This past week’s blockage of the Suez Canal registered briefly in the oil market before the ship was freed, several high-profile oil field deals are expected soon, and the Supreme Court of Canada recently ruled carbon pricing constitutional.
Biweekly, we round up news and analysis about three things going on in the energy industry that we think you should know about. Here’s the latest.
1. Suez Canal blockage affects oil trade
One of the world’s largest container ships garnered constant headlines this past week after it ran aground and got stuck across the width of the Suez Canal in Egypt, blocking the passageway for other marine traffic for nearly a week. The Japanese vessel, named the Ever Given, stretches a quarter mile long and weighs 224,000 tons.
The situation put the global supply chain into crisis mode until the massive ship was finally freed Monday, after several days of unsuccessful efforts to move it. During the time the canal was blocked, some ships turned around, some took the lengthy route around southern Africa, and nearly 200 others waited in line to cross the canal, according to Bloomberg.
The shutdown was more than an inconvenience; it caused major delays and increased costs for operators. “About $9.6 billion worth of daily marine traffic” was halted by the Ever Given, Bloomberg reported. The energy industry was far from immune to these complications; around 10% of seaborne oil trade is estimated to pass through the Suez Canal, according to Marketwatch. Although oil prices spiked on Friday, we don’t expect the incident to have any long-term impact on oil prices now that the ship is on the move. Delays are still expected, however, for oil and petroleum products that were backed up by the incident, per Marketwatch.
Delays are still expected for oil and petroleum products that were backed up by the incident.
The Suez Canal, completed in 1869, is a crucial part of the global supply chain because it is the only place that connects the waters of Europe with the Arabian Sea, the Indian Ocean and the countries of the Asia-Pacific. Without the canal, ships would have to go around Africa in order to travel between Europe and Asia, adding days or weeks to shipping journeys.
2. Deals in the oil field
This year has already proven to be a big one for deals in the oil field, with many more expected. Here are just a few that caught our eye this week:
- Noble Corp. to acquire Pacific Drilling Co. LLC: Noble Corp. (not to be confused with Noble Energy, which was acquired by Chevron last year) and Pacific Drilling are both Houston-based offshore drilling companies that recently emerged from Chapter 11 bankruptcy. The deal has been described as an all-stock transaction where Pacific Drilling equity holders will receive 16.6 million shares of Noble, according to Rigzone.
- North Sea transactions: A significant upswing in M&A activity in the North Sea totals $3.5 billion in activity this year, on trend to exceed the $4 billion total from all of 2020. Recent North Sea deals include:
- Polish oil and gas company PGNiG will acquire Ineos’s Norwegian oil business for $615 million.
- NEO Energy will acquire Zennor Petroleum Limited (both U.K.-based companies) in a deal valued up to $625 million.
- Waldorf Production Limited will acquire Cairn’s interests in the U.K. Catcher and Kraken fields for $460 million cash (Waldorf and Cairn are also based in the U.K.).
- Houston-based Talos Energy and Mexico’s state-owned oil and gas company Pemex continue discussions about developing the 700-million-barrel Zama play discovered by Talos in 2017, Reuters reported last week. The find extends into Pemex’s adjacent block in the Gulf of Mexico. The two are working toward a unitization agreement to jointly operate the area, according to Reuters, despite missing this week’s deadline to finalize a deal.
- Iraq and French oil company Total SE are in discussions to finalize a $7 billion agreement for Total to construct significant infrastructure and develop and produce oil and gas reserves in Iraq. A memorandum of understanding was signed in January, and the parties expect to finalize the agreement by July.
3. Carbon pricing ruled constitutional in Canada
The Supreme Court of Canada ruled on March 25 that the country’s federal carbon pricing law is constitutional, ending a two-year legal challenge from multiple provinces. Alberta, Saskatchewan and Ontario filed a lawsuit against the federal government in April 2019 on the grounds that a federal carbon tax set a precedent for intrusions on provincial jurisdiction.
The three provinces argued that regulating greenhouse gas emissions and managing natural resources fall under provincial jurisdiction and referred the legislation to their highest appeal courts. Saskatchewan and Ontario lost to the federal government in 2019, but Alberta won in February 2020 on the decision that it was unconstitutional for the federal government to exercise jurisdictional power not granted by the Canadian Constitution in imposing a federal carbon tax, and that it would grant the federal government broad power to intervene in provincial affairs going forward.
The Supreme Court majority decision ruled that climate change is a national concern and falls within the federal government’s constitutional power to regulate.
The Supreme Court majority decision ruled that climate change is a national concern and falls within the federal government’s constitutional power to regulate as a national emergency. Provinces without a carbon pricing regime that meet federally set minimum standards are now required to adopt the federal carbon tax enacted into law in 2018 under the Greenhouse Gas Pollution Pricing Act.
In our last post, we discussed the carbon credit cap-and-trade system in place with Quebec and California under the Western Climate Initiative, and we expect more jurisdictions with climate change policies and net-zero emission goals to adopt a form of carbon pricing going forward. A majority of the United States does not currently have a form of carbon pricing in place.
On the same day as the Supreme Court ruling in Canada, the American Petroleum Institute—which represents over 600 members in the oil and gas industry—made a notable shift when it announced its endorsement of a carbon price policy across all economic sectors as part of its new climate action framework.
We recommend for companies operating in this space to have a knowledgeable understanding of how carbon pricing regimes function globally to best position themselves going forward.