Biden energy agenda on collision course with reality, shale banker says

One thing to start: commodity prices are softening again for an all-too-familiar reason — worries about coronavirus, specifically the Delta variant that is surging in Asia and Europe. Concerns about China’s economic growth are weighing on markets too.

Welcome back to another Energy Source. First up today are strong comments from Bobby Tudor, well-known banker to the US oil sector, about the Biden administration. And deals in the country’s shale patch soared in the second quarter — that’s the second note. Don’t miss Data Drill, on global carbon prices.

Bobby Tudor: consumers ‘don’t want to be paying’ for the energy transition

One of Houston’s top oil bankers sees reality setting in for the Biden administration as its green push collides with the deep roots of America’s fossil fuel economy.

I recently talked to Bobby Tudor, who had a front-row seat to the country’s oil boom over the past decade as chair of Tudor, Pickering Holt & Co, a leading investment bank to the shale patch. Now he wants Houston to profit off the energy transition in the same way the city has profited from the age of oil.

But in Washington he thinks the Biden administration is only beginning to come to grips with how difficult the politics of that transition will be.

“It’s one thing to demonise the oil and gas business or in particular the major oil companies. It’s another thing to go to consumers and say, we need you to use a lot less of this stuff so what we’re going to do is we’re going to slap a big tax on it,” argued Tudor. “And consumers say ‘Whoa, whoa, wait a minute, we don’t want to be paying for this’.”

Tudor argues that this has been on full display in recent weeks as the climate-minded Biden administration lobbied Opec+ to start pumping more oil to help bring fuel prices down. Surging costs threaten to undermine America’s reopening and economic recovery.

“The politics around consumption are really, really difficult,” says Tudor.

The Biden administration has sent conflicting messages on energy in its first few months in office as it tries to balance an aggressive climate agenda with the realities of US oil dependence.

It has put climate change at the centre of its governing agenda in a way no administration has before, describing the potential fallout from rising CO2 in the atmosphere as an “existential threat”.

It has set ambitious new climate targets, paused new oil and gas leasing on federal lands, killed the Keystone XL pipeline, and pushed for new controls on methane emissions from the industry — among other initiatives.

Yet it has also drawn fire from climate activists for allowing oil to continue flowing through the controversial Dakota Access Pipeline in North Dakota, backing the Line 3 oil sands pipeline expansion, which would bring more crude across the border into Minnesota, and allowing a controversial Alaska oil project approved by the Trump administration to move ahead.

“This happened in the Obama administration. If you go back and track the rhetoric that came out of the Obama administration regarding oil and gas and how it changed over time — what happens is reality sets in,” Tudor told ES.

Tudor says he sees signs of this same reckoning from the Biden administration, even as it continues to champion the energy transition.

“Energy Secretary [Jennifer] Granholm was just in Houston about three weeks ago . . . and she made very pointed comments around the importance of CCUS as a key component to any credible pathway to net zero,” Tudor said, referring to carbon capture and storage — a technology he thinks Houston should embrace as it eyes a low-carbon energy future.

“That was a really important statement because it reflects the reality that the world, and the US, are going to need to produce hydrocarbons in real size for quite a long time.” (Justin Jacobs)

Oil M&A picks up steam in industry reshuffle

The value of upstream oil dealmaking hit $33bn in the second quarter and the number of transactions worth more than $1bn equalled the record high set in 2014, according to Enverus, a consultancy.

Total deal value in the past 12 months has now reached more than $85bn, as a sector ravaged by last year’s price crash undergoes a fundamental reshuffling of assets and ownership.

Upstream companies “have prioritised consolidation”, said Andrew Dittmar, Enverus’s senior M&A analyst, as they respond to investor pressure to drive down costs and achieve scale.

Among the findings from an Enverus report:

1 . Public buyouts of private equity-backed companies was a theme during the quarter, led by Pioneer Natural Resources’s $6.4bn acquisition of DoublePoint Energy, and including Southwestern Energy’s $3bn deal for Indigo Natural Resource and EQT’s $2.9bn purchase of Alta Resources. Dittmar said this was “welcome relief” for private sponsors that had struggled to find an exit. (Justin and I reported on private equity’s struggles in the shale patch earlier this year.)

2. This year has seen only two deals between public companies worth more than $1bn: Cimarex Energy and Cabot Oil & Gas’s $9.3bn deal and the $1.4bn merger between Bonanza Creek Energy and Extraction Oil & Gas. Only the latter was considered to involve the kind operational synergies that motivated earlier waves of M&A, according to Enverus.

3. Stock transactions dominated this year, with 70 per cent of the deal value coming in the form of buyers’ equity. That contrasts with previous years, when private sellers sought cash, Enverus said. The rally in shale equities in recent months means all- or mostly-stock purchases are now very much in favour.

4. More M&A is likely in the second half of the year, so long as oil and gas prices don’t fall back sharply, said Dittmar.

Speaking to us last week (see Justin’s note above), Bobby Tudor, founder of Tudor, Pickering, Holt & Co agreed, saying “scale matters” in shale and more aggregation was necessary:

“The number of companies that are big enough, good enough and strong enough to both grow production at high single digits and return capital to shareholders, in the form of dividends or share repurchase, the number of companies that can do that is somewhat limited. So given that that’s what investors are demanding these days . . . you’ll continue to see consolidation.”

(Derek Brower)

Data Drill

The G20 endorsed carbon pricing for the first time last weekend, less than a month after the IMF proposed an international carbon price floor. While the US remains resistant to a global carbon tax, many countries already have, or plan to implement, a system to put a price on pollution.

The EU’s emissions trading system (ETS) was launched in 2005, and Brussels intends to introduce a carbon border tax in the next two years. China is set to launch an ETS, which, if it happens, would be the world’s largest carbon market.

Despite the rise of carbon pricing initiatives, costs remain below the recommended level if the world is to hit its Paris Climate goals. According to the World Bank, about 75 per cent of covered emissions are priced at less than $10 per tonne of CO2 equivalent, compared with the $50-100/tCO2e recommended by the High-Level Commission on Carbon Prices, an organisation supported by the World Bank. Less than 20 per cent of global greenhouse gas emissions are covered by carbon prices.

Power Points

• Berkshire Hathaway’s energy unit scrapped a deal to buy Dominion Energy’s Questar Pipelines, the companies said on Monday, citing uncertainty associated with regulatory approvals. Dominion will use a loan to repay a $1.3bn transaction deposit to Berkshire Hathaway Energy and said it would find another buyer for the pipeline business by year-end to cover the cost. An earlier deal between the companies for gas storage and transmission assets closed last year. (Business Wire, FT)

• US President Joe Biden and community groups are at a stalemate over where to source their renewable energy. (NYT)

• Shell will supply PetroChina carbon-neutral liquefied natural gas (LNG) cargos, marking an industry milestone. (Reuters)

• Over a decade ago, the EPA approved fracking chemicals linked to cancer and birth defects. (NYT)

• Biden’s clean energy plan could save 317,000 lives in the next 30 years. (Guardian)

• A wildfire is threatening California’s electricity supply. (Washington Post)

• The UK will ban the sale of diesel trucks from 2040, and VW says EU rules will make electric vehicles more profitable than petrol cars.