Fossil Fuels Flexing Muscles as Chevron Buys Hess

Despite the vilification and the billions of dollars being spent on alternative supplies of energy, fossil fuels are far from vanquished. Oil and gas are doing well in the U.S., and coal is holding its own.

This morning (Oct. 20), Chevron announced it is buying Hess Corp. in an all-stock deal worth $53 billion ($171/share). Chevron’s interest in Hess is based on Hess’s heavy presence in the South American country of Guyana. In a news release, Chevron said, “The Stabroek block in Guyana is an extraordinary asset with industry leading cash margins and low carbon intensity that is expected to deliver production growth into the next decade.” Hess also has a solid presence in the oil-rich Bakken formation in western North Dakota, eastern Montana, and southern Saskatchewan in Canada.

The New York Times commented that the Chevron deal “marks further consolidation of the oil industry and highlights the confidence that energy companies have in the future of fossil fuels.”

The deal comes just two weeks after Exxon announced a $60 billion deal to buy independent producer Pioneer Natural Resources in an all-stock deal ($253/share). Pioneer is a major producer in the Permian Basin in Texas and New Mexico, using fracking technology to develop from shale deposits not reachable before the advent of directional drilling and hydraulic fracturing.

According to the Energy Department’s Energy Information Administration, U.S. crude oil production in September hit 13.2 million barrels per day, recovering from a steep decline that began in 2020 and the arrival of the Covid pandemic. In September 2014, U.S. oil production was 7.5 million barrels per day.

EIA also reports that U.S. crude oil exports for the first half of 2023 averaged 3.99 million barrels per day, the highest since 2015, “when the U.S. ban on most crude oil exports from the United States was repealed. In the first half of 2023, crude oil exports were up 650,000 b/d (19%) compared with the first half of 2022.” According to Oilprice.com, oil “is on track to be the largest export item for the United States this year for the first time in history, highlighting the growing influence of U.S. oil production and exports on the global oil market.”

CNBC noted, “Big Oil isn’t back all over America: Production is still down sharply in Oklahoma and North Dakota. It hasn’t changed much in Alaska, where production is in a long-term tailspin. And offshore oil drilling in the Gulf of Mexico recovered to 2 million barrels a day but hasn’t grown.” Well productivity has grown. The Baker-Hughes rig count is half where it was in 2018. According to EIA, the average production of new wells is topping 1,000 barrels per day, up from 668 in 2019.

The rise in U.S. crude production and imports has also had an impact on Saudi Arabia and world oil prices. The large increase in U.S. production puts downward pressure on world oil prices. Saudi Aramco, the largest oil exporter, has responded by cutting its production. According to Oilprice.com, the kingdom’s oil company says it has “3 million barrels per day” of spare production capacity that it has taken off the world market to support current prices. Current Saudi production is about 9 million barrels per day.

Jay Hatfield, CEO of energy and infrastructure investment firm Infrastructure Capital Advisors, told Fortune that the surging strength of U.S. oil “signifies that there’s a little bit more rationality coming into the energy transition. The fantasy world of having just renewables as electricity within 50 years or so is now clearly not going to happen. It’s a recognition that these forms of energy are not going away anytime soon.”

Then there is U.S. natural gas, also hitting high production rates. EIA’s October Short Term Energy Outlook reports, “At the end of October, we expect U.S. natural gas inventories to total 3,854 billion cubic feet, 6% more than the five-year (2018–2022) average for the end of October.” Oil&Gas Journal says that “the primary driver is the Permian basin, where EIA expects improved well-level productivity and higher crude oil prices will spur drilling activity.”

Permian is largely associated with crude production from oil wells. According to EIA, “Advances in hydraulic fracturing and horizontal drilling techniques have improved US oil and natural gas well productivity. The length of a well’s horizontal section, or lateral, which is a key factor in well-level productivity, has increased substantially for wells operating in the Permian region, from an average of less than 4,000 ft in 2010 to over 10,000 ft in 2022.”

Along with the increase in natural gas production has come an increase in gas-fired generating capacity. According to EIA, the U.S. will see 8.6 gigawatts of new gas-fired electric generating capacity in 2023, more than the gas-fired additions in 2022 and 2021. EIA noted that 6.8 GW has already gone into service this year. “Total natural gas-fired capacity additions increased in both 2022 and 2023 after consecutive declines in the prior three years,” EIA said.

Then there is coal. The long-term decline in the production of the “dusky diamonds” continues, according to EIA, but the slide is slow. “U.S. coal production during the second quarter of 2023 totaled 142.3 million short tons (MMst),” said EIA, “which was 4.3% lower than the previous quarter and 1.6% lower than the second quarter of 2022. Production in the Western region, which represented about 53.7% of total U.S. coal production in the second quarter of 2023, totaled about 76.4 MMst (3.6% lower than the second quarter of 2022).”

Elderly coal-fired plants continue to retire, but industry reliability concerns could keep some old coal in the game. In Texas, for example, Austin’s municipal utility and the Lower Colorado River Authority have repeatedly slipped its deadline to retire the three-unit, 1,615-MW Fayette Power Project coal-fired plant. The Texas Tribune reports, “The city approved a plan in 2020 to shut the Fayette Power Project plant with the aim of eliminating carbon emissions. But political, economic and technological forces have gotten in the way.”

The Austin city council’s first retirement date for the plant was the end of 2022. That didn’t happen. And now, thanks to the reliability mess in the Electric Reliability Council of Texas, the plant is still running, and making money for the city and the public power joint action agency owners. The Tribune reported that on Aug. 17, “Austin Energy made $11 million from the plant on that day alone.”

The newspaper noted, “Rising demand for power in Texas and changes to the state’s electricity market are making coal power – the dirtiest energy source from a carbon emissions perspective – even more financially valuable.” Facing multiple years of weather-related reliability problems in the winter and summer, ERCOT this year provided for enhanced payments for plants willing to hold a portion of their generating capacity in reserve – ancillary services – to call on during emergencies.

“Every time you have a new ancillary services product that has to do with dispatchability, power plants that are dispatchable like coal and natural gas benefit from it,” said Austin Energy’s Michael Enger. Ironically, according to POWER magazine, during the 2021 Texas power crisis, Fayette Power Project was reported to have lost 453 MW of generation capacity across Units 1 and 2 on February 17, 2021

–Kennedy Maize

kenmaize@gmail.com

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