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Waking up from a pipe dream


First came the cancellation of the Atlantic Coast pipeline on Sunday — “legal uncertainty”, said its developers. Less than 24 hours later arrived a judge’s ruling that shut the Dakota Access pipeline. Shares in Energy Transfer, its operator, plunged. Then the Supreme Court barred for now further development of Keystone XL, the one the oil industry wants most. Who, in the era of American pipeline wars, would want to own one?

Warren Buffett, evidently. The Oracle of Omaha just spent almost $10bn buying nearly 8,000 miles of pipeline and related storage infrastructure — about the same amount Berkshire Hathaway invested in struggling Occidental Petroleum last year. As Mr Buffett doubles down on fossil fuels, Dominion Energy, the utility that sold the lines, will focus on its net-zero ambitions. Is this a model for the energy transition? Generalists piling in as experts flee?

Pipelines are the subject of our first note. Our second looks at another victim of this year’s oil crash: refiners. We contrast Orsted’s market capitalisation with BP’s, and wonder how energy job losses will affect the US election.

Thanks for reading. Let us know your thoughts and ideas at energy.source@ft.com. Please sign up for the newsletter here — Derek

Trouble in the pipeline

Two days, three major setbacks for pipelines in the US.

On Sunday, Dominion Energy and Duke Energy scrapped plans to construct the 600-mile, $8bn Atlantic Coast pipeline, blaming legal and regulatory uncertainty. Yesterday, a court ordered the shutdown of the 1,172-mile, $3.8bn Dakota Access pipeline for not having carried out sufficient environmental checks. Finally, the Supreme Court ruled that some pipelines could be built during an environmental review process — a victory for the US government over activists — but not Keystone XL, the huge 1,210-mile pipe that would ship Canadian bitumen from the oil sands to Nebraska and on to Texas. This may deal a fatal blow to that controversial project.

The Dakota Access pipeline has faced heavy opposition from native American tribes and environmental groups © REUTERS

The Dakota Access pipeline faces a 13-month closure while an environmental-impact statement is conducted. The Atlantic Coast project will not be built at all after its developers decided that a recent court decision relating to waterway permits on the Keystone XL pipeline had thrown the door open for a spate of new challenges.

President Trump had vowed to ensure Keystone XL’s progress but the new ruling means none is likely before November, when the fate of the $8bn project will hinge on the election. Joe Biden opposes the pipeline.

The oil and gas industry says the system is broken. US energy secretary Dan Brouillette lashed out at environmental activists. Mike Sommers, chief executive of the American Petroleum Institute, called for an urgent overhaul of the country’s “outdated and convoluted permitting rules”. Thomas Farrell, Dominion’s chief, said the “increasing legal uncertainty” would kill other projects too.

But analysts say the decisions — just two months after New York state withheld permission for another proposed gas pipeline — show the permitting system is working.

“Any good permit process should stop a bad project,” Suzanne Mattei, a policy analyst and attorney at the Institute for Energy Economics and Financial Analysis, told Energy Source. “Companies need to read the writing on the wall.”

What next? Environmentalists will take heart. Investors in other potential ventures will waver. As Jason Bordoff, head of Columbia University’s Center on Global Energy Policy, put it to ES, in reference to the Atlantic Coast decision:

“The same rationale the companies gave for abandoning the project — that a recent court ruling would make it more costly and time-consuming to get permits — applies to many other pipelines projects, too, that environmentalists will target.”

(Myles McCormick)

The world has too much refining capacity — and more is coming

The fundamentals have turned against the global refining business. It has too much processing capacity for a market that suddenly doesn’t need as much fuel — that’s the underlying problem. The nearer-term one is that deep cuts to global oil supply have lifted crude feedstock prices, but fuel demand and prices have lagged behind. Renewed Covid-19 lockdowns will just worsen all this.

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Refining is a cyclical business, says Rick Joswick, head of S&P Global’s refining analysis. “And this is going to be one of the bad years.”

The surplus is extreme. Capacity already exceeded demand in 2019, and another 1.7m b/d, from Nigeria to Kuwait, is due on line this year. Demand, though, is down by 9m b/d.

Even if consumption increases to pre-Covid levels, getting rid of the excess capacity will be a long and painful process. Local politicians in places like Europe — where ageing refineries are most exposed to the depression in margins expected over the coming years — don’t like to see job-supporting plants shut down. Meanwhile, the wave of new plants of recent years has come mainly in countries where security of fuel supply, employment creation, export prowess, or the need to process domestic crude production locally, are more important than profitability. So they don’t shut either.

Line chart of Thousands of barrels showing Refineries have far more capacity than the world needs

The end-game will only approach when big capital (re) investments are needed — in turnrounds and costly maintenance projects. At that point, the refiners will really need to be confident in long-term demand to justify multi-billion-dollar upgrades. The energy transition looms over these decisions. Even if peak oil demand is 10 years off, that might be just one price cycle away for a big refiner.

Meanwhile, unwilling or unable to close, they chug along, still buying crude. Processing capacity continues to grow, leaving too many refineries chasing too few barrels, propping up feedstock prices and eroding margins.

“Refineries don’t die, until they come to some sort of gate where they have to make a decision on investing a lot of capital,” said Robert Campbell, head of oil products at Energy Aspects. “They can lose money for quite a while.”

“Too many are looking at the refinery next door saying that one is bound to close and therefore I must stay running.”

(Derek Brower)

Royal Dutch Shell’s Norco Refinery in Louisiana. The industry is struggling with a surplus of processing capacity. © AFP /AFP via Getty Images

Data Drill

It’s not quite Tesla beating Toyota, but as an indicator of what’s afoot in the energy business, Orsted’s steady rise in valuation is telling. The Danish wind farm developer was the first fossil fuel producer to ditch its traditional business — putting all of its chips firmly in the renewables basket. The bet has paid off. Over the past three years its market capitalisation has risen 175 per cent. Set that against BP, whose valuation has slid by a third over the same period — and it’s not surprising the oil major’s chief wants to green things up.

Line chart of Market capitalisation ($bn) showing Orsted's valuation is closing in on that of BP

Power points

  • Mustafa Sanalla, head of Libya’s National Oil Corporation, told the FT that “some regional countries” — a reference to the United Arab Emirates and Saudi Arabia — were stymying efforts to end a six-month-long oil blockade that has shattered Libya’s economy. 

  • Mining is crucial to supplying the metals that will be needed in the wind, solar, electric vehicles, storage and transmission sectors that will help the world meet the Paris climate goals. But it also needs to decarbonise its own sector, argues James Whiteside, of Wood Mackenzie.

  • China’s carbon dioxide emissions are soaring again, with Beijing’s tacit approval. China should use the coming months, as it deliberates its next five-year plan, to burnish its green credentials and reverse this rise, argues Sam Geall, of the University of Sussex.

  • Spain’s Iberdrola is defying the downturn, increasing investment to €10bn a year to accelerate a clean-energy push that has made it the country’s second-biggest listed company.

  • Bikes have done well in the lockdown and are taking over European city streets, notes this piece from Bloomberg.

  • Startling data from the UK’s Society of Motor Manufacturers and Traders, meanwhile, show just how bleak the downturn has been for conventional engines. Sales of diesel engines in the UK were down 60 per cent in June compared with a year earlier. Those for battery electric vehicles soared by 262 per cent.

Sales of diesel vehicles in the UK have tumbled over the past year. © PA


Could job losses in the American oil sector help President Trump? Energy remains in the doldrums. Payrolls in oil and gas continue to be cut, with almost 115,000 people out of work since the beginning of the coronavirus outbreak.

Politically, the timing of any oil jobs rebound will be key. Analysts reckon employment will keep sliding over the summer, but start a reversal at the beginning of the fourth quarter, just before Americans head to the polls.

Many of the states hit hardest — from Pennsylvania to Ohio — will be pivotal electoral battlegrounds. A resurgence just in time for polling day would be good news for Mr Trump, who has placed a lot of political capital in the oil and gas industry.

“There is a chance that the timing of this could actually work for the election coming up,” Matthew Fitzsimmons, an analyst at consultancy Rystad Energy, told ES.

“There are swing states that have seen significant oil and gas lay-offs . . . if you start to see that turn around — and people get hired back — there could be a sense of stronger faith in the electorate.”

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.

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