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Ask Me Nicely?

Another week gone by and the outrage continues in Ukraine. The relentless march of the Russian forces continues and the inevitability of it all playing out on television is, quite frankly, soul-crushing. This is not going to be a short war. The conquest of the cities may come faster than people think, but the insurgency is going to last a long time. Putin’s folly will be his downfall although at the current moment, it doesn’t appear that the reality of the situation has set in with the general Russian populace, who remain stuck in a thrall of propaganda.

 

Some encouraging “signs” nonetheless. A cease fire has been struck to start and continue for some undetermined time to allow for evacuations and humanitarian aid. The United States and Russia have established a communication protocol to ensure Armageddon isn’t triggered. So that’s reassuring, right?

 

Oddly enough, a company, Lukoil, one of the three major energy companies in Russia, has called on Putin to end the invasion. Why? Well one would hope the reason is the obvious one, but really it is more likely purely about the effect of sanctions. The president of Lukoil has seen his net worth drop by a staggering $6.9 billion in less than a week. Not very oligarchian anymore. I’d ask Putin to stop too, although I’m not sure he’d listen given that the dude is now broke.

 

This decline in fortunes has happened notwithstanding the Russian energy trade remaining open and the price of oil running amok above $110 a barrel. Not so much for Urals oil though, which can’t find buyers, even when deeply discounted. In the meantime, the value of publicly traded shares in Russian oil and banking companies on the London Exchange are virtually worthless. We don’t know about the Russian exchange, it has been closed all week. Inflation is expected to run to 50%, interest rates are doubled to 20%, 3 mega-yachts have so far been seized. The wheat crop is expected to be cut in half. All in the service of what? No one knows.

 

(BTW – I feel a need to apologize right here, on review this blog is more than a little disjointed. Maybe that is a reflection on current events.)

 

On the energy side, analysts figure that somewhere between 1.5 to 2.5 million barrels of Russian crude are going to come out of the market. That’s a lot of damage to industry. With that much demand coming off, wells may need to be shut in, with unpredictable consequences.

 

Finally, with oil prices breaking $100 billion a barrel, everyone is running around like it’s the end of the world and wondering what oh what are we going to do? Gas prices are hitting levels we haven’t seen since… the last time oil was this expensive.

 

The obvious answer is of course to pump more oil.

 

Obviously.

 

Wait, what’s that? Not so fast? You have a political agenda you want to push first? Sure, go ahead.

 

What? Vladimir Putin has done the climate movement the biggest favour ever by… never mind. I can’t. There was an article like that. It made my eyes bleed.

 

Federal governments should be good for encouraging drilling, right? Umm, no. Not yet at least.

 

Companies? Doing it for their own economic interest? What?!? Are you nuts? At these prices? How could the “market” ever tolerate a company being so bold as to, you know, put a drilling rig to work, assuming I could even find one, never mind staff.

 

So we’ve got an energy crisis, a climate crisis, an Putin crisis, a humanitarian crisis, a dependency crisis and no one is willing to take the bold first step to address at least the first one, instead they are flapping their arms and pointing at the other guy to solve it for them.

 

It boggles comprehension that with all of the intelligent political leadership running around (and don’t get me wrong, a lot of them are pretty smart, they just don’t like to reveal it publicly) no one, I mean no one has been able to figure out that the counter to Vladimir Putin’s energy stranglehold is to outproduce him. In oil, in gas, in coal, in wind, in hydro, in nuclear, in geothermal, in whatever.

 

Here’s the message. If you disproportionately rely on a brutal dictator and thug for your energy supplies, eventually he is going to hold you hostage. And make your lives miserable. Break out the contingency plan. Suck it up and solve the problems you created by pushing all the nasty stuff to the nasty places and the nasty people.

 

We have the means (and the reserves) to get ourselves out of this mess, both in the short term by producing enough fossil fuels so that we aren’t dependent on rogue actors anymore and in the long term by executing a proper energy transition so that ultimately we aren’t dependent on just fossil fuels. Like, aren’t we the rich countries? With the money? And the smart people? Well maybe just the money.

 

I have also seen a lot of punditry saying this is the next coming of the 1970s Oil Embargo. I don’t buy it. I mean sure there will be localized shortages and the current price spike is unprecedented, almost. But in our haste to find historical corollaries in everything (the Russian invasion of Ukraine is just like the Finnish invasion of 1939!). Let’s not lose sight of the fact that “energy” is not being sanctioned by Europe and NATO. It is instead being refused by commercial actors who either want to avoid the negative market perceptions or fear counterparty risk (what if an actual embargo happened?) or are concerned about getting side-swiped by payment snafus. Each of the refineries, traders and energy companies that received Russian oil before the invasion can receive Russian oil currently – and at a significant discount no less! They are just choosing not to.

 

In fact, only one country has actually stepped up with an outright ban of Russian oil. That would be us. Canada. Well done, right? It took a while. First we had to flail ourselves over the fact that we dared to import “unethical conflict oil” when we have such bounty at home and all we need to avoid this was a $20 billion 3500 mile pipeline to run from Alberta to a New Brunswick refinery that can’t process WCS. Then, we had to go through they typical meme based shaming of the Liberal government for presiding over, oh my, $13 billion of “unethical Russian conflict oil” in the period 2001 to 2020, which of course included 8 years of Stephen Harper, but who’s counting. Finally, we had to wait while someone did the actual research to figure out if we were in fact still importing “unethical Russian conflict oil and/or refined products”. After much digging, we were able to discover that we were in fact bringing refined liquids into Quebec. A whopping equivalent to 10,000 barrels per day so far this year, or one tanker. And that while there were no more tankers ordered, the ban was now in place.

 

Look, I’m totally in favour of the ban. But watching the process unfold was painful.

 

Not so painful? Chrystia Freeland, who is culturally, historically, genetically and intellectually perfectly suited for this moment given her family history, field of expertise, role in government and temperament. She is truly a thorn in Russia’s side, running point on some of the most impactful sanctions, including the freezing of central bank F/X holdings, such that one can imagine Putin thundering across a 278 foot long table: “will no one rid me of this meddlesome Canadian!”

 

But back to the oil crisis. And the ensuing gas crisis. Like Holy Expensive Molecules Batman. Even I’m looking for an EV now. Except of course there aren’t any because of the chip shortage. Which will be exacerbated by a neon shortage or something like that, because the bulk of production is in Ukraine and Russia. Did I mention wheat yet?

 

Anyway, governments are pointing fingers right left and centre. Democrats, who mostly haven’t got a clue how the energy industry works are trying to push the Build Back Better and Green agenda, sensing an opportunity to get some political leverage and, let’s face it, not wanting to give Texas a win.

 

Meanwhile Republicans, many of whom are energy industry sith lords are equally confused about what to do, having just recently awoken from their trances and realizing that they don’t much like that Putin fellow either. How bad has Putin overplayed this? A bar I know in very republican Phoenix is hosting a fundraiser for Ukraine featuring a Putin pinata (and TBH, I hope they make it a regular thing, I’m going there for spring break. But never mid that, after calling Putin a genius, Donald Trump suddenly found religion and is now calling the invasion a holocaust. A bit over the top, but at least he’s on the right side of history here. No matter, they see the pain at the pump, are blaming Biden and are going to ride that hard to the midterms. Build Back Badly.

 

Tangent aside, momentum is clearly against Russian energy. So something needs to be done.

 

  • Calls are being made to Saudi Arabia.

 

  • Iran is being fast-tracked back into the world of non-psycho countries.

 

  • Canada is being asked to step up and produce more, with a newly approved Keystone XL fast-tracked for completion in late 2022.

 

  • An SPR release has been authorized.

 

  • Europe and the IEA have decided that in order to release reliance on gas from Russia, Europe should get gas elsewhere.

 

Wait, what? Oh, you noticed that? Yeah sorry, thought I would try and slip that one in.

 

No, rest assured that the last idea to increase oil supplies inside fortress North America that will ever be advanced by Biden or Trudeau is the one that admits that they maybe, kinda, sorta, had it wrong and that Canada (of all places) and maybe the United States itself (fancy that) should possibly further exploit their mammoth resource bases and save the free world. Or at least help solve the immediate and medium term problem and lower gas prices. Before the truckers get mad again.

 

But even if they did learn that lesson, you know what?

 

It may not happen. Because the robber barons of the energy sector don’t need to increase production.

 

Why would they? They are currently cash cows and companies that have spent the last 7 years since November of 2014 having their cash flow sucked dry by low prices or growth at all costs or both at the same time are not going to suddenly, magically and magnanimously step up, defy their bankers and shareholders and start playing Permian pin cushion with drilling rigs. It’s just not going to happen.

 

Unless, of course, someone asks them nicely. And that someone will have to be governments.

 

That’s right. Those self-same governments that have spent the better part of the last decade vilifying energy companies as environmental laggards and evil relics of a dying industry (peak demand! Energy transition! Retraining! Great reset! Environmental racism!), are going to now have to go cap in hand to the industry they hate and ask them to please, please, please, bring some production relief to the industry and help lower prices so that they can get re-elected.

 

Most of the E&P’s of course aren’t really exuding the warm and fuzzies. I mean after all, who can make money at (checks notes) $110 a barrel, especially when a well costs (checks notes) somewhere between $30 and $50 a barrel to drill and complete. Why that’s not even enough money to pay for management compensation packages? Not to mention it dips into the share buy-back plan.

 

So instead of aggressively going out to harvest some law hanging fruit and creating a mini-boom in the service sector through immediately jacked up drilling plans, we instead get the $8.5 BILLION free cash flow generating machine of CNRL sitting back on its laurels, and Exxon Mobil telling the market that it only plans to grow production 5% – by 2027!!! Across the board, no one is stepping up. Not because they can’t. Because they won’t. Because they don’t trust governments to not drop the hammer on them once the crisis clears, having been burned one time too many. And because, quite truthfully, none of them have ever made this much money before and they quite like it.

 

Ironically, notwithstanding the energy crisis unfolding before our eyes and a price deck that oilmen could only dream of, the producers are sticking to their plans. At least for now.

 

What will it take to move them? Who knows.

 

Here’s hoping it’s governments asking them nicely and not the alternative.

 

Sorry for the meandering blog. I started it and had no idea where it would finish but here we are.

 

More oil!

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