NEWS OF THE DAY:
Conoco Buys Shell’s Permian Assets for $9.5 Billion
Luke Johnson, Energy Intelligence, September 20, 2021
ConocoPhillips has agreed to buy Royal Dutch Shell’s assets in the Permian Basin for $9.5 billion in cash, marking a major expansion for the independent in the US’ premier oil play as the Anglo-Dutch supermajor exits amid legal and investor pressure to reduce its carbon emissions.
The deal, announced late Monday, follows months of speculation around Shell’s plans to sell out of the Permian, its last remaining US shale asset. The transaction achieves strategic objectives for both companies.
For Shell, the sale moves the company toward its targets for reducing absolute emissions of both carbon dioxide and methane as it focuses on less emissions-intensive operations in offshore and LNG. It also brings a large injection of cash, a significant portion of which will be distributed back to shareholders.
Conoco, meanwhile, will become a truly dominant force in one of the world’s most important oil fields, expanding its position with largely contiguous acreage at a low cost of supply. The company touted the assets’ low greenhouse gas (GHG) intensity, which it says will further its own goals to be a net-zero emitter by 2050.
Shell’s Permian position includes around 225,000 net acres located entirely within Texas in the Delaware subbasin of the Permian, as well as over 600 miles of operated crude, gas and water pipelines and infrastructure.
Conoco estimates production from the assets in 2022 will hit about 200,000 barrels of oil equivalent per day, roughly half of which is operated. The assets currently produce around 175,000 boe/d.
The deal is expected to close in the fourth quarter of 2021, subject to regulatory clearance.
Both companies stressed the benefits of the deal to shareholders.
Shell said it will allocate $7 billion of the sale price after it closes to additional shareholder distributions, with the rest used to further strengthen its balance sheet.
It said these distributions “will be in addition to our shareholder distributions in the range of 20%-30% of cash flow from operations.”
Conoco said it will pay for the deal with available cash “while still retaining a significant level of cash on the balance sheet for general purposes.”
“Our underlying business drivers will be stronger and the expanded cash flows derived from this transaction mean shareholders will benefit from higher returns of capital,” Conoco CEO Ryan Lance said in a statement. “The assets we’re adding improve our ability to generate returns that are consistent with what investors demand through cycles.”
Conoco now plans to increase its asset sale target by 2023 from $2 billion-$3 billion to $4 billion-$5 billion. The additional sales will come from the Permian as Conoco high grades its portfolio in the play. It will also maintain its previous debt-reduction target.
Conoco also announced a 7% increase in the company’s quarterly dividend, from 43¢ per share to 46¢/share, representing a current dividend yield of 3%.
Shell has been one of the most outspoken oil companies on the need to reduce emissions from operations (Scope 1 and 2). It is also under growing pressure to do so, from investors as well as the courts.
Earlier this year, a Dutch court ruled Shell must work harder to reduce emissions this decade, although Shell has appealed the ruling .
The sale of its Permian assets will remove a large chunk of oil production from its portfolio, which will help it tackle slippery Scope 3 emissions — those from the use of products — as well as Scope 1 and 2.
Conoco also framed the deal as an opportunity to improve its emissions profile.
In conjunction with the transaction, Conoco now says it will improve its Scope 1 and 2 GHG emissions intensity reduction targets from a 35%-45% reduction by 2030 to a 40%-50% reduction, based on 2016 levels.
Shell has done a lot of that work itself in the Permian, chopping GHG and methane intensity by 80% through investment in infrastructure and technology.
Net Zero, Net Negative
It is still not clear how much the deal will help with overall global emissions, however.
Abhi Rajendran, Energy Intelligence’s director of oil markets research, said the deal is a “net negative” for carbon emissions reductions since the assets are much more likely to be fully developed and more quickly by Conoco than by Shell.
“If these assets had just stayed with Shell over the next five to 10 years, there’s no way investors would have allowed them to commit the capital to significantly develop them,” Rajendran said.
Making sense of Shell’s exit from the Permian Basin
Ben Geman, Axios, September 21, 2021
Royal Dutch Shell’s sale of its Permian Basin assets to ConocoPhillips can’t be untethered from how the industry is positioning itself as it faces pressure on climate change.
Catch up fast: The companies announced the $9.7 billion cash deal yesterday afternoon. ConocoPhillips will get 225,000 acres in Texas it expects will produce 200,000 barrels of oil equivalent per day in 2022.
The big picture: The deal comes as Shell, like other European majors, is moving to diversify its business into low-carbon sectors. The company says its oil production likely peaked in 2019.
- “The shift in focus among the industry’s largest players seems to be creating opportunities for Conoco, which remains more aligned with traditional oil and gas production,” Andrew Dittmar, senior M&A analyst at Enverus, said in a note.
- ConocoPhillips said in the deal announcement that it’s also boosting its 2030 goals for cutting emissions intensity — that is, emissions per unit of output.
- Northland Capital Markets analyst Subash Chandra tells the Wall Street Journal that environmental issues are becoming a more important part of oil patch deals.
- “Shell doesn’t want to sell to someone who is going to make them look bad on their ESG metrics even after the sale,” he said.
The intrigue: “Shell has been under pressure to accelerate its strategy for the energy transition after a Dutch court ruled that the company must sharply reduce its CO2 emissions this decade,” Argus Media notes of the May decision.
Yes, but: Bloomberg unpacks Shell’s decision to send $7 billion of the proceeds from the Permian deal back to shareholders even as some European peers spend big on renewables projects.
IEA calls on Russia to be a “reliable supplier” and send more gas to Europe
Emma Ross-Thomas, Isis Almeida, World Oil, September 21, 2021
The International Energy Agency called on Russia to supply more natural gas to Europe, saying the energy crunch was an opportunity for the country to show it’s a “reliable supplier.”
Russia is meeting is contractual obligations to ship gas to Europe, but its exports to the continent are still down from levels in 2019, before the global pandemic, the agency said. More gas flowing from the east would help Europe boost its stockpiles before the winter.
Gas prices in Europe are breaking records day after day as top supplier Russia keeps a cap on the additional flows needed to refill storage sites. Norway has struggled to sell more due to heavy maintenance while Asia is scooping up cargoes of liquefied natural gas, leaving Europe starved of the fuel just a few weeks before the heating season starts.
“Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season,” the IEA said in a statement on its website. “This is also an opportunity for Russia to underscore its credentials as a reliable supplier to the European market.”
Gazprom PJSC, Russia’s state-owned gas producer, didn’t immediately respond to a request for comment.
The IEA was created to defend the energy interests of rich industrialized countries. The agency is no stranger to interventions in the oil market, sometimes calling on the OPEC to boost supply and on rare occasions coordinating the release of emergency fuel stockpiles. It’s less common for the Paris-based organization to get involved in gas markets.
Energy prices are soaring from the U.S. to Europe and Asia as economies rebound from the global pandemic and people return to the office. In Europe, gas supplies were already low after a long cold winter left storage sites depleted and refilling them hasn’t been easy.
Europe is entering the heating season in just a few weeks with the lowest inventories in more than a decade, leaving the market vulnerable to price volatility when the sun isn’t shining, or the wind isn’t blowing — curbing the output of renewable power.
“Going forward, the European gas market could well face further stress tests from unplanned outages and sharp cold spells, especially if they occur late in the winter,” the IEA said.
The agency stressed that it’s wrong to blame the shift away from fossil fuels for the spike in gas prices.
“Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition,” said IEA Executive Director Fatih Birol.
Teck Resources cuts forecast zinc output on BC fires impact
Cecilia Jamasmie, Mining.Com, September 21, 2021
Canada’s largest diversified miner, lowered on Tuesday expected refined zinc production for 2021 as widespread wildfires in British Columbia over the summer impacted its operations.
The Vancouver-based miner’s Trail Operations in BC were temporarily shut in August for about ten days due to poor ambient air quality resulting from wildfires.
The complex, located in the community of Trail, produces refined zinc and lead, a variety of precious and specialty metals, chemicals, and fertilizer products.
The company now expects refined annual zinc production to be in the range of 285,000 tonnes to 290,000 tonnes, down from a previous estimate of 290,000 tonnes to 300,000 tonnes.
Further headwinds are likely to weigh on third-quarter production, Teck noted, which will leave it with figures either on the lower end of its previous guidance or recast lower altogether.
Teck also cut its third-quarter sales outlook for contained zinc from its Red Dog operations in northwest Alaska to 145,000 tonnes to 155,000 tonnes, down from 180,000 tonnes to 200,000 tonnes expected previously.
The company, which has been working with the Toronto office of Barclays Investment Bank on a possible sale or spinoff of its coal division, said that unprecedented high steelmaking coal prices have altered its plans.
“We have made decisions to maintain available production for sale by operating higher cost equipment and relying on overtime to offset the increased absenteeism, which has also contributed to higher unit costs,” it said.
On the chopping block
According to mining industry sources, Teck chief executive Don Lindsay had held talks in the past year with big players, including Glencore and Lundin Mining, but negotiations didn’t lead to any deal.
Teck produced more than 21 million metric tonnes of steelmaking coal last year from four locations in western Canada. The business accounted for 35% of the company’s gross profit before depreciation and amortization in 2020, according to its website.
The company has talked openly in the past about possibly spinning off or selling its coal assets to focus on increasing its exposure to copper, one of the key metals need to spur an energy transition.
Major miners across the globe, including BHP, Rio Tinto and Anglo American have been shedding their coal assets, particularly of the thermal kind.
The trend has reached banks, with several international lenders bowing to pressure from shareholders and lobby groups to avoid coal investments.
Australian banks have recently made headlines as Macquarie Group, Australia and New Zealand Banking Group (ANZ Bank), Commonwealth Bank of Australia and Westpac recently signaling their intention to stop coal financing.
Last week, South Africa’s First Rand jumped on the coal exit train, announcing the end of loans for new coal-fired power stations and coal mines in 2026.
China seeks to extend critical minerals monopoly with help of Taliban
Christopher Barnard, The Hill, September 20, 2021
One of the first nations to move to recognize the Taliban’s legitimacy amid its takeover of Afghanistan was communist China. For those that pay attention to geopolitics, this didn’t come as much of a surprise. Yet, beyond mere realpolitik and great-power posturing, another tangible, even materialistic, reason has become clear: Afghanistan’s abundance of critical minerals.
Despite being a poor nation, Afghanistan has nearly $1 trillion worth of untapped mineral deposits, many of which are rare earth minerals such as cobalt, nickel and copper. Used in everything from cellphones and laptops to medical and military equipment, these critical minerals are the building block of a modern, technologically advanced society. Afghanistan is thought to have the largest lithium deposit in the world, which is a key component of modern forms of energy storage, such as batteries for electric vehicles and renewable energy.
As the world transitions from fossil fuels to clean energy, the demand for lithium especially will continue to skyrocket. Increasingly, access to these types of minerals will define the future of geopolitics, in the way that oil and natural gas have shaped the modern world’s balance of power. Worryingly for the United States, China not only possesses 35 percent of the world’s entire critical mineral supply, but it also accounts for 70 percent of global production. Additionally, China directly supplies 80 percent of the U.S.’s rare earth imports.
This could have severe consequences for U.S. national and economic security. As the U.S. seeks to hold China accountable for its crimes, such as oppression of the Uyghur population, infringement on Hong Kong’s sovereignty, or the country’s environmental abuses, China can leverage its critical mineral dominance over us to evade genuine accountability. In 2019, at the height of the escalating U.S.-China trade war, the Communist Party of China’s (CCP) internal newspaper published a warning that the Chinese government might cut off all exports of critical minerals to the United States. This isn’t just empty rhetoric. In 2010, the CCP followed through on a similar threat, using a minor diplomatic scuffle with Japan to temporarily halt critical mineral exports to the country.
The opportunity to seize further control over the world’s supply of these critical minerals, particularly lithium, is a determining factor in China’s cozying up to the Taliban. If the CCP successfully aligns itself with the Taliban and brokers a productive relationship to tap the nation’s mineral resources, China will gain a nearly insurmountable leg up in the global clean energy arms race.
Allowing CCP influence over Afghanistan’s mineral resources would be a mistake with repercussions for the entire international community. With lithium quickly becoming one of the most sought-after minerals for clean energy development, a Chinese monopoly would weaken America’s geopolitical standing in the world, while making addressing greenhouse gas emissions even more difficult.
Fortunately, there are several steps we can take to address this looming problem. First and foremost, the United States must establish reliable, domestic supply chains for key rare earth minerals to remain competitive in developing and deploying clean energy technologies. While progressive environmentalists often look at mining as an unequivocally bad thing, the fact remains that we actually mine much more sustainably here than China does. Incentivizing mining in the U.S. is of crucial importance, for example by encouraging greater capital investment and simplifying the permitting process.
Secondly, the U.S. should diversify beyond lithium-ion batteries to meet our clean energy needs.
Rich Powell from ClearPath recently wrote that “innovators are exploring solutions to source lithium domestically but also get beyond lithium-ion batteries for grid-scale storage.” Indeed, while companies such as Lilac Solutions are seeking to make domestic lithium extraction more efficient, many other energy storage technologies are showing promise too. These other forms of energy storage, from pumped storage hydropower to iron-air batteries, are expanding and innovating, providing alternatives to full lithium-ion dependence. Innovation in these technologies is crucial to clean energy diversification.
Yet, we must not forget that lithium-ion batteries are still by far the fastest-growing energy storage technology in the U.S., with costs having fallen 88 percent in the last decade. Third, therefore, the U.S. should seek to build closer relationships with other countries that also have significant resources of these minerals, such as Australia, South Africa, and India. Sourcing critical minerals such as lithium from allies is far preferable to dependence on China. Moreover, sharing innovations, embarking on joint mining projects, and creating closer ties with other countries is crucial to the U.S. creating a much friendlier, non-China supply chain.
Ultimately, the U.S. should counteract China’s ventures in Afghanistan and the burgeoning critical minerals monopoly by going on the offensive when it comes to domestic mining, technological innovation, and non-China supply chains. America’s clean energy future should be beholden to neither the CCP nor the Taliban.
Christopher Barnard is the national policy director for The American Conservation Coalition (ACC) and regular contributor to a variety of news outlets.
Biden pledges to double U.S. climate funding to developing nations
Andrew Freedman, Axios, September 21, 2021
Staring down a “borderless climate crisis,” President Biden told the UN General Assembly on Tuesday that the U.S. will double public financial assistance to developing countries, including money to help them adapt to present-day climate impacts.
Why it matters: The failure of industrialized nations to fulfill a 2009 pledge to devote $100 billion annually to developing countries is a major impediment to a successful UN Climate Summit in Glasgow, which starts next month.
By the numbers: A report released this week by the OECD found a $20 billion gap between climate finance pledges and the $100 billion figure.
- The U.S. had already pledged to provide $5.7 billion in public financial aid by 2024, and Biden said doubling that will make the country the global leader in providing public finance.
Yes, but: Public finance likely requires approval from Congress, which may pare back the proposed figure.
State of play: On Monday, about two-dozen leaders met behind closed doors at the UN for a frank exchange of views on the distrust between developed and developing nations heading into the Glasgow climate summit, known as COP26.
- A member of a climate negotiating team who observed the meeting told Axios the session featured stark, uncharacteristic language for a meeting of heads of state, and made it clear how significant the divides are heading into Glasgow.
The bottom line: The upcoming summit is viewed by leaders as the world’s last, best chance to ensure the Paris Agreement’s temperature targets remain feasible. A key question is whether the new U.S. financial pledge will encourage other industrialized nations to step forward with their own added figures.