The Fuse

Twin Defeats Highlight Industry in Crisis

by Nick Cunningham | July 06, 2020

In the span of 24 hours, two long-distance pipelines suffered massive defeats, one of which appears to be fatal for the project’s existence. The developments will have far-reaching effects on producers, pipeline builders and how investors perceive risk in today’s environment.

But those pipeline setbacks are part of a broader story in which the winds facing the oil and gas industry are blowing in an increasingly unfavorable direction.

Two pipeline losses
On Sunday, Dominion Energy and Duke Energy pulled the plug on their $8 billion, 600-mile Atlantic Coast pipeline, which would have carried natural gas from the Marcellus Shale through West Virginia and to markets in Virginia and North Carolina. The decision comes just a few weeks after a high-profile victory the U.S. Supreme Court, which upheld permits granted to the project to cross the Appalachian Trail.

Despite prevailing in the Supreme Court, other regulatory challenges remained. The Army Corps of Engineer’s Nationwide Permit 12 authority, which offered an accelerated track to obtain key water permits, was recently tossed out by a Montana judge, raising risk not only for the pipeline in question (in that case, Keystone XL), but for all pipelines using that process. That includes the Atlantic Coast pipeline.

The potential collapse of the Nationwide Permit 12 authority led to “an unacceptable layer of uncertainty and anticipated delays” for the Atlantic Coast pipeline, Dominion Energy said in a press release. That, combined with skyrocketing costs, led the utilities to cancel the project, a dramatic and sudden demise after years of controversy.

A day later, another judge vacated a permit for the Dakota Access pipeline, ordering the pipeline – which has been operating for three years, carrying 570,000 barrels of oil per day from the Bakken – to temporarily shut down and empty the line by August 5. The judge blasted the Army Corps’ violation of federal environmental laws when it granted approval for the project in 2017. Dakota Access now needs an entire environmental impact statement, which is widely expected to last until at least the spring of 2021. Unless Energy Transfer, the pipeline’s owner, prevails in an appeal, the pipeline could be offline until then.

Dakota Access is not only slated for immediate shutdown, but is also at risk of being entirely scrapped, pending the outcome of the 2020 presidential election. Energy Transfer’s stock plunged by 11 percent shortly after the decision.

The shutdown will affect upstream producers as well. Continental Resources, a prominent driller in the Bakken shale, also saw a steep drop in its share price.

Oil industry at a crossroads
The pipeline defeats come as oil and gas markets suffer through historic crises due to overcapacity at a time of a global pandemic and sharp economic downturn. The market urgency for new infrastructure has evaporated as a result.

Meanwhile, the long-term outlook for oil and gas has never looked less certain. In just the past few weeks, BP took a $17.5 billion writedown and Royal Dutch Shell topped that with a planned writedown of $15 to $22 billion. ExxonMobil has stubbornly refused to write down assets, but has hinted at a major loss for the second quarter.

On Monday, Italian oil giant Eni said it would write down between 3 billion and 4.2 billion euros, the bulk of which will be related to its upstream unit.

The oil majors are acknowledging that some of their oil and gas assets have not only soured, but may never see the light of day.

The oil majors are acknowledging that some of their oil and gas assets have not only soured, but may never see the light of day. Lowering their long-term oil price assumptions, the majors are resigned to the fact that oil and gas demand may be weaker than previously thought.

Some are positioning themselves as trying to get ahead of the coming energy transition. “We confirm our strategy to become a leader in the decarbonization process, notwithstanding the enduring impacts of the COVID-19 pandemic on the global economy and the Company,” Eni CEO Claudio Descalzi said in a statement on Monday. “We are assessing how to speed up our plans.”

The write-downs, along with the broader market downturn, have fueled debate about the prospect of peak demand. And not just that peak demand may arrive sooner, but that it may have already passed.

Forecasts vary, and the arrival of peak demand is by no means a market consensus. But such a prospect is no longer confined to some outlier status. In just the past week, Danish consultancy DNV and Citigroup each offered versions of peak demand. “Oil product demand growth will falter significantly, change its contours and never return to pre-covid-19 rates of growth,” Citi analysts said.

“Even with slower growth, however, by mid-century the world economy will still be twice its size today,” DNV wrote. “In contrast, energy demand will not grow. In 2050, it will be about the same as it is today, in spite of a larger population and world economy.”

The specifics of the natural gas industry are different, but in broad strokes, the trend is similar. Utilities are increasingly “skipping” the natural gas bridge, and accelerating a shift to renewables, according to recent report from the Institute for Energy Economics and Financial Analysis (IEEFA). Renewables are already cheaper than gas in most markets. “[W]hat is clear is that transitioning from coal to renewables can be done now, cost effectively and reliably, without an interim shift to gas,” IEEFA analysts wrote.

The losses to the oil and gas industry continue to pile up, with market, regulatory and political forces throwing up new hurdles. The cancellation of the Atlantic Coast and the Dakota Access pipelines, and the plunging value of oil and gas assets around the world, are all reflections of the industry’s declining fortunes.

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