With Donald Trump set to enter the White House and OPEC having agreed to production cuts, analysts are focused on how the global oil industry and prices will be impacted in 2017. The new U.S. President-elect and his cabinet, along with their pro-drilling policies, are increasing hopes of a bright future for the U.S. oil industry, but it remains to be seen whether these hopes will translate into any practical outcomes. The most important of Trump’s energy appointments, it would seem, is the ex-CEO of ExxonMobil Rex Tillerson as Secretary of State. This and the recent deal struck in Vienna among the OPEC and NOPEC producers has caused global oil markets to rally. The benchmark Brent crude price has crossed the $55 mark and WTI is not far behind. Analysts are predicting that Trump’s team − unlike the outgoing Obama administration − will approve many of the halted North American pipeline projects and will make more land available for drilling, greatly benefitting the U.S. oil and gas industry.
But Michael Lynch, an energy analyst with a decade of experience in the industry, describes in a recent article how president-elect Donald Trump may cause damage to the industry instead of helping it to grow. Trump’s acrimony towards China has been widely reported on, evidenced by his threats to stop Chinese imports in order to boost U.S. domestic industry. But the approximately $500 million per annum of U.S oil and drilling equipment imported from China will certainly be more expensive if it is imported from elsewhere or made in the U.S. Lynch argues that “onshore operations could be made more expensive by tariffs on Chinese steel pipes in an effort to bolster U.S. steelmaking and coal mining”, adding that if Trump ends federal support for renewables there may be a loss of jobs in the energy sector. Such an outcome would be antithetical to his promises.
With regard to the availability of U.S. federal lands, one can easily see that land is not the major issue that oil majors and independents face − it is the price. Analysts have seen how the rig count has continued to climb as the prospect of a tighter oil supply in 2017 has increased the likelihood of higher prices. But the future of this rally hinges on the sensitive OPEC deal agreed in Vienna on November 30th and, as this reporter has noted before, the first six months of the planned reduction in output by OPEC and NOPEC are extremely significant. If the producers do not see any difference in oil price then members may eventually back off.
And, there is another catch. As Tillerson is perceived to be a reliable ally of Russian President Vladimir Putin, next year might see the lifting of sanctions on Russia by the U.S, which may consequently encourage the Russians to produce more oil as they would be unhindered by any Western sanctions. "While Russia is expected to substantially raise its mineral-extraction tax for next year, the crude export duty is set to decrease, “making crude exports in January more attractive vs. this month,” said JBC Energy in a research note.”
Another question yet to be answered is whether, after Tillerson’s appointment, Saudi Aramco − considered to be the largest company in the world by valuation − will be undermined by Tillerson’s ExxonMobil ties. “Most of Tillerson’s Exxon shares will not vest for a decade and would stand to increase in value from political decisions made in favour of Exxon’s interests. It seems unlikely that Tillerson would shun the shares to walk away with just $57m and a conflict-free bill of health. But keeping the shares would open the door to unrelenting scrutiny of his actions. Tillerson has been outspoken in his disapproval of sanctions against Russia, which reportedly cost Exxon $1bn in lost revenue from its projects in the hydrocarbon-rich country” reports the U.K. Telegraph.
But recently, the U.S. oil majors −once called before Congress to explain their ‘windfall profits’ − have suffered from lay-offs and falling share values. BP, Chevron and ExxonMobil and many more have posted billions of dollars in losses last year. “Tillerson's exit from Exxon would come after a tumultuous period for his company, punctuated by a $1.7 billion loss in the second quarter and the loss of its AAA credit rating following the crushing global slide in oil prices” USA Today reported.
On the other hand, not much is known about Saudi Aramco. The Saudi oil giant’s facts and figures have long been shrouded in mystery as the oil kingdom does not release reliable data regarding its operations and financials. The recent plan to make a 5 percent share of Aramco public will create the largest sovereign fund in history, with a valuation conservatively estimated at $1 trillion. The recent increase in oil price may help the public offering further. Also, as the Saudi Deputy Crown Prince, Muhammad bin Salman, embarks on a plan to wean the country off oil, industry observers expect to see significant diversification in the Saudi energy sector. Few of these developments have been initiated, but recently Saudi Aramco announced two contracts: one for a wind turbine facility and another for a gas plant. A $900 million contract signed with South Korea’s Doosan Heavy Industry and Construction for establishing a power plant of 1.5GW is another development. Additionally, SoftBank and KSA are launching a technology fund which will see 100 billion dollars in investment. This marks Saudi Arabia’s entrance into the global technology sector.
Notwithstanding the fact that Exxon’s former CEO will sit in the world’s most powerful diplomatic position, the fact remains that he − or for that matter Mr. Trump − do not have much power over the global oil industry, especially as to the oil and gas majors’ ability to generate profits and increase crude oil prices commensurate to the levels seen before 2014. “It’s clear that he’s talked about relaxing environmental regulations, and that would obviously bode well for the drillers and what not, and that would include opening up some federal lands that have been restricted, both onshore and offshore,” Thomas Watters, an energy analyst, was quoted as saying by USA Today. “But just to be clear, the drilling activity... that we have seen in the U.S. wasn’t due to regulation, it was due to economics. So, at the end of the day, it’s going to be about where oil prices are and how producers react to that”.
In fact, Saudi Aramco, is doing very well as it appears to be moving towards a path of future diversity and adaptability. ExxonMobil and other majors should do the same. As far as oil prices are concerned, it seems that the strength of the U.S. dollar, U.S. wells being expected to produce prolifically given the regulatory support of Trump administration, and the “Putin factor” may not prove as beneficial to the oil industry as they seem on the surface. As noted above, it remains to be seen whether the hopes of a new energy re-emergence will translate into any practical outcomes.
By Osama Rizvi for Oilprice.com
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