Exxon’s Analysis Supports Trump’s Priority On Natural Gas And For Strong Mid Term Prices
Jan 6, 2017
The Trump inauguration is two weeks away. Our Nov 9, 2016 blog “Piecing Together Trump’s Oil And Gas Impact” [LINK] was our analysis of Trump’s statements/plans/commitments with respect to oil and gas, including his ambitious 100 day action plan “Donald J. Trump’s Contract With The American Voter” [LINK]. We highlighted a number of points including Canadian heavy oil was positioned to benefit if Trump can reduce or eliminate, over time, imports from OPEC.
ExxonMobil CEO Rex Tillerson’s pick as Secretary of State reminded us that Trump’s natural gas priority should add more support for strong mid term natural gas prices.
The last three weeks remind that weather drives winter natural gas prices. The significantly colder than expected Xmas period led to two big storage withdraw weeks (209 bcf and 237 bcf) and Henry Hub (HH) prices up to $3.70 at year end. But the switch back to warmer weather moved HH back down to ~$3.25, still a price well above the pre-winter expectations.
Near term swings in winter prices from weather often lead to overlooking positive mid term trends. This happened last winter when the hot El Nino winter crashed HH prices to $2 and expectations for a $2.50 outlook. At the same time, natural gas trends were building (increasing gas pipeline exports to Mexico, startup of LNG exports, and industrial plants using natural gas as feedstock) effectively building a better mid term base to HH gas prices to ~$3. The view of a better mid term base provided opportunity for mid term natural gas investors.
We see natural gas being a winner in the Trump administration and positioned to benefit from any slowdown in future electricity generation additions from solar, wind or other renewables that is expected as Trump eliminates/reduces renewable subsidies. This will provide additional mid term support to natural gas prices. Natural gas power generation has an advantage of being quicker to add than coal, another priority for Trump. Yesterday, FERC issued its Energy Infrastructure Update [LINK], which noted that YTD Nov 30 solar/wind generation additions were 9,250 megawatts vs 8,109 megawatts for natural gas and 45 megawatts for coal.
The market focus in the two week countdown to new Trump administration is on the high profile items including Obamacare, the last minute rush of Obama initiatives, Russian hacking, global hotspots (Iran, South China Sea, ISIS, Syria, etc), Mexico (trade and the wall), tax relief, and, of course, the ongoing Trump tweets.
The Russian hacking has brought attention on Rex Tillerson, ExxonMobil (XOM) CEO, as President-Elect Trump’s nominee for Secretary of State for his reported friendship with Putin and his opposing the sanctions of Russia due to XOM’s Russia interests. The Secretary of State role is not just diplomacy, as seen when Clinton stopped Keystone thru the State department. But we also see Tillerson having an indirect influence if XOM analysis, in particular its recent “2017 Outlook for Energy: A View to 2040” [LINK] are used to support Trump’s natural gas priority.
The closing comments of the XOM View to 2040 makes it sound like the analysis was written for this very reason. The View to 2040 closes “Meeting energy demand safely, reliably and affordably – while also minimizing risks and environmental impacts – will require advanced technology and expanded trade and investment. It will require innovation. And it also will require smart, practical energy choices by governments, individuals and businesses”. Even without including huge or great, it sounds like it was written for Trump. This last sentence caused us to take a second look at the View to 2040 to see if there was analysis/data that would help drive key Trump oil and gas initiatives. We believe there are many, but the one that stood out were analysis to support Trump’s priority on natural gas.
We think the XOM analysis sets natural gas to play an even bigger role than most expect. Trump has consistently highlighted unleashing natural gas as one of his priorities. His “An America First Energy Plan” said “encourage the use of natural gas and other American energy resources that will both reduce emissions but also reduce the price of energy and increase our economic output”. The XOM outlook provides support for natural gas playing an even bigger role in emissions and economic output.
Natural gas focus can reduce emissions intensity more than a wind/solar focus. XOM included a comparison of the success in the US vs Germany in reducing CO2 emissions intensity from power generation from 2005 to 2015. XOM wrote “The U.S. and Germany illustrate different options available to reduce CO2 emissions. A shift in the U.S. has favored natural gas, along with growth in wind and solar. In contrast, Germany targeted greater use of wind and solar while phasing out nuclear. As a result, from 2005 to 2015, the CO2 intensity of power generation fell more than 20 percent in the U.S., or more than twice the improvement shown in Germany, where it fell about 10 percent”. Tied to Trump’s comments on energy sources “the government should not pick winners and losers”, we see the XOM analysis supporting Trump’s view that natural gas can reduce emissions and that eliminating/reducing subsidies for renewables (ie not picking the winner) should lead to more natural gas generation than under Obama.
- Natural gas can be a major economic growth engine. XOM’s analysis on natural gas demand and US supply growth potential provide support for Trump’s emphasis that natural gas can increase economic output. In XOM’s analysis, the impact is significant and also ties to Trump’s desire to increase exports. Perhaps the biggest surprise in the XOM View to 2040 was “North America becomes the largest LNG exporter from growth in unconventional gas production”. XOM included the below graph showing XOM’s view that North America (essentially the US) is going from zero LNG exports last year to #1 at ~25 bcf/d. To put in perspective, US dry natural gas production was ~72 bcf/d in Nov.
There will be weather volatility every winter in natural gas prices. But the lesson learned in 2016 was that the strong “new” (at least in 2016) US specific demand trends of increasing pipeline exports to Mexico, LNG exports, and industrial projects using natural gas as feedstock provided a stronger base to natural gas for the next few years than the market expected a year ago. Trump’s energy priority is on natural gas. XOM’s analysis provides support that natural gas can deliver on Trump’s statements that natural gas can reduce emissions and drive economic output. This means that natural gas is positioned to benefit from any slowdown in future electricity generation additions from solar, wind or other renewables, which is inevitable as no one expects Trump to continue with Obama’s renewable subsidies. And any added natural gas generation provides additional support to our call for strong natural gas prices to 2020.