JUAN M. SZABO, LUIS A. PACHECO(MADRID, BOGOTA--)
The long-awaited OPEC+ meeting in Vienna took place on Sunday under complex conditions. Falling oil prices, coupled with tensions and discontent between Russia and the largest producers in the Middle East, Saudi Arabia, and the United Arab Emirates (UAE), among others, predicted tough talks. Some deja vu was in the room with similar differences of early 2020, which the pandemic forced to settle, but without remedying the core disagreements.
The Arabs accuse Russia of not having honored its commitment to cut production by 500,000 bpd. Indeed, the Russians have liquidated floating inventories and increased exports, sacrificing domestic consumption, to generate the incremental income they need to fund an expensive and prolonged war in Ukraine. According to the Arabs, the Russian attitude has not only affected the perception of the market, despite the cuts announced last April but also makes the agreements look less serious for the future.
However, Saudi Arabia, the de-facto leader of the expanded cartel, found itself between a rock and a hard place upon arrival to the Austrian capital. They knew that they could not achieve unanimity in the group to apply a further reduction in production, but they were not willing to engage in a price war, knowing that non-compliance of the Russians is unsustainable over time. Perhaps the most striking thing that leaked out of the seven-hour meeting was that Russia used Nigeria and Angola as mouthpieces for its opposition to Saudi Arabia's suggested production cuts.
The final statement of the meeting requires some interpretation, as it is not entirely clear. On the one hand, no new cuts to those already agreed upon since October 2022 were announced, so it is presumed that the status quo remains for the rest of this year.
Interestingly enough, a new quota distribution was announced that would become effective from January 2024 to December of that same year. Most of the implicit cuts for 2024 are not real because they result from adjusting individual quotas to their current productions; with the sole exception of the UAE, which managed to get an increase equivalent to the quotas not used by African countries.
On the other hand, unexpectedly, Saudi Arabia announced a voluntary reduction by its country of 1.0 Mmpd during July, extendable depending on the market's performance. The Saudi minister, Prince Abdulaziz bin Salman, ambiguously called this gesture a "Saudi lollipop": a gift to the oil community and perhaps a fulfillment of his warning to speculators who bet on the downside of the market. To be sure, losing credibility was a true risk given its prior threats.
OPEC+ announcements try to bring order to its members, which together represent almost 40% of world production, in a market where the other 60% do not seem to be able to orchestrate a cohesive or adaptive policy. Ultimately, this decision by the cartel, or rather by Saudi Arabia, tries not only to impact oil prices but also to signal how far they are willing to go. We already know that the market will react more to fundamentals and less to this sort of announcement. OPEC+ makes a high-risk bet, and given the divisions within the cartel, it is uncertain whether it will be successful.
Meanwhile, in Washington, DC, the agreement between the White House and the House of Representatives deactivated the potential default crisis threatened by the US government. The debt ceiling was increased and embodied in a law approved, in an accelerated manner, by both houses of Congress and ratified by President Biden.
The Market
After an uncertain start last week, bullish sentiment returned to the oil market, pushing the price of Brent crude above USD76/bbl and WTI to almost USD72/bbl, practically at the levels of the market close of last week. Although, the slight increase in US crude inventories and the weak China manufacturing sector outlook do not help in the recovery of oil prices, the initial transactions after the OPEP+ meeting point to a recovery in prices.
The market is also anxiously awaiting the decision of the Federal Reserve (Fed) after noting at its last meeting the possibility of a pause in rate hikes. However, that decision could be reconsidered in the light of the latest economic data, particularly the creation of 339,000 new jobs, the highest figure since January, but with the unemployment rate rising to 3.7% compared to 3.4% in April.
Outside of OPEC+, the largest producer is undoubtedly the US, with crude oil production today of more than 11Mmbpd. In the past decade, the source of growth has been oil and gas production from shale or what is commonly called “unconventional” hydrocarbon. Some analysts conclude that this type of exploitation is showing signs of exhaustion and that it is reaching the "Peak Shale Oil and Gas", akin to the Hubbert Peak for conventional hydrocarbons. Indeed, productivity in the Permian, the largest and best of the unconventional basins, fell last year for the first time in history, due to a combination of lower productivity per well and other characteristics of this type of production. The continued reduction in rig activity (-15 units this week) could be a confirmation of that view.
However, just like at the beginning of the 21st century, when the Hubbert Peak prediction was demolished by the horizontal fracking technological revolution, fueling a new cycle in US oil history, this time will be no different. Technological advances will emerge in the form of a second wave of shale development, likely with larger reservoir extensions and slower rates of decline, in what could be the “permeability revolution” ; if barrel prices generate enough incentives, that is.
As for the demand part of the equation, this has not been affected by the global economic evolution, not even by the data from the Chinese statistics office that revealed that the growth rates, both in the manufacturing sector and in the construction and services, have fallen for the second consecutive month. The physical crude oil market continues to expose relative supply weakness
Finally, we cannot fail to mention the change that the “Dated Brent ” marker, the most important oil price benchmark in the world, used to set the prices of around 70% of the crude oil traded in the world, is undergoing.
This benchmark index owes its origins to the development of the North Sea in the 1970s and 1980s, and underpins billions of dollars in futures, options and other derivatives trading. The physical volumes of Brent Crude production have been declining, which threatens its validity over time.
Platts, part of S&P Global Commodity Insights, first launched the Dated Brent assessment in 1987. After the Brent production peaked, other North Sea crudes were included to offset the decline, integrating the crudes Forties, Oseberg, Ekofisk and Troll. As North Sea production languishes, Platts took upon the task of evaluating the addition of another crude to the basket and keeping the index valid over time. WTI Midland (USA) crude was chosen for being light, sweet, and plentiful, to complement the current basket.
Energy Transition
One of the hottest topics in the periodic meetings of shareholders of international oil and gas companies is about the initiatives of these companies to, on the one hand, reduce emissions in their activities and their products, and on the other, the strategy of these companies to migrate their investments towards the generation of “green energy”. To exemplify this theme, we will analyze some recent events.
In this discussion, there is a clear distinction between the strategy of European companies, where the presence of activist investors is well-marked, and North American companies, which tend to be less susceptible to activism.
Shareholders of ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), in their recent meetings, rejected calls for tougher measures to mitigate climate change, ruling out proposals related to their emissions reduction. Financial results in recent quarters, showing record profits, helped both US companies counter pressure from investor groups calling for them to follow their European rivals and agree to tougher emissions reduction targets. As a curious fact, Exxon and Chevron assemblies were held virtually to avoid external protesters. Not so for Shell (SHELL: LON), BP (BP: LON), and TotalEnergies (Euronext Paris: TTE), whose shareholder meetings were interrupted by activists, but nevertheless managed to contain the most radical proposals.
“There is not a single big oil company that really wants to make the transition. Everyone wants to hold on to fossil fuels for as long as possible," said Mark van Baal, founder of the activist group Follow This .
His group, which represents some 9,500 oil and gas company shareholders, had asked Exxon to set medium-term goals to reduce emissions from fuels burned by customers - Scope 3 targets. That resolution received less than half the support of the previous year, 11% of the votes cast, compared to 27% in 2022.
Darren Woods, ExxonMobil's CEO, said that "Follow This" is an anti-oil and gas group that uses environmental and social targets to undermine the important role that Exxon plays in the industry, adding that: "Scope 3 gives companies like ours zero credit for reducing the emissions of others through technologies like carbon capture and storage.”
This is not a discussion that is going to go away, and it will be increasingly difficult for Big Oil to avoid devising more aggressive strategies regarding greenhouse gas emissions and their participation in the new energy space.
Venezuela, Operational Activities
May production averaged 712 Mbpd, distributed as follows:
West 98 (50 Boscan)
East/South: 165
Belt: 449 (69 PetroPiar and PetroIndependencia)
Total: 712 (Chevron 119)
Numerous online publications and analysts have covered the subject of Chevron's production under OFAC General License 41, and agreements with PDVSA and the oil ministry. Although the details of those agreements have not been officially published, it is relevant for the analysis to know the operational and volumetric scheme of Chevron's contribution to production and export. In this connection, a simplified analysis of the production, processing, and shipment of crude oil to final customers, and in some cases to inventories, is presented below.
In the month of May, Chevron's operations produced 119 MBPD. The crude produced in the Orinoco Belt was processed in the PetroPiar upgrader, located on the northern Caribbean coast, or mixed with light crude to obtain the commercial segregations Hamaca and Merey. As a result of this operation, 133 Mbpd of crude oil for export was obtained, including 14 Mbpd of blended crude. Additionally, Chevron exported 11 Mbpd to the Bahamas, as an intermediate step to its destination in the US, these last barrels were drained from inventories in Venezuela.
Inventories of Iranian crude oil condensate, used as diluent, were normalized with the arrival of a shipment of 2.0 Mmbls, thus eliminating the dilution restrictions that were present at the beginning of the month.
Domestic refineries processed some 230 Mbpd of crude and intermediate products, but operational problems with catalytic cracking units and reformers limited gasoline production, so shortages in the domestic market have continued, most visibly in the interior of the country.
In another order of ideas, the government of Trinidad and Tobago announced that they will hold meetings with PDVSA to advance the negotiations related to the supply of natural gas, from Campo Dragón, in the northeast of the country, to the gas liquefaction plant in Trinidad. They also indicated that they had requested a review of the conditions of the license granted by OFAC, since they considered the payment restrictions to Venezuela established in the License too restrictive.
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