Tuesday, March 12, 2024

OIL PRICES REMAIN CONTAINED DESPITE THE EXTENSION OF OPEC+ CUTS

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 


Oil prices continued their quasi-lateral movement dynamics in a range between $82/bbl and $84/bbl, in terms of Brent Crude. Positive signals coming from China and impressive oil demand from India did little to change this dynamic, perhaps due to the continued rise in US crude inventories. The extension of OPEC+ production cuts also did not impress the market, not only because they were expected, but because they were taken as a sign of not very robust demand. The market's reaction to US crude oil inventories is a puzzle. Crude oil inventories increased by just over 1 MMbbls, reflecting an increase of 0.9 MMBBLS in imported crude, while gasoline inventories decreased by just over 5.0 MMbbls. Although this situation does not indicate a negative effect on global demand, after the EIA announcements prices fell to their lowest level of the week.

Economy

Jerome Powell, the president of the Federal Reserve (FED), attended this week to testify in front of the Financial Services Committee of the House of Representatives of the North American Congress. In his remarks, Powell said rate cuts “can and will begin” in 2024, which was seen by many analysts as the most unequivocal comment to date on the start of interest rate cuts. His comments also helped boost the broader financial sector with equity markets in the US challenging new highs, with gold rising to a record high of over $2,150/tm. However, Powell was careful to state that reducing interest rates “too soon or too long” could cause inflation to reignite, forcing it to raise rates even more than planned. But by the same token, he noted that cutting rates “too late or too little” could slow economic growth and hurt the labor market.

In that context, the Department of Labor announced that 275,000 non-farm jobs were added in February and the unemployment rate increased to 3.9%. Analysts had expected figures of 198,000 jobs and an unemployment rate of 3.7%. The effect of the addition of jobs was diminished by the fact that the increases announced during recent months were revised downwards on each occasion, reducing the reliability of the indicator.

Basics

Iraq continues to produce more than its OPEC quota, despite the country's oil minister pledging not only to meet its quota but also to make up for January's overproduction. This overproduction contributed, in part, to the decline in prices, even though the rest of the group remained within expectations.

Fuel consumption in India, the world's third-largest oil importer and consumer, rose 5.7% year-on-year in February, government data showed, largely due to growth in manufacturing activity. Fuel consumption, an indicator of total oil demand, rose to 4.98 MMbpd in February, compared to 4.74 MMbpd consumed in January.

On the contrary, according to some, China's oil demand growth this year could be half of pre-pandemic levels (2019), when the dynamics of its economy supported demand growth of more than 1. 0 MMBPD annually; The central government of the world's second-largest economy is battling an economic slowdown. The construction and automotive sectors, key drivers of oil demand, now appear to be the focus of economic woes, limiting annual growth in demand to less than 0.5 MMbpd, or half the growth during the golden years.

The other major consumer and producer of oil, the US, is showing no signs of materially affecting oil balances, either on the supply or demand side, for now. This week drill activity fell again, after a two-week hiatus, the bulk of the reduction and rearrangement of drills occurred in the state of Texas, the US-producing state par excellence.

Geopolitics

We see a widespread deterioration of conditions in the Middle East. Negotiations between the warring parties are at a standstill, while efforts to provide humanitarian aid to civilians in Gaza face significant difficulties. In addition to the unacceptable human tragedy, the conflict seems to increasingly impact the global oil and gas balance.

The maritime transport situation around Yemen, in the Red Sea, has shown a marked deterioration. The first recorded deaths were reported after the attack by Houthi militants on the cargo ship, “True Confidence”, which will likely accelerate the already sharp decline in oil tanker traffic through the Red Sea. The cargo ship, “Rubymar,” which was being towed to port after suffering damage from Houthi attacks on February 18, sank. In addition to the potential environmental damage of its cargo, it is estimated that the dragging of its anchor caused the breakage of three underwater communication cables.

This weekend, the US military reported that US, French, and British forces shot down dozens of drones in the Red Sea area, after Houthi rebels attacked the bulk carrier “Propel Fortune” and US destroyers in the region.

In the confrontations between Russia and Ukraine, the Ukrainians have chosen to attack industrial targets inside Russia, with some success. In the first two months of 2024, key targets achieved include the Ust-Luga fuel export terminal on the Baltic Sea near St. Petersburg and major oil refineries in Yaroslavl and Volgograd. They have also attacked manufacturing plants for goods that are difficult to replace due to the economic sanctions. This week was no exception, two Ukrainian unmanned aircraft attacked fuel tanks and the Mikhailovsky GOK iron ore processing plant, owned by Metalloinvest, one of the largest in Russia. Fuel production in Russia is reported to be reduced compared to last year, due to damage to refineries, which will take some time to repair.

In that European scenario, Sweden joined NATO, two years after the Russian invasion of Ukraine forced them to rethink its traditional national security policy. Sweden concluded that the support of the alliance was its best guarantee of security. The incorporation of Scandinavian countries into NATO is one of the unexpected consequences of the Russian invasion.

Thus, combining the economic and geopolitical elements and the traditional Demand/Supply equation, we conclude that the oil market is once again focusing on the fundamentals of supply/demand. Our analysis, perhaps more art and experience than science, tells us that the price of Brent Crude Oil will increase during the second and third quarters of this year to remain in a range between $86/bbl and $92/bbl.

During the week, the Brent and WTI crude markers, at the close of the markets on Friday, March 8, were trading at $82.08/bbl and $78/BBL, respectively, after reaching $84/bbl and $80/bbl earlier.

In other news

·      Geneva-based trading house Montfort Group is in talks with Sinopec's fuel oil division, Sinopec Fuel Oil, for the sale of part or all of its 65 MBPD refining facility in Fujairah, United Arab Emirates. The refinery produces VlSFO (very low sulfur fuel oil).

·      ENI announced a significant discovery of oil, gas, and condensate, offshore of the Ivory Coast. This is the Murene-1 exploratory well. Preliminary results indicate potential resources of up to 1.5 MMMboe (billion barrels of oil equivalent). The exploratory success follows the Baleine discovery, which ENI is currently developing.

·       Saudi Arabia has transferred 8% of Aramco to the Kingdom's sovereign wealth fund, Saudi Crown Prince Mohammed bin Salman said Thursday. This transfer strengthens the strong financial position and credit rating of the Public Investment Fund (PIF); The chairman of the board of directors is the crown prince. The 8% stake in Saudi Aramco is currently worth about $160 billion. The transfer is between state-owned companies but will give the fund the capacity to finance the Crown Prince's Vision 2030 program. Once the transfer is completed, PIF, which already owned 8% of Aramco, will double its stake in the Saudi oil giant. About 2% of Aramco is in the hands of private investors, following the company's IPO in December 2019, however, Saudi Arabia is rumored to be working with advisors to make another public offering of Aramco shares.

 

VENEZUELA

Political/Economic Situation

We are in the presence of a unique week, as will surely be many of the weeks to come, in the political/economic management of the country. Undoubtedly, everything is aimed at implementing elections tailored to the regime, while feints of “controlled amplitude” are made to impress the international community to try to get the OFAC License 44 renewed and the European sanctions lifted.

The regime continues to insist, echoed by a sector of the “opposition”, that a replacement must be chosen for the “disqualified” María Corina Machado, knowing that will stoke quarrels, interests, and egos.

Meanwhile, the traditional methods of increasing public spending aimed at certain components of the population, services, and CLAP funds, whose financing will require, at least until July of this year, growing oil revenues to be sustainable. That explains the contortions the regime has been making to please the Biden administration.

With the electoral schedule severely shortened, the incremental oil revenues resulting from the granting of License 44 would maintain the flow of income until close to the peak of “public electoral spending,” even if it were not renewed. For exports made before April 18, the date on which the license would expire, income would be received until early June.

Hydrocarbon Sector

The production of Merey 16 crude oil has become the Achilles heel of the oil chain, from production to export. We must infer that the market is not willing to buy the DCO substitute crude oil (a mixture of extra heavy crude oil, 8.5 API, with naphtha) except at enormous discounts, which is why it has been all but abandoned.

Merey 16 crude oil, a heavy crude oil mixture, requires light crude oil of around 30 degrees to achieve the specifications that the market accepts, mainly related to sulfur content. Light crude oil, traditionally produced in the north of Monagas and Anzoátegui, is declining and is also required to feed the Puerto la Cruz refinery.

Enough heavy naphtha has been imported for the dilution requirements, but for some reason, the only cargo of light crude suitable for blending Merey 16 crude, the 2.0 MMBBLS cargo of Russian Ural crude, is being unloaded and stored in the Amuay area. It is possible that, through cabotage, part of this light crude oil may reach Jose, to be used in the mixing plants. Meanwhile, Merey 16 crude availability problems will continue to cause delays at the Jose terminal, limiting production and export.

Production for the week remained unchanged, averaging 757 Mbpd, distributed geographically as follows:

·       West                       139 (Chevron 55)

·       East                        148

·       Orinoco Belt            470 (Chevron 88)

·       TOTAL                    757 (Chevron 143)

·        

National refineries processed 202 Mbpd of crude oil and intermediate products. Gasoline production was 70 Mbpd and 75 Mbpd of diesel. According to users nationwide, the gasoline supply situation shows some improvement.

It is too early in the month to set export levels for March. However, the programming indicates that it should reach around 650 Mbpd of crude oil and about 40 Mbpd of residual fuel. Reaching the crude oil export figure depends on the solution given to the limitations of producing Merey 16 crude oil. In theory, the balance suggests a volume of produced crude oil available for export of 610 MBPD; net of refining and considering the use of Ural crude oil in Paraguaná, which together with 40 MBPD of diluent would serve the schedule.

Oil revenues during February were $600 million, and the monetary equivalent of barter was slightly more than $100 million.

Given that the Iranian presence in Venezuelan refineries has been announced for months, our attention is drawn to the announcement by Iran's deputy oil minister. He announced that his country has managed to manufacture 80% of all the oil parts and equipment in the country, despite being under Economic sanctions.

 

Tuesday, March 05, 2024

OIL REACTS TO OPTIMISM ABOUT INTEREST RATES AND OPEC+ ANNOUNCEMENTS.

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 



 

The price of crude oil benefited during the week from the publication of data on the personal consumption index (PCE), the preferred inflation indicator of the Federal Reserve (FED), which, as expected, decreased in January. This has generated, even though the index remains well above the FED's annual target, some hope that the Federal Reserve will consider reducing rates as inflation cools, thereby boosting economic activity in the largest oil consumer in the world.

Meanwhile, in the eurozone, inflation fell to 2.6% in February, from 2.8% in January, but both the headline figure and core inflation, which excludes volatile food and fuel prices, barely met analysts' expectations. These figures also create hope that a rate cut is on the table. On the other hand, the European Central Bank (ECB) appears to be concerned about the economic problems of the largest industrial economies in the Union.

The information, which had been leaked from OPEC+, was confirmed on Sunday morning with an announcement from Saudi Arabia, extending the current production cuts until the middle of 2024. The Russian Federation gave the same message in the mouth of the minister. Alexander Novak. The confirmation will have little effect on prices when the market opens on Monday; We believe that this extension of the cuts was already discounted by the market. The next formal meeting of the OPEC+ Joint Ministerial Monitoring Committee is scheduled for April 3.

On the supply side, both Brazil and Guyana are at production plateaus until the start of additional developments with the incorporation of new floating production units (FPSOs). This will occur at the end of the year in the case of Brazil, and next year in the case of Guyana. OPEC members produced 26.88 MMBPD in February, an increase of 110,000 bpd from the previous month, although when including partner countries, the expanded cartel met the agreed cuts.

Meanwhile, in the US, production is constrained by the number of active rigs in the appropriate basins and the depletion of the DUC well pool (uncompleted drilled wells in the Shale basins). Moreover, the relatively high number of companies involved in M&A transactions affects the scheduled flow of capital investments. EIA inventory data showed sustained growth in crude oil, but that was offset by declines in gasoline and distillate inventories, mitigating the market's natural downward reaction to growing crude oil inventories.

Demand prospects remain uncertain, especially given the difficulties the Chinese government is experiencing trying to promote growth and bring order to the real estate sector. China's manufacturing purchasing managers' index (PMI ) reached 49.1% in February, down from 49.2% in January, a slight decline that could be a consequence of the Lunar New Year holiday last month and below the threshold that could indicate a recovery. The uncertainty in China has been offset by increases in demand in India and some items, such as distillates, in the US and Brazil.

 

Geopolitics

The wars in Europe and the Middle East keep political risk premiums high due to the potential collateral effects on the supply of hydrocarbons to the market and the nervousness associated with the expansion of conflicts.

In the case of Russia's invasion of Ukraine, the delay or reduction of US military aid is leaving the Ukrainian army short of ammunition, which explains the progress the Russians have made recently. Thus, the Ukrainian strategy has changed to attacking Russian energy and air infrastructure. As a result, Russia has suspended gasoline and distillate exports for six months to stabilize its domestic market. This measure represents a reduction in Russian supplies to the international market.

In the other conflict, the framework of Israel, Hamas, Houthis, Hezbollah, and Iran remains complicated. The Biden administration is pressing Israel to delay its military escalation in southern Gaza to protect civilians surrounded in Rafah. In the north, Hezbollah threatens to attack Israel. Sources indicated that Israel had agreed to a ceasefire for six weeks, a period that would begin with the handover of several “vulnerable” hostages, presumably the sick, elderly, and women. The agreement was reached in meetings in Doha, and now they are moving to Cairo to continue negotiations.

The effects on the maritime transport of crude oil due to the Houthi attacks, which are intertwined with this conflict, are manifested in reductions in inventory levels in developed countries (OECD), putting the energy security of some countries at stake. There are new reports that Yemen's Houthis have destroyed some undersea telecommunications cables linking Europe and Asia, although the extent of the damage remains uncertain.

All these elements, and especially the solid physical fundamentals that point to a precarious demand/supply balance, influenced market perception, and prices increased close to 3% compared to the previous week. At market close on Friday, March 1, Brent and WTI crude oil were trading at $83.55/bbl and $79.97/bbl, respectively.

In other news

·      Over the past week, active drills in the US have increased marginally, adding two units to drill in Alaska and one in New Mexico. In the rest of the world, during February, drilling activity showed a reduction of 7 units, mainly in the North Sea and Colombia.

·      ExxonMobil (NYSE: XOM) said this week that the terms of its partnership with Hess Corp. (NYSE: HES) warrants them (and its third partner, Chinese company (CNOOC) the right of first refusal in acquiring the Hess Corp. in the Stabroek block. This concerning the announced purchase of Hess by Chevron (NYSE: CVX). Without Guyana's assets, the alliance between Hess and Chevron would make little sense. On the other hand, unofficial sources indicated that the Guyana government wants the Hess/Chevron agreement to come to fruition.

·      French oil company TotalEnergies (NYSE: TTE) is moving full steam ahead with plans to make a final investment decision (FID) for a large oil project in Block 58 off the coast of Suriname. , at the end of 2024. Following the evaluation of two major oil discoveries (Sapakara South and Krabdagu) in Block 58, combined recoverable resources of nearly 700 million barrels were estimated, in water depths of less than 1,000 meters for the two fields. TotalEnergies is the block operator, with a 50% stake, along with APA Corporation (NASDAQ: APA), which owns the remaining 50%.

·      According to leading Russian coal traders, new US sanctions on Russia look set to reduce India's imports of thermal coal from Russia. Russia increased shipments to India after Western sanctions against Moscow for its invasion of Ukraine. The latest US sanctions include Russia's payments system, financial institutions, and energy production.

 

VENEZUELA

Political/Economic Situation

The board of the National Assembly (AN), led by Jorge Rodríguez, has delivered to the National Electoral Council (CNE) a “national” agreement that addresses general principles, calendar, and expansion of electoral guarantees for the 2024 presidential election. The agreement, signed by political organizations allied to the regime and by others of the “opposition”, it aims, according to the announcements, to replace the agreements of Mexico and Barbados. This is a clear strategy to exclude the political forces brought together by the “disqualified” María Corina Machado, while they decorate the stage for their international and national allies.

In every event, the regime seems to want to be on good terms with God and the Devil, ignoring its commitments in the Barbados Agreement, but maintaining conversations with its counterparts in that agreement. It is speculated that there have been meetings this week and that the conversations between Jorge Rodríguez and Biden's new representatives continue. The purpose of the regime is to try to convince the “gringos” that the disqualification of MCM is not a violation of the Barbados Agreement, since she may well appoint a substitute candidate; an argument with which they hope to achieve the renewal of the License 44 from OFAC. In this same context, non-governmental actors advocate for the license to be renewed.

Meanwhile, the long-awaited increase in public spending has already begun, especially in those elements that may have the greatest effect on popular favoritism, such as the increase in CLAP boxes.

Internationally, Maduro suffered a setback when an appeal filed by the regime before the International Criminal Court (ICC) was dismissed, in which he demanded that the progress of investigations against him for possible crimes against humanity be halted. Judge Marc Perrin de Brichambaut read the unanimous ruling, in which “The Appeals Chamber rejects the arguments presented by Venezuela.” Hence, the process continues to its next phase.

Hydrocarbon Sector

PDVSA announced this week two events of little relevance, but which we report here for the information of our readers. On the one hand, the start of production of the A-162 well in the Ambrosio Field, operated by the joint company PetroWarao (PDVSA and Perenco), in Lake Maracaibo, was announced. The announcement details that the condensate produced will be used as a diluent and the natural gas will be sent to Tía Juana – the announcement does not mention volumetric figures. Perhaps the news is because every drop counts in an environment of chronic shortages of diluent and natural gas. On the other hand, a joint PDVSA and Chevron visit to the PetroPiar upgrader was reported to “verify” the safety, reliability, and production levels of the plant.

Additionally, PDVSA also reported that its president was visiting Repsol in Spain, presumably to advance the potential reactivation of the PetroQuiriquire joint venture.

Oil production continued to be affected by a shortage of diluent, despite the arrival of Russian light crude oil, and by power outages in a system overloaded by demand. The delay in blending crude oil to export specifications limited loading operations at the Jose terminal, creating congestion of tankers anchored outside the terminal, waiting for crude oil. As a partial solution, the export of crude oils that do not require dilution and treatment, Boscán and Hamaca, was maximized.

Under these boundary conditions, production for the week was 754 Mbpd distributed geographically as follows:

·       West                       138 (Chevron 55)

·       East                        148

·       Orinoco Belt            468 (Chevron 88)

·       TOTAL                    754 (Chevron 143)

National refineries processed 194 Mbpd of crude oil and intermediate products. Gasoline production was 66 Mbpd and 74 Mbpd of diesel. In the coming weeks, gasoline production could reflect the use of oxygenates produced in the east. However, the domestic gasoline market continues to depend on product imports through barter with Chevron.

Crude oil exports for February averaged 605 Mbpd, due to the limitations mentioned above: 32 MBPD were exported from inventories, 15 MBPD from Boscán and 17 Mbpd from Hamaca, which raised the crude oil destined for the US to 195 Mbpd; 395 Mbpd were shipped to Asia (China and India) and about 10 Mbpd (a shipment of 300 MBBLS) left, possibly destined for the Netherlands, but this could not be confirmed.

The availability of drilling rigs is emerging as an obstacle to the announced increase in production. Around fifty units are in the country: two that are operating in the Orinoco belt, nine stored in the yards of private contractors, and 39 that belong to PDV Servicios. Of the earth drills, 41 require major maintenance and/or have been cannibalized. Only two are lake drills, but they are not in condition to be operated.

Tuesday, February 27, 2024

THE TENSE CALM OF THE OIL MARKET.

El Taladro Azul  Published  originally in Spanish in  LA GRAN ALDEA

M. Juan Szabo and Luis A. Pacheco 



Although war events continue to threaten the security of supply, the oil market seems immune to specific events, as well as to the repeated and contradictory announcements from Central Banks about interest rates and their potential effect on energy demand. Hence, prices, recently, have experienced relatively low volatility. The price of Brent Crude Oil has moved within a narrowband lately: between $81/bbl and $84/bbl.

Middle East

Attacks on shipping continue to occur. Earlier this week, a Belize-flagged British cargo ship, the Rubymar, was hit by two missiles while sailing in the Gulf of Aden, near the Bab el-Mandeb Strait, and the crew had to abandon ship. The ship is being towed to the Port of Djibouti, but it is unknown if it will be able to stay afloat during the voyage. On Thursday, an attack was reported on a Palau-flagged cargo ship called the Islander.

This past Saturday, the United States and Britain attacked 18 Houthi targets in Yemen, in response to a recent increase in the rebel group's attacks on ships in the Red Sea and the Gulf of Aden. The Houthis denounced “American-British aggression” and vowed to continue their military operation in response.

Israel has not begun its final attack on Rafah, where the remainder of Hamas forces are believed to be taking refuge. Either because of the complexity of coordinating this large-scale operation, which requires the handling of more than a million civilians, or because of the pressures that the US is exerting to stop it. On the other hand, negotiations are taking place in Paris and Qatar between the two sides, in an attempt to establish a ceasefire before the start of the holy month of Ramadan.

Russia-Ukraine

Two years ago, Russia launched a large-scale attack on Ukraine, displacing millions of people and destroying homes and businesses across the country. The number of military and civilian casualties during the conflict is difficult to establish, given that they are considered state secrets by both sides. According to some estimates, Russian forces have suffered around 315,000 casualties, including dead and wounded. On the Ukrainian side, there is talk of casualties of an order of magnitude smaller, but it is impossible to verify these reports. In any case, important losses with nothing to show in return.

The US has announced a package of more than 500 sanctions against Russia later this week following the death of opposition leader Alexei Navalny and continued aggression against Ukraine. It is still too early to evaluate the effect they may have on the global oil and gas market.

Economy

Meanwhile, the US Federal Reserve has given indications that it is in no rush to begin lowering interest rates. Two of its directors gave contradictory opinions this week about an early reduction in rates, which once again put the forecasts of lower oil demand in motion, putting pressure on prices.

We, on the other hand, think that supply is more limited than any reduction in demand that could be induced by restrictive policies. The most relevant factor is the behavior of US oil production, which has been almost two months below the record of 13.2 MMBPD, reported in November 2023, with no signs of increasing soon.

Regarding China, we can mention two important factors. One factor encouraging optimists is strong domestic travel data for the start of the Year of the Dragon. Figures show 474 million domestic journeys were made during the eight-day break that ended on Sunday. That was more than 34% more than last year and 19% above pre-pandemic levels in 2019.

As for international travel, about 13.52 million inbound and outbound trips were recorded during the holidays, a 2.8-fold increase over the same holiday period last year, according to the National Immigration Administration.

Elsewhere, China's Central Bank attempted to catch markets off guard with a surprise monetary easing, including interest rate cuts, in a bid to revive the building sector, which remains one of the most influential drivers of the Chinese economy.

Thus, given that the war fronts had relatively little activity that affected the supply and distribution of hydrocarbons, it was the concern of the monetary restrictions for a longer period that marginally eroded crude oil prices. At the close of the markets on Friday the 23rd, Brent and WTI crude oil were trading at $81.62/bbl and $76.49/bbl respectively.

This relative price weakness can be misleading. Some market analysts, such as Goldman Sachs and Standard Chartered, agree with us that supply fundamentals and geopolitical elements suggest a higher crude oil price than the market indicates. Brave is who bets against the opinion that the prices reflect.

In other news

·      Chord Energy Corp. (NASDAQ: CHRD), an operator in the Montana and North Dakota basins, has agreed to merge with Enerplus Corp. (NYSE: ERF) in a deal valued at $3.7 billion in stock and cash, continuing a wave of asset consolidation in shale oil and gas production basins. The result of the merger will be a leading producer in the Williston Basin in the northern US.

·      According to the Baker Hughes report, the number of active drills in the US showed a modest increase of 5 units over the past week, mainly in land operations.

·      Royal Dutch Shell (NYSE: RDS.A) announced it will withdraw from a MunmuBaram floating offshore wind project in South Korea, adding to the list of oil companies withdrawing from the segment. Shell decided last year to abandon its plan to reduce its oil production by 1% to 2% annually, partly because it has concluded, like other oil companies, that renewable energy projects are not delivering the desired returns.

·      Occidental Petroleum Corporation (NASDAQ: OXY) is exploring the sale of Western Midstream Partners (NYSE: WES), a US gas pipeline operator, valued at $20 billion. The divestiture would help OXY, which is backed by Warren Buffett's Berkshire Hathaway, to cut the heavy debt it has accumulated due to acquisitions.

A very particular situation is developing in the natural gas market in the US. This market has been oversupplied since November 2023, and the low prices reflect this. However, this week, gas prices rebounded after Chesapeake Energy (NASDAQ: CHK), which will be the largest gas producer in the US following its merger with Southwestern Energy (NYSE: SWN), announced that it will reduce its gas production in 2024 by approximately 30%; The decision was replicated by other producers in a demonstration of self-regulation exercised by the same industry.

VENEZUELA

Political/Economic Situation

Perhaps the most curious news of the week was the agreement reached between Haiti and Venezuela to settle the debts that the Caribbean country acquired through the agreement known as Petrocaribe. The Maduro regime agreed to receive $500 million as full payment of a debt of $2.3 billion that Haiti had with Venezuela.

In the Petrocaribe plan, created in the years of the oil boom of the first decade and a half of the century, more than 200 Mbpd of crude oil and products were delivered by PDVSA to Caribbean islands, with financing that almost turned them into gifts. In addition to some staple products as partial payment, the Venezuelan government “bought” their political support in international organizations such as the OAS. In a historical irony, impoverished and undercapitalized Venezuela considers it an achievement to receive, from one of the poorest countries in the world, what is now a symbolic payment.

This unexpected income clarifies the origin of the funds used by the regime in recent economic management, in terms of being able to stop the deterioration of the monetary sign and, therefore, reduce inflation. It also explains the multiple trips of Vice President Delcy Rodríguez to other Caribbean countries, presumably, to structure payments like the one in Haiti.

On the political front, mutual accusations of who is to blame for breaking the Barbados agreement became more intense. However, talks continue about returning to negotiations. The regime may have the objective of misdirecting the new US negotiators and trying to ensure that OFAC License 44 does not expire. We still do not have a clear route to the presidential elections.

Hydrocarbon Sector

The arrival of 2.0 MMBBLS of Ural crude oil from Russia was announced, after five years without oil exchange with that country. This occurs in part due to the interruptions in maritime transport in the Red Sea that led the Russians to look for more distant buyers for their crude oil, and to the window of opportunity presented by the suspension of the supply of Iranian condensate to Venezuela. The continuity of this supply could be affected by the recent additional sanctions imposed on Russian oil, the transport, and the financial system behind these transactions.

Power outages appeared again, and the shortage of diluent affected PDVSA's production. This last problem will probably be resolved with the arrival of light crude oil from Russia.

It was also known that the MTBE plant (octane booster used in gasoline), in the José Antonio Anzoátegui petrochemical complex, was put into operation. Its production will be used to increase the octane rating of the gasoline produced in the refineries, improving gasoline production.

Crude oil production during the week was 762 Mbpd, distributed geographically as follows:

·       West                       140 (Chevron 56)

·       East                        148

·       Girdle                     474 (Chevron 88)

·       TOTAL                    762 (Chevron 144)

National refineries processed 191 Mbpd of crude oil and intermediate products. Gasoline production was 59 Mbpd and 76 Mbpd of diesel. The domestic gasoline market continues to depend on product imports through barter with Chevron and European companies and, therefore, is vulnerable to the reinstatement of sanctions.

Crude oil exports for February continue to focus on achieving exports slightly above 600 MBPD of crude oil and 55 MBPD of products.

Guyana announced that it will not approve additional exploration activity in the undelimited waters between Venezuela and Guyana until the International Court publishes its ruling. Venezuela welcomed the Guyanese announcement, although our interpretation of the announcement is that the exploratory activities that Exxon and its partners will carry out will continue in the eastern part of the Stabroek block.

CITGO.

In another interesting turn of events, the New York State Court of Appeals ruled, on February 20, 2024, that the Constitution of Venezuela does apply to the PDVSA 2020 bonds. In particular, the pertinence of the prior control that the National Assembly had to exercise so that PDVSA could transfer 50.1% of the shares of CITGO Holding, Inc. as collateral.

The Court of Appeals addressed the issue as a continuation of the litigation presented by the ad hoc administrative board of PDVSA, in 2019, in the court of the Southern District of New York, questioning the validity of this debt operation. Since then, the lawsuit has been highly criticized by some opposition parties and prominent Venezuelans, who considered it a waste of resources and with no chance of success.

The Court's decision, as it indicates, does not guarantee a final victory for PDVSA, but it does shift the risk over time and creates better conditions for a negotiated solution between the parties. Dr. Jose Ignacio Hernández has written in La Gran Aldea about the history and implications of this legal decision.

 

Energy Transition

Biofuels[1]

 

The transition to an energy system that reduces the carbon footprint is one of the greatest challenges facing humanity in the 21st century. Among the various technological solutions that can contribute to this transition, biofuels represent a renewable option with great potential yet to be exploited. In principle, biofuels seem to be an almost optimal energy alternative: produced from organic matter, known as biomass, which contains carbon absorbed by plants through photosynthesis, when used to produce energy, the carbon is released during combustion and returns to the atmosphere. If more biomass is produced, an equivalent amount of carbon is absorbed, in a kind of quasi-virtuous circle:

 

History

Early civilizations used wood as a fuel source for heating, cooking, and lighting – even today, two billion people use wood as their primary source of energy. The discovery of how to produce alcohol through fermentation also dates back thousands of years, and alcoholic beverages were among the first biofuels used by human societies.

 

In the 19th century, Rudolf Diesel, the inventor of the diesel engine, advocated the use of vegetable oil as fuel for his engine. At the beginning of the 20th century, the use of biofuels decreased significantly. However, concerns about oil shortages in the 1970s later led to renewed interest in biofuels as an alternative energy source.

 

Brazil was one of the pioneers in developing modern biofuel industries in the 1970s and 1980s. Gasoline blended with ethanol produced from sugar cane became a standard transportation fuel. Biodiesel production from soybean and other oils also grew significantly. In the United States, federal programs that began in the late 1970s promoted the production of ethanol from corn and other crops.

 

Many countries began promoting biofuels in the 1990s and 2000s to reduce dependence on imported fossil fuels, improve energy security, and reduce environmental impacts. Ethanol and biodiesel production experienced significant growth in this period. Second-generation biofuels using non-food crops and agricultural residues also saw increased research and investment.

 

Technologies

In general, three generations of biofuel technologies are defined:

 

-      First-generation biofuels. Made from food crops such as cereals, sugar crops, and oil seeds, with well-established production technologies, these are the most common. Some examples are corn ethanol, sugar cane ethanol, soy or palm biodiesel, and biogas.

-      Second-generation biofuels. Made from lignocellulosic biomass raw materials, and non-food vegetable dry matter. It also uses inedible parts of food crops. Some examples are cellulose ethanol and biomass diesel.

-      Third-generation biofuels. Derived from microalgae biomass. Even in the demonstration and pilot phase of development, algae can produce more oil per acre than conventional oil seed crops. Some examples are algae biodiesel, aviation fuels, and biocrudeIATA has set targets of 2% biojet use by 2025 and 10% by 2030 under its sustainability program. However, achieving these goals will require a substantial increase in production.

 

Biofuels have grown to become an important source of renewable energy in many countries. Several factors drive this growth. Global production of ethanol and biodiesel reached well over one hundred and sixty billion liters in 2020.

Locally produced biofuels reduce dependence on imported oil and create markets and jobs in agricultural regions. On the other hand, biofuels such as ethanol and biodiesel work with existing engines and distribution infrastructure. Additionally, biofuels burn cleaner than fossil fuels and can reduce greenhouse gas emissions, especially in their advanced forms, and are competitive at relatively moderate oil prices.

 

The rapid growth of biofuel production has raised concerns about potential conflicts with food production and land use. These concerns center on two key issues:

 

Diverting cropland or food products such as corn and vegetable oils toward biofuel production reduces their availability to food and feed markets. This impacts food prices. Global ethanol production uses about 5% of the world's grain supply. Biodiesel uses 20% of the vegetable oil supply. Although critics argue that biofuels divert agricultural resources from feeding a growing world population. Proponents argue that net food production continues to grow and keep pace with demand.

 

Increasing the production of biofuel crops can displace existing agriculture and lead to the conversion of forests and grasslands into new cropland. Indirect changes in land use, in response to the demand for biofuels, can contribute to deforestation and the release of carbon stored in soils and vegetation, nullifying the anticipated decarbonization benefits. Modeling and accounting for these indirect impacts of land use change on emissions remains complex and controversial.

 

The attached table summarizes the approximate annual production volumes of the largest global producers of ethanol and biodiesel. The data provides insight into the main players and current production scales in these important biofuel markets.

 

Country

Biogasoline production

Total: 1855 Mbpd

Country

Biodiesel production

Total: 1003 Mbpd

USA

54%

USA

24.5%

Brazil

28.6%

Indonesia

18.8%

China

3.5%

Brazil

10.8%

India

2.8%

Germany

7.0%

Canada

1.6%

China

4.1%

Thailand

1.2%

Argentina

3.7%

France

1.1%

Netherlands

3.6%

Argentina

1.1%

Spain

3.5%

Germany

0.7%

France

2.8%

Others

5.4%

Others

21.1%

 

Source: ENI World Energy Review 2023[2]

 

As in all energy issues, economics plays an essential role. Feedstock costs account for up to 70% to 80% of total biofuel production costs. Therefore, the sustainability of raw materials and optimization of the supply chain are essential. At oil prices below $60-$80 per barrel, first-generation biofuels such as corn ethanol and soybean biodiesel struggle to compete without subsidies. Advanced cellulosic ethanol and biomass-based diesel can become profitable at prices between $80 and $100 per barrel of oil. Compared to other renewable energies such as solar and wind, biofuels benefit from taking advantage of existing engines, infrastructure, and distribution. But power generation costs per kWh are even higher.

 

Biofuels are already playing a significant role as a renewable alternative to petroleum-derived fuels. With continued innovation and supportive policies, they can continue to deliver greater environmental and economic benefits. But to realize their full potential, sustained research, development, and investment in advanced biofuels integrated into overall sustainable energy systems will be needed.

 

According to the International Energy Agency (IEA), in the short term, almost two-thirds of the growth in biofuel demand will occur in emerging economies, mainly India, Brazil, and Indonesia. Policies in all three countries are also based on energy security considerations, as increased use of biofuels will offset some oil imports. India imported 87% of its crude oil supply, and Indonesia's net imports accounted for 20% of supply in 2021. Brazil is a net exporter of crude oil but still imported 19% of its gasoline and diesel in 2021.

 

While the use of biofuels for transportation and power generation continues to evolve, in the long term, the IEA projects, in its Net Zero scenario, that the use of biomass (wood and organic waste) for heating and cooking food will disappear in emerging economies. If we judge by the rest of the IEA projections, this will be difficult to materialize.

 

 

 

 



[1] The information for this section was compiled with the help of Claude.ai and other sources referred to in the text.

OIL PRICES REMAIN CONTAINED DESPITE THE EXTENSION OF OPEC+ CUTS

El Taladro Azul    Published  originally in Spanish in    LA GRAN ALDEA M. Juan Szabo and Luis A. Pacheco   Oil prices continued their quasi...