NEWS OF THE DAY:
More than supply and demand in play for oil prices
Bob Campbell, Odessa American /Tribune News Service, August 4, 2021
Predicting what the prices of oil and natural gas will be in the next few months requires the weighing of several factors besides just supply and demand.
Oilmen Kirk Edwards and Frosty Gilliam, economist Ray Perryman and Professor Dennis Elam say fluctuations of the pandemic, the whimsy of OPEC and OPEC+ and the policies of the Biden administration and the Environmental Protection Agency must also be considered.
“The price of oil will do exactly what Saudi Arabia wants it to do,” Edwards said. “For some reason during the pandemic, they allowed themselves to keep oil off the market, which reduced inventories and steadily let the price go up from $30 a barrel at this time last year to close to $70 today.
“They’re trying to limit how much product they put on the world market. With all the COVID setbacks that there have been in so many different countries and now with the new Delta variant coming around, we’re seeing Saudi Arabia produce half as much oil as they were a year ago and make the same amount of money.”
Edwards said the Mideast nation “can drop the price right back down to $30 if they want to, but luckily we have hedging instruments to protect ourselves with, though only for a year or two.”
He said gas prices have been just as volatile, falling to minus-zero last year but rebounding to around $4 per thousand cubic feet. Two years ago, the price was $1.30.
“It’s been so low for the last four or five years, again because the world market was flooded,” said Edwards, whose Latigo Petroleum is heavily invested in gas production in the Texas Panhandle. “There’s not a lot of gas coming onto the market now and that has caused its price to increase.”
The July 18 OPEC+ announcement that it would bump monthly production by 400,000 barrels per day fomented a drop from the mid-$70s to the upper $60s that had partly corrected to the low $70s by mid-week.
“Anything they say is probably a lie,” Edwards said. “They’re just trying to keep the Permian in check, so we don’t put out a bunch of rigs.”
Asked if the domestic industry has considered cutting production to exert more control on prices, he said the Texas Railroad Commission called a meeting of representatives in March last year to discuss prorations, but before action could be taken, “The Saudis did it for us.
“They took two million barrels a day off the market.”
Thirteen nations belong to the Organization of Petroleum Exporting Counties. OPEC+ has 10 more, led by Russia.
Gilliam said the coronavirus factor “will potentially continue to depress travel and projects and indirectly affect fuels and energy, which would cause supply to outgain the demand.
“OPEC always tries to play the role of the leader and they’ll want to dictate what the price does,” he said. “The political realm certainly trumps a lot of the practical sciences of oil prices.
“Supply and demand should dictate it, but historically attitude and the perception of what might happen end up weighing heavily. All that adds up to a real likelihood of lower prices.”
Gilliam said the industry is very uneasy about the Biden administration.
“The standard Democrat play is to limit drilling and increase regulations, which make the cost of doing business increase,” the AgHorn Operations president said. “Keeping drilling projects from occurring on federal lands and offshore adds up to a damper on supply and production.”
Perryman, an Odessan whose consulting company is based at Waco, Texas, said the recent oil setback stemmed from the OPEC+ announcement and a spike in coronavirus cases domestically and abroad.
“As always, there is a lot happening in oil markets that creates a lot of noise,” he said. “The virus is clearly the biggest wild card at the moment. If it reaches the point of substantially slowing global demand growth, then the price will likely fall for an extended period. We cannot get the economy fully on track till the health crisis is manageable.
“Assuming we avoid another widespread surge, demand is growing faster than supply, even with the OPEC+ increase, and prices should enjoy an upward trend for the next few months. Global demand is back to about 97 percent of pre-pandemic levels and travel and production are both enjoying substantial growth.”
Perryman said a new consumption record will happen next year if there isn’t another crisis with the virus.
“Although the domestic rig count has approximately doubled, it remains below prior levels, and oil field service employment, despite impressive recent gains, has only recouped about 20 percent of the lost jobs,” he said. “There’s a lot of room for growth and the market outlook is positive; but as we have said about so many things for so long, it all depends on the virus.”
Elam is an associate professor of accounting and finance at Texas A&M University-San Antonio and an Odessa American columnist who writes about the energy industry.
“Demand for natural gas in the Far East is still on the rise, making that market stronger,” Elam said. “The fact that refiners like Valero are turning away from carbon-based oil to vegetable oil for so-called clean diesel may keep gasoline prices fairly high.
“I expect oil to stage a 50 percent recovery, which is where it is today, and then fall to the lower $60s in August.”
Elam said President Biden’s order to stop construction on the Keystone Pipeline from Canada caused more expensive rail shipping from the Dakotas.
“The great irony is that Biden forced gasoline prices higher by shutting down Keystone, not to mention the EPA’s general war mongering,” he said.
“So, gasoline goes above $3 just as America comes out of COVID, when people want to travel. Now he has to ask the Mideast to export more oil and bang, we’re back to depending on that region again.”
However, Elam said inflation and a rise in consumer prices may be held down if oil and stocks have peaked and are starting to decline.
“That would be deflationary,” he said. “Which will it be? I’m seeing headlines that the economy slows from here and I’m guessing that stocks have topped.”
Referring to options contracts that give owners the right to sell a certain amount of their underlying assets at a set price within a specific time, he said: “Many had sold puts and they had to either buy the puts back or sell futures.
“It looks like they sold futures. Financial shenanigans have a lot more to do with oil price volatility than supply and demand.”
OIL:
Iran’s rapid oil return looks less likely after ship attacks
Bloomberg, August 5, 2021
Iran’s oil comeback, already taking longer than many traders expected, will be further complicated by shipping attacks in the past week, including a deadly drone strike on a tanker near the Gulf of Oman that the U.S., U.K. and Israel all blamed on Tehran.
With talks held up by a change of presidency in Tehran, the incidents add friction to a process that could return 1 million barrels of oil a day to the global market within months. Even if the allies decide against a military response, Washington may be less willing to ease sanctions on the Islamic Republic’s energy exports.
“It looks inevitable that this will cast a black cloud over nuclear talks” between Iran and world powers including the U.S., said Bill Farren-Price, a director at energy-research firm Enverus.
The negotiations — to revive a 2015 pact that limited Iran’s atomic program in return for sanctions relief — had already stalled. A sixth round in Vienna broke up last month. Diplomats are waiting for Iran to re-enter talks now that Ebrahim Raisi, an austere cleric who has long argued against a rapprochement with the U.S., has become president.
Restoring the Joint Comprehensive Plan of Action — which then-President Trump pulled the U.S. out of in 2018 — is key to Iran’s ability to increase oil production. Its crude exports have plummeted to almost nothing from more than 2 million barrels a day in mid-2018.
Many oil investors had expected a new nuclear deal before Iran’s elections in mid-June.
While Raisi and Supreme Leader Ayatollah Ali Khamenei could resume negotiations soon, there’s still much for the sides to overcome. Iran wants a guarantee that future U.S. administrations won’t withdraw from any deal, as Trump did. It also insists sanctions are removed across the board — on its shipping and banking industries as well as on energy exports.
Washington is wary of both demands. Another sticking point is the JCPOA’s so-called “break out” clause. It was designed to constrain Iran’s nuclear activities enough that it would need a full year to build a bomb if it chose to exit the accord. Some U.S. officials believe Iranian scientists have made enough progress in the past three years to construct an atomic weapon within a few months.
Still, Iran and the U.S. have both said they’ll continue to negotiate. Washington sees a deal a way to help stabilize the Middle East — even if it doesn’t address Tehran’s ballistic missiles or support for proxy forces in the likes of Yemen and Lebanon — while sanctions have battered the Iranian economy.
“There will be more tanker attacks, but they are not what’s standing in the way of a nuclear deal,” said Scott Modell, managing director of Rapidan Energy Group, a Washington-based consultant. “Neither is Iran’s incoming hardline president, who’s not about to trot out a whole new series of demands. But he will continue pushing for concessions.”
Modell predicts there’ll be an agreement by September, allowing Iran to raise daily oil output by around 1 million barrels by the end of the year.
For now, oil traders are more concerned about the spread of a delta coronavirus variant than a lack of supply from Iran. Brent crude has slipped 5% this week to around $72 a barrel. But with prices still up almost 40% this year and most analysts forecasting a tightening market over the rest of 2021 as major economies recover, Iran’s absence could soon be felt.
Last Thursday’s drone attack on the Mercer Street, an oil-products vessel managed by an Israeli company, makes the prospect of U.S. sanctions being removed “ever more remote,” according to Helima Croft, chief commodities strategist at RBC Capital Markets.
“The key question that comes from the Mercer Street incident is whether the Supreme Leader has calculated that a return to the JCPOA is not a top-of-the-agenda item and brinkmanship may produce more benefits,” she said.
GAS:
Marathon Petroleum hopeful yet cautious on refining sector recovery
Janet McGurty, Jeff Mower, S & P Global Platts, August 4, 2021
Spiking cases of coronavirus delta variant of concern
Higher natural gas prices a Q3 headwind
Q2 refinery utilization at 94% of capacity
Marathon Petroleum, the largest US refiner, is “hopeful” that the US refining sector will recover as demand for gasoline and diesel picks up but remains cautious about the impact of the spreading delta variant of the coronavirus.
“We are going to have to see how the COVID plays itself out in the second half of the year and [as] we approach another winter season,” said Marathon CEO Mike Hennigan on the company’s Aug. 4 results call.
Noting the stalled vaccination rate has increased infections, he said “there’s obviously going to be some restraint on the demand as a result.”
“We’re obviously hopeful that people will take caution and get vaccinated,” he added.
According to the New York Times coronavirus tracker, there were over 92,000 new cases of coronavirus reported in the US on Aug. 3, an increase of 139% over the last 14 days.
Marathon trims Q3 refinery run rates
Marathon expects to process 2.67 million b/d of crude in the third quarter, down from the 2.71 million b/d in the second. This is due in part to work planned during the third quarter at its Robinson, Illinois, and Mandan, North Dakota, refineries, and weakening demand.
“We’re close to the summer driving season, which is typically our strongest time of year,” Hennigan said.
“Gasoline demand is currently 2% to 5% below 2019 levels, with the West Coast lagging 10%. Overall, jet demand remains down nearly 30% below pre-pandemic levels,” he added.
Wildfires sweeping the Pacific Northwest, parts of Canada and Northern California have reduced demand, while California’s coronavirus infection rates have risen. About 10,000 new cases reported on Aug. 3, according to the New York Times.
Regardless of the impact of the coronavirus, Marathon has succeeded in lowering its refining costs to about $5/b in 2021 from $6/b in 2020, said executive vice president and CFO Maryann Mannen on the call. However, that could be changed by the increase in natural gas prices. Used to power refineries, the price of natural gas has risen by about $1/MMBtu and is anticipated to be a “headwind for the third quarter,” she said.
Marathon ran its refineries at 94% utilization in the second quarter, up from the 83% in the first, Mannen said, especially in the Midcontinent where cracks improved 57% from the first quarter.
Repositioning the portfolio
Marathon Petroleum’s Dickinson, North Dakota, renewable diesel facility reached full design capacity during the second quarter, Hennigan said.
“At approximately 180 million gal/year, Dickinson is the second largest renewable diesel facility in the United States,” he added.
Renewable diesel yields at the plant reached the mid-90% level, and the feedstock is currently an 80%/20% blend of soybean/corn oil, despite the high cost of soybean oil.
And Marathon is currently in the engineering and permitting phase of its plans to transform the Martinez, California, oil refinery acquired with the purchase of Andeavor into a renewable diesel facility.
“Based on our progress and discussion with feedstock suppliers, we are confident in the timeline we have set to begin producing renewable diesel in the second half of 2022, with approximately 260 million gal/year capacity,” Hennigan said.
The plant will reach full capacity of 730 million gal/year by the end of 2023.
Hennigan declined to discuss the feedstock slate for Martinez, due to ongoing discussions with suppliers.
Phase I of the Martinez startup will be the initial hydroprocessing unit, with later phases including a pretreatment plant, which will allow the company more feedstock flexibility and many different forms of logistics with which to bring in feedstocks.
“We have really strong logistics: pipeline, rail, water, truck,” Hennigan said
“And the ultimate logistics is we’re in California where we are sitting on the demand,” he added.
US West Coast renewable diesel with credits including the state’s Low Carbon Fuel Standard and federal taxes is averaging $6.18/gal so far in the third quarter, compared with $5.51/gal in the second, according to S&P Global Platts assessments.
MINING:
Fort Knox gold output starts upward trend
Shane Lasley, North of 60 Mining News, July 29, 2021
Kinross Gold Corp. July 29 reported the new Barnes Creek heap leach pad is contributing to increased gold production at its Fort Knox gold mine about 25 miles north of Fairbanks, Alaska.
During the second quarter of 2021, Fort Knox produced 63,302 ounces of gold, which is a more than 13% percent increase over the 55,815 oz produced during the first quarter and roughly 13% higher than the 56,031 oz of gold produced at the Interior Alaska mine during the second quarter of 2020.
Kinross attributes these increases to more gold being produced from the Barnes Creek heap leach pad, which was built to support the Gilmore expansion at Fort Knox.
During the second quarter of 2021, 7.9 million metric tons of ore averaging 0.22 grams per metric ton gold was stacked on the Barnes Creek heap leach pad at Fort Knox, compared to 4.8 million metric tons averaging 0.23 g/t gold stacked on the Walter Creek pad during the same period last year.
In addition, the mill at Fort Knox processed 1.9 million metric tons of ore averaging 0.7 g/t gold during the second quarter, compared to 2 million metric tons averaging 0.73 g/t gold processed during the same period last year.
Earlier this year, Kinross Gold Chief Technical Officer Paul Tomory said he expects gold production at Fort Knox to continue to increase as the year progresses, reaching nearly 80,000 oz in the fourth quarter.
Increased gold production is expected to continue into 2022 as ore from the Gil-Sourdough satellite deposits is anticipated to be delivered to the Fort Knox mill by the end of this year.
According to the current plan, roughly 10 million metric tons of ore averaging 0.60 g/t gold is expected to be mined from smaller pits at Gil-Sourdough and trucked roughly eight miles (13 kilometers) east on existing roads on the Fort Knox property to the mill for processing. At mill recovery rates of around 83%, Gil-Sourdough is expected to contribute roughly 160,000 oz of gold to Fort Knox production over about two years.
In its second quarter report, Fort Knox said the development work at Gil is proceeding as planned, with production expected to begin in the fourth quarter.
The two-year mine plan for Gil-Sourdough dovetails nicely with Manh Choh, which remains on pace to deliver much higher-grade ore to the Fort Knox mill in 2024.
Located about 200 miles southeast of Fort Knox, Manh Choh hosts 9.2 million metric tons of measured and indicated resources averaging 4.08 grams per metric ton (1.21 million ounces) gold and 14.19 g/t (4.2 million oz) silver in two adjacent deposits on the project.
With the idea of processing high-grade ore from Manh Choh in the mill at Fort Knox, Kinross paid US$93.7 million to buy a 70% interest in this project from Contango ORE Inc.
Peak Gold LLC, a joint venture between Kinross (70%) and CORE (30%), budgeted US$18 million for a 2021 program focused on completing a feasibility level study for establishing a mine at Manh Choh.
Based on the resource established prior to its acquisition, Kinross expects to produce 1 million oz of gold-equivalent, which includes the value of both the gold and silver recovered from Peak Gold ore over a 4.5-year mine life, or roughly 222,000 oz per year.
A scoping study completed during the second quarter confirms the initial estimates that trucking ore from Manh Choh to Fort Knox for processing results in a low-cost, high-margin project.
“Many of the key metrics in the study remain comparable to our view at the time of the acquisition, including grades, recoveries, life-of-mine production of approximately 1 million ounces, with first production expected in 2024,” Tomory informed investors on July 29.
The scoping study, however, estimates the capital expenditure to develop Manh Choh to be US$150 million, which is roughly US$50 million higher than originally estimated. Kinross says this increase is in part due to strategic decisions that are expected to de-risk the project and improve operational cost efficiencies, including reducing the use of contractors. A better understanding of project site conditions such as topography and environment also contributed to the capital estimate increase.
During the first half of 2021, Peak Gold JV completed roughly 3,900 meters of drilling targeting near-mine extensions at Manh Choh. This included exploration drilling at the East Peak, Forks, and Ridgeline targets, as well as four holes at North Peak, one of the two Peak deposits that host the current resource. Kinross says two of the North Peak holes cut mineralization below the scoping study depth, indicating the potential for resource expansion.
Manh Choh is now proceeding to a feasibility study, which is expected to be completed by the end of 2022, with production remaining on schedule to begin in 2024.
POLITICS:
Congress Enters August Recess With Pending Legislation
Deidre Kohlrus, Energy Workforce and Technology Council, August 4, 2021
The House and Senate are heading into their annual month-long district work periods, commonly known as “August recess.” The House began their district work period on July 30, and the Senate is scheduled to go into recess August 6. Both chambers will reconvene in September. There is plenty of unfinished business affecting the energy industry. Below is an overview of what lawmakers are doing, and what will likely be high priority when Congress returns in September.
Pending Legislation
Infrastructure Bill: The Senate is currently considering an infrastructure bill that includes funding for energy projects such as carbon capture, and the clean-up of orphaned wells. Senate leadership is eager to pass this bill before the August recess, however the House will need to pass its own version in September. A full analysis of what is included in the Senate Infrastructure legislation can be found here.
CLEAN Future Act: The Biden Administration’s primary legislation addressing climate change, the CLEAN Future Act, remains in the House Energy and Commerce Committee. This bill includes potential regulatory changes that would affect oil and gas permitting and management of waste. The Committee has held more than 10 hearings on the measure, but there is no sign a vote on this legislation is imminent.
Clean Energy for America Act: On May 26, the Senate Finance Committee passed the Clean Energy for America Act out of committee. This legislation addresses energy industry-specific taxes and incentives by denying access to business provisions available to all industries. The bill targets cost-recovery mechanisms, such as the intangible drilling costs (IDCs) tax provision and removes access to “CARES Act” funding. The measure will not be taken up by the Senate before August recess, however the Council continues to monitor its progress as these provisions would have major impacts on the energy sector.
Administration and Regulatory Activity
Review of Federal Lands Oil and Gas Leasing Program: Lawmakers from both parties are pressuring the Biden Administration to release its review of the federal oil and gas leasing program and end the moratorium on new leases on federal lands. While a judge has ruled the pause on lease sales is not legal, the Department of Interior has yet to hold a lease sale since that a judge ruled on June 15 that the pause on lease sales is not legal. On August 3, the Biden Administration announced a similar review of the oil and gas leasing program on the Arctic National Wildlife Refuge (ANWR). This will likely follow a similar process, which includes a two-month public comment period followed by an environmental review that could run until early 2022.
Executive Branch Nominations: The Senate is considering several of President Biden’s nominees to positions overseeing programs that regulate the energy industry. Perhaps the most relevant appointee awaiting confirmation is Tracy Stone-Manning to be Director of the Bureau of Land Management, which manages the federal government’s onshore oil and gas program.
In the queue are nominees for positions at the Department of Interior, Department of Energy and Environmental Protection Agency. If confirmed, these individuals will have authority to manage regulations, permitting and allocation of grants and other federal funding to the energy industry.
The Council will continue to monitor all legislative and regulatory action through the August recess and into the next legislative session in September.
CLIMATE CHANGE:
Exxon reportedly weighs 2050 net-zero carbon pledge
Ben Geman, Axios, August 5, 2021
The Wall Street Journal reports this morning that Exxon is “considering a pledge to reduce its net carbon emissions to zero by 2050.”
Why it matters: It would be a major shift for Exxon, the U.S.-based multinational giant, which to date has opposed the long-term targets embraced by European giants like Shell and BP.
The big picture: It comes as Exxon — and the industry as a whole — faces growing pressure to act more aggressively on climate change.
- That was brought into stark relief in May when Exxon shareholders sided with an activist hedge fund to elect three new board members over management’s opposition.
Catch up fast: Exxon has vowed to expand activities around carbon capture and hydrogen, but overall has not been seeking to diversify as widely as European majors (though fossil fuels remain the dominant business for majors on both sides of the Atlantic).
Where it stands: Here’s a little more via the WSJ’s reporting based on “people familiar with the matter”…
- “The Irving, Texas, company hasn’t made a final decision on a net-zero pledge…It plans to unveil a series of strategic moves on environmental and other issues before the end of the year, the people said.”
What they’re saying: Exxon, in a statement to the WSJ and Axios, said it would not comment on internal discussions. But spokesman Casey Norton also Exxon is “working to decarbonize high-emitting sectors through our new Low Carbons Solutions business and our ongoing investments to develop and deploy the technologies that will help society achieve a net zero future.”
- He said Exxon’s cutting near-term emissions, citing their 2025 targets unveiled late last year.