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Five Major Challenges Facing The Energy Industry

Five Major Challenges Facing The Energy Industry

Authored by Irina Slav via OilPrice.com,

Record-high prices at the pump, a looming diesel…

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Five Major Challenges Facing The Energy Industry

Authored by Irina Slav via OilPrice.com,

Record-high prices at the pump, a looming diesel shortage right when the summer season is starting, and an uncooperative OPEC are probably reasons for many headaches among government officials around the world.

Yet these are, in fact, manifestations of deeper problems in the energy industry.

Underinvestment 

In the past decade or so, Europe and, to a lesser but no less significant extent, North America, have made it their mission to reduce their reliance on fossil fuels and increase their reliance on renewable energy.

This has spurred an investor exodus from oil and gas and the emergence of the so-called ESG investing trend. Money for new oil and gas developments has become more difficult to tap as banks join the ESG movement, and companies have had to cut back on spending.

Saudi Arabia's oil minister warned that underinvestment in oil and gas would have a boomerang effect on consumers earlier this year, and he is not the only one. Many OPEC officials have made the same warning but, apparently, to no avail. After all, none other than the International Energy Agency said last year the world does not need new oil and gas exploration because we won't be needing any more new oil or gas supply.

Of course, it was only a few months later that the IEA changed its tune, calling on OPEC to boost production, and it demonstrated one of the harsh realities of the energy industry: you cannot reverse a process that has been going on for years in a matter of months.

Low discovery rates

A topic that doesn't get much talked about, the average rate of new oil and gas discoveries is, in a way, comparable to the average conversion rate of solar panels: it is well below 30 percent.

Bloomberg recently reported that three wells that Shell had drilled offshore Brazil had come up dry. The supermajor had paid $1 billion for drilling rights in the area and had spent three years drilling to come up empty-handed. Exxon had also failed to tap any significant oil reserves in its Brazilian blocks, which cost it $1.6 billion.

The news highlights the risky nature of oil and gas exploration even in places like Brazil, which has been touted as the next hot spot in the industry, probably alongside Guyana. Brazil has become a magnet for supermajors because of its prolific presalt zone, but, as one local energy consultant told Bloomberg, the big discoveries have already been made—back when the discovery rate was close to 100 percent.

The average successful discovery rate for the oil and gas industry is much lower than that, however, at 24.8 percent, according to Bloomberg. And there are fewer and fewer big discoveries to be made.

Production cost inflation

Broader inflation trends, in large part driven by soaring energy costs, have not passed the energy industry itself. In the U.S. shale patch, production costs have risen by some 20 percent. Two companies recently warned they would be reporting higher costs for their second quarters, Continental Resources and Hess Corp, and they are far from the only ones experiencing these higher costs.

Shortages of raw materials such as frac sand and, earlier this year, steel piping for wells, are one reason for the production cost inflation, not just in the shale patch but everywhere where these raw materials are used in oil fields. A shortage of labor is a special problem for the U.S. shale patch, too, helping to drive production costs higher. Lingering supply chain problems from the pandemic are also in the mix.

The bigger problem is that the industry is not expecting any respite in the coming months, either, as Argus recently reported, citing oil and gas executives. The production cost squeeze comes at a time when the federal government really needs more oil and gas, which is probably the worst possible time as it has discouraged drillers further from spending more on new drilling.

Cyberattacks

Cybersecurity has become a cause for concern in the energy industry in the past few years as cyberattacks have multiplied significantly. The Colonial Pipeline hacking really helped out things in perspective on the cybersecurity front, but little action followed, it seems.

A brand new survey by DNV, the Norwegian risk assessment and quality assurance consultancy, revealed this week that the industry is quite uneasy about cyberthreats and, what's worse, not really prepared to handle them.

According to the study, 84 percent of executives expect cyberattacks will lead to physical damage to energy assets, while more than half—54 percent—expect cyberattacks to result in the loss of human life. Some 74 percent of the respondents expect environmental damage as a result of a cyberattack. And only 30 percent know what to do if their company becomes a target of such an attack.

Geopolitics

The most chronic risk in the energy industry, geopolitics is never far away when prices start swinging wildly or, as is the case right now, remain stubbornly high. The prospect of an EU oil embargo on Russia, although dimming in the past few days, is one big bullish factor for oil prices. The lack of progress on Iran nuclear talks is another. And then there is, of course, OPEC's evident unwillingness to respond to calls from the West for more oil.

Russia itself does not seem bothered by the embargo prospects at all. "The same oil that they [the EU countries] bought from us will have to be purchased elsewhere, and they will pay more, because the prices will definitely rise; and once the cost of delivery and freight increase, it will be necessary to invest in building the corresponding infrastructure," Deputy Prime Minister Alexander Novak said this week.

Iran is meanwhile boosting its oil exports, which go almost exclusively to China. The country has signaled it will not agree to a deal with the U.S. unless the U.S. meets its demands, and it appears that the ball is now in Washington's court. In the meantime, China will have Iranian oil, but no one else will.

For the U.S., the price problem has become so dire that now President Biden is seeking a meeting with the Saudi Crown Prince Mohammed, whom he has consistently refused to communicate with, instead communicating with his father, King Salman. Biden has also been openly critical of MbS for his alleged role in the killing of a dissident Saudi journalist, calling the Kingdom a "pariah" with "no redeeming social value." Geopolitics can be awkward.

Tyler Durden Mon, 05/23/2022 - 21:40

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6 Questions for Alyssa Tsai of Panony

We ask the buidlers in the blockchain and cryptocurrency sector for their thoughts on the industry… and throw in a few random zingers to keep them on…

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We ask the buidlers in the blockchain and cryptocurrency sector for their thoughts on the industry… and throw in a few random zingers to keep them on their toes!


 

This week, our 6 Questions go to Alyssa Tsai, founder and CEO of Panony an incubator, investor and adviser for blockchain and Web3 business.

My name is Alyssa Tsai, and Im the founder and CEO of Panony. There are three pillars of businesses under our group umbrella. PANews is one of the earliest crypto media outlets in Greater China and South Korea. It has published over 20,000 articles, with an average of over 5 million page views per month. At Panony, we invest in blockchain projects worldwide and consult Fortune 500 companies for integration and expansion into the industry, spanning the entire spectrum of the blockchain industry from solution providers and exchanges to public chains, protocols and DApps. Im also a limited partner of NGC Ventures, the Animoca Metaverse Fund and the Delta Fund.

Before falling down the rabbit hole of crypto, my prior work experience included Cond Nast, Isentia, Ogilvy and a high-tech law firm. I also actively speak at and moderate global blockchain conferences.

 


1 What is the main hurdle in the way of the mass adoption of blockchain technology?

The industry is still in its infancy. We should be aware of the many challenges, though its already a buzzword in the tech world. The scalability problem is directly related to adoption and blockchain implementation. This question is about whether the system can operate smoothly as demand increases, which inevitably determines mass integration.

Its also important to address that the complexity of blockchain technology limits mass markets ability to appreciate the benefits. The entry barrier is high, so people need to make an effort to understand, not to mention having to keep up with the rapid changes and disruptions. Now they might as well use an adequately good solution for their needs, like regular financial services.

Thats why I feel like Im doing a meaningful job every day. Its early for blockchain and never too early for us. There are so many things to do and so many people we can support through education. The future is now.

 

2 Which countries are doing the most to support blockchain, and which ones will be left behind?

Since Im based out of Greater China, I can share whats happening here from my perspective.

Chinese President Xi Jinping once stated that the country needs to seize the opportunities given by blockchain technology. Following that principle, China has been developing a platform, known as the Blockchain-based Service Network, aimed at making blockchain technology implementation easier for businesses. Many governments are experimenting with a CBDC a central bank digital currency, which has blockchain at its core and China is piloting its digital yuan.

In recent years, the nation has issued statements supporting the development of blockchain tech across several sectors, with an ambition to consolidate the technology into its financial and growth strategies. We also appreciate its intention to build up industrial norms, or tariff incentives to support blockchain-based businesses.

Hong Kong has a robust system that has given birth to Animoca Brands, Crypto.com, BitMEX and many other exceptional companies in the industry. And on a global scale, Switzerland has SEBA Bank, the first regulated crypto bank in the country. In 2016, Zugs local government became the first municipality in the world to accept taxes in Bitcoin; and in 2020, the Swiss authorities allowed citizens and companies based in Zug to pay their taxes in either Bitcoin or Ether.

Other countries such as the United States, Singapore, Japan, South Korea and South Africa also play significant parts in the blockchain ecosystem.

 

3 What would you like to see tokenized? When, if ever, do you expect this to happen?

The history of art in museums, like the Dunhuang Murals. I visited years ago and learned that many experts and scientists are working tirelessly to discover a solution to slow down the oxidation of wall paintings caused by light and air exposure. Tokenizing these could help bring in more money for research and democratize art investment by making art pieces accessible to the general public. It could happen at any time.

In addition, charity work and support for research would be great to see tokenized, especially under the shadow of COVID-19.

 

4 What makes sense to you, and what makes no sense whatsoever?

Gender equality. As a young female entrepreneur who originates from the East and connects to the West, I plead for more investment and education around women. I have met so many powerful women of diverse backgrounds, and they are just as smart and hard-working as men. In reality, challenges remain: There is discriminatory legislation, societal practices persist, and women continue to be underrepresented in leadership at all levels.

Speaking of education, children being taught to learn for the sake of their parents pride does not make sense to me. We should pay attention to personal growth.

 

5 Which alternate movie universe would you most like to live in, and why?

Marvels. It dawned on me at the very beginning of the COVID-19 pandemic that we really could have a mighty superhero who could save thousands of lives. Furthermore, the films are about incredible, exciting voyages through time and space. Id love to discover new worlds. For the time being, Ill have to settle on crypto as my wild new world to explore.

 

6 Think of a favorite poem or musical lyric. What is it, and why does it speak to you?

From Bring in the Wine by Li Bai of the Tang Dynasty: When hopes are won, oh, drink your fill in high delight; And never leave your wine cup empty in the moonlight! Heaven has made us talents; were not made in vain. A thousand gold coins spent; more will turn up again. For people who might be interested in the original version

I learned this classical Chinese poem during middle school, and it was eye-opening for me at the time how people living thousands of years ago could live their life to the fullest even when excluded from a position working for the emperor. I guess thats how I learned about resilience and not being afraid of challenges.

Even today, I still remember every single word of this poem that inspires and empowers me its like Im encouraged to be someone like Li Bai, who continues to push forward despite the difficulties and stay truthful. I just keep on doing things I believe in, even when feeling down.

 

A wish for the young, ambitious blockchain community:

Be aggressive and inclusive. Get to know your community, and listen to your community. Lift and add value to one another through collaboration and fair competition.

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Visualizing A Decade Of Population Growth And Decline In US Counties

Visualizing A Decade Of Population Growth And Decline In US Counties

There are a number of factors that determine how much a region’s population…

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Visualizing A Decade Of Population Growth And Decline In US Counties

There are a number of factors that determine how much a region’s population changes.

If an area sees a high number of migrants, along with a strong birth rate and low death rate, then its population is bound to increase over time. On the flip side, as Visual Capitalists Nick Routley details below, if more people are leaving the area than coming in, and the region’s birth rate is low, then its population will likely decline.

Which areas in the United States are seeing the most growth, and which places are seeing their populations dwindle?

This map, using data from the U.S. Census Bureau, shows a decade of population movement across U.S. counties, painting a detailed picture of U.S. population growth between 2010 and 2020.

Counties With The Biggest Population Growth from 2010-2020

To calculate population estimates for each county, the U.S. Census Bureau does the following calculations:

      A county’s base population → plus births → minus deaths → plus migration = new population estimate

From 2010 to 2020, Maricopa County in Arizona saw the highest increase in its population estimate. Over a decade, the county gained 753,898 residents. Below are the counties that saw the biggest increases in population:

Phoenix and surrounding areas grew faster than any other major city in the country. The region’s sunny climate and amenities are popular with retirees, but another draw is housing affordability. Families from more expensive markets—California in particular—are moving to the city in droves. This is a trend that spilled over into the pandemic era as more people moved into remote and hybrid work situations.

Texas counties saw a lot of growth as well, with five of the top 10 gainers located in the state of Texas. A big draw for Texas is its relatively affordable housing market. In 2021, average home prices in the state stood at $172,500$53,310 below the national average.

Counties With The Biggest Population Drops from 2010-2020

On the opposite end of the spectrum, here’s a look at the top 10 counties that saw the biggest declines in their populations over the decade:

The largest drops happened in counties along the Great Lakes, including Cook County (which includes the city of Chicago) and Wayne County (which includes the city of Detroit).

For many of these counties, particularly those in America’s “Rust Belt”, population drops over this period were a continuation of decades-long trends. Wayne County is an extreme example of this trend. From 1970 to 2020, the area lost one-third of its population.

U.S. Population Growth in Percentage Terms (2010-2020)

While the map above is great at showing where the greatest number of Americans migrated, it downplays big changes in counties with smaller populations.

For example, McKenzie County in North Dakota, with a 2020 population of just 15,242, was the fastest-growing U.S. county over the past decade. The county’s 138% increase was driven primarily by the Bakken oil boom in the area. High-growth counties in Texas also grew as new sources of energy were extracted in rural areas.

The nation’s counties are evenly divided between population increase and decline, and clear patterns emerge.

Pandemic Population Changes

More recent population changes reflect longer-term trends. During the COVID-19 pandemic, many of the counties that saw the strongest population increases were located in high-growth states like Florida and Texas.

Below are the 20 counties that grew the most from 2020 to 2021.

Many of these counties are located next to large cities, reflecting a shift to the suburbs and larger living spaces. However, as COVID-19 restrictions ease, and the pandemic housing boom tapers off due to rising interest rates, it remains to be seen whether the suburban shift will continue, or if people begin to migrate back to city centers.

Tyler Durden Sat, 07/02/2022 - 21:00

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Airline stocks have been beset by external problems but could now be a good time to invest in a sector many think is in crisis?

It’s fair to say it has been a tough couple of years for the commercial aviation sector and investors in airline stocks. In 2019 the sector enjoyed record…

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It’s fair to say it has been a tough couple of years for the commercial aviation sector and investors in airline stocks. In 2019 the sector enjoyed record passenger numbers and 2020 was expected to be better yet. Low cost airlines were expanding aggressively, as they had been for years, and national carriers, in response, had made strides in cutting costs and introducing other efficiencies.

Then the Covid-19 pandemic struck, devastating the sector. Over the early part of the pandemic when international travel was severely restricted, airlines operated skeleton schedules. Severely reduced capacity, and schedules regularly interrupted by new lockdowns and shifting government policies bedevilled the sector for the next two years.

Even over the past few months which have seen most pandemic-related travel restrictions drop, a spate of new problems has hampered the sector’s recovery. Staff shortages, the result of a combination of the continuing need for those that become infected with Covid-19 to isolate and a tight labour market, have been a major headache. London-listed easyJet recently cut its capacity forecasts as a result of staffing issues.

And last week over 700 Heathrow airport staff voted to strike over the peak summer period, which promises chaos, and hundreds of cancelled flights, if an agreement can’t be reached over pay in the meanwhile. Staff at three Spanish airports are also calling for industrial action this summer and strikes are a threat elsewhere around Europe’s favourite holiday destinations.

Sky high fuel costs will also put pressure on margins this summer and potentially well into next year and a growing cost of living crisis sparked by inflation levels at 40-year highs will not help demand.

Airline share prices have predictably slumped since the onset of the pandemic. EasyJet’s valuation is down over 50% in the past year and over 75% since summer 2018. Its shares haven’t been worth as little as they currently are since early January 2012.

easyjet plc

Hope on the horizon?

But despite the fact the immediate future still looks tough for airlines, there are a number of reasons why investors might consider dipping into their stocks now or in the months ahead.

The first is that the bulk of the problems that have crushed airline valuations over the past couple of years have been external factors outwith control and unrelated to the underlying quality of companies. They are also all problems that are expected to be temporary and will ease in future. Covid-19 restrictions are, with the notable exception of China, no longer a big issue and hopefully won’t return. And even China recently reduced its mandatory quarantine period for anyone arriving in the country from two weeks to seven days.

That’s still problematic but a sign that an end to the dark cloud of the pandemic may finally be in sight. Most airlines were forced to either take on significant new debt or raise cash through equity issues that diluted existing shareholders, or through mechanisms such as selling and leasing back aircraft.

It will take time for that gearing to be unwound and balance sheets brought back to health. But the sector will eventually recover from the pandemic which should see higher valuations return, providing a buying opportunity at current depressed levels.

Airlines that have come out of the pandemic in the strongest positions will also likely gain market share from weaker rivals, improving their future prospects. British Airways owner IAG, for example, currently has access to more than £10 billion in cash after raising capital to cover losses over the pandemic. EasyJet has access to £4.4 billion. That means both should be well placed to cover any continuing short term losses until passenger numbers return to 2019 levels and push their advantage over less well-capitalised rivals.

Both IAG and easyJet have also seen their passenger capacity improve significantly in recent months. Over the all-important summer quarter to September, the latter expects its passenger capacity to reach 90% of 2019 levels despite the ongoing operational challenges. IAG expects to return to 90% of 2019 capacity over the last quarter of the year.

A full recovery to 2019 levels is possible by next year even if higher costs are likely to mean ticket price increases are inevitable. That does pose a risk for near-term leisure travel demand but there is confidence that remaining pent-up demand from the pandemic period will help soften the impact on discretionary spending on international travel that might have otherwise been more pronounced. Western consumers have also, the pandemic period apart, become so accustomed to taking foreign holidays that some analysts now question if they should still be considered discretionary spending rather than a staple.

Despite the transient and external nature of the problems that have hit easyJet’s valuation, not all analysts are convinced the current share price offers good value even despite its depressed level. They still look relatively expensive given the risks still facing the sector at a forward price-to-earnings ratio of close to x160.

iag

IAG could offer better value, currently trading at a price-to-earnings ratio of just x5.8 for next year. It is also expected to reverse return to a healthy profit by 2023. The company also has exposure to the budget airline market through Vueling and Aer Lingus and while it abandoned its move to take over Air Europa late last year it shows it has ambitions to further expand in this area. And it has plenty of capital available to it to make major acquisitions that could fuel growth when the sector recovers.

IAG’s cheap valuation does reflect the risks it faces over the next couple of years but for investors willing to take on a little more risk the potential upside looks attractive.

A dollar-denominated airline stock play

On the other side of the Atlantic, American airlines also suffered during the pandemic but are now recovering strongly. For British investors, dollar-denominated U.S. stocks also offer the attraction of potential gains in pound sterling terms as a result of a strengthening U.S. dollar. The Fed’s more aggressive raising of interest rates compared to the ECB or Bank of England is boosting the dollar against the pound and euro and it is also benefitting from its safe haven status during a period of economic stress.

One U.S. airline that looks particularly interesting right new is Southwest Airlines, the world’s largest low cost carrier. The USA’s domestic travel market has recovered so strongly this year that Southwest expects its Q2 revenues to be 10% higher than those over the same three months in 2019. It’s already profitable again and earnings per share are forecast to come in at $2.67 for 2022 and then leap to $3.84 in 2023. It’s a much more profitable operator than easyHet.

It also, unusually for an American airline, hedges a lot of its oil. That’s expected to see it achieve much better operating margins this year, predicted to reach 15.5% in Q2,  than other airlines being hit by much higher fuel costs. The company isn’t immune to the risk of the impact the inflationary squeeze could have on leisure travel but is seen as one of the most resilient airlines in the sector. It could be a better bet than either of its two London-listed peers.

The post Airline stocks have been beset by external problems but could now be a good time to invest in a sector many think is in crisis? first appeared on Trading and Investment News.

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