Drone strikes attempt to disrupt Saudi oil exports

On 14 September 2019, drone and missile attacks on oil installations in Saudi Arabia briefly put about half the country’s oil production offline. Houthi rebels in Yemen claimed responsibility, but the US administration blamed Iran, an allegation that the Iranian government denied. Whoever was responsible, the key point for oil markets was that there were forces that had both the intent and the capability to disrupt Saudi production and exports.

This month, another round of attacks has again highlighted the security situation in the region. After a succession of strikes on Saudi Arabia in recent weeks, Houthi militants said they launched a total of 22 drones and missiles on Sunday at targets including Ras Tanura, the critical oil export terminal.

This time, the impact was minimal. Most of the attacking ordnance was destroyed by the Saudi defence systems. There were no casualties, and there was no damage to property or material disruption to oil supplies. Since 2019, Saudi Arabia has taken steps to strengthen its defences against missile and drone strikes, and those efforts appear to be paying off: it has recently had a good success rate in stopping attempted attacks.

However, the threat of possible disruption to supplies still helped boost oil prices. The attacks came hard on the heels of the decision by the OPEC+ countries last week to keep production largely unchanged, allowing only small increases for Russia and Kazakhstan. With that decision creating a supportive environment for prices, Brent crude briefly rose above $71 a barrel on Monday.

As well as reawakening oil markets to the potential threats to supplies from the Gulf, the attacks have also been a reminder of the enduring strength of the US-Saudi alliance. The Biden administration has talked about “recalibrating” the US relationship with Saudi Arabia, and has taken several steps reflecting that shift, including ending the official designation of the Houthis as a terrorist organisation. The administration described that decision last month as “a recognition of the dire humanitarian situation in Yemen”, and urged all parties in the war to “focus on engaging in dialogue”.

After the weekend’s strikes, however, the US embassy in Saudi Arabia tweeted its condemnation of the “heinous” attacks, saying the Houthis had demonstrated “their lack of respect for human life and interest in the pursuit of peace”. The embassy added that US commitment to defending Saudi Arabia and its security was “unwavering”.

Jen Psaki, the White House press secretary, said the US was “alarmed” by the frequency of Houthi strikes, adding: “Escalating attacks like these are not the actions of a group that is serious about peace.” She promised that the US would “look for ways to improve support for Saudi Arabia’s ability to defend its territory against threats.”

The strength of the reaction underlined the continuing importance of Saudi Arabia. Even after a series of changes over the past decade, including the US tight oil revolution and the beginning of a global shift towards lower-carbon energy, Saudi Arabia still plays a critical role in global fuel supplies. The risk of material disruption to its oil exports may currently seem low, but it is a threat that the US and other leading economies will continue to take very seriously.

Chevron keeps on full steam ahead in the Permian Basin

Chevron this week gave its annual Investor Day presentation, setting out its plans for raising returns while cutting the carbon intensity of its production. One of the company’s more eye-catching goals was the objective of doubling its return on capital employed by 2025, from 2.9% in 2020. It is aiming to achieve that with Brent crude averaging $50 a barrel, but the presentation also made clear that higher or lower prices would lead to very different results. A sensitivity analysis showed a downside scenario for 2021-25 with Brent flat at $40 a barrel, which would mean Chevron having to borrow to cover its capital spending and dividend. In the upside scenario with $60 Brent, there would be excess cash after capital spending and dividends, and that could also be distributed to shareholders.

Another noteworthy feature of Chevron’s presentation was its projection for production growth in the Permian Basin. Last week ExxonMobil held its Investor Day, which similarly highlighted prospects for increased returns and cash flow while curbing carbon emissions. One of the headlines from that presentation was a sharp scaling back of production growth projections for the Permian Basin over the next five years. A year ago ExxonMobil suggested that by 2024 it could be producing more than 1 million barrels of oil equivalent a day in the Permian. This month, it scaled that projection back to about 700,000 boe/d by 2025.

Chevron was similarly aiming for more than 1 million boe/d of Permian production by 2025, but it has stuck to its plans, with the help of the 92,000 acres in the basin that it added as a result of the $13 billion acquisition of Noble Energy last year.

Chevron’s presentation his week showed it expects a slight dip in production from the Midland and Delaware basins this year, but then a strong rebound up to 2025. “In the short term we expect to invest [in the Permian] at levels consistent with last year,” said Jay Johnson, Chevron’s executive vice-president for upstream. “Over the next five years we expect to flex our activity higher as supply and demand come into balance.” Wood Mackenzie’s Robert Clarke is working on a comprehensive analysis comparing Chevron’s target with ExxonMobil’s, so look out for further details coming soon.

Meanwhile, Chevron has also published its 2021 climate change resilience report, including the company’s views on climate policy and the energy transition, and a wealth of detail on its own emissions over the past five years. One issue that caught my eye was the methane leakage associated with Chevron’s  production. Its US onshore operations emit just 0.8 kilograms of carbon dioxide equivalent in leaked methane per barrel of oil equivalent produced. That is less than one sixth of the US national average, which is 5.4 kg CO2e per boe.

Democrats propose climate legislation

While the Biden administration has been focused on steering its $1.9 trillion economic stimulus plan through Congress, some Democrats have already been working on what they would like to be next on the legislative agenda: measures to cut US greenhouse gas emissions. Three leading Democrats in the House of Representatives last week launched the “CLEAN Future Act”, a wide-ranging bill intended to commit the US to “a 100% clean economy” by 2050. To set the country on course for that goal, the bill would mandate a 100% zero-carbon power sector by 2035, offer new support for storage, transmission and EVs, and require states to draw up plans for cutting total emissions over the next three decades.

It is hard to see much of this plan ever being passed into law. There is some bipartisan support in Congress for action on climate change: Mitt Romney, the Republican senator from Utah and former presidential candidate, said last month that he was “very open to a carbon tax, carbon dividend, where there's a tax on oil companies and coal companies and so forth,” with the revenue returned to taxpayers. However, that market-oriented approach based on carbon prices, which is supported by ExxonMobil, Chevron and soon the American Petroleum Institute, is significantly different from the more prescriptive strategy of the CLEAN Future Act, and it will be difficult to bring supporters of the two approaches together. And unless there is at least some measure of bipartisan consensus, climate legislation is highly unlikely to pass. Joe Manchin, the centrist Democratic senator from West Virginia who is a key swing voter in the Senate, made clear recently that he would not back any infrastructure or climate legislation that did not have support from Republicans.

Rather than either mandated clean energy standards or carbon prices, President Joe Biden is likely to throw his weight behind carbon-reducing investments as part of a strategy to rebuild US infrastructure. On the campaign trail and in office, he has often emphasised that he wants his climate policy to support job creation. This week the Bureau of Ocean Energy Management published its environmental impact statement for the Vineyard Wind 1 offshore wind farm off the coast of Massachusetts, taking the project a step closer to being able to start construction. Infrastructure investments like that, which help create jobs and generate tax revenues, stand the best chance of finding broad-based support.

Jared Bernstein, one of Biden’s economic advisers, said this week that he thought an infrastructure package could win bipartisan backing. “I think when it comes to investments, for example, in infrastructure, there are a lot of Republicans — I know this for a fact — who are willing to work with us,” he said. The future of Biden’s climate ambitions could hang on whether he  is right about that.

In brief

Tesla is developing a 100 megawatt battery storage project in Texas to support the state’s power grid, Bloomberg reported. After the catastrophic failure of power supplies in freezing weather last month, there is naturally great interest in any development that might make system more resilient. If the project in Texas is similar to the large battery that Tesla installed in South Australia, however, its value in another cold weather emergency will be limited. Tesla’s Hornsdale Power Reserve has a maximum output of 150 MW, and storage capacity of 189 megawatt hours, meaning that it could potentially run at full power for about an hour and a quarter. That could help with short-term threats to grid stability, but would not make much difference in another shortfall of generation capacity that lasts for several days.

BP’s trading arm made nearly $4 billion in 2020, almost equalling its record profit in 2019, Reuters reported.

And finally: another book recommendation. Javier Blas and Jack Farchy of Bloomberg are two of the best reporters covering the energy and natural resources beat, and whatever they do is always worth a look. They have a new book out about the great commodity traders, called The World For Sale, which is a lively, incident-packed read about an important and under-reported sector. Recommended.

Other views

Jonathan Sultoon — What would it take to limit global warming to 1.5 degrees?

Simon Flowers — US tight oil: the investment dilemma

Gavin Thompson — China’s blue skies need green clouds

Julian Kettle — A new mining super-cycle: can supply rise to the challenge?

Emma Weng — Tracking Tesla’s revenue generator: the Fremont factory

Alex Trembath — Our ecomodernist politics

Homi Kharas and Andrew Rogerson — Climate finance: what are the ‘known unknowns’?

Jimena Blanco and Mariano Pablo Machado — Resource nationalism surges in 2020 as Covid-19 worsens the outlook

Julio Friedmann — Direct air capture is ready for its close-up

Quote of the week

“I fought a lot within the framework of the recovery plan to explain that a car means freedom of movement. Today, if a French person owns a car, they know they are going to be able to find a gas station, they don’t have to worry about it. But having bought an electric car myself, I know people do worry about it then. And so it is absolutely necessary to cover the country, and to cover it with fast charging stations.” — Patrick Pouyanné, chief executive of Total, used a television interview to explain the critical importance of investment in a network of fast-charging stations for countries such as France that are planning to switch to electric vehicles. The full interview includes a number of other valuable insights on Total’s views on the energy transition.

Chart of the week

A corollary of the expected boom in EV sales is that there is also going to have to be a boom in charging infrastructure. This chart from Wood Mackenzie’s Kelly McCoy shows the massive growth expected in the market for equipment for charging commercial vehicles. Electric buses and trucks remain relatively expensive compared to their diesel and gasoline-fueled rivals, but governments pushing for reductions in greenhouse gas emissions and local air pollution are expected to drive rapid growth over the coming decades. Last year, most of the spending on charging infrastructure worldwide was for electric buses, where China is dominant, but that is expected to change dramatically over the next few years. Charging equipment for light trucks is forecast to account for the great majority of spending on infrastructure for commercial EVs out to 2050.