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Speaker 2: Hello, and welcome to another episode of the Oddlocks podcast.
Speaker 3: I'm Joe Wisenthal and.
Speaker 4: I'm Tracy Alloway.
Speaker 2: Tracy, remember a couple of years ago, you know, when
Speaker 2: like oil prices started booming, and there was this big
Speaker 2: story that like production wasn't coming back. All these oil
Speaker 2: companies had found discipline, They're all focusing on profits, et cetera,
Speaker 2: not just volume, and that the expectation would be that
Speaker 2: production would be depressed for a long time.
Speaker 4: Wait, I don't think it wasn't that production was ever
Speaker 4: coming back. It was that production and would slow substantially.
Speaker 4: And the idea was that this is one part of
Speaker 4: the oil boom story of the sort of mid twenty tens.
Speaker 4: That always fascinated me was it was actually a capital
Speaker 4: market story. So it was all these investors who just
Speaker 4: poured money into shale oil basically and thought they were
Speaker 4: going to make millions and millions. Shale completely over expanded.
Speaker 4: It became very very difficult for them to actually pump
Speaker 4: at a profit, and so they all started collapsing. They
Speaker 4: all started pulling back. All the investors got burned, and
Speaker 4: they were like, we're never going to touch this industry
Speaker 4: with a ten foot pole ever again.
Speaker 3: And then lo and.
Speaker 4: Behold in sort of the early twenty twenties, shale starts
Speaker 4: to become profitable again. It starts to expand. It says
Speaker 4: it's expanding at a more disciplined pace than previously. But
Speaker 4: I have questions about that. But yeah, it's all changed,
Speaker 4: it's all turned around.
Speaker 2: Yeah, I'm glad. You know, you brought up that capital
Speaker 2: market aspect that did seem to be in this idea
Speaker 2: of depressed production, seemed to be all part and parcel
Speaker 2: of that that suddenly financial conditions were tightening, that the
Speaker 2: market was placing this premium in this new nonserp world
Speaker 2: of you know, cash flow today, et cetera. And so like,
Speaker 2: I'm stillly confused, like what exactly happened with that story.
Speaker 2: You know, there's lots of things. As production has come back,
Speaker 2: it seems like investors are still into the space. Prices
Speaker 2: have come down, then there's all kinds of obviously geopolitical
Speaker 2: stuff going on. It seems like it's a time to
Speaker 2: sort of take stock of what's going on in.
Speaker 3: The energy world.
Speaker 4: Yeah, well, US oil production in particular, right, I mean,
Speaker 4: I think that's an all time high. I actually, if
Speaker 4: you look at domestic production in the US, I think
Speaker 4: it's something like thirteen million barrels of crude per day
Speaker 4: and twenty million including you know, energy and things like that.
Speaker 4: So an all time high. And it means that you
Speaker 4: oil basically accounts for one of every eight barrels of
Speaker 4: global output. So pretty big stuff there.
Speaker 2: Yeah, pretty extraordinary. So what happened to all the narratives?
Speaker 2: Is production coming back? Why have prices falling? I'm very
Speaker 2: pleased to bring in the person we always love to
Speaker 2: turn to when it comes to oil and energy. We're
Speaker 2: going to be speaking to our colleague, Javier Blast, Bloomberg
Speaker 2: opinion columnists on oil and energy. How thank you so
Speaker 2: much for coming back on outlaws.
Speaker 3: Thank you for having me again?
Speaker 2: Have you what is the deal with that? So like
Speaker 2: we're back at records again in the US production we add.
Speaker 5: Two record levels, and it's just an incredible number.
Speaker 3: As Stracey said.
Speaker 5: If you look just at what we say is crude oil,
Speaker 5: it's more than thirteen million dollars a day. But if
Speaker 5: you add on top of that number other things that
Speaker 5: they go into the oil liquids streams, so like condensates
Speaker 5: and NGLs or natural gas liquids, a bit of ethanol,
Speaker 5: et cetera, et cetera, we are well above million borrows
Speaker 5: a day of oil production on that compares to one
Speaker 5: hundred million worldwide. So you put everything together, the US
Speaker 5: is producing one in five barrels of oil consumed. That
Speaker 5: is just an incredibly high number, and it doesn't seem
Speaker 5: to be about to stop. Probably it's gonna slow down
Speaker 5: a bit in twenty twenty four, but it's going to
Speaker 5: continue to go up.
Speaker 4: Okay, where is all that new oil actually coming from?
Speaker 4: Because it's been a while since I've brought up the
Speaker 4: rig count chart, But if you look at the rigcount chart,
Speaker 4: I mean, this is such a fun one because you
Speaker 4: can see the big humps of the early twenty tens
Speaker 4: and then the big slide into twenty fifteen, and now
Speaker 4: it seems kind of flat. So there's been some increase
Speaker 4: between twenty twenty and twenty twenty two. The number of
Speaker 4: new rigs being drilled has gone up, But it's not
Speaker 4: like it's not like we're seeing a boom in new
Speaker 4: gas rigs and new explorations. So where is all this
Speaker 4: oil coming from.
Speaker 5: Well, it's coming from the very same places that it
Speaker 5: was coming about ten years ago, but it's coming in
Speaker 5: some way, and.
Speaker 3: For lack of a better war better.
Speaker 5: So it's coming from Texas, it's coming from New Mexico,
Speaker 5: and it's coming a bit from North Dakota, Oklahoma, et cetera,
Speaker 5: et cetera. It's coming from the shale regions of the
Speaker 5: United States. But if we were to say where in
Speaker 5: just one single or two or in this case three
Speaker 5: single wars is Texas and New Mexico. That's where the
Speaker 5: new oil is coming. And you're right, Tracy, the recount
Speaker 5: is not significantly up. Actually, you look at from a
Speaker 5: long perspective, it's lower than it was during the previous
Speaker 5: booms of shale.
Speaker 3: But it's just that the oil.
Speaker 5: Companies in Texas and New Mexico have got very good
Speaker 5: at distracting more oil from those rigs, from those wells
Speaker 5: that they are drilling, and they're also doing much longer well. See,
Speaker 5: if you think about how an oil shale were looks
Speaker 5: like it first goes down vertically and then it just
Speaker 5: turns around ninety degrees and he goes horizontal for a while.
Speaker 5: At the beginning, those horizontal wells were relatively short, perhaps
Speaker 5: you know, a quarter of a mile, half a mile
Speaker 5: at most. Now they're going as much as three miles horizontally,
Speaker 5: and that they can get a lot more oil that
Speaker 5: they were able to do a few years back.
Speaker 3: So it's important.
Speaker 2: We're going to talk a lot about the capital markets
Speaker 2: an investor aspect, but it's important just like ongoing technological
Speaker 2: improvements as well. What else is happening on this sort
Speaker 2: of Oh.
Speaker 4: Oh, can I read? Sorry, I never get a chance
Speaker 4: to do this. Can I read one of my all
Speaker 4: time favorite leads from a story that is all about
Speaker 4: technological improvements?
Speaker 3: Oil? Joy?
Speaker 4: Okay, okay, Javier, Joe, you guys are ready, I'm gonna
Speaker 4: read it.
Speaker 1: Okay.
Speaker 4: This is a story from twenty sixteen. Last spring, stat
Speaker 4: Oil announced it had used the same oil well design
Speaker 4: and components to drill three reservoirs for the price of one.
Speaker 4: While the specs for Norwegian sy drilling might provoke reactions
Speaker 4: akin to the oil field's name, the snore, such standardized
Speaker 4: pipes and casings could hold the key to a pervasive
Speaker 4: mystery about today's energy market. Why is everyone still drilling
Speaker 4: when prices are in the basement? Snore? Get it? Oh
Speaker 4: that's good, Maybe you have to read it.
Speaker 2: So that really held up?
Speaker 3: Well?
Speaker 2: So what changed twenty sixteen?
Speaker 3: Have you?
Speaker 2: Well?
Speaker 5: Technologically? Why we can driad longer, particularly the laterals. We
Speaker 5: can pump fracking fluids at the higher pressure, and companies
Speaker 5: are also very good at doing these super quick. Previously
Speaker 5: a well could have taken thirty days. Now it takes ten.
Speaker 5: They just companies and their crews have got very good
Speaker 5: at doing it, and that means that they can do
Speaker 5: it cheaply. And that's the funny part of the whole
Speaker 5: boom of twenty twenty three and twenty twenty four, at
Speaker 5: difference of the previous ones, companies are made making money
Speaker 5: and investors are making money, so everyone is loving it.
Speaker 5: This is the first time, and this is what really
Speaker 5: terrorized or PEG. This is the first time that shale
Speaker 5: oil is growing and making money at the same time,
Speaker 5: and that's a big problem in you are Saudi Arabia.
Speaker 4: I definitely want to get to the possible response from OPEK,
Speaker 4: but just in terms of technology, I mean one of
Speaker 4: the things and the reason I brought up that story,
Speaker 4: it was the idea of standardization. So before you used
Speaker 4: to have all these bespoke custom fittings for oil rigs
Speaker 4: or platforms or whatever. But then I think there was
Speaker 4: actually like an industry wide effort or attempt to start
Speaker 4: standardizing some of these things so you didn't have to
Speaker 4: order a bespoke component for every single oil project that
Speaker 4: you were doing, and that seems to have helped make
Speaker 4: things go faster to Havier's point, and also brought down costs.
Speaker 4: How much of a big deal is that in the industry.
Speaker 5: It is a big deal. I mean it has happened
Speaker 5: everywhere in the oil industry. Let me give you my
Speaker 5: fabord Anne though, of a standardization in the oil industry.
Speaker 5: So you are working on a norsea oil platform. This
Speaker 5: is offshore outside Norway and and the United Kingdom. You
Speaker 5: need to paint a lot of the stuff yello kind
Speaker 5: of you know, yellow Dungeier, very busybll et cetera, et cetera,
Speaker 5: very stormy areas of the world.
Speaker 3: The Norsea folk.
Speaker 5: You get the kind of it's not the kind of
Speaker 5: place that you really want to spend an evening in
Speaker 5: winter there. So every company have their own shade of yello.
Speaker 5: They were nineteen different kinds of yello to paint things
Speaker 5: in the Norseea. Each company have their own shade with
Speaker 5: their own specification, and it was just ridiculous. So at
Speaker 5: one point a few engineers in the industry got together
Speaker 5: and said, well, this is a bit ridiculous. I mean,
Speaker 5: can we not just doing like a Yello Norsea And
Speaker 5: so they got together and everyone decided this is the
Speaker 5: shade of jello that we're gonna use. And now everyone
Speaker 5: is painting everything that they need to paint in yello
Speaker 5: with the same shade that at a much bigger scale
Speaker 5: has happened across the oil industry. Everything has got a
Speaker 5: standard and companies within themselves.
Speaker 3: They like it to do everything best spoke.
Speaker 5: They really in some ways gold plated a lot of projecs,
Speaker 5: so each well was a bit different to the other one.
Speaker 5: Now companies are designing one single design and when they
Speaker 5: have really thought Okay.
Speaker 3: This is it.
Speaker 5: This really works very well now copy and paste for
Speaker 5: the next twenty five to fifty one hundred wells, and
Speaker 5: that has cut costs significantly.
Speaker 2: I love the fact that, like, just something as simple
Speaker 2: as the color painting of.
Speaker 4: I'm imagining a room full of oil executives looking at
Speaker 4: different swatches of yellow and being like, no, that one's
Speaker 4: too orange. Can we get something a little bit more buttermilk?
Speaker 5: Maybe I would love to be the competition lawyers who
Speaker 5: has to stop it on the meeting to make sure
Speaker 5: that no one is saying anything inappropriate that the Department
Speaker 5: of Justice could get us, like there was a conspiracy
Speaker 5: for the yellow color look.
Speaker 2: At the different pan turner shape, but gotta do so
Speaker 2: in a legal way. All right, Let's talk about the
Speaker 2: capital markets aspect, because you know, it did seem like
Speaker 2: the way people thought about it was that the industry
Speaker 2: face had to face a choice. Would it be pursuing
Speaker 2: volume or would it be pursuing profitability? And as you've
Speaker 2: just said, like there seems to be this very weird
Speaker 2: situation in which volume is ramping and productivity is sustained.
Speaker 2: How is that happening?
Speaker 5: And how sustainable is that well to the question of
Speaker 5: how long how sustainable. I'm gonna be honest either know,
Speaker 5: I thought that production on growth will have a slow
Speaker 5: down in twenty twenty three, and it never happened. It
Speaker 5: did the opposite. They accelerated. You look to every oil executive,
Speaker 5: if you look at the forecasters of the industry, everyone
Speaker 5: is saying it's gonna sloan in twenty twenty four. But
Speaker 5: also they said the same for twenty twenty three and
Speaker 5: they were wrong. So we'll see what happens really. But yes,
Speaker 5: I mean, the industry went into this new era thinking
Speaker 5: about profitability, so everyone cut kapex, everyone tried to get
Speaker 5: more fee, and everyone thought that production growth was going
Speaker 5: to slow down because the focus was profitability. The fact
Speaker 5: that they were able to grow quite strongly came a
Speaker 5: bit of a surprise to the industry and then everyone
Speaker 5: kind of, you know, celebrated it. But here there is
Speaker 5: a very important question. If opeck have not cut production
Speaker 5: to make room for all these new shale oil from
Speaker 5: the United States, prices will have come down, and then
Speaker 5: the industry will have faced the same kind of dilemma
Speaker 5: of the past. You are producing too much, then the
Speaker 5: prices come down, your profitability comes down, and then you
Speaker 5: have a problem. So a lot of these that we
Speaker 5: are putting based on efficiency, It's true. But if not
Speaker 5: for OPEC cuting production and keeping prices about seventy dollars
Speaker 5: a power, then shale companies will be in trouble.
Speaker 4: One thing I'm really curious about is who is actually
Speaker 4: funding production now versus say, in the early twenty tens.
Speaker 2: And just to air on to that a little bit,
Speaker 2: is there any difference between private and publicly traded domestic
Speaker 2: US players?
Speaker 5: Okay, so let's go from pars on Tracy's question, who
Speaker 5: is founding this well? Back ten years ago, five years ago,
Speaker 5: it was Waller Street. It was a mix of equity
Speaker 5: and credit markets which were founding or all of these
Speaker 5: growth through different instruments. I mean sometimes it was just
Speaker 5: issuing of fresh equity. Sometimes it was bond high till bonds.
Speaker 5: Researchs lending where a bank is lending to an oil
Speaker 5: company based on the research underground, more or less like
Speaker 5: a mortgage rather than a house. You mortgage the oil
Speaker 5: research that they are underground, and a lot of that
Speaker 5: is still there, but a lot of the money now
Speaker 5: needed for the espansion and to financing all these new
Speaker 5: growth is coming from cash flow generation, is the internal
Speaker 5: cash flow of these companies. They generate enough cash to
Speaker 5: pay for all the new drilling that they're doing, to
Speaker 5: pay for all the capital investment that they need to
Speaker 5: do alongside new pipelines, et cetera, et cetera, and to
Speaker 5: pay the shareholders. These companies now for the very first time,
Speaker 5: are paying dividends and that sounds like well companies publicly
Speaker 5: listed companies would be paying dividends, that that's like normal. Well,
Speaker 5: that was not the case a few years back. But
Speaker 5: now they generate enough cash to do all of the
Speaker 5: boat And in terms of the is there a difference, Yes,
Speaker 5: publicly listed companies have been a bit more caustios. They
Speaker 5: have been trying to they have the shareholders, they have
Speaker 5: wall strips on top of them, and they have to
Speaker 5: really try to focus as much as possible on paying
Speaker 5: dividends and buying back shares. Probably on they don't have
Speaker 5: that pressure, that super strong pressure, so they have done
Speaker 5: a bit more of growing, and there is a suspicion
Speaker 5: in the industry that a lot of that growth was
Speaker 5: to try to maximize the amount of production that you
Speaker 5: are doing. So you can sell yourself to a big player,
Speaker 5: say Exomobile or Chevron, and perhaps that's not as sustainable
Speaker 5: as he looks like.
Speaker 2: Talk more about Opek, because you mentioned that USHL has
Speaker 2: benefited from OPEC cutting production.
Speaker 3: You know, I remember, I.
Speaker 2: Guess it was twenty fifty fifteen. I think when OPEK
Speaker 2: did that huge increase in production to try to kneecap
Speaker 2: US Shew, why are they sort of I guess in
Speaker 2: alignment these days, where OPEC's impulse to maintain production is
Speaker 2: good for OPEC, but also I guess clearly as you say,
Speaker 2: benefiting US production.
Speaker 5: Well, Opek is trying to keep oil prices as close
Speaker 5: as he can to one hundred dollars. It's not as
Speaker 5: successful as they will hope. Prices have been between seventy
Speaker 5: and eighty despite a lot of geopolitical tension that you will,
Speaker 5: in mind, will have pushed prices even higher. I think
Speaker 5: that they The key question here is that OPEK is
Speaker 5: convinced that this is a bit of a blip, that
Speaker 5: at some point the growth in US production slows down,
Speaker 5: the demand remains there, the annual demand growth remains there,
Speaker 5: and then they have room to expand their production to
Speaker 5: bring some of the production that they have taken off
Speaker 5: the market.
Speaker 3: Now they will able to bring it back.
Speaker 5: And I was, to be honest, the same kind of
Speaker 5: bet that Opek made in twenty eleven, twenty twelve.
Speaker 3: You know, this is a blip.
Speaker 5: Usl growth is going to slow down at some point,
Speaker 5: and after a few years, by twenty fifteen, twenty sixteen,
Speaker 5: they knnot discovered actually, no, this is not working at
Speaker 5: seventy five eighty one hundred dollars oil. These guys can
Speaker 5: grow and they can grow forever. We need to change
Speaker 5: the strategy. And that's when Opek decided to float the market,
Speaker 5: kill prices. The price of West Texas and a brand
Speaker 5: crew the two global benchmark collapsed to thirty dollars a barrel,
Speaker 5: and that's what really brought down shale growth for a
Speaker 5: few years. The jury is out whether they are making
Speaker 5: the same mistake or not, and I think that we
Speaker 5: are going to see it by the middle of this year,
Speaker 5: at most Q three of this year, we are gonna
Speaker 5: see whether US shale really is slowing down or not,
Speaker 5: and whether demand is either sustaining the growth or we're
Speaker 5: beginning to see a slowdown in demand. Because you know,
Speaker 5: electric vehicles and more energy efficiency, et cetera, et cetera.
Speaker 5: So this is this is a very important year for
Speaker 5: OPEK because if it doesn't really go as planned, OPEK
Speaker 5: really needs to change the strategy completely.
Speaker 4: What can it do in that scenario, Well.
Speaker 3: They can only do two things.
Speaker 5: One is to accept that, you know, the one current
Speaker 5: prices of seventy five dollars plus they need to cut
Speaker 5: even more production, giving shale more share of the market.
Speaker 5: Or they accept that they need to bring prices down
Speaker 5: because shale can grow at seventy five dollars and perhaps
Speaker 5: cannot grow at say fifty or four. And then OPEK
Speaker 5: and that's Saudi Arabia puts a lot more production into
Speaker 5: the market and triggers a crash. But that means lower
Speaker 5: prices for OPEK.
Speaker 4: Yeah, and it didn't really work the last time because
Speaker 4: it just incentivized everyone to cut costs and streamline and
Speaker 4: become more efficient.
Speaker 5: Indeed, you're absolutely right, and on both options means lower revenue,
Speaker 5: either because you are producing less or because you are
Speaker 5: accepting lower oil prices. But if the strategy of OPEC
Speaker 5: doesn't work, and I am not really one hundred percent
Speaker 5: sure that OPEK really has much of a strategy of
Speaker 5: the next six months. I think that they are holding
Speaker 5: the line for the next six months and then they
Speaker 5: will see.
Speaker 3: What they do.
Speaker 5: But if they are wrong, it means a period of
Speaker 5: low revenues for OPEC countries and that will be very painful.
Speaker 5: Just in mind lower revenues when you have experienced a
Speaker 5: significant increase in inflation. That means that the purchasing power
Speaker 5: of your barrel goes even lower. That's very painful for
Speaker 5: Saudi Arabia.
Speaker 4: This is a slightly off topic question, but shale producers
Speaker 4: in the US cannot join OPEK right because we do
Speaker 4: not like price fixing cartels.
Speaker 3: I think that the Department of Justice may have one.
Speaker 4: Or two yea and might have something to say.
Speaker 5: Yeah, you know, like no, I mean, it's not a
Speaker 5: completely you know, it's not a crazy question.
Speaker 4: Tracy Texas, I know it's come up every once in
Speaker 4: a while.
Speaker 5: The State of Texas sent observice to OPEK meetings in
Speaker 5: the eighties. They never joined, but actually they send observice
Speaker 5: and the State of Alaska so send observers to the
Speaker 5: OPENK meetings. I mean they will be you know, an
Speaker 5: American gentleman sit down during the open meeting as an observer.
Speaker 3: I think at some.
Speaker 5: Point cool heads and some legal advice decided that I
Speaker 5: was not very cool.
Speaker 2: It's funny the things that like one remembers from like
Speaker 2: the sort of fever swamp days of spring twenty twenty
Speaker 2: during the peak of the pandemic. But I just remember
Speaker 2: there was like some like railroad commissioner in Texas, and
Speaker 2: of course the Railroad commission in Texas is the oil regulator.
Speaker 3: There was some oil.
Speaker 2: There was some railroad commissioner who was like trying to
Speaker 2: like do diplomacy with Opek in the middle of I
Speaker 2: can't remember his name, but he was like some guy
Speaker 2: on Twitter. Do you guys remember that.
Speaker 5: Yes, there was someone I cannot remember one hundred percent,
Speaker 5: but I will come back.
Speaker 2: Yeah, there was some random guy.
Speaker 3: Let's not forget that.
Speaker 5: When Opek and an Opek plash with this this alliance
Speaker 5: between Opek and and other oil producers, including Russia, they
Speaker 5: were negotiating how to respond to the pandemic and just
Speaker 5: basically trying to agree how to split a ten million
Speaker 5: bowles that they got. Ten percent of global oil production
Speaker 5: was taken out of the market by Opek and his allies.
Speaker 5: A lot of the negotiations Donald Trump that that point,
Speaker 5: President Donald Trump was heavily involved. I mean, the whole
Speaker 5: final deal was effectively cook on a three way phone
Speaker 5: conversation between President Donald Trump, President Bloody Meat Putting, which
Speaker 5: was still, you know, negotiating these things with the White
Speaker 5: House face to face effectively on and King Salmon of
Speaker 5: Saudi Arabia. So the US in some ways it was
Speaker 5: not part of the cartel or anything like that, but
Speaker 5: it was participating in the conversations, and Trump got actually
Speaker 5: acquired a sweet deal because he got the Saudist and
Speaker 5: the Russians to agree to cut production while the US
Speaker 5: industry got absolutely nothing.
Speaker 2: I think his name. He even wrote a Bloomberg opinion
Speaker 2: column in March March twentieth, twenty twenty. Ryan Sitton was
Speaker 2: his name. The railroad commissioner who called on OPEK to
Speaker 2: coordinate with the US in constraining supply. I want to
Speaker 2: pivot for a second and talk about the Red Sea,
Speaker 2: and we talked about it a couple of weeks ago
Speaker 2: at the context of container freight. What is the rising
Speaker 2: tensions there? We recently saw the US strike at UTI assets.
Speaker 2: What does the rising tension there mean from an oil perspective.
Speaker 3: Well, it's more or less a binary situation.
Speaker 5: As long as the straight up Hormos, which is big
Speaker 5: outlet from the Persian Golf for countries like Kubey or
Speaker 5: Saudi Arabia into the open markets. As long as that
Speaker 5: remains open, what's happening on the Red Sea is of
Speaker 5: less importance. Yes, it's gonna mean an increasing cost because
Speaker 5: a lot of the oil tankers and also the leg carriers,
Speaker 5: this is liquefied natural gas carriers, they're gonna have to
Speaker 5: divert about the Red Sea and go around Africa that
Speaker 5: ads from the Persian Golf into Europe.
Speaker 3: That had probably a good.
Speaker 5: Ten to fifteen days extra, so you know, it's not
Speaker 5: as small and it could really increase the cost of shipping,
Speaker 5: but it's not the end of the world. And that's
Speaker 5: what the oil market is taking it quite relaxed. I mean,
Speaker 5: prices has barely increased over the last few days.
Speaker 3: But then you could think.
Speaker 5: Well, okay, so that is basically on a scale of
Speaker 5: one to ten, probably that's a two, maybe a three.
Speaker 5: What is the other scenario? Where the other scenario is
Speaker 5: the you know open five with Iran, not with his
Speaker 5: proxies the hoodies in Germen, but actually with Iran and
Speaker 5: the straight of hormones from somehow gets in trouble. Shipping
Speaker 5: is more difficult through it probably is not completely close,
Speaker 5: but things get really bad, and that on a scale
Speaker 5: of one to ten, that's probably twenty five. And that's
Speaker 5: the problem. That's what I say. It's a bit of
Speaker 5: a binary situation at the moment. Are we well so
Speaker 5: so far not so bad?
Speaker 4: Could it mean that more LNG gets exported from the
Speaker 4: US to Europe. That seems to be the obvious solution, right.
Speaker 5: Yeah, the obvious solution is that all the Atlantic LENG
Speaker 5: goes into euro So that's the US, but also in
Speaker 5: Nigeria trily that that's gonna go as much as possible
Speaker 5: to Europe.
Speaker 3: And then all the non Atlantic basin LENG goes to Asia.
Speaker 5: So Gutar will try to radiorect as much of the
Speaker 5: leg that they can into intu Asia. I could provide
Speaker 5: some training opportunities for LNG exporters in the United States,
Speaker 5: and let's not forget that means also more Russian LENG
Speaker 5: is gonna remain in Europe rather than going into Asia.
Speaker 5: Because Europe continues buying LG from Rascia. I mean, we
Speaker 5: stopped buying Rascia and gas through pipeline bat lngs real quickly.
Speaker 2: Just going back to the OPEC conversation, I just remembered
Speaker 2: one of the other things that we talked about a lot,
Speaker 2: I think in like twenty twenty two was just that,
Speaker 2: you know, setting aside what was going on with US
Speaker 2: show production, that there were various structural impediments to OPEC
Speaker 2: supply or non OPEC supply or OPEC plus supply, that
Speaker 2: a number of countries had let their own infrastructure slowly
Speaker 2: get into disarray with the low prices of twenty tens,
Speaker 2: that that was constraining the ability to expand. What is
Speaker 2: happening with sort of non US OPEK related capacity, what is.
Speaker 3: True in part?
Speaker 5: I mean you look at so particularly the African producers
Speaker 5: of OPEK, the likes of Nigeria, well, they have been
Speaker 5: in travel and they have been struggling to meet their
Speaker 5: own production targets. Recently, Angola left OPEK because it was
Speaker 5: not happy with the fact that OPEK was pointing to Angola,
Speaker 5: you cannot produce as much as we even allowed you
Speaker 5: to produce, so we are going to bring your production
Speaker 5: level officially to what you are able to do. Well,
Speaker 5: don Goola didn't take that very well and then decided that, well,
Speaker 5: we don't want to be part of this club anymore.
Speaker 5: Then we have two other countries that they have been
Speaker 5: producing far less than in the past but due to sanctions,
Speaker 5: as Venezuela and Iran. The sanctions are still there, but
Speaker 5: the US is enforcing them while the US is not
Speaker 5: really enforcing them anymore. It's particularly in the case of Iran,
Speaker 5: has started a blind eye because you know, the priorities
Speaker 5: get oil prices under control. So Iranian and Venezuelan production
Speaker 5: has increased significantly last year, to the point in twenty
Speaker 5: twenty three the biggest source of extra oil into the
Speaker 5: market was the ushail industry. The US was the kind
Speaker 5: of the big number into the oil market put in
Speaker 5: extra oil. The second source of extra oil in twenty
Speaker 5: twenty three compared to twenty twenty two was Iranian oil production.
Speaker 5: And that's just incredible to me that Iran added so
Speaker 5: much oil into the market to the tune of how
Speaker 5: half a million borrowers to day. So the story of
Speaker 5: Opek struggling is not as true as it was three four,
Speaker 5: five years ago. And then you have the UE which
Speaker 5: is adding a lot of production and not happy that
Speaker 5: it cannot produce more. And we are beginning to see
Speaker 5: also the Southeast starting to try to increase the production capacity.
Speaker 5: Some of that will come on a stream next year
Speaker 5: and then in twenty twenty six and twenty twenty seven.
Speaker 5: So the story within OPEK is starting to change from
Speaker 5: one of struggling to keep production to one where it
Speaker 5: and Venezuela are adding a lot of burrowers. But also
Speaker 5: we have this new production capacity expansion plants of the
Speaker 5: UIE and Saudi Arabia really about to hear the market
Speaker 5: potentially because we don't know if they will translate that
Speaker 5: capacity into actual products or not. That's a political that's
Speaker 5: a political decision.
Speaker 4: Yeah, Saudi Arabia needs to pump more in order to
Speaker 4: afford Rinaldo's contract, I guess. But you know, hearing you
Speaker 4: weigh all this out, Havevier, it sounds almost as if
Speaker 4: we're watching like a slow motion reconfiguration of the world's
Speaker 4: energy sources or energy trade, one where the US is
Speaker 4: far more prominent, Iran is more prominent than it used
Speaker 4: to be. Is that a fair way of putting it, Like,
Speaker 4: is this a reordering of the system in some respects?
Speaker 5: I think that you're putting it absolutely right. I mean,
Speaker 5: the fact that the US is exporting so much oil,
Speaker 5: and when you count crude and refined products many weeks,
Speaker 5: the US on a growth basis is sporting more than
Speaker 5: ten million borrows a day. Obviously, at the same time
Speaker 5: it's important in a bit so on a net basis
Speaker 5: about two million borrowers a day.
Speaker 3: But the fact that the US has.
Speaker 5: Oil to sport on a net basis that you know,
Speaker 5: more than he consumes and it can esport it. It's
Speaker 5: just mind blowing, and particularly for you know, I have
Speaker 5: been writing about this industry for twenty five years. If
Speaker 5: even ten years ago you have told me that the
Speaker 5: US was going to be exporting the amount of crude
Speaker 5: that is doing today, I would have said absolutely not.
Speaker 3: And you know, no way, I mean, no way, this
Speaker 3: is happening.
Speaker 5: And you know the fact that Iran and Sancians is
Speaker 5: back producing quite a little oil is also quite surprising.
Speaker 5: And the fact that Saudi Arabia has accepted again to
Speaker 5: cut unilaterally his production without the help of other production countries,
Speaker 5: something that if promise, will never do again. That is
Speaker 5: also very surprising.
Speaker 4: Yeah, where does the Biden administration set in all of this?
Speaker 4: And we've sort of touched on it in a few
Speaker 4: episodes at this point, but Biden came on on a
Speaker 4: very oil unfriendly campaign, basically talking about transitioning to green energy,
Speaker 4: and yet here we are a few years later and
Speaker 4: US domestic production is that a record around is pumping again,
Speaker 4: which is a whole other political situation. But you talk
Speaker 4: to people in the industry, how are they feeling about
Speaker 4: the Biden administration at the moment.
Speaker 5: Well, I think that the Biden administrations say it has
Speaker 5: a narrative in public just very climate change green transition,
Speaker 5: and in practice what you see has been they have
Speaker 5: not really done much to limit the US industry ability
Speaker 5: to expand. Yes, people in the oil industry will say,
Speaker 5: oh my god, you know, we have all these problems
Speaker 5: with the White House and you know they are really
Speaker 5: anti oil and anti fossil fuels and so on. But
Speaker 5: you really sit down with them and told privately and relaxed,
Speaker 5: they will admit, Look, they leave us alone, we can
Speaker 5: produce as much as we can. Their focus is on
Speaker 5: keeping energy prices down and we are all happy. Can
Speaker 5: we get more things from them?
Speaker 3: Yeah?
Speaker 5: Probably without Republican administration, we will get it more. But
Speaker 5: to be honest, we're getting more than enough. And actually
Speaker 5: we do not really produce too much oil the same
Speaker 5: prices crashing. So yeah, I mean, I think that everyone
Speaker 5: in the industry privately at least it's pretty happy with
Speaker 5: the Biden administration. In public, of course, the lobbies and
Speaker 5: so on, they have to say, oh my gosh, President
Speaker 5: Biden is threatening an energy crisis in America.
Speaker 3: That's just completely utter nonsense.
Speaker 2: Let's pivot real quickly. You have a new big piece out,
Speaker 2: I know, not all related, but about the changes happening
Speaker 2: in European energy market. What's the story about.
Speaker 3: Well, it's particularly about how we trade electricity.
Speaker 5: And you think about a few years back, and by
Speaker 5: that I mean five six years ago. A lot of
Speaker 5: the electricity market in Europe was controlled by the typical
Speaker 5: names that we all knew, the utilities that have been
Speaker 5: privatized but used to be stay owned companies, big names
Speaker 5: like you know, eedf Electricity of the France, r WUE,
Speaker 5: et cetera, et cetera. And the market was quite sedated
Speaker 5: prices were not really moving much. There was not much volatility.
Speaker 5: There were very few of the independent trade that's really
Speaker 5: making money trading electricity.
Speaker 3: And a few years back.
Speaker 5: In the middle of nowhere in Denmark, in a town
Speaker 5: called Ark, who's the big, big university town in rural Denmark,
Speaker 5: a group of companies kind of started to plot how
Speaker 5: we can make out of money out of this market.
Speaker 5: And they were really driven by two things that were
Speaker 5: happening in Europe. Was the liberalization of the market. It
Speaker 5: was a lot more of cross border electricity trading in Europe,
Speaker 5: and there was also a lot more volatility in the
Speaker 5: supply of electricity in Europe because win and solar you
Speaker 5: cannot predate how much win and solar power you're gonna
Speaker 5: get more than five days, perhaps ten days. But you know,
Speaker 5: meteorologists have a limit of you know, how strongly the
Speaker 5: win is gonna blow, or whether it's gonna be you know,
Speaker 5: cloud covered in one area of the continent or not
Speaker 5: for solar et cetera, et cetera. So that variability created
Speaker 5: a lot of price polatility, particularly in the very short
Speaker 5: of the short term market. I mean, electricity used to
Speaker 5: be traded one year in advance, one month in advance,
Speaker 5: and this company is kind of specialized in trading the
Speaker 5: next thirty minutes of the electricity market. But it's going
Speaker 5: to be you know, what is mid morning, what is
Speaker 5: going to be the demand for electricity by lunchtime.
Speaker 3: That's what they specialized.
Speaker 5: But it was you know, the five or six top
Speaker 5: of these companies were making perhaps one hundred million dollars combined,
Speaker 5: so not a lot, and you know, they were in
Speaker 5: the rather of the industry, but all that in twenty
Speaker 5: twenty two they made five billion dollars.
Speaker 3: Their return on equity on.
Speaker 5: Many names of the industry went well above one hundred percent,
Speaker 5: in some cases well about two hundred and fifty percent.
Speaker 5: So let me put it this way. The companies that
Speaker 5: were making a couple of million dollars were making ten
Speaker 5: twenty five thirty million. The guys who were making twenty
Speaker 5: five thirty million before were making a couple of one
Speaker 5: hundred million dollars, and the guys who were making one
Speaker 5: hundred all the way, they just.
Speaker 3: Went to a billion.
Speaker 5: It was just one of the biggest booms in commodity
Speaker 5: trading profitability I have ever seen. And that the piece
Speaker 5: is about these names, which outside the industry basically no
Speaker 5: one really knows about.
Speaker 4: Wait, how much of a parallel is there with the
Speaker 4: sort of old school commodities traders like a Glencore or
Speaker 4: a traffic Era. To the point where as we saw
Speaker 4: after the pandemic, you had sort of systemic issues among
Speaker 4: those commodities traders that became a headache or problem for
Speaker 4: everyone in Europe at one point in time. Could something
Speaker 4: like that happen with this new breed of electricity trader.
Speaker 5: It's the results are different, but there are very significant
Speaker 5: races with this new breed of electricity traders. A lot
Speaker 5: of what they are doing is computer driven. Some of
Speaker 5: the desks where this happening they are called automated electricity
Speaker 5: trading desk. I mean everything is done by the computer.
Speaker 5: I have been on their trading floors and in some
Speaker 5: cases eighty percent of the volume is run by computers,
Speaker 5: with the traders and the meteorologies just sitting in front
Speaker 5: of the computers making sure that everything is fine, but
Speaker 5: just the computers deciding where to buy and sell. To
Speaker 5: the point that the kind of the umbrella of the
Speaker 5: regulators in U that look at the electricity market reported
Speaker 5: that in twenty twenty two they monitor four point four
Speaker 5: billion transactions in the electricity market in Europe. That's one
Speaker 5: hundred and forty transactions every second.
Speaker 3: For the whole year. And how do you monitor that that.
Speaker 5: I don't think that the regulators really have the capacity.
Speaker 5: And then that a significant chunk of the market now
Speaker 5: is traded by firms that they have relatively small capital bases,
Speaker 5: that they are all trading from the same place in
Speaker 5: the middle of nowhere in them market, using the same
Speaker 5: banks and the same brokers. Well, it's when you know,
Speaker 5: the worst systemic risks kind of come to mind. And
Speaker 5: I'm not saying that there is a problem, but I
Speaker 5: am concerned that regulators, some policy makers in Europe don't really.
Speaker 3: Know much about them. And I was.
Speaker 5: I was recently, as I was reporting for this column,
Speaker 5: I was talking to one of the top people in
Speaker 5: the European Commission that looks at, you know, these kind
Speaker 5: of situations, and I said, well, what do you know
Speaker 5: about XY said the names of these companies and this
Speaker 5: person told me, honestly, havevier.
Speaker 3: I know that they.
Speaker 5: Exist and that's about it. I have never met. Then
Speaker 5: I don't really know much about them. When I said, oh,
Speaker 5: do you know that you know, this company made a
Speaker 5: billion dollars, you know, in twenty twenty two, and the
Speaker 5: person was utterly surprised.
Speaker 3: About the level of profitability.
Speaker 5: And the fact is kind of the I think that
Speaker 5: a lot of European policy makers they don't know what
Speaker 5: they don't.
Speaker 2: Know high policymakers all around the world. That could be
Speaker 2: said Javier Blast, thank you so much for coming back
Speaker 2: on odd louds and I guess describing across many different
Speaker 2: realms the massive changes that are happening in the energy boards.
Speaker 3: It's great to have you back, my blessed Thank you.
Speaker 4: Thanks, that was fun.
Speaker 3: Yeah, thank you.
Speaker 2: Just real quickly, Tracy, we should do more on electricity trading.
Speaker 2: I've had some requests, and I have to say, like,
Speaker 2: I still don't totally understand like the basics of electricity
Speaker 2: trading in the sense that when I think about trading shops,
Speaker 2: whether it's commodities or even just the traditional financial instruments,
Speaker 2: you know, I think about like entities that are able
Speaker 2: to wear house or absorb some sort of risk in
Speaker 2: exchange for but you can't wear house electricity because it's.
Speaker 4: I suddenly have this vision of like these electricity traders
Speaker 4: on a trading for with tool belts filled with batteries
Speaker 4: and they're like, I'm buying electricity and then someone comes
Speaker 4: and like charge their battery and then they like hold
Speaker 4: on to it and sell it two days later. It's
Speaker 4: not how it works.
Speaker 3: I don't think so.
Speaker 2: But for real, like there's not much electricity storage or
Speaker 2: it's pretty small, so like I want to do more.
Speaker 4: It does seem Yeah, it does seem like it's a
Speaker 4: unique commodity in the sense that, like the timeframe is
Speaker 4: so short and you don't have a good line of
Speaker 4: sight into electricity availability, you know, beyond a few days,
Speaker 4: because you don't know what the wind's going to be
Speaker 4: like or what how strong the sunlight's going to be
Speaker 4: and things like that. So it is really interesting from
Speaker 4: that perspective.
Speaker 2: Yeah, we should do more just on like the basics
Speaker 2: of what electricity traders do and where they they're sort
Speaker 2: of how they harvest profits. But on the oil question,
Speaker 2: I mean it's pretty wild that, at least for the
Speaker 2: moment and who knows how long it lasts, the US
Speaker 2: industry hasn't had to choose between volume and profitability. Yeah,
Speaker 2: it was like why not both.
Speaker 4: Yeah, and I think that story about technology. I mean,
Speaker 4: shale was always a technology story and a capital market
Speaker 4: story and investors getting excited about the new technology that
Speaker 4: made all this possible. But it feels like people think
Speaker 4: about technology and they think some like really cool new
Speaker 4: way of drilling. And Okay, yes, the horizontal drills are
Speaker 4: getting more horizontal and more powerful, but horizontal at horizontal AERT.
Speaker 3: That's right.
Speaker 4: But we can also talk about like just really small
Speaker 4: incremental changes, like standardizing the types of bolts that you're
Speaker 4: using in a rig, standardizing the color yellow on your
Speaker 4: North Sea platforms. That was pretty fun.
Speaker 2: I love that example. But no, it's like you just
Speaker 2: don't know where you are in the tech cycle. And
Speaker 2: the fact while you were talking, I looked up your
Speaker 2: old article from twenty fifteen that you mentioned and seem
Speaker 2: to have nailed it perfectly. We should do more on standardization.
Speaker 2: Standardization bodies are really interesting organizations too.
Speaker 4: Yeah, standardization is kind of like what drives the world
Speaker 4: and also causes problems a lot. It's really interesting. Yes,
Speaker 4: let's do a standardization series. I really want to speak
Speaker 4: to the guys that make the c the barcodes, the
Speaker 4: bar code Association.
Speaker 3: What are they up to?
Speaker 2: Love the idea of a standardization series?
Speaker 4: Yeah, all right, okay, well this is one of those
Speaker 4: episodes where we've kind of come away with five other
Speaker 4: things to discuss. Shall we leave it there?
Speaker 3: Let's leave it there. Okay.
Speaker 4: This has been another episode of the Odd Thoughts podcast.
Speaker 4: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
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