Part 2 – Guaido’s Game Changer For A Return To Growth, PDVSA Doesn’t Have To Be >50% In Any Joint Ventures

There is no question that Maduro is doing all he can to fight to hang on to power.  No one knows when (or some still say if) there will be regime change, but we believe the end is closer than most expect because Maduro has dwindling financial assets and cash flow to fund his fight.  We outlined this dwindling financial position in our Feb 6, 2019 blog “Part 1 – Maduro Looks To Have Pulled And Whiffed On His 3 Big Levers To Stay In Power[LINK].  Today’s blog is a followup. There will be an oil supply interruption in any regime change.  No one knows how long that will last, but today’s blog outlines why we see that interruption period being minimized given the domestic conditions and the US led international financial support to give Guaido a chance to implement his restoration plan.  Most importantly, Guaido recognizes that PDVSA has to be the engine to fund his restoration of Venezuela.  Ultimately, the length of oil supply interruption will depend on Guaido’s ability to attract big international oil capital and we believe Guaido has a game changer to do so.  The key reason for today’s blog was an overlooked Feb 4 Bloomberg story that noted this game changer – Guaido says PDVSA doesn’t have to be >50% in any joint venture.  By removing the >50% rule, Guaido is eliminating one of the two key reasons why big international oil companies avoid some countries – they don’t want the NOC to be operating and have control by having more than 50%.  The other big holdup is always government take and we have to expect that Guaido will be having a reasonable government take in light of his need to get oil production growth to provide cash flow.  Guaido may not be able to stop an oil supply interruption, but he and Trump are doing all they can to minimize the length of an interruption.

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Part 1 – Maduro Looks To Have Pulled And Whiffed On His 3 Big Levers To Stay In Power

Its been a bad week for Maduro in his bid to stay in power.  And we believe the end of his regime is going to happen very quickly, likely within weeks and it could even be within days.  We won’t be surprised if we woke up any day now to read he has left the country.  We thought it was inevitable for Maduro to leave as we saw his financial assets/reserve crumble.  That was the thesis in or Jan 13, 2019 Energy Tidbits memo “Are Dwindling Gold Reserves The Timing Catalyst For Venezuela Regime Change?” [LINK].  We looked at Maduro having 4 (3 big ones and 1 smaller levers) he had to pull on to give him a chance to stay in power, to give him money so he can keep the army onside and have them believe he can survive. The 3 big levers were offshore gold/cash reserves, PDVSA/CITGO cash flow, and Russia.  The 4th and smallest was China.  These are the major levers that Maduro has tried to call on to give him cash to keep the country afloat and the army behind him.  Its all about keeping the army supporting him because once they leave, it is over.   He has pulled on his 3 big levers to get cash to fund his fight to stay in power and he has whiffed thereon, and he may be down to his 4th (and smallest lever) and we believe that one will also strike out if it hasn’t done so already.  He has effectively struck out and the only question will he walk back to the his or the opposition’s dugout.  Part 2 of this blog series will highlight how we see Venezuela under Guaido, in particular the impact on oil markets, which seem to be different than other views.

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Lasting Change To Oil & Gas #5 – Libya Likely Stuck Around 1 mmb/d By Its Inability to Peacefully Resolve Sharara Shut In

This is Blog #5 in our series of blogs to mid Feb on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and that are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas.  Libya had become a negative to oil prices in H2/18 as it was only 3 to 4 months ago that there was big positive momentum to Libya’s oil production returning to May 2013 levels of 1.2 mmb/d.  We may not have agreed with the Libya NOC target to get to 2 mmb/d, but its oil outlook looked strong as Libya was also announcing the return of IOCs in Oct with the resolution of the security situation in Libya.  This strong momentum was interrupted when Libya NOC declared force majeure on Dec 10 on the shut in of its 315,000 b/d Sharara oil field in southwest Libya due to security concerns.  But we now see the risk that its outlook for an expected increase in oil production in 2019, 2020 and 2021 is now at risk with Libya moving away from negotiating a peaceful resolution at Sharara to bringing in armed forces from Libya’s eastern leader Khalifa Haftar to regain control of security.  The loss of Sharara oil production is, by itself, significant at 315,000 b/d, but the bigger impact to global oil markets is that it sets up ongoing military clashes in southwest Libya region around the Sharara oil field and means that Libya isn’t likely to move toward the NOC target of 2 mmb/d, but rather be stuck in the same situation as the past few years with production around 1 mmb/d plus or minus with interruptions like Sharara taking production down on some sort of regular basis ie. the same old story.

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Lasting Change To Oil & Gas #4 – Bill Gates “Unlikely To Have Super-Cheap Batteries Anytime Soon” To Store Sufficient Energy

This is Blog #4 in our series of blogs to Jan 31 on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and that are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas. This blog could easily be called Blog #2B as we would have highlighted this in our Dec 20, 2018 Blog #2 “Lasting Change To Oil & Gas #2 – Speed Bumps On The March To Renewable Energy Means Oil Is Stronger In The Mid/Long Term[LINK].  This week, Bill Gates highlighted the need to have breakthroughs in clean energy and “But solar and wind are intermittent sources of energy, and we are unlikely to have super-cheap batteries anytime soon that would allow us to store sufficient energy for when the sun isn’t shining or the wind isn’t blowing.”  One of our mid to long term oil concerns has been that, by Jan 1, 2019, we expected that the breakthrough would be there for battery storage of electricity to be cheap enough (good economics) and available enough such that there is visibility for a predictive timeline in the 2020s of a major adoption reliance on renewable energy to start a more significant displacement of oil and natural gas for electricity.  Gates still waiting for a breakthrough on battery storage is significant as he has specific insight into battery storage and other energy storage companies.  His comments certainly suggest the visibility for a broad battery storage adoption isn’t here in 2019 (as we expected) for a predictive rollout.  Any delay in broad big application of solar/wind (ie. Saud Arabia) is a direct positive to oil.   Gates shares an important insight and supports our Blog #2 that there are speed bumps on the march to renewable energy and this mean oil is stronger in the mid/long term. Continue reading “Lasting Change To Oil & Gas #4 – Bill Gates “Unlikely To Have Super-Cheap Batteries Anytime Soon” To Store Sufficient Energy”

Lasting Change To Oil & Gas #3 – Premier Horgan Confirms Our Fears, LNG Canada Is Surely The Last Major BC LNG Project

This is Blog #3 in our series of blogs to Jan 31 on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas.  The timing for this blog was driven by three Dec events – First and foremost BC’s Dec 5 Clean BC plan that caused our fears that no more major BC LNG projects will be built, then this week’s Exxon/Imperial’s subsequent Dec 20 withdraw of their WCC BC LNG project from BC’s environmental review process, and finally the key Premier Horgan Dec 20 year end interview that effectively shoots down the possibility for any new BC LNG project (after LNG Canada) to fit into the Clean BC emission targets. Horgan said that in setting the Clean BC emissions targets “we have decided that one plant, LNG Canada, can fit in and we’ve built our plan around that. Additions to that emission profile are going to be harder to prove”. Horgan then says that other BC LNG projects can proceed, but his conditions to do so are impossible in today’s world.  He said any other BC LNG projects effectively have to have “their emission profiles are close to zero, then I don’t see why not. But they’re going to have to prove that to us before they proceed.”  It’s a good thing for western Canada natural gas that Shell was able to negotiate BC govt approval of its LNG Canada project.  LNG Canada is a big relief valve for western Canada natural gas at ~1.7 bcf/d for Phase 1 and an additional ~1.7 bcf/d for Phase 2.  This compares to total western Canada natural gas production of 14.6 bcf/d in 2017, US imports of Canada natural gas peak month of 9.25 bcf/d in Jan 2018, and its low month of 7.09 bcf/d in Sept 2018.  However, unless there is a change in Clean BC emissions targets or LNG plants can be built with close to zero emissions, the reality of Clean BC and Horgan’s comments is that Shell’s LNG Canada is surely the last major BC LNG project approved for the foreseeable future.

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Lasting Change To Oil & Gas #2 – Speed Bumps On The March To Renewable Energy Means Oil Is Stronger In The Mid/Long Term

This is Blog #2 in our series of blogs to Jan 31 on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and that are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas.  The timing for this blog was driven by two events this week – the lack of consensus from the Poland climate change talks, and the IEA”s new report “Coal 2018 – Analysis and forecasts to 2023” that calls for growth in coal demand in 2017 and again in 2018 following declines in 2015 and 2016. The IEA report reminds that energy trend lines aren’t always straight as evidenced by the rebound in coal demand.  We believe there have been multiple speed bumps in the march to a world of accelerating renewable energy market share and an early demise of coal and oil.  The driving force for this shift to renewables is governments regulating change. The unified global approach to climate change is no longer, and we are seeing leaders not accept climate change, forced by their citizens to pull back on climate change, or are just quietly not pushing on climate change. These speed bumps may not change the direction, but have to have an impact on the speed and timing for the demise of fossil fuels.  Its hard for anyone to believe the rate of regulated changes to renewables isn’t slowing down. And if so, it also points to stronger than previously expected mid and long term cash flow generation from oil. One of our upcoming blogs is the most significant lasting change – the oil and gas sector has proven they can produce way more than expected and these shifting supply chains are causing price dislocations in the short term and a lower but still strong price in the mid to long term.   Even still, the speed bumps in the march to renewable energy add to why we believe there is a lot more money to be generated and made from oil and natural gas in the mid and long term, but just not as much as we expected a year ago.

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Lasting Change To Oil & Gas #1 – AMLO’s Refinery Push Should Take >300,000 b/d Heavy/Medium Crude Out Of Gulf Coast By 2021

This is Blog #1 in our series of blogs over the 45 days on overlooked “Lasting Changes To Oil & Gas”.  The brutal Q4 to date for oil and gas investors has led to a flight of capital and meant there are overlooked lasting change items (both positive and negative) that are reshaping the 2019 to 2025 outlook for oil and natural gas.  Declining Venezuela and Mexico oil production and exports to the US has directly led to increasing Cdn oil exports to the US.  Blog #1 in this series is how the election of Andrés Manuel López Obrador as President of Mexico and his priority on fixing/upgrading Mexican refinery operations is an added plus for Cdn heavy/medium oil.  AMLO’s first big announcement, the Plan Nacional de Refinacion, says Mexico’s refineries “will process 1 million 863 thousand barrels of crude oil per day by 2022”.  This compares to the 640,000 b/d processed by Mexican refineries in Q3/18.  Even if AMLO only gets at least half way to the target, this should reduce Mexico heavy/medium crude exports into the US Gulf Coast (USGC) refineries by at least ~300,000 b/d by 2021/2022.  This will create added demand opportunity for Cdn heavy/medium oil to fill.  This is a key AMLO priority for his first 6-year term.  It isn’t likely to happen as quickly as AMLO’s target, but even reaching half of his target should create a big opportunity for Cdn heavy/medium oil in the USGC.

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India’s Natural Gas Consumption Would Be Up ~1.3 Bcf/d Per Year If Its To Reach Its Target Of 15% Of Its Energy Mix By 2030

India has mostly been a non-factor to date in the correction of LNG markets in 2017 because of a lack of domestic natural gas infrastructure, but that should change in 2019 and 2020.  Yesterday, we saw two good reminders on how India is just now starting to build out the domestic natural gas infrastructure to support India Prime Minister Modi’s target to get natural gas to 15% of its energy mix in 2030.   Modi’s made a major speech highlighting the build out of its compressed natural gas (CNG) distribution centres for vehicles and local natural gas distribution pipelines.  Bloomberg estimated that LNG regasification capacity additions of ~4.9 bf/d in 2019/2020, which is 1.3x current India LNG regasification capacity.  If Modi is to hit the natural gas target to reach 15% of energy mix in 2030, this would add ~1.3 bcf/d of natural gas consumption per year.  India may not be a China in terms of its LNG impact, but ~1.3 bcf/d of increased demand per year is equivalent to approx 2 Cheniere LNG phases, or ~75% of LNG Canada’s Phase 1 of 1.7 bcf/d.  Its one more reason why the outlook for LNG demand looks good in the early 2020s.

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Our Suggestion To Premier Notley: Act Now, Don’t Let The Liberals Accelerate The Phase Out Of Jacketed CPC-1232 Tank Cars

We aren’t on Premier Notley’s special envoy consultation list to come up with solutions to narrow the heavy oil differentials, but, if we were, we would tell them that the first priority should be to not make the situation worse.   And we would be strongly pushing that they act now to make sure the Liberals do not move on their announced desire to accelerate the phase out of the jacketed CPC-1232 tank cars. The jacketed CPC-1232 tank car is likely the majority of crude by rail tank cars in Canada and any elimination or earlier phase out of the existing CPC-1232 tank cars would directly reduce Cdn crude by rail capacity and volumes.  This would lead to an increasing in heavy oil differentials.  We don’t think it is an easy task, but it will be a lot easier for her to stop the Liberals from moving on this issue as opposed to trying to get it overturned after it has been implemented.  Our concern is that if Alberta does not act now, they run the risk of a similar situation as Bill C69, where something gets passed that is a big negative to the oil sector.  No one should forget that its not just Alberta that has elections in 2019, the next we shouldn’t forget that the Canada federal election has to be held by Oct 21, 2019.

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Did Saudi’s Threat Today To Use Oil As A Weapon Also Include A Broadening Of What Would Cause It To Do So?

Oil is up tonight (WTI ~$0,90 and Brent ~$1.10) following Saudi’s not so veiled threat this morning to potentially use oil as a weapon.  We are also writing ahead of the 60 Minutes playing of its full interview with Trump.  However, that was recorded yesterday (before today’s Saudi warning) so we don’t expect the interview to have any major shifts in emphasis from the publicly disclosed portion yesterday for potential “severe punishment” if Saudi Arabia is at guilty in the Khashoggi mystery.  Unless the US, Canada and others retreat on the Khashoggi mystery, we expect that oil is likely higher with the Saudi threat.  Global oil supply is tight with the Iran/Venezuela oil declines and any Saudi retreating of its current 10.7 mmb/d  will cause oil to go higher.  Perhaps most importantly, we see added risk as today’s Saudi statement seemed to point to a change in the Saudi policy on oil exports.  Today, Saudi Arabia includes in others attempt to undermine it threatening sanctions, but also “using political pressures, or repeating false accusations”.  This appears to be a broadening of the risk of impacting oil exports from the recent Saudi Press Agency report “that said “Khalid Al-Falih, reaffirmed that the petroleum policy of the Kingdom of Saudi Arabia emphasizes that the Kingdom’s petroleum supplies to countries around the world are not to be impacted by political considerations.  He reiterated that this is a firm and longstanding policy that is not influenced by political circumstances”.   We believe this broadening of the Saudi position should put more of a risk premium in oil than what is being seen so far tonight, that is unless there is a retreat in criticism of Saudi Arabia.  Today’s statement suggests a broadening of what would cause Saudi to cut off oil exports.

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