Questions about where things are and where they’re headed with the Global and US Energy Markets are top of mind for stakeholders across the commercial marine industry. Will the price of oil today demonstrably change over the next year? What does the current energy market makeup tell us about opportunities that could be leveraged? How should risk assessment be approached across the industry in 2022?
There are few better to answer these sorts of questions than Dr. Kent Moors. An internationally recognized expert in oil/natural gas policy and market risk assessment, he has become a leading “go-to” consultant for public and private sector entities that are focused on impacting policy and security concerns. He’s also a familiar face to the Workboat community, having spoken at various Workboat events over the years.
Dr. Moors is set to once again share his expertise with the Workboat community during the State of the Energy Industry Think Tank session that is set to take place this December at the International Workboat Show. In preparation for this, we caught up with him to ask about some of the lessons learned from his previous presentations, how he thinks offshore wind energy is going to change the way we gather energy, whether or not COVID-19 is going to dominate his presentation at IWBS and much more.
Jeremiah Karpowicz: The Workboat audience remembers your presentation at the 2015 OSV Summit, but that's just one of the reasons so many are looking forward to what you have to say about the market in 2021. Looking back, are there any lessons from that wave of price changes in oil products that have carried over into the present?
Dr. Kent Moors: Yes, there are several “lessons.” First, despite significant changes in the energy sourcing balance, crude oil pricing continues to be the barometer for the energy sector as a whole.
Second, OPEC+ (OPEC plus non-US producers led by Russia) has remained together longer than I initially anticipated. However, third, the recent opposition of the UAE to rolling forward production constraints indicates a rising rift in OPEC over production levels. This will be augmented by an intensifying field problem in Russia. At current levels, the mature Western Siberian fields will have an accelerating decline in lifting rates.
Is there anything from that presentation that ended up happening over the next few years that really surprised you?
The speed with which energy demand in general and oil requirements in particular have gravitated to the Asian market. This is now happening more quickly than analysts had anticipated. And few have yet understood that the African market is advancing right behind the Asian.
How have you seen the insights and updates that you've shared in these sorts of presentations translated into the real world?
My work now stands at the center of a dynamic. In addition to other activities (which include my public addresses), I continue to advise several high-net-worth global private investment groups. Energy remains one of their primary targets. The changes in those targets, and the manner in which these investors approach them, provide a preview of matters to hit the market. In several respects, what I present is less a prognostication than it is a summary of what is coming.
Broadly speaking, what does everyone need to know about the state of the energy industry in 2021?
The energy industry is far more resilient than some commentators have concluded. We are not seeing the “end of oil.” Rather, there is a solidifying global energy balance forming in which crude will continue to play a central role for several decades as the fulcrum of energy use moves to Asia (and then, by 2030 or so, Africa). The real challenge remains to integrate the sources.
At that same very broad level that I'm sure you'll explore in more detail during the presentation, how will much do you think offshore wind energy is going to change the way we gather and use energy in this country? Using President Biden's goals for 2030, how much will wind energy make us less dependent on oil and gas?
Renewables (wind, solar, biofuels) will continue having the single biggest increase among energy sources. But there are signals emerging of a slowing in that trajectory. The impact on oil comes from the rise in EV usage. That will translate into some marked changes in transport both in North America and Europe, but there are two caveats here: (1) the capital requirements for a detailed passenger EV support network are higher than proponents have estimated; and (2) electric vehicles will increase in number worldwide, but there will be a recurring need for conventionally powered (including gasoline, gas hybrids) as well, especially in regions where the economy and lifestyle prospects require.
On the natural gas front, the primary competition will be in power generation. However, and this is what has hit home during the current electricity crunch in the UK and Europe, the expansion of renewable sourcing requires that additional conventionally fueled sources of power remain online as backup. There is a composite of old and new rapidly forming that will only increases in importance. This is not a “winner take all” scenario.
And then there is the entire petrochemical sector, where demand will expend faster than for generic energy. Here, we will see continued replacement of petroleum with natural gas products as feeder stock. Renewables, on the other hand, don’t factor in here at all.
I imagine COVID-19 will be a big part of your presentation this year but is it a topic that will be at the margins of your presentation or a foundational issue that defines everything you discuss?
COVID is an outlier, as for that matter are geopolitical events. Both are regarded as outside effects on energy availability and/or use. The ability to translate either into a tangible indicator of the impact on energy demand (as a corollary to economic activity) has been difficult to determine. But both can have short-term effect.
I have been seeing signs for several months that markets have begun offsetting the COVID effect. Much of this continues to generate political dispute over masks, vaccine mandates, and related matters. This is not going away anytime soon. Nonetheless, US economic activity will continue to increase. In other parts of the world, especially Brazil and Russia, the strain is becoming acute.
Analysts at Goldman Sachs recently predicted that the price of a barrel of oil could average $85 for the next few years. Without taking anything away from your upcoming presentation, are they mostly right or mostly wrong?
My current projections for end of 2021 prices are $85-$87 a barrel for WTI and $90-$92 for Brent, assuming of course that there are no geopolitical or pandemic events changing the landscape. That would translate into an average in the high 70s. Projecting the next several years at this point is largely fodder for press releases.
On the other hand, there is a contraction in pricing coming, resulting from weakening in a series of artificial machinations in oil trading. These machinations have already had three results: (1) the difference between what the increasingly artificial futures contracts (the “paper” barrels) convey and the consignments actually in trade (the “wet” barrels) has exceeded what trading arbitrage can easily reconcile. Second, the price commanded is beginning to have an adverse impact on profitability in those market sectors most directly dependent upon energy. Third, this is beginning to make all manner of forward hedging more difficult.
As of close of trade on Friday, October 29, my proprietary effective crude price (ECP) calculations estimate the current WTI price to be almost 14 percent higher than what internal market indicators justify. Meanwhile, Brent is approaching 16 percent higher.
What types of action items and bottom-line insights are you hoping 2021 IWBS attendees will be able to come away with from your presentation this year?”
Three in number here:
(1) become more aware of the energy balance forming, there is more space in the sector moving forward
(2) operating companies will need to revise up cap ex projections as OFS costs accelerate, peg costs/prices higher to reflect the environment developing; and
(3) maintain planning flexibility, as events both expected and unanticipated in one part of the world have a tsunami-like roll on effect in others. This may include learning Chinese this year….and Swahili down the line.