I close out every year with an examination of how my annual predictions fared, followed by what I felt were the top energy stories of the year. I then open up the new year with energy sector predictions for the upcoming year. Today, my top energy stories of 2019.
A plant manager I once worked for was fond of the saying “Perception is reality."
I hated the phrase. I am a logical math and science guy. After all, 1+1 is never 3, even if you believe it to be so. Reality is reality, regardless of what your perception may be.
But I came to understand what he meant by the phrase, even if I didn’t agree with it. How you perceive things influences your actions. It is your reality, even if isn’t objective reality.
That brings me to today’s oil markets. Of all the top stories this year - and for the past couple of years for that matter - the underlying theme is one of too much oil and not enough demand. That’s essentially true, but the perception for many is that slow demand is the dominant factor. This, in turn, is perceived to be a result of decarbonization trends like electric vehicles (EVs) taking a big bite out of oil demand.
This perception has affected oil markets so much that they now seem relatively impervious to news that would have sent oil prices skyrocketing a decade ago.
My reality is that the demand side of the equation remains strong. When the BP Statistical Review was released in June, it showed that annual oil demand had grown by 1.4 million barrels per day (BPD) year-over-year. That 1.5% gain to a new all-time high was ahead of the 10-year average of 1.2%.
Demand growth has been slowing somewhat lately, but the International Energy Agency (IEA) projects that 2019 demand grew by 1.0 million BPD, and 2020 demand growth will be 1.2 million BPD. But U.S. shale oil production has been expanding at a faster clip than demand growth, and that’s what’s really driving the ambivalent oil markets.
While many of this year’s top stories would have had a major and long-lasting impact on the oil markets before the shale oil boom, today they are quickly forgotten.
As long as U.S. shale production continues to grow at the current pace, global supplies are deemed to be adequate and oil prices will continue to face headwinds. And if U.S. shale grows for another 5-10 years, EVs will likely make serious inroads into oil demand and oil prices may never recover.
This theme underlies this year’s top stories. Below I present what I believe were this year’s top stories, followed by brief commentary on each.
The Top Five
1. Attacks on Aramco oil facilities.
The September drone attacks on Saudi Arabia’s largest oilfields and the world’s biggest crude processing facility at Abqaiq knocked a total of 5.7 million BPD of oil production offline. This represented more than 5% of the world’s oil production, and was the most significant attack on oil infrastructure ever.
Yet these attacks weren’t the most consequential disruption, primarily because of the abundance of shale oil and because Saudi Arabia had built up inventories. There was a brief spike of nearly 20% in the price of oil, but it returned to normal relatively quickly as the damages were repaired.
2. Aramco IPO
In early December, Aramco finally carried out its long-awaited initial public offering (IPO). The company initially traded at a valuation of $1.7 trillion, but quickly ran up to the $2 trillion value that had been suggested by Saudi Crown Prince Mohammed bin Salman.
3. OPEC cuts production to prop up oil price
OPEC continued to respond to swelling U.S. shale oil production by reducing its own production. As I have argued before, this is really the only strategy that makes sense for the cartel. The group made two production cuts this year in conjunction with Russia and other oil-producing nations. This brings the total production cuts from OPEC and its allies to 1.7 million BPD.
4. U.S. oil production sets a new record of 12.8 million BPD
This could have been the top story of the year, because of its impact on the rest of the world’s oil markets. We would be living in a very different world today if not for the massive increase in U.S. oil production over the past decade.
The new record was 1.2 million BPD higher than last year’s record, and it pushed the U.S. to net exporter status for crude oil exports and finished products for the month of October.
5. Norway announces fossil fuel divestment
The Top 4 were pretty clear to me, but beyond that there were several stories that could have landed in the fifth spot. I chose Norway’s announcement early in the year that its Government Pension Fund Global (GPFG) would divest certain fossil fuel investments.
The announcement was symbolically important, given the size of the fund and the fact that the fund itself is a product of Norway’s oil and gas history. Most of the reporting missed major context over the story, namely that the fund would actually retain most of its oil and gas investments. But the move follows similar moves around the globe, so I chose it as a representative example of the push to divest fossil fuel investments.
Other Noteworthy Stories
Beyond the Top 5, here were other 2019 energy stories of significance, in no particular order.
ExxonMobil (NYSE: XOM) wins climate lawsuit
The state of New York sued ExxonMobil, charging that the company engaged in “a longstanding fraudulent scheme" on the the economic risks of climate change.
In early December the verdict came down, which read in part: “The Office of the Attorney General failed to prove, by a preponderance of the evidence, that ExxonMobil made any material misstatements or omissions about its practices and procedures that misled any reasonable investor."
Occidental’s (NYSE: OXY) acquisition of Anadarko
Chevron (NYSE: CVX) initially attempted to acquire Anadarko, but Occidental ultimately offered more in a transaction valued at $55 billion. The market deemed that Occidental overpaid, punishing shares mercilessly following the transaction.
Permian becomes top oil field
Ahead of its IPO, Aramco lifted the veil of secrecy around its oilfields. Production at the Saudi Ghawar oilfield - which has long been the world’s largest conventional onshore oil field - was reported at only 3.8 million BPD. That meant that the Permian Basin had surpassed Ghawar to become the world’s biggest oil-producing region.
Green New Deal
There were a number of important stories in the renewable/environmental space this year, but one of the most talked-about stories was the so-called “Green New Deal."
The Green New Deal refers to a pair of resolutions from Rep. Alexandria Ocasio-Cortez (D-NY) and Sen. Ed Markey (D-MA) to transition the United States to 100% renewable, zero-emission energy sources within 10 years. The deal received a lot of criticism - including from within the Democratic party - that many of the ideas didn’t represent realistic policy proposals. However, the story itself received quite a lot of coverage.
Greta Thunberg
As with the Green New Deal story, there are lots of questions around whether real action will arise from Greta Thunberg’s activism. But the rise of 16-year-old Swedish environmental activist Thunberg and the “strike for climate" received considerable media attention throughout the year.
During the year, as she traveled the globe to challenge political leaders to take serious action on climate change, Thunberg addressed the United Nations and earned Time magazine’s ‘Person of the Year’ award. She even got the attention of President Trump, who singled her out more than once on Twitter.
Renewable capacity surpasses coal
The U.S. has been increasing renewable power capacity at a rapid clip over the past decade. A number of milestones have fallen in the process, as renewable energy and natural gas worked together to slash U.S. coal consumption.
During the year, the Federal Energy Regulatory Commission (FERC) reported data that showed that renewable energy’s share of total available installed U.S. generating capacity had surpassed coal’s share for the first time ever.
Trade war impact on ethanol
Over the past couple of years, there has been a constant battle between ethanol producers and oil refiners over how much ethanol must be blended into the nation’s fuel supply. But this year, another factor had a major impact on ethanol’s market. The trade war with China caused ethanol exports to that country to dry up, which put pressure on ethanol producers all year.
Russia’s Floating Nuclear Power Plant
A story that received far more coverage internationally than it did in the U.S. was Russia’s deployment of the world’s first floating nuclear power plant, the Akademik Lomonosov.
The plant was deployed to Pevek, a port town on the remote Chukotka Peninsula in the Russian Arctic and will provide power to about 100,000 homes. Greenpeace opposed the project, dubbing it “Chernobyl on ice," while staging protests to get the message across.
Those are my picks for the year’s top energy stories.
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