While oil production in the U.S. will continue its return towards pre-Covid levels, limits on refining capacity and inventory mean it will not grow as much as some hope, according to Pioneer Natural Resources CEO Scott Sheffield.
“We just don’t have that potential to grow U.S. production ever again,” Sheffield told CNBC’s Brian Sullivan on Tuesday at CERAWeek.
To be clear, this doesn’t mean no production growth. Many oil companies have outlined production increases as part of spending plans this year, though oil companies are now in an era of greater fiscal discipline, not shy about signaling they will favor shareholder rewards like stock buybacks over higher production levels. Sheffield expects growth to top out at a level that was already reached pre-pandemic.
“We may get back to 13 million barrels a day,” he said, which would match the record high average recorded in November 2019 by the U.S. Energy Information Administration. But he added it will be at a “very slow pace,” taking two and half to three years to match that previous record level.
For consumers, that means gas prices are more likely to stay within the current range, and pricing risk be tilted to the upside later this year.
According to the EIA, an average of 11.9 million barrels of U.S. crude oil were produced per day in 2022, below the record in 2019 of an average of 12.3 million barrels per day. The EIA is forecasting a new record for this year, but barely higher, at an average of 12.4 million barrels per day.
“We don’t have the refining capacity … if we all add more rigs, service costs will go up another 20%-30%, it takes away free cash flow,” Sheffield said. “And secondly, the industry just doesn’t have the inventory.”
Drilling rigs sit unused on a companies lot located in the Permian Basin area on March 13, 2022 in Odessa, Texas.
Joe Raedle | Getty Images News | Getty Images
The price of a barrel of oil has fluctuated between $75 and $80 this year, well off the $100+ prices seen this time last year. While the level of economic slowdown in the U.S. will be a significant factor as the Fed continues to signal its commitment to higher rates, Sheffield said he sees these current prices as “the bottom,” citing the demand boom expected alongside the reopening of China.
“The question is when do we break out? I predict sometime this summer to break fast $80, on the way to $90,” he said.
Occidental CEO Vicki Hollub told Sullivan at CERAWeek that the $75-$80 range for oil prices is a “sustainable price scenario for the industry to continue to be healthy.”
“I think gas prices at the pump are not so bad at this price, so I think it’s optimal,” she said.
The EIA forecast for gas prices is an average $3.57/gallon this year, down from the $3.97/gallon seen in 2022.
The White House has pushed oil companies to use their record profits to ramp up production instead of on buybacks or increasing dividends.
“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now. Not while a war is raging,” President Joe Biden said at a press conference in October. “You should be using these record-breaking profits to increase production and refining.”
During his State of the Union address in February, Biden noted that “Big Oil just reported record profits…last year, they made $200 billion in the midst of a global energy crisis.”
Biden said U.S. oil majors invested “too little of that profit” to ramp up domestic production to help keep gas prices down. “Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders.”
Occidental, which was the No. 1-performing stock in the S&P 500 in 2022, completed $3 billion in share repurposes last year. In 2023, the company has already authorized a new $3 billion share repurpose authorization and a 38% increase to its dividend.
While Hollub told CNBC’s Sullivan on Monday at CERAWeek that the company does have the ability to produce more oil — it is forecasting 12% production growth this year — “We have a value proposition that includes an active buyback program and also a growing dividend and we always want to make sure we max out our return on capital employed.”
“So, we are very careful with how we structure our capital program on an annual basis to make sure we still have sufficient cash to buy back shares,” Hollub said.
She cited the lack of new oil capacity, which is still near the same level as it was pre-pandemic, and the contraction in the refining sector. “We’re still limited,” she said.
While the industry can balance the supply issues by importing more of the heavy crude handled by U.S. refiners and exporting more of its own light crude, and existing refiners can add capacity, Hollub said it’s not likely that many new refining complexes will be built.
Chevron CEO Mike Wirth told S&P Global vice chairman Daniel Yergin during an on-stage interview at CERAWeek that he has concerns about the exogenous events that can lead to an abrupt supply-demand imbalance in a world which has created new limits on the flow of oil to markets, including the ban on Russia oil in the EU and U.S.
“What concerns me is we have introduced new rigidities into these systems,” Wirth said. “Normally, it’s one big just-in-time delivery machine and demand grows slowly and production grows slowly,” he said. “There’s not a lot of swing capacity or inventory capacity. … The market is tight and the logistics system has been stretched in ways it normally isn’t.”
Hess CEO John Hess said on Tuesday at CERAWeek that “biggest challenge is investment and having policies that encourage that investment.”
“Energy has a supply chain, and the energy industry has a structural deficit in investment,” Hess said. “We have higher interest rates, we have tighter financial markets; all of this makes the mountain steeper.”
China’s CATL launched its new Bedrock Chassis on Monday, calling it “the world’s first ultra-safe skateboard chassis.” The global EV battery leader said its newest tech “activates a trillion yuan market” as the new standard for intelligent vehicle design. According to CATL, it will also end the belief that gas-powered cars are safer than EVs.
CATL launches the world’s first ultra-safe EV chassis
On December 24, CATL officially launched the new Bedrock Chassis with “outstanding” safety performance. The company proved it in a video presented during the launch event.
The video showed a prototype model’s front impact at 120 km/h (about 75 mph) without exploding or catching fire. CATL claims its newest tech “sets a new standard for intelligent chassis safety” with comprehensive protection across all scenarios and speed ranges.
According to CATL, the Bedrock Chassis passed the world’s first “highest speed +strongest impact” dual extreme safety test.
In China, the commonly used speed for frontal impact safety tests in the C-NCAP (China New Car Assessment Program) is 56 km/h (35 mph).
At that speed, the collision generates energy equivalent to falling from a 12-meter-high (39-foot) building. At 120 km/h, it’s like dropping 56 meters (183 feet). According to CATL, the collision energy is 4.6 times greater.
During the launch, Ni Jun, CATL’s chief manufacturing officer, said, “Safety is the core of CATL—it’s part of our DNA.”
A trillion yuan market
There has been no previous instance of a new energy vehicle (NEV) “daring to challenge a 120 km/h frontal pole impact test,” the company said during the event.
With a battery-centered design, CATL’s new Bedrock Chassis directly integrates the battery cells into the unit. The design enables it to absorb 85% of the vehicle’s collision energy compared to about 60% by a traditional chassis.
The unit features an “ultra-safe battery cell design,” disconnecting the high-voltage circuit instantly within 0.01 seconds. It will then complete the vehicle’s residual high-voltage energy discharge within 0.2 seconds, a new industry record.
CATL boasted that its new chassis design “paves the way for the industry,” but more importantly, “it also overturns the conventional belief that gasoline vehicles are safer than NEVs.”
The global EV battery leader claims its new Bedrock Chassis “activates a trillion yuan market” and will accelerate the shift toward modular, personalized, intelligent vehicle design. At the launch event, CATL revealed that AVATR will be the first automaker to use the new tech.
CATL is on a “never-ending journey” to create safer batteries and vehicles to accelerate the industry’s shift to EVs.
The news comes after CATL revealed ambitious plans to expand its EV battery swap network last week with its new “Chocolate” SEB batteries. CATL aims to phase out gas stations over the next few years as it rapidly expands battery swap stations across China.
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Construction at BYD’s new EV plant in Brazil was suddenly halted Monday after authorities found Chinese workers in “slavery-like” conditions. The workers were hired in China by another firm, and BYD has since cut ties.
Why construction at BYD’s EV plant in Brazil is halted
According to a statement from the Public Ministry of Labor (MPT), 163 workers at the construction site of BYD’s new EV plant in Salvador, Brazil, were “being held in conditions analogous to slavery.”
Construction on the site was halted on Monday after the findings. According to the authorities, Jinjiang Group, one of the contractors BYD hired to build the new EV plant, hired the workers in China.
BYD released a statement saying it has cut ties with Jinjiang and is assisting the victims as it works with Brazilian authorities. All workers will be transferred to hotels. They will not be able to work and will have their contracts terminated.
Alexandre Baldy, senior vice president of BYD Brazil, said the company remains “committed to full compliance with Brazilian legislation, especially with regard to the protection of workers’ rights and human dignity.”
The MPT statement detailed the extreme “slavery-like” worker conditions. For example, they had one bathroom for every 31 workers, forcing them to wake up at 4 am to get in line to be ready for work at 5:30 am. They slept without mattresses on the bed, and the kitchens operated in “alarming conditions.”
If a worker quit after six months, they would leave the country without any pay after factoring in the cost of a round-trip airplane ticket.
BYD said it has held a “detailed review” over the past few weeks. The Chinese EV giant asked Jinjiang several times to improve the conditions.
A joint virtual hearing of the MPT and MTE is scheduled for December 26. The MPT said the need for new “on-site inspections” has not been ruled out. BYD’s new EV plant is set to begin production next year. Check back soon for more updates on the situation.
BYD is already a top-selling EV brand in Brazil. In October, it launched its first pickup, the Shark PHEV. The pickup is BYD’s sixth vehicle in Brazil, joining other popular models like the Dolphin Mini (Seagull), Yuan Plus, and Dolphin.
Source: Bloomberg, Brazil Public Ministry of Labor
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