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Welcome back to Energy Source. BP released its always hotly-debated energy outlook this week. The report provides endless fodder for energy nerds (that’s us!) to argue about the future of the sector.
I want to focus here on the projections for future oil demand, which has vast implications for climate change, national economies and some of the biggest companies in the world. BP predicts demand will plateau this decade and then fall off — gently in its current policies scenario and more aggressively if governments crack down on emissions. In its current policies scenarios, the world is burning around 75mn barrels of crude a day in 2050, roughly 25 per cent less than today.
Contrast this with the (more overlooked) outlook from ExxonMobil released several weeks ago. Exxon is kinda sorta on the peak oil demand bandwagon. But its peak comes much later and in its view of the world, the global economy is still burning more crude in 2050 than it does today.
Both see deep electrification of cars and trucks. One of the biggest differences is that Exxon believes booming demand for oil in things such as plastics and chemicals will more than make up for the boom in EVs.
These are remarkably different views of the future of crude coming from within the small crop of western oil supermajors — and underscores the companies’ very different strategies. Who do you think is likely to be more correct, Exxon or BP? Let me know: firstname.lastname@example.org.
Also in today’s newsletter, Myles has a dispatch from his trip to the booming Permian, Harry Dempsey digs into a flurry of big rare earth announcements, and Amanda looks at where Europe is getting its diesel ahead of new Russia sanctions on the fuel.
Thanks for reading — Justin
Dispatch from the bustling Permian
The Permian at night is a spectacle to behold.
As sun sets over the vast plains of south-eastern New Mexico and west Texas, lights flitter across the horizon as pick-up trucks haul equipment to-and-fro, convoys of oilfield workers motor back to town after the day’s shift and towering rigs peer down over the melee.
Despite increasing doubts over the longevity of America’s shale revolution the world’s biggest oilfield is a hive of activity. I spent some time on the New Mexican side of the Permian last week, travelling between Hobbs, Carlsbad and Artesia.
You can read my write up here. But here are some of my key takeaways:
1. The jobs market is booming . . .
As production ratchets up, employment in the Permian is soaring. Joblessness in oil and gas has slipped below 2 per cent to a decade low.
Pay is on the up too. Roustabout wages have jumped 7 per cent to $22/hour in the past 12 months, according to Rystad Energy.
Truck drivers in particular are in high demand. “If you have a CDL [commercial trucking license] that’s like a golden ticket,” Josh Grassham, senior vice-president at Lea County State Bank told me. “If you can get that, you’re going to make $100k without an education.”
The boom in oil jobs has spilled into other industries as workers are drawn to the oilfields. Retail and hospitality bosses have been forced to jack up wages as they scramble to hold on to staff. Burger King in Hobbs is offering up to $28 an hour to flip burgers — $10 more than the same job earns in New York.
“I think the market has been working in south-east New Mexico,” said Cathrynn Brown, who represents the area in the state legislature.
“Fast food places have had to raise their wages to get employees in so they’re paying some pretty impressive wages — $15 an hour just to start. But there are so many help wanted signs still.”
2 . . . so is everything else
It’s not just the job market that is in a frenzy. Everywhere you turn in Lea and Eddy counties — which make up the vast majority of New Mexico’s oil production — there are signs that the economy is heaving.
“I’d say we’re boom territory again,” said Dustin Armstrong, head of the Hobbs Chamber of Commerce. “And for me, I judge it just by the traffic.” Congestion on the roads has become a fact of life in Hobbs since May of last year.
Land values have soared too. One tract in the latest federal lease sale in New Mexico notched up a whopping $68,000 an acre — when a high bid in the state (where much of the drilling land is federally-held) rarely exceeds $10,000 an acre. “It’s been years since we saw prices like that,” said Justin McClelland, who works as a landman in Artesia.
3. New Mexico moves into the spotlight
New Mexico is often forgotten about when people talk about the Permian, with its bigger Texan neighbour stealing the limelight. But the state is now producing more oil than ever before — at 1.6mn barrels a day it is pumping even more than Mexico.
That is good news for a state that has struggled with high levels of poverty. Driven by oil and gas revenue, the state budget has exploded to $9.4bn this year, versus $6bn in 2019.
“Its almost shocking how quickly that fund has grown because of oil and gas,” said Randy Pettigrew, a representative in the New Mexico state house.
4. A ‘greying’ workforce
Wages in the Permian look set to remain elevated through to the end of 2024, analysts say. But aside from the risks associated with price volatility, one key challenge looms on the horizon: the age of its workforce.
“Operators are likely to continue facing some headwinds with respect to hiring activity — primarily driven by a rapidly ageing workforce,” said Sumit Yadav, a supply chain analyst at Rystad Energy.
About a quarter of New Mexicans will be over 65 by the end of the decade, according to Rystad. That means almost 1,000 extra retirements by 2025 — representing 3 per cent of the state’s oil and gas workforce.
Whatever oil prices do, that will provide employers with increasing headaches.
Are the latest rare earth claims to be believed?
As the race to build a US clean energy supply chain speeds up, an exploration group claims to have found the country’s highest-ever grade deposit of rare earths.
But in a sector where big claims are becoming commonplace, scepticism abounds.
The discovery by US Critical Materials comes just weeks after another group claimed it had discovered Europe’s largest deposit in Sweden. In both cases, rare earth industry veterans have decried the fanfare as overblown.
US Critical Materials’ announcement claims a 9 per cent concentration of rare earth oxides at Sheep Creek in Montana, which was confirmed by analyses from an independent Canadian laboratory ActLabs. By comparison, the Swedish discovery had a .18 per cent concentration.
Rare earth elements are a set of 17 metals that are relatively abundant but difficult to process economically. China controls 90 per cent of global rare earths processing and dominates the magnet industry that consumes the outputs.
Breaking that dependency is of strategic importance to the US with rare earth demand expected to increase three to seven times by 2040, according to the International Energy Agency. Washington is offering juicy incentives to relocate mining and processing for minerals used in clean energy technology to its own shores.
But Jon Hykawy, president and director of Stormcrow Capital, said a full mineralogy study for Sheep Creek was lacking, making it impossible to judge the size of the resource and whether it would be economically feasible to extract.
“The question isn’t whether you find one rock and it contains a lot of rare earths, the question is whether you have a lot of these rocks,” he said. “Every prospective mine has a lot of work to do before it can think about becoming commercial.”
Ryan Castilloux, managing director of consultancy Adamas Intelligence, questioned the role that Sheep Creek could play in supplying the US with rare earths even if production can begin within four years as the company hopes. It would compete for limited demand from North American magnet producers with MP Materials, which is restoring the US’s only rare earths mine and processing facility.
There could be more opportunity in Europe because of the continent’s up-and-coming permanent magnet supply chain. But attempts to create western rivals to China have suffered failed attempts before, including US Rare Earths, the previous incarnation of US Critical Materials, which went out of business in 2014 when China flooded the market and rare earth prices tumbled.
Castilloux says “the challenge going forward for governments is to avoid being at the mercy of China’s pricing” of rare earth elements by legislating to create higher prices for sustainably produced metal rather than competing on cost alone. (Harry Dempsey)
The EU will enforce another round of sanctions next week against Russia. The sanctions, which go into effect February 5, will ban imports of Russian diesel and refined products.
Despite the looming deadline, almost 30 per cent of the EU’s diesel imports still come from Russia, according to data firm Kpler. The trade bloc is averaging 547,000 b/d in Russian diesel imports in January, up 2.4 per cent from last year, prior to Russia’s invasion of Ukraine.
“The EU27 countries are going to have to pivot dramatically to offset the loss of that Russian material,” said Matt Smith, lead oil analyst at Kpler.
Smith expects a reshuffling in the diesel market following the embargo, with the EU importing more from the Middle East, India, and the US, and Russia rerouting products to Africa and Latin America.
The role of Asian buyers is a key difference in this round of sanctions from the one in December, which banned exports of Russian seaborne crude. While India and China have been gobbling up the surplus of discounted Russian barrels, the two countries are major refining hubs and will not be much help to Russia to offset the EU’s demand this time around.
The G7 and EU have yet to agree on a price cap for Russian refined products. The price cap of $60 per barrel on Russian seaborne oil in December had minimal impact on Russian production. Kpler expects Russian crude exports to reach a seven-month high in January. (Amanda Chu)
EU plans to relax state-aid rules in retaliation against “toxic” green subsidies in the US Inflation Reduction Act.
Shell announces the company’s second internal restructuring in three years as it seeks to navigate the energy transition.
High material costs and bureaucratic delays are depressing profits for the European wind industry.
Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.
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