Arjun, I have 3 questions: While you give examples, have you defined "diversified" in a previous post? When I see Exxon and Chevron I think of integrated oil companies, but I'm not exactly sure that is what you mean, because you also mention duration which I've been interpreting as having additional long term supply capacity (which investors are not rewarding companies for presently); On the Canadian pure plays, my theory had been that they provide vital heavy oil which our refining system developed in the 70s needs to mix with domestic light sweet crude. We used to get a lot from Venezuela and of course we import heavier sour crude from the Saudis for our Gulf Coast refiners. So what is the "shelf life" for the Canadian pure plays in your opinion; Finally, what about natural gas. As we develop more LNG export capacity to replace Russian gas, shouldn't the spread drop more as export demand increases?
James, (1) no doubt the "diversification" commentary needs follow up. Short answer is I do NOT believe one needs to be integrated (or merge with a refiner) to achieve diversification or to be able to generate competitive profitability over long periods. (2) Canada I think has a lot of resource that could be developed...the politics and logistics matter as much as investor willingness to fund...and that is the question. (3) for sure we are going to need a lot of natural gas to balance renewables growth in the west and to reduce dependence on coal in EM markets. Regarding the spread, it's a complex topic...I am not 100% convinced that US pricing will ever fully close the gap with int'l and I do worry politicians here will keep that from happening (especially if int'l prices are high) by limiting exports.
Thanks for your detailed reply. I agree that a natural gas export ban is a possibility if exports materially raise domestic prices, as there were rumblings of banning oil exports last year when prices spiked. I wonder if that might create "stranded assets" given all the projects for LNG facilities that are in progress, such that one should avoid companies building such facilities?
I just subscribed - finally found someone with a common sense macro analysis of the energy sector. I am a petroleum engineer working in the Permian Basin for a small privately owned O&G company. I have more than a few grey hairs and have seen a lot in my career, but the extreme push to renewables is alarming and will end in misery for many. In the 90's I took a detour into nuclear waste disposal analysis, joining a team responsible for the environmental impact analysis of several of the large waste repositories in the US. Safe storage of nuclear waste is possible in well-engineered sites, and nuclear makes much more sense when considering the environmental damage caused by over-building wind and solar. Keep up the great analysis, Arjun!
That is very kind of you to say Kumar, thank you. But in reality, the world needs more of all of us that aren't on either extreme but still feel strongly about various issues.
Great post Arjun. It's late so I'm only going to comment about your point on Canadian "dirty oil". It's born of ignorance in my view about the maturation process of petroleum from simple keragen to less complex molecules through pressure and temperature. It drives me nuts to hear people say this but you can't fight the tide. CHeers!
Thank you for all your insights over the past year.
Re: DRC and James Robertson's NYS comments, I think we had better realize that for those who truly believe that they have a very brief time to save the planet, no amount of human suffering or economic waste is too much. How can it be? It seems it will come down to pain vs true believers. Do I dare note the True Believers run every institution in the country as of now?
Thank you Tom. What I don't get is the solutions proposed by the True Believers don't make any sense. If they really are True Believers, they should be all over nuclear power.
That's a good point, Arjun. In a rational world that would be the answer (or one of several reasonable answers). I'm admittedly speculating here, but I think it's a combination of nuclear just being off-limits (utterly beyond even discussing in polite circles) and the magical thinking that "renewables" and "energy storage" will solve any problems.
I was once a scientist (B Sc MIT 1980; M Sc Northwestern 1981), but left to go trade options at the CBOE and CBOT. When we traded bond options at the CBOT we regularly carried 100,000 options home at night. Risk managing that was our forte. I've been in markets my entire career (tho retired several years ago). What I learned is that markets are not inanimate emotionless coin tosses that can thus be easily modeled. They are irrational highly emotional human beings. "Impossible" tail events happen regularly. As I tell the young kids, "I've seen 8 once-in-a-lifetime events in my 42 yr career." : ) That has made markets immensely enjoyable. I tell people I also "enjoy" market's "evil twin": politics; it's the same irrational human behavior. History is littered with millennia of human irrationality; and it can persist. It has that feel now.
I assume you have read Daniel Kahneman's "Thinking Fast and Slow"? It explained all the things I've seen in markets over the years, and also in politics. Cialdini too. Taleb's Fooled By Randomness saved me a lot of money over the years.
I apply the same potential for irrational unreasonable unexpected outcomes to politics and to the political ramifications for my investments. Politics, as much as oil price volatility potential, has kept me from being truly overweight energy. It is also the attraction. Feels like Big Tobacco decades ago. Time will tell.
Happy New Year Arjun and thanks so much for your excellent work! Was nice to see the links to Joe Rogan's interview on cobalt mining in the DRC and George Noble's interview with Motorhead. They both appeared in my YouTube feed and I watched/listened to them both earlier (kind of scary how Google's algorithms can predict what I'm interested in). Also as a resident of NYS we not only followed CA with the EV mandate, which if I read the articles about it correctly imposes some intermediate compliance deadlines (first one in 2026), but also the State's climate action council recommended new laws on 12/19 that I'll be waiting to see if the State adopts. One recommendation is that existing homes won't be able to replace fossil fuel heating furnaces after 2030, but must use heat pumps. A lot of older houses like mine use hot water baseboard that you just can't plug a heat pump into and I get A/C with window units or through the wall A/C units. I replaced my oil burner for about $8000 in 2014 and I don't have air conditioning ductwork. Even with tax credits, it would be a lot more expensive for me to install a split system heat pump. So if this recommendation becomes law, I guess I better sell before 2030 and make it the next owner's problem. .
James, Thank you very much for your kind words! Thanks for the color on the challenges in upstate NY with what is being mandated. I suspect all these mandates will have to change...but not without a lot of consternation in the short term. I am personally not against moving toward any of these new items: EVs, heat pumps, etc. It's the "mandate" part that seems highly problematic.
Arjun I agree completely. We should be pursuing all these new technologies. It's just the mandates/unrealistic deadlines that bother me. I'm very interested in the development of heat pumps that will work in colder climates (ones that can handle below zero Fahrenheit like we had for several days recently), but if an article I read earlier this week is accurate, the tech is still being tested and not ready for production at scale. Also if we are going to electrify all the things we currently use fossil fuel for, there must be a lot of spending to improve the grid to carry that additional load. Transformers around here blow out regularly under existing loads, because the distribution system is old and doesn't get replaced until something breaks (very much like our water/sewer system).
Many thanks for your thoughtful & balanced musings over the last year. I look forward to seeing your updates in my ‘stack. I am a 25+ year PM/Wealth Advisor, who thankfully caught the energy lift in late’21/22 while piecing together a high short/intermediate-term inflationary thesis. I can tell you are a passionate educator and we certainly need more like you on social media. Wishing you a healthy and prosperous ‘23
Many thanks Art. I really appreciate the kind words and well wishes. It has been surprisingly fun and rewarding to engage with a broader audience than I had been in all my current and previous roles.
Arjun, I have 3 questions: While you give examples, have you defined "diversified" in a previous post? When I see Exxon and Chevron I think of integrated oil companies, but I'm not exactly sure that is what you mean, because you also mention duration which I've been interpreting as having additional long term supply capacity (which investors are not rewarding companies for presently); On the Canadian pure plays, my theory had been that they provide vital heavy oil which our refining system developed in the 70s needs to mix with domestic light sweet crude. We used to get a lot from Venezuela and of course we import heavier sour crude from the Saudis for our Gulf Coast refiners. So what is the "shelf life" for the Canadian pure plays in your opinion; Finally, what about natural gas. As we develop more LNG export capacity to replace Russian gas, shouldn't the spread drop more as export demand increases?
James, (1) no doubt the "diversification" commentary needs follow up. Short answer is I do NOT believe one needs to be integrated (or merge with a refiner) to achieve diversification or to be able to generate competitive profitability over long periods. (2) Canada I think has a lot of resource that could be developed...the politics and logistics matter as much as investor willingness to fund...and that is the question. (3) for sure we are going to need a lot of natural gas to balance renewables growth in the west and to reduce dependence on coal in EM markets. Regarding the spread, it's a complex topic...I am not 100% convinced that US pricing will ever fully close the gap with int'l and I do worry politicians here will keep that from happening (especially if int'l prices are high) by limiting exports.
Thanks for your detailed reply. I agree that a natural gas export ban is a possibility if exports materially raise domestic prices, as there were rumblings of banning oil exports last year when prices spiked. I wonder if that might create "stranded assets" given all the projects for LNG facilities that are in progress, such that one should avoid companies building such facilities?
not sure if we get to "stranded assets" or not but a high risk business for sure.
I just subscribed - finally found someone with a common sense macro analysis of the energy sector. I am a petroleum engineer working in the Permian Basin for a small privately owned O&G company. I have more than a few grey hairs and have seen a lot in my career, but the extreme push to renewables is alarming and will end in misery for many. In the 90's I took a detour into nuclear waste disposal analysis, joining a team responsible for the environmental impact analysis of several of the large waste repositories in the US. Safe storage of nuclear waste is possible in well-engineered sites, and nuclear makes much more sense when considering the environmental damage caused by over-building wind and solar. Keep up the great analysis, Arjun!
thank so much Dan! and appreciate your comments on nuclear storage.
Beautiful and well written ,the world needs more of you
Thank you
That is very kind of you to say Kumar, thank you. But in reality, the world needs more of all of us that aren't on either extreme but still feel strongly about various issues.
Great post Arjun. It's late so I'm only going to comment about your point on Canadian "dirty oil". It's born of ignorance in my view about the maturation process of petroleum from simple keragen to less complex molecules through pressure and temperature. It drives me nuts to hear people say this but you can't fight the tide. CHeers!
thanks Dave!
Arjun,
Thank you for all your insights over the past year.
Re: DRC and James Robertson's NYS comments, I think we had better realize that for those who truly believe that they have a very brief time to save the planet, no amount of human suffering or economic waste is too much. How can it be? It seems it will come down to pain vs true believers. Do I dare note the True Believers run every institution in the country as of now?
Thank you Tom. What I don't get is the solutions proposed by the True Believers don't make any sense. If they really are True Believers, they should be all over nuclear power.
That's a good point, Arjun. In a rational world that would be the answer (or one of several reasonable answers). I'm admittedly speculating here, but I think it's a combination of nuclear just being off-limits (utterly beyond even discussing in polite circles) and the magical thinking that "renewables" and "energy storage" will solve any problems.
I was once a scientist (B Sc MIT 1980; M Sc Northwestern 1981), but left to go trade options at the CBOE and CBOT. When we traded bond options at the CBOT we regularly carried 100,000 options home at night. Risk managing that was our forte. I've been in markets my entire career (tho retired several years ago). What I learned is that markets are not inanimate emotionless coin tosses that can thus be easily modeled. They are irrational highly emotional human beings. "Impossible" tail events happen regularly. As I tell the young kids, "I've seen 8 once-in-a-lifetime events in my 42 yr career." : ) That has made markets immensely enjoyable. I tell people I also "enjoy" market's "evil twin": politics; it's the same irrational human behavior. History is littered with millennia of human irrationality; and it can persist. It has that feel now.
I assume you have read Daniel Kahneman's "Thinking Fast and Slow"? It explained all the things I've seen in markets over the years, and also in politics. Cialdini too. Taleb's Fooled By Randomness saved me a lot of money over the years.
I apply the same potential for irrational unreasonable unexpected outcomes to politics and to the political ramifications for my investments. Politics, as much as oil price volatility potential, has kept me from being truly overweight energy. It is also the attraction. Feels like Big Tobacco decades ago. Time will tell.
Thank you again for all you do.
I have not read Kahnemann's book...appreciate the recommendation.
Thank you Arjun and Happy New Year !! 🌈 🌈
Ive been following you for most of 2022, looking forward to your input in 2023 😊
Your comments on Capex and ROCE are guiding me well. !! 👍👍
Thank you Gary. Happy New Year to you as well and appreciate all your support and readership!
Happy New Year Arjun and thanks so much for your excellent work! Was nice to see the links to Joe Rogan's interview on cobalt mining in the DRC and George Noble's interview with Motorhead. They both appeared in my YouTube feed and I watched/listened to them both earlier (kind of scary how Google's algorithms can predict what I'm interested in). Also as a resident of NYS we not only followed CA with the EV mandate, which if I read the articles about it correctly imposes some intermediate compliance deadlines (first one in 2026), but also the State's climate action council recommended new laws on 12/19 that I'll be waiting to see if the State adopts. One recommendation is that existing homes won't be able to replace fossil fuel heating furnaces after 2030, but must use heat pumps. A lot of older houses like mine use hot water baseboard that you just can't plug a heat pump into and I get A/C with window units or through the wall A/C units. I replaced my oil burner for about $8000 in 2014 and I don't have air conditioning ductwork. Even with tax credits, it would be a lot more expensive for me to install a split system heat pump. So if this recommendation becomes law, I guess I better sell before 2030 and make it the next owner's problem. .
James, Thank you very much for your kind words! Thanks for the color on the challenges in upstate NY with what is being mandated. I suspect all these mandates will have to change...but not without a lot of consternation in the short term. I am personally not against moving toward any of these new items: EVs, heat pumps, etc. It's the "mandate" part that seems highly problematic.
Arjun I agree completely. We should be pursuing all these new technologies. It's just the mandates/unrealistic deadlines that bother me. I'm very interested in the development of heat pumps that will work in colder climates (ones that can handle below zero Fahrenheit like we had for several days recently), but if an article I read earlier this week is accurate, the tech is still being tested and not ready for production at scale. Also if we are going to electrify all the things we currently use fossil fuel for, there must be a lot of spending to improve the grid to carry that additional load. Transformers around here blow out regularly under existing loads, because the distribution system is old and doesn't get replaced until something breaks (very much like our water/sewer system).
Many thanks for your thoughtful & balanced musings over the last year. I look forward to seeing your updates in my ‘stack. I am a 25+ year PM/Wealth Advisor, who thankfully caught the energy lift in late’21/22 while piecing together a high short/intermediate-term inflationary thesis. I can tell you are a passionate educator and we certainly need more like you on social media. Wishing you a healthy and prosperous ‘23
Many thanks Art. I really appreciate the kind words and well wishes. It has been surprisingly fun and rewarding to engage with a broader audience than I had been in all my current and previous roles.
Thank you for your terrific work Arjun
Thank you MA! very much appreciated.