Thanks again Arjun for a very nice piece. If I was going to nitpick, I do think the Brent price range probably would need to be $10/bbl, or higher, to ensure the industry generates sufficient FCF and ROCE as unit costs would inflate (both opex and capex) if the industry attempted to increase production to the level you propose, and to incent demand to contract. Otherwise, keep sharing these articles as they are great thought prices and I hope are read by many outside the energy industry to get a better understanding of how the industry works and what is at stake.
Arild, so great to see you here and thank you very much for your comments. One of the best parts about writing in a public forum again is reconnecting with former clients. I do hope you'll check out the ROCE ones I did, in particular "Identifying Early ROCE Signals Ahead of Major Cycle Turns". Would welcome your feedback. Regarding your $10/bbl comment, I agree. But even though I wasn't publishing publicly before, I had basically been using a ~$65/bbl normalized price as where I thought industry earned its cost of capital (my personal view, not the view of any affiliations to be clear to others that may read this). I think you are right that with inflation, etc., one could easily add $10/bbl and rising to that number. I think with the geopolitical madness we we are in, it really isn't about the "normalized" price for the foreseeable future. There is no real near-term path to replacing 5-7 mn b/d of Russia net oil/product exports. Going to be a super volatile environment.
In North America the pipeline issue is a very real constraint, and unfortunately, contains so many veto points that stretch out over years.
I think the transition "valley of death" is a major risk, and asking real questions about "where should the last barrell come from?" Is an interesting framing.
One under discussed risk among those interested in climate policy that I simply can't fathom being ignored: these price swings, global supply shocks, and lack of investment uncertainty are the kind of things that will SLOW and damper political efforts towards emission reductions. There is some weird thing going on where folks think the current situation helps their cause, by showing "see we should be at least at 1 or 2mmbd less of domestic oil consumption here in the US and then we'd have more wind turbines and then everything would be fine." Even were that true (it's not) I think the number of voters who see it that way is nearly zero. So the backlash will be very real.
Plans that require 10-30 years of more or less perfect geopolitical stability to maintain popular support for their energy transition models are very bad plans.
You’ve got the fire in your belly Arjun. Excellent piece, well argued.
“I am not in the camp that for US shale that “ESG”, thus far, has been a major driver for why CAPEX growth has been subdued.” This is an important detail that gets overlooked too often. I understand why folks are critical of decarbonisation policies. But we mustn’t lose sight of what’s really been deterring upstream investment in recent years, and it’s not ESG — yet. That seems to be changing, but blaming ESG for past mistakes made by industry/investors is unhelpful & divisive.
Same goes for the ‘renewables/ESG bear some responsibility for events in Ukraine’ line that’s getting some airing at the moment (not in Super-Spiked, I might add). Yes some terrible mistakes have been made in European energy policy, too many to name. But the zealotry of some people to use this f***ed up situation to further an anti-renewables, anti-emissions reduction ideology is extremely unwelcome.
The balance and perspective you bring to this debate is welcome and important Arjun, keep up the good work.
Thanks so much Seb. And the feelings are mutual and I hope all my subscribers check out your EnergyFlux newsletter for excellent perspectives in particular on European energy. I am especially relieved to see that my comment about the role of Europe's energy choices on Ukraine was correctly received (at least by you). The issue of course is not renewables growth...it is prematurely moving away from other sources of energy too quickly and not having a resiliency plan for either intermittency (renewables) or geopolitics (Russia gas and oil).
Indeed Arjun. The problem is not adding in new energy sources (wind, solar), it is subtracting old ones (gas, coal, oil) before replacements are ready. It never ceases to amaze me how many commentators fail or refuse to understand this.
I've been thinking more about your good/bad barrels concept. There is probably scope for a new category, or perhaps some nuance. For example, where would you place producers such as Nigeria, or non-OPEC members Brazil, Mexico, Malaysia? Or new exporter Guyana? These are not geopolitical adversaries to the West and their economies rely on oil exports.
Thanks for the positive words. Since you mentioned my newsletter, people can check it out at www.EnergyFlux.news :)
The "good" vs "bad" concept, as you highlight, isn't near as black and white as the words suggest. In the context of American politics, I think it 100% fits that Texas + Alberta are definitely "good" and Russian and Iran are "bad". Not sure how there could be any argument to that, but based on rhetoric at least, apparently some Americans think otherwise. I will call Mexico good, Brazil as pretty good, Guyana I think is good. But "good" also includes environmental protections and other related considerations. There is still plenty of room for American oil to improve its methane metrics, which it should do with the same urgency that I think the US admin should stop seeking oil everywhere but at home. Both sides could do better.
I can't disagree with that. At the extremes, who else goes into the 'bad' pot? Curious to run the numbers on it: what % of global supply is 'bad' and how many of those barrels can be replaced by increasing output from the 'good' or 'intermediate' ones? Assuming 100% replacement is not possible, do we just have to live with some 'bad' barrels to meet demand?
Great piece. I think this is the trap of western environmentalism: we push problems to other corners of the world where we don't have to look at them. Nickle, cobalt, and lithium mining are other great examples of this phenomenon.
thank you Cole. fully agree with your sentiments. I just don't get why this isn't painfully obvious to the enviro movement. I am fully on board with holding oil companies accountable for what they can control, e.g., methane emissions, etc. But the idea that somehow not drilling here helps solve climate change doesn't bear out on any analysis.
Great piece but regrettably I suspect your current administration is too entrenched in virtue signalling to go down the path of, ironically, most virtue. Never ceases to amaze me how dogma can outweigh logic, it’s the same over here in Europe with our friends in Germany.
thank you Andrew. What I find most disconcerting is that moderate Dems, who fully understand these issues, can't or don't recognize the urgent need for a mindset shift. So we have elections basically every 2 years and would be on-track to swing hard the other way, which means we likely will get the embrace for NAM drilling/pipelines/regulatory relief, but without the reasonable climate steps we should be taking. Sigh.
Thanks again Arjun for a very nice piece. If I was going to nitpick, I do think the Brent price range probably would need to be $10/bbl, or higher, to ensure the industry generates sufficient FCF and ROCE as unit costs would inflate (both opex and capex) if the industry attempted to increase production to the level you propose, and to incent demand to contract. Otherwise, keep sharing these articles as they are great thought prices and I hope are read by many outside the energy industry to get a better understanding of how the industry works and what is at stake.
Arild, so great to see you here and thank you very much for your comments. One of the best parts about writing in a public forum again is reconnecting with former clients. I do hope you'll check out the ROCE ones I did, in particular "Identifying Early ROCE Signals Ahead of Major Cycle Turns". Would welcome your feedback. Regarding your $10/bbl comment, I agree. But even though I wasn't publishing publicly before, I had basically been using a ~$65/bbl normalized price as where I thought industry earned its cost of capital (my personal view, not the view of any affiliations to be clear to others that may read this). I think you are right that with inflation, etc., one could easily add $10/bbl and rising to that number. I think with the geopolitical madness we we are in, it really isn't about the "normalized" price for the foreseeable future. There is no real near-term path to replacing 5-7 mn b/d of Russia net oil/product exports. Going to be a super volatile environment.
In North America the pipeline issue is a very real constraint, and unfortunately, contains so many veto points that stretch out over years.
I think the transition "valley of death" is a major risk, and asking real questions about "where should the last barrell come from?" Is an interesting framing.
One under discussed risk among those interested in climate policy that I simply can't fathom being ignored: these price swings, global supply shocks, and lack of investment uncertainty are the kind of things that will SLOW and damper political efforts towards emission reductions. There is some weird thing going on where folks think the current situation helps their cause, by showing "see we should be at least at 1 or 2mmbd less of domestic oil consumption here in the US and then we'd have more wind turbines and then everything would be fine." Even were that true (it's not) I think the number of voters who see it that way is nearly zero. So the backlash will be very real.
Plans that require 10-30 years of more or less perfect geopolitical stability to maintain popular support for their energy transition models are very bad plans.
You’ve got the fire in your belly Arjun. Excellent piece, well argued.
“I am not in the camp that for US shale that “ESG”, thus far, has been a major driver for why CAPEX growth has been subdued.” This is an important detail that gets overlooked too often. I understand why folks are critical of decarbonisation policies. But we mustn’t lose sight of what’s really been deterring upstream investment in recent years, and it’s not ESG — yet. That seems to be changing, but blaming ESG for past mistakes made by industry/investors is unhelpful & divisive.
Same goes for the ‘renewables/ESG bear some responsibility for events in Ukraine’ line that’s getting some airing at the moment (not in Super-Spiked, I might add). Yes some terrible mistakes have been made in European energy policy, too many to name. But the zealotry of some people to use this f***ed up situation to further an anti-renewables, anti-emissions reduction ideology is extremely unwelcome.
The balance and perspective you bring to this debate is welcome and important Arjun, keep up the good work.
Thanks so much Seb. And the feelings are mutual and I hope all my subscribers check out your EnergyFlux newsletter for excellent perspectives in particular on European energy. I am especially relieved to see that my comment about the role of Europe's energy choices on Ukraine was correctly received (at least by you). The issue of course is not renewables growth...it is prematurely moving away from other sources of energy too quickly and not having a resiliency plan for either intermittency (renewables) or geopolitics (Russia gas and oil).
Indeed Arjun. The problem is not adding in new energy sources (wind, solar), it is subtracting old ones (gas, coal, oil) before replacements are ready. It never ceases to amaze me how many commentators fail or refuse to understand this.
I've been thinking more about your good/bad barrels concept. There is probably scope for a new category, or perhaps some nuance. For example, where would you place producers such as Nigeria, or non-OPEC members Brazil, Mexico, Malaysia? Or new exporter Guyana? These are not geopolitical adversaries to the West and their economies rely on oil exports.
Thanks for the positive words. Since you mentioned my newsletter, people can check it out at www.EnergyFlux.news :)
The "good" vs "bad" concept, as you highlight, isn't near as black and white as the words suggest. In the context of American politics, I think it 100% fits that Texas + Alberta are definitely "good" and Russian and Iran are "bad". Not sure how there could be any argument to that, but based on rhetoric at least, apparently some Americans think otherwise. I will call Mexico good, Brazil as pretty good, Guyana I think is good. But "good" also includes environmental protections and other related considerations. There is still plenty of room for American oil to improve its methane metrics, which it should do with the same urgency that I think the US admin should stop seeking oil everywhere but at home. Both sides could do better.
I can't disagree with that. At the extremes, who else goes into the 'bad' pot? Curious to run the numbers on it: what % of global supply is 'bad' and how many of those barrels can be replaced by increasing output from the 'good' or 'intermediate' ones? Assuming 100% replacement is not possible, do we just have to live with some 'bad' barrels to meet demand?
Great piece. I think this is the trap of western environmentalism: we push problems to other corners of the world where we don't have to look at them. Nickle, cobalt, and lithium mining are other great examples of this phenomenon.
thank you Cole. fully agree with your sentiments. I just don't get why this isn't painfully obvious to the enviro movement. I am fully on board with holding oil companies accountable for what they can control, e.g., methane emissions, etc. But the idea that somehow not drilling here helps solve climate change doesn't bear out on any analysis.
Great piece but regrettably I suspect your current administration is too entrenched in virtue signalling to go down the path of, ironically, most virtue. Never ceases to amaze me how dogma can outweigh logic, it’s the same over here in Europe with our friends in Germany.
thank you Andrew. What I find most disconcerting is that moderate Dems, who fully understand these issues, can't or don't recognize the urgent need for a mindset shift. So we have elections basically every 2 years and would be on-track to swing hard the other way, which means we likely will get the embrace for NAM drilling/pipelines/regulatory relief, but without the reasonable climate steps we should be taking. Sigh.