Come January 2020, the International Maritime Organization ruling regarding global shipping goes into effect. The ruling will cut the sulfur content in maritime fuel from 3.5% to 0.5%. It was first announced in 2008 that this would be going into effect. The target date of 2020 was set in 2016. Though the ruling was set in 2016, it wasn't until recently that economist Philip Verleger raised the red flag about the ramifications of this ruling. He argued that oil prices could hit $200 due to the ruling.
As for the shipping industry, there are three ways to meet the sulfur cuts:
1. Put scrubbers on their ships, which helps reduce the sulfur content.
2. Switch to LNG.
3. Buy lower sulfur content fuel.
Back in a December blogpost on the topic, I mentioned that scrubbers may not be an option as Singapore stated they wouldn't allow the discharge of wastewater that comes from scrubber use.
Splash has an update that looks more favorable on the use of scrubbers:
Japanese authorities have declared washwater discharge from open-loop scrubbers to be not harmful to the environment, lending credence to a three-year study on the topic carried out by cruise giant Carnival, which was unveiled last week. Open-loop scrubbers have come under enormous scrutiny in the past 12 months with key shipping locations such as Singapore, China and Fujairah banning the technology. However, Japan, home to the world’s second largest merchant fleet, has come out in favour of them.
After Singapore came out against the use of scrubbers, so did China and Fujairah (UAE). Japan is now saying that they will allow wastewater discharge. Of course, note the last sentence of the quote: second largest merchant fleet. There might be a reason why they're open to scrubbers. It'll be interesting to see how other nations deal with this scrubbers/no scrubbers argument as 2020 nears.
Shale Oil Cash Flows
Back in January, I posted a blogpost about a WSJ article on shale. The article mentioned that the shale industry (excluding oil majors) had negative cash flow of $112 billion. Ouch.
IEEFA discusses this via Q3 2018:
This report examines a cross-section of 32 publicly traded fracking-focused companies. All told, these firms spent nearly $1 billion more on drilling and related capital outlays during the quarter than they generated by selling oil and gas. These results may come as a surprise to investors who incorrectly equate rising output with financial success. U.S. oil and gas production hit an all-time high during the quarter, even as oil prices rose to $70 per barrel, their loftiest level since late 2014.
To me, the question is, what is the breakeven for shale oil? I keep reading articles where $50 is quoted, but then 32 publicly traded fracking companies were still negative cash flow at $70. Now not all fracking companies are cash flow negative. Per the link, 8 of the 32 companies were cash flow positive over a trailing 12 months. The article also mentioned that borrowing costs are rising, which will make it harder to become cash flow positive.
Frack focused corporations aren't the only ones having a hard time making money. Per OilPrice, oil majors like Chevron are also having difficulties:
Chevron maintains that it will be cash flow positive in the Permian by 2020 and that the company would allocate much of additional cash flow to shareholder distributions. The company appears confident about the path that it is on in West Texas.
So yeah, even Chevron is having cash flow issues. As can be implied, they definitely weren't cash flow positive in 2018 and won't be in 2019.
And I wonder if BP kind of admitted it is also having issues with their shale assets. Per Reuters:
BP Chief Executive Bob Dudley described the United States’ high-pace shale oil sector as a “market without a brain” that, unlike Saudi Arabia and Russia, only responds to market signals . . . In its biggest deal in around 20 years, BP bought U.S. assets from BHP for $10.5 billion (£8.0 billion) last year.
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