Is Unprepared For The Coming Energy War | OilPrice.com

When you see statements like:

"...over the course of the same five years the breakeven cost of an oil well in places like Texas has been cut in half and it’s “rig productivity” has increased by nearly ten-fold. And it’s not just about more horsepower and better drill bits. Big data, optimization, Internet-of-things and machine learning are rejuvenating a hitherto fossilized industry."​

...do you find that credible? I'm not in the energy world, but when I hear of magical 50% cost savings out of the blue I assume there's been considerable fudging. Are the new breakeven points we're seeing more likely just the product of clever financing?

When I think about how guys like Aubrey McClendon run drilling operations, they're simply trying to jump from new find to new find providing enough growth to keep the scam rolling. What happens when demand tanks and the entire thing unravels? Are we going to see that half of the costs were simply kicked down the road and have ALL come due?

If demand is set for a permanent downward trajectory starting around 2022-2026, should I be building an underground shelter?

 

[ggies07]

Why Big Oil Is Unprepared For The Coming Energy War | OilPrice.com

See my comments to this article. Perhaps we can discus the oil reserve value of a Gigafactory. I estimate that 150 GWh/yr productive capacity is worth at least 10 B barrels of oil and gas reserves at an "exploration" cost of less than $1.50/b. Meanwhile the industry spends about $10/b to replace reserves. There are some really big implications here.

Thanks for sharing the article and great comment. Poor Bud in the comments though........haha.......

 

[Oil4AsphaultOnly]

2016 BYD sales (mostly ev sales blogspot, but also some chinese sites and other google)
BYD Tang 31,405 vehicles 18.4kwh 577,852kwh
BYD Qin 21,868 vehilces 13kwh 284,284kwh
BYD e6 20,605 vehicles 82kwh 1,689,610kwh
BYD e5 15,639 vehicles 48kwh 750,672kwh
BYD Qin EV300 10,656 vehicles 48kwh 511,488kwh
BYD bus 14,903 vehicles 324kwh 4,828,572kwh
BYD Denza EV 2,000 vehilces 42-62kwh 110,000kwh
BYD F3DM ? 13kwh
total 2016 automotive li ion batteries for BYD produced vehicles 8,752,478 kWh (nb this excludes non BYD produced vehicles that use BYD batteries)

I don't have clarity to compare pansonic vs byd customers, but i do have clarity on BYD VS Tesla in terms of 2016 sales production for automotive li ion. and unless Tesla sold each and every car last year at about 115kWh each they have ceased leadership in automotive li ion capacity. Tesla only sold 76,230 EVs last year, even if they were all 100kWH, they would still obviously not be enough to match BYD.

Tesla like Nissan before it, like Mitsubishi before that, is no longer the leader in the plugin vehicle battery production stakes.
which is not bad,
Mitsubushi was far more successful without that crown than with it (iMiev vs Outlander PHEV)
Nissan is looking to be far more successful at gen 2 EV, than gen 1 LEAF
Tesla is looking to be far more successful with model 3 than with Tesla S/X

who comes after BYD, I dunno, I guess in approx. 3 years there will a further unpronounceable Chinese name to learn.

That's pretty compelling evidence for BYD. But Tesla sells batteries for storage as well, which doesn't count towards their automotive sales count. And Toyota relies on Panasonic for ALL of their hybrid batteries (including the prius prime).

Hmmm, upon closer inspection, some of your stats are iffy. What's the deal with the Denza being 42-62kwh?! And the e6 is currently listed as 62kwh (on their website) not 82!

I think I'll wait for BYD's 10-Q filing to see what they their cumulative battery production for 2016 really was.

 

[neroden]

Renewable Energy Is “Gaining Ground According To Nearly Every Measure,” Says IRENA

Geez, I was wrong about natural gas still having upto a quarter of the market for new power. According to this article already in 2015, wind and solar captured 90% of the new power market. No wonder there have been issues with investment growth slowing up in 2016. The new power market is saturated. It's hard to grow by 30% when you already have 90% of the market.

So what does this mean? As the cost of solar, wind and batteries decline they must enter new markets. So heat and transportation markets are next. This would imply a boost in the EV market.

Yes, but they have to pass their own "critical price thresholds". EVs have passed that threshold (as we've hammered to death) and it's now just a matter of increasing production capacity. Heat has NOT passed that threshold yet, though it's getting close. (It's past it in warm climates for buildings, but not in cold climates -- except where natgas is super expensive -- or for process heat).

Additionally for that saturated power market, the next step is to push fossil fuel generators into an early retirement. So at this point it becomes relevant to compare an solar PPA to the fuel cost in a gas or coal plant, ignoring capex.

That's what I've been doing.

That is, we are at a threshold where new solar capacity must be cheaper than burning fuel at an existing plant. This is a very scary threshold for power producers. They are at risk of needing to impair or write off assets. This is essential what we mean by the casual term "stranded asset."

It turns out this becomes a very location-dependent calculation. This is why I've been discussing coal power plants which are *far from* the mine (high transportation costs) vs. coal power plants which are *near to* the mine (low transportation costs). This "solar is cheaper than operating the coal plant" threshold has already been passed for the ones further from the mines!

So somehow this one snuck up on me. I did not realize we were so close to saturation in 2015!

Interesting, eh? I actually knew we were close -- which is why I've been looking at utility solar/wind vs. *variable operations & fuel costs* of power plants, and at utility batteries vs. distribution line maintenance charges, and at residential solar + battery vs. retail electric rates.

Though I didn't realize we were quite *that* close on wiping out new fossil generators.

 

[neroden]

When you see statements like:

"...over the course of the same five years the breakeven cost of an oil well in places like Texas has been cut in half and it’s “rig productivity” has increased by nearly ten-fold. And it’s not just about more horsepower and better drill bits. Big data, optimization, Internet-of-things and machine learning are rejuvenating a hitherto fossilized industry."​

...do you find that credible? I'm not in the energy world, but when I hear of magical 50% cost savings out of the blue I assume there's been considerable fudging. Are the new breakeven points we're seeing more likely just the product of clever financing?

There was a discussion on oilprice.com not long ago which said that the cuts in the cost of production of shale oil were due to oilfield services suppliers cutting their costs to breakeven or loss-making levels. This was only possible temporarily; the oilfield services companies did it to stay in business long enough for the oil price to rise again. Now that it's back up, the oilfield services suppliers are raising their prices again. There go the supposed cuts in cost of production, all gone.

If the price of oil stays low permanently, the oilfield services suppliers won't run at a loss next time, they'll shut down first. So those cuts in cost of production will not be repeated.

When I think about how guys like Aubrey McClendon run drilling operations, they're simply trying to jump from new find to new find providing enough growth to keep the scam rolling. What happens when demand tanks and the entire thing unravels? Are we going to see that half of the costs were simply kicked down the road and have ALL come due?

Lots of bankruptcies. Equity and debt investors in oil & gas lose their shirts. Smarter companies undergo a controlled downsizing and liquidation.

If demand is set for a permanent downward trajectory starting around 2022-2026, should I be building an underground shelter?

Absolutely not! You should be building a mountaintop shelter covered in solar panels, surrounded by wind turbines, and full of batteries.

 

[tander]

Why Big Oil Is Unprepared For The Coming Energy War | OilPrice.com

See my comments to this article. Perhaps we can discus the oil reserve value of a Gigafactory. I estimate that 150 GWh/yr productive capacity is worth at least 10 B barrels of oil and gas reserves at an "exploration" cost of less than $1.50/b. Meanwhile the industry spends about $10/b to replace reserves. There are some really big implications here.

That's an interesting way of making the comparison between batteries/oil. Are you saying the gigafactory would be 10B barrels a year total?

 

[neroden]

In 2016 Chinese car sales totaled just over 24M

China’s Car Sales Rose Fastest in Three Years in 2016

Sound projections are 50M in 2020?

Do "electric vehicles" include PHEVs that rarely get plugged but are purchased in order to get preferential license registration vs ICEv?

If you've GOT a PHEV, operating it on electricity is a lot cheaper than operating it on gas. So they get plugged in.

Even *more* so in China than in the US. China has higher gasoline prices than the US (equivalent to $2.76/gallon last I checked) AND lower electricity prices (averaging 8 cents/kwh last I checked)

 

[tander]

...
Absolutely not! You should be building a mountaintop shelter covered in solar panels, surrounded by wind turbines, and full of batteries.

We have a lot of "prepping" going on where I live for earthquakes. But I think the single biggest thing people should do aside from water/food/etc is make sure they are healthy enough to walk a lot, or maybe ride a bike because most of the roads are going to be toast, as in not even the best 4x4 or tesla is going to be able to use them, and that's assuming they don't run out of gas. It's gonna be hard to get to that mountain top cabin without some strong legs or a helicopter.

 

[dc_h]

NPDC Pipeline Set Ablaze Less Than 24 Hours After Vice Presidential Visit | OilPrice.com

Check out last two paragraphs.

Very sad for Nigeria. They have a few years to get value out of this resource and should be dedicating the revenue to education and infrastructure.

 

[dc_h]

There was a discussion on oilprice.com not long ago which said that the cuts in the cost of production of shale oil were due to oilfield services suppliers cutting their costs to breakeven or loss-making levels. This was only possible temporarily; the oilfield services companies did it to stay in business long enough for the oil price to rise again. Now that it's back up, the oilfield services suppliers are raising their prices again. There go the supposed cuts in cost of production, all gone.

If the price of oil stays low permanently, the oilfield services suppliers won't run at a loss next time, they'll shut down first. So those cuts in cost of production will not be repeated.


Lots of bankruptcies. Equity and debt investors in oil & gas lose their shirts. Smarter companies undergo a controlled downsizing and liquidation.

I think they really have cut costs, but they are limited in the long run on how much you can cut from your costs. Some cost cutting could be bankruptcy and buyouts for dimes on dollars, but it sounds like high tech has helped them drill much more effectively. They know where the needle is before the drill into the haystack, so if wells are successful 80-90% of the time vs 50% of the time, costs are about cut in half. This only makes Permaen more competitive versus Venezuela, but most global producers are not innovating so rapidly. I don't think this makes oil competitive versus solar, in the long run, but it keeps them in the race an extra 5 years. Remember that they can go bankrupt more than once, and if someone buys them out of bankruptcy, they can get assets at a huge discount, so they can drive costs down again, even without technical change. As you noted, that doesn't stop new production from stopping, but it can keep older wells and sites chugging along longer than you might expect.

On the other hand, Exxon exploration costs are still rising, and they continue to buy exploration groups to fill the gap in their replacement cycle. They lost 85 cents a share last year after dividends, but I don't think that counts dilution from acquisitions.
The lower extraction costs seem to be on the mid tier producers, big enough to research and pay for high tech options up front, small enough to adapt to the latest tech, but not so big and lumbering to take 5 years to adjust best practiced. I know someone with XOM and I hate to push her to sell it, she reads up and brokers say it is rock solid high dividend stock. I look and see bleeding, with no improved ROI in the future. In the short term, many things could push up oil prices and Exxon stock, but not many events could push oil past $70 a barrel for more than a year.

I think the IMF is starting to catch on to long term fossil fuel challenges and am looking forward to more research from them. I would like to see CIA start publishing this type of analysis as well. CIA tends to get congressional attention and it would be nice to see conservatives wake up to their being more jobs in solar power than coal mining, and the long term national security benefits of renewable energy.

 

[SebastianR]

When you see statements like:

"...over the course of the same five years the breakeven cost of an oil well in places like Texas has been cut in half and it’s “rig productivity” has increased by nearly ten-fold. And it’s not just about more horsepower and better drill bits. Big data, optimization, Internet-of-things and machine learning are rejuvenating a hitherto fossilized industry."​

...do you find that credible?

It is clearly not credible at all. What is missing is are the buzzwords "cloud", "[something] as a service" and of course something somethng "blockchain"...

/s

Interesting article though - and the author got a point: keeping an eye on the competition is usually a great idea.

 

[neroden]

I think they really have cut costs, but they are limited in the long run on how much you can cut from your costs.

Drilling giant, deep holes in the ground is inherently expensive. In the old days, you got a lot of oil out of the holes once you drilled them. Now you don't. That's basically not fixable -- the costs are amortized over shorter and shorter well lifespans, and it's practically impossible to cut costs enough to keep up with that.

Bankruptcy refinancing is of course going to happen, because the US has a really sick and corrupt corporate bankruptcy system (total third-world no-rule-of-law crap, stuff which should cause any investor to be warned about the added risks of investing in US companies rather than companies with responsible bankruptcy systems). It's going to happen mostly in the US. I suspect bankruptcy refinancing is *much* less feasible in most countries so they'll stop drilling first.

 

[jhm]

Do you know if Walmart has battery storage too?

Yes, they do. They use them to shave peak demand charges.

 

[jhm]

When you see statements like:

"...over the course of the same five years the breakeven cost of an oil well in places like Texas has been cut in half and it’s “rig productivity” has increased by nearly ten-fold. And it’s not just about more horsepower and better drill bits. Big data, optimization, Internet-of-things and machine learning are rejuvenating a hitherto fossilized industry."​

...do you find that credible? I'm not in the energy world, but when I hear of magical 50% cost savings out of the blue I assume there's been considerable fudging. Are the new breakeven points we're seeing more likely just the product of clever financing?

When I think about how guys like Aubrey McClendon run drilling operations, they're simply trying to jump from new find to new find providing enough growth to keep the scam rolling. What happens when demand tanks and the entire thing unravels? Are we going to see that half of the costs were simply kicked down the road and have ALL come due?

If demand is set for a permanent downward trajectory starting around 2022-2026, should I be building an underground shelter?

Yeah, I did not take that so seriously. The author seems to be trying to identify with an audience that might feel that their advances in drilling are misunderstood. He wants his audience to be willing to look at what their competitors are doing. So I applaud his effort to cut through the layers of denial. Even so, it does sound like an exaggeration. I do suspect that much of the decline in breakevens is due to squeezing oilfield service providers. Many in the business are just trying to survive so they're willing to work super cheap. So if rig count were substantially higher, breakeven prices would go right back up.

In any case I don't think it is really relevant. That may seem arrogant to the oil guys, but there is an economic argument here. The price of gasoline as a function of crude is about gas = .922 + .0261×crude. That intercept, $0.922/gal, represents the infrastructural cost of refining, distributing and retailing gasoline. The price of crude can drop ridiculously low, like $10/b, and gas remains uncompetitive with electricity once EVs are no more expensive than ICEVs. So even if fancy drilling cut certain costs by 50%, it still would not be enough to change the longterm outcome. The idea that the oil industry can just hunker down and cut costs to survive is missing the point of the threat. And even if the industry could somehow keep up a steady supply of oil at below $10/B, why would they want to. This is not a test of grit, it's investment chasing profit. Just breaking even for the next 20 years is a massive waste of talent and capital. So the industry thinks that if it can just survive and keep up volume, that is some sort of moral victory over EVs and renewable energy. But what they should really worry about is price pressure. Even if they can take oil prices down low enough to slow the growth of EVs, they still give up profit. However, if they accept the inevitability of EVs, the industry could maximize profit on what is left of demand. They could have decades of profitability if they were to pull back from overinvestment.

So in my comment, I wanted to highlight the inevitability the situation by focusing of managing the value of reserves. I did a little math, and in my working scenario, cumulative GF capacity replaces a year of oil production by 2022, and annual incremental capacity replaces production by 2025. So I don't think these will be consciousness raising markers. Moreover, clear thinking suggests that it is already time to stop wasting investment dollars on exploration. Even so, I think this analysis set up the inevitability of EV dominance. There is not an economic way to add to reserves. To attempt to do so only sacrifices profit and courts greater risks of stranded assets. The inevitability is a sort of trap. If the industry adds reserves they court an economic collapses. But if they stop adding to reserves, they will shrink away, but they will also optimize total profit as volume shines. Maximizing volume may destroy more value than leaving reserves forever untapped. Thus, we have unborn able reserves on purely economic grounds.

So once the industry sees that there is a limit on how much profit can be extracted from reserves, they will see that maximising volume only destroys value of reserves. But they are still largely playing a volume game. In a way they are victims of their own climate denial. The denial makes it hard to pull back and pursue terminal payoff.

 

[renim]

"Hmmm, upon closer inspection, some of your stats are iffy. What's the deal with the Denza being 42-62kwh?! And the e6 is currently listed as 62kwh (on their website) not 82!"

Go to BYD's Chinese website. ALL the e6 are the e6-价格配置-比亚迪汽车官方网站 比亚迪汽车 ─ 新能源汽车引领者 400 variant which is the 82kWh model. English website is, well outdated. Its fairly well documented that for 2016 these are 82kWh variants
The 2016 BYD e6 Will Get a Longer Driving Range of 400km | ChinaAutoWeb
2016 BYD E6 Will Get Bigger Battery & Longer Range
etc

similar story for Denza, but due to low volume, thats mostly irrelevant for BYD, Denza shares lots of parallels with Tesla's Mercedes B class conversion.
the BYD/Daimler Denza was upgraded to 62kWh Daimler strengthens dedication to emission-free mobility with new DENZA 400 EV for China | marsMediaSite, but only during the year, and its not a popular car anyway.

like Tesla Energy, BYD also does ESS, for instance Reference | Energy Storage | BYD
but this is not automotive, plug in systems, to date Tesla energy used Samsung cells anyway.

it portends lower oil prices, that despite Tesla's great success in 2016, Tesla ceded the leadership in Automotive li ion production to BYD.

Unlike Tesla which effectively has the luxury EV market to itself, BYD is less than 20% of the EV bus market. and has multiple serious competitors in the 50kWh class BEV market.[/QUOTE]

 

[jhm]

That's an interesting way of making the comparison between batteries/oil. Are you saying the gigafactory would be 10B barrels a year total?

Not per year, but over a 30 year time horizon.

Here's the analogy:

Gigafactory ~ Oilfield
Battery pack (GWh) ~ Oil well
EV miles ~ ICEV miles

So in our GF "oilfield" we can drill 150 GWh "wells" per year. So over 30 years that is about 4500 GWh of battery packs. This supplies a fleet of 45 million EVs. Each EV is able to deliver 200k to 250k miles over the life of the pack. So 9 to 11.25 trillion vehicle miles.

Notice it will take 40 to 50 years for these 10T miles to be realized (30 years of production and 10 to 20 years of consumption). So this puts this on a time scale comparable to the reserves on an oilfield where it takes 30 years to drill all the wells and 10 to 20 years to pump each well.

So to complete the analogy we need to convince ourselves that an oilfield with 10B in reserves would suffice for 9 to 11 trillion vehicle miles spread out over 40 to 50 years. I won't rehash our discussion of how many ICEV miles per barrel, but my analogy is good for 1000 +/- 10%. Of course technologies and efficiencies will change substantially over the next 40 years. But reserve estimates of oilfield are notoriously imprecise, so the accuracy bar is not set too high to begin with. Actually I think the Gigafactory could deliver twice as many vehicle miles.

 

[jhm]

$25 Trillion Investment Needed To Meet Future Oil Demand | OilPrice.com

I thought of a different angle on this. OPEC says $25T investment is needed to meet growing demand for oil over next 25 years. What does this tell us?

First, we know that growth is modest compared with replacement. That is the natural decline rate is about 6% while even 1% annual growth over next 25 years would be optimistic for the industry. So at least 85% of this investment is purely replacement of declining assets.

Second, in an average year about 35B are produce (allows for a little growth), and per OPEC prescription about $1T investment needed. So this is an investment of about $30/b. I suspect that this investment may not be inclusive of taxes, royalties, leases, or other kinds of payment for access to oil reserves. Nor would it be inclusive of gross profit which oil producers would need to cover cost of capital.

So if the price of oil were on average say $50/b. That would leave about $20/b to be split between reserve holders and providers of debt and equity.

Now we know that the marginal cost adding adding to reserves is about $10/b. This means a reserve holder can essentially collect $10/b as economic rent on reserves. Thus if you are a sovereign reserve holder with 100B in reserve this is worth about $1T. Presumably, the present value of a barrel rent a decade from now is also $10. If it were more, then you'd reduce production and wait for value to go up. Or if it were less, then you'd accept lower rent to put more barrels sooner. So the reserve replacement cost is the value of rent so long as you believe there is sufficient longterm demand to fully monetize your reserves. If to the contrary you see that your reservessay will lose value in the future, then you may be willing to rent barrels at below the cost of replacement.

The trick here is that to fully monetize your reserve the price of oil must be sufficiently high to attract investment. So suppose $5/b net is sufficient to attract the $30/b of investment. If the price of oil is at $50/b, then you are inclined to do your own production. You get your $10 rent, $5 return on capital and a $5 surplus. If the price of oil is just $45, then this surplus is gone, so you may be indifferent to allowing another producer to pay you $10 rent, if they do all the rest. But what happens when oil is $40? Producers will pay you no more than $5 rent because after investment and rent they only make back their cost of capital $5. As an alternative you could produce yourself but after the cost of capital you only make $5. So now the marginal cost of reserves may still be $10, but the most rent you can collect (on newly negotiated deals) is $5. So your 100B reserve which used to be worth $1T, might only be worth $500B if there is no prospect for oil to return to sustainable price above $40.

So what I am trying to grapple with here is the economic outlook of sovereign (or nearly so) reserve holders with very large reserves. The value of your reserves is entirely dependent on attracting $25T in investments over the next 25 years. Should that stream of capital diminish, then value of your reserves declines and rapidly so. $25T is what OPEC needs to preserve the value of its reserve for the next 25 years.

Do you hear the cry for help in this? Price volatility and the threat of EVs both create uncertainty for investors. This makes it harder to attract investment. As cost of capital increases, reserve holders must accept lower rent, and the value of reserves.plummet with that.

Elsewhere I have found that about a $1T investment in Gigafactories will undo the whole damn thing.

 

[GoTslaGo]

OPEC and Friends Agree on Way to Monitor Oil Cuts to End Glut

Seems OPEC has come to an agreement to monitor to limit output, let's see how this pans out.