Effects of Decarbonization/Environmental Regulation on Prospects for O&G Trading

I've noticed that the conversation in the energy industry over the last couple of years has really started shifting towards decarbonization and sustainability. Regardless of what anybody's personal beliefs are, all of the major O&G companies are facing stiff pressure from shareholders and lawmakers to reduce emissions. In addition, places like New York City, California and many European countries have pledged to be carbon neutral by around 2040. This trend will only continue elsewhere, and if it happens, it seems like demand will decline fairly quickly. I know that in some cases these goals seem unrealistic given current trends and technology. But it's impossible to know where renewables will be in 20-30 years.

My question is how O&G traders will fit into this trend of decarbonization. I can imagine that there may be opportunities from O&G companies trying to optimize their assets in an increasingly complex supply chain with shrinking demand. Is this true, or will there simply be less desk seats as demand goes down?

IMO 2020 is a good example of this, where trading heavy fuel oil seems to be an opportunity after regulations are set:

But how long will this last?

Comments (18)

Dec 22, 2018

@monty09 @Butterbean @George_Banker @EnergyHOU I'm curious what your thoughts are.

Dec 22, 2018

This will lead to higher volatility for crude+products, which is good for traders.

Demand will continue to grow for many decades, driven by EM.

Green policies will be hard to implement because they are made by politicians, and politicians are disconnected from their constituents. The average person in the west is struggling, although thats not what the "data" shows and politicians do not realize this.

There will be probably 2-3 recessions or economic crises between now and "peak oil", and these will hurt way more than in the past and they will be much more global in nature even if the origin is local. These crises will slow progress towards reaching sustainability, and very few researchers/experts really get this point. When people are losing their homes left and right, nobody cares about the environment.

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Dec 22, 2018

My experience is as a summer analyst on a gas/crude desk. If anyone can build on this would be interesting

Dec 22, 2018

believe it or not. Decarbonization is bullish natural gas. At the end of the day reliability triumphs all and when the sun doesn't shine and the wind doesn't blow you need a fast ramping fuel type aka nat gas and volatility. IMO 2020 will increase LNG demand, lots of projects expanding LNG at ports, new ships using LNG, etc

As stated above, look at the growth of crude demand, EM will lead this for a while, and looking close to home it looks like SUV/truck sales are up in NA again.

As it becomes increasingly harder to build pipelines, etc - This is bullish energy vol (even though most might be bearish price)

Dec 22, 2018

Yeah being bullish nat gas makes a lot of sense, although the recent news of Exxon shelving their Canadian LNG export project makes you start scratching your head. It sounded like the environmental proxy costs from the Canadian government were too high to make the project worth while. As @trading01 mentioned above, politicians may get in the way of LNG growth, favoring renewables.
https://www.reuters.com/article/us-lng-exxonmobil-...

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Dec 22, 2018

Why build in Canada right now where you have a federal government doing everything to stop projects and kill the Canadian energy industry.

Even though the Montney/Deep Basin is arguably the most prolific gas shale formation in North America - regulatory delays, protesters, green field pipeline builds, etc vs going to the gulf where you can build on a reasonable timeline and leverage all the pipeline and storage capacity at the hub

Dec 22, 2018

Yeah, oil is here to stay for a very long time. Two points worth noting are:
1- the price elasticity of demand curve for crude
2- gains in fuel efficiency for ice vehicles. Increasingly cheaper to buy and run a ICe vehicle... we went from 30s to 20s average MPG over last decades, and this will continue. Tack on cheaper gasoline and this throws a stick in the wheel of the peak oil by 2030 crowd...

Funny to say but I think a lot of people forget that a peak isnt followed by a sharp drop in demand for crude...it's followed by years of high(in mmblpd demand terms) demand which will slowly decrease after peaking, but will still experience spikes due to the factors i listed above. We still need that coal. Gasoline demand in the US was actually decreasing in the 2000s and picked up again after Shale ....just let that sink in.

Dec 24, 2018

Crude oil will die or reach pricing parity with natural gas. It's just a matter of one breakthrough tech in batteries. The legitimate electric car is coming and that is the majority of oil demand.

Agree on EM growth versus efficiency games. That's the demand side near term.

Oil isn't going to disappear. Old vehicles will exists and perhaps oil is cheap enough to encourage some ICE engines. But if demand is at 60 million barrels a day versus 100 it's not going to be pretty for oil prices.

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Dec 23, 2018

To say the truth most talk about decarbonization & sustainability is not what it is made out to be. Yes, countries have pledged to be carbon neutral by 2040. But in the end its politicians making grand claims.

Decarbonization is a long way away. The fact is the major oil companies are not just dependent on gasoline/diesel sales. Realistically, over the next decade or half we can expect electrification of light vehicles but that still leaves the heavy vehicles on the road/sky/seas. The fuel for them will be provided by the O&G industry.

For demand to truly decline there has to be a seismic shift in human behavior pattern and in development of the necessary infrastructure required to support this revolution. Another thing to consider is the fact that O&G companies are more pervasive in daily life than we think. The EV vehicles in the future will still require coolants and these are basically lubricant provided by the O&G companies, they will require plastic which again is a product of the petrochemical industry whose supplies are provided by O&G companies.

According to a number of studies and forecasts that I have come across oil demand will continue to grow at least until 2040. It is still growing in the developed countries. And the number of developing and under developed countries who will want to make use of fuel to reach a developed status is far larger.

We can illustrate this point better by looking at coal. Coal was the king supreme in the 19th century and gasoline started being used early 20th century. Yet it took about 70 years before it actually began to be phased out in all seriousness in the developed countries and the developing countries such as China & India are still using it 100 years after Oil started becoming the main source of energy.

Anyways, for near future I think Biofuels (FAME & other such stuff) are going to become an increasingly important, if niche, segment. Currently there is a distinct lack of knowledge in the market on this topic and with it being so closely related to laws of different countries and being the main driver of decarbonisation will play an increasingly important role in the future.

Dec 24, 2018

Yeah I largely agree with this sentiment. Worst (or best) case scenario would be emerging markets skipping fossil fuels and going straight to renewables. Solar is already cheaper than new fossil fuel projects in many instances, and look at how GE Power is doing to get a feel for new gas turbine projects. Obviously the infrastructure doesn't exist in places like India and SEA to have a fully electrified energy infrastructure, so IC engines should still exist far into their future. But if/when light vehicles become fully electrified, heavy vehicles become more efficient/hybrid, and power gen comes mainly from renewables, then these markets will be very different, no?

What I'm trying to determine is, in a scenario where there is rapid change towards decarbonization, in different time horizons how will this effect energy trading? Biofuels is definitely an interesting market to begin looking at.

Dec 24, 2018

Biofuels is definitely interesting. It's still not at a scale where it can power the fleet and I don't think it will reach that level in the next decade. But it derives it's importance from being blended with regular fuel which allows companies to capture incentives.

Dec 26, 2018

I diversified out of oil and gas into broad infrastructure for this reason. Peak oil demand in 2040 means new investments in the sector happen well before that, and if you live in an OECD country demand will peak in the next decade. You are also backing an industry where it is in everyone's best interest for it to decline in favor of low carbon substitutes. Natural gas is fine but has its own problems in North America as it is becoming a free resource/byproduct of oil drilling so hard to build a business around. The 2 or 3 LNG platforms that make it to the other side are fascinating businessses as well.

Dec 26, 2018

Long-term trend of higher market share from nat gas and LNG

Dec 26, 2018

I think some people here are underestimating the likelihood of major regulations regarding decarbonization which could impact crude/products and coal big-time. Not saying they will disappear overnight, but we haven't seen anything yet, and the alarm bells on the environment are ringing louder and louder. The backlash from Trump and lowball efforts from COP21-24 are sowing the seeds for a pretty big pendulum swing on the regulatory front.

Massive carbon taxes could change the math on some of the O&G field quite drastically. Good for volatility in the short-term, but 30 years from now you can be pretty sure crude and coal will not be the sexiest desks in commodities.

As far as Canada, I don't know enough about their nat gas economics, but the oil sands are basically the stupidest project in the industry so good riddance.

But yes, long nat gas and the petchem industry, particularly in the Gulf.

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Dec 27, 2018

Yeah this is what I've been thinking as well. If you had to guess which commodity would be the sexiest in 30 years what would you say? Or might that market not yet exist?

Dec 27, 2018
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