EL TALADRO AZUL - ZIGNOX
JUAN M. SZABO, LUIS A. PACHECO
In a world enduring long-lasting armed conflicts, as well as economic and technical barriers to deploy alternative energies, the replacement of fossil energy will not advance at the speed the IEA assumes in its most recent projection.
Several factors on the supply side have come together in recent days to give oil prices an upward push. Production interruptions in Libya, Nigeria, and Mexico, coupled with reinforced production cut commitments from Saudi Arabia and Russia, boosted prices to their highest levels in three months. In addition, the slowdown in US inflation seems to give, at least temporarily, an upper hand to the Federal Reserve's monetary tightening policy.
The oil supply has narrowed by more than 2.0 MMbpd, due to the apparent compliance with the production quota cuts announced by Saudi Arabia and Russia, which combined represent 1.5 MMbpd.
Additionally, in Libya, some 350 Mbpd of crude from some of the most productive fields, including El-Sharara, were shut for some days down last week. The rivalry between the factions, aggravated by protests by local tribes over the kidnapping of a former minister, disrupted the production, which later on was re-established.
In Nigeria, an alleged leak in the pipeline that connects to the loading buoy seems to have restricted the loading of tankers from the Forcados terminal, affecting some 300 Mbpd until the problem is solved.
On the other side of the world, the accident at Pemex’s operation in the Campeche Bank, caused a shutdown of some 700 Mbpd (almost half of Mexico's production). Output recovered somehow, but the last 150 MBPD, directly related to the gas compression that was destroyed by the fire on the Nohoch Alfa platform, will require more time and effort to be reactivated.
Meanwhile, the U.S. continues without contributing significant volumes to the composition of the supply. This week, the Baker Hughes report on drilling rigs showed a reduction of 5 net rigs; in the Permian Basin, the most attractive to reverse the stagnation, showed a reduction of 8 units. On the other side of the coin, , according to data from the same report, both Saudi Arabia and the United Arab Emirates (UAE) are incorporating drilling rigs.
On the demand side, mixed signals emerged, but the most relevant are the signs of economic lethargy coming from China; the main question being the government's ability to stimulate the economy. In any case, the month of July presents crude oil imports markedly lower than the high levels achieved in June. Part of the high import volumes went to swell the strategic reserves, which, unlike those of the US, are practically full.
Divergent views
Two of the most influential international organizations in the world of energy, OPEC and the International Energy Agency, IEA, regularly publish their views on the oil industry. Their analyses rarely coincide: sometimes it seems that they are analyzing different commodities.
OPEC, for example, raised its oil demand growth forecast for 2023 and predicted only a slight slowdown in 2024. According to the analysis, despite economic headwinds, China and India continue to boost demand. In its monthly report, OPEC indicates that global oil demand will rise by 225 MMBPD in 2024, an increase of 2.2%, compared to a growth of 2.44 MMBPD in 2023. The analysis considers that the demographics, economic growth, and modest competition from viable energy alternatives will sustain the growing demand[1].
On the other hand, the IEA argues that oil demand is under pressure from the economic backdrop and its reaction to the drastic tightening of monetary policy in many advanced countries. Still, it forecasts global oil demand to increase seasonally by 1.6 MMbpd from Q2 to Q3 of this year, averaging 102.1 MMbpd for the full year, a record. Growth will slow to 1.1 MBPD in 2024, as the recovery loses momentum and increasing measures of electrification and vehicle fleet efficiency take hold.
These forecasts, while marginally different from OPEC's on energy and climate change, do point to declining demand, reflecting the IEA's political mandate to drive the energy transition as fast as possible.
A world with long-lasting armed conflicts, non-aligned interests between rich and poor countries, and economic and technical barriers in the deployment of alternative energy, among other variables, lead us to conclude that, for now, the replacement of fossil energy will not advance with the speed that the IEA assumes in its short-term analysis. OPEC's forecast, undoubtedly interesting, seems more likely for now.
In short, a potential economic recession, and the structural and accidental limitations in the supply of crude, position oil prices within a virtual band.
OPEC+ is determining a floor price, due to its ability to close and open production. The Saudis as swing producers. On the other hand, the Chinese economy sets a price ceiling with its less-than-optimal economic performance, bolstered by its ability to use its strategic crude oil reserves to prevent prices from spiraling out of control.
In this range, the week showed a significant increase in prices from the previous week. Brent Crude was close to $82/bbl, but the news received from China caused massive sales of oil contracts. So, at the close of the market, prices fell back, trading at $79.87/bbl and $75.42 /bbl for Brent and WTI crudes respectively.
Finally, several important news is still developing, but their effect on the oil balance is unknown. Among the most relevant:
Russia increased the price of its Ural crude by more than $60/bbl, a move that was born out of the need for additional revenue. India, its second-best market, could veto the purchase of oil at those prices, for fear of being sanctioned. Local banks in India require proof that the price of shipping oil is below $60/bbl—please note that this is the ceiling imposed by the economic sanctions.
The heat wave in Europe is affecting the production of the Bugey and Saint Alban nuclear plants in France, due to environmental regulations on the use of river water for reactor cooling. Nuclear power generation in France constitutes about 70% of the country's electricity matrix, making France a net exporter of electricity to other European countries when its reactors are fully operational.
ExxonMobil (NYSE: XOM) has agreed to buy Denbury Inc. (NYSE: DEN) for $4.9B in stock. This acquisition seeks to accelerate the presence of the transnational in the field of energy transition, with an already established operation of Carbon Capture, Use, and Storage (CCUS: for its acronym in English). The acquisition, gives Exxon among other advantages, access to existing CO₂ transport capacity. Denbury also has an oil and gas production business.
California, the seventh-largest producer of crude oil in the US, has almost completely suspended the issuance of permits to drill new wells this year, according to state data. The state's Division of Geologic Energy Management, known as CalGEM, approved just seven new permits for 2023, compared to the more than 200 it had issued by this time last year. More than 1,400 requests have not been answered.
Shell (NYSE: SHEL) announced its fourth ultra-deep-water hydrocarbon discovery in Namibia, one of the most interesting offshore exploration provinces. The company, associated with France's TotalEnergies (NYSE: TOT) confirmed the presence of hydrocarbons in the Lesedi-1X well in ultra-deep waters off Namibia. Indications of the reservoir types discovered by Shell and Total suggest an oil province with characteristics similar to the discoveries in Guyana on the other side of the Atlantic.
Rare Earths
A few days ago, China announced that it will restrict the export of gallium and germanium, two minerals considered critical in the production of semiconductors, solar cells, and other systems associated with advanced electronics; on which much of modern life and the emerging energy transition depend.
According to what was announced by the Chinese Ministry of Commerce, these minerals and more than three dozen related metals and other materials will be subject to export controls from August 1, 2023. According to the Chinese government, the restrictions are motivated by security considerations and national interests, but it seems to be a deepening of the trade war that the eastern giant is carrying out with the US. The Americans had previously imposed restrictions on its gallium oxide exports in 2022 and other technologies associated with the manufacturing of computer chips.
This is not the first time that China has placed export restrictions on key materials in the electronics industry, in particular the so-called rare earth elements (REE), to secure their availability for its manufacturing and computer industries; and also, to underline its control over the global supply chain.
In the early 1990s, China began exporting REE after discovering large deposits in Inner Mongolia in the 1980s, and quickly became the largest global supplier. In 2005, China began to apply tariffs to the export of rare earths to conserve resources and protect the environment. Since then, the government has been implementing different measures to safeguard its dominant position in the rare earth market. According to the IEA, in 2019, China produced 87% of the rare earths and continues to be the heavyweight in the sector.
In February 2021, US President Joe Biden signed an executive order aimed at reviewing deficiencies in the country's supply chains for rare earths, medical devices, computer chips, and other critical resources. In March of the same year, the US Department of Energy announced an initiative to investigate and secure the national supply chains of rare earths and battery metals such as cobalt and lithium. In June 2022, Biden invoked the Defense Production Act to increase domestic production of critical minerals like rare earths, as well as fund feasibility studies and expand existing resources.
What are Rare Earths? [2]
Rare earths, also called rare earth elements or rare earth oxides, are a group of 17 metallic elements, located in the middle of the periodic table (atomic numbers 21, 39, and 57–71), in the lanthanide group . These metals have unusual fluorescent, conductive, and magnetic properties, making them very useful when alloyed or mixed in small amounts with more common metals, and are crucial materials in modern electronics.
Some names of these minerals are derived from the names of the scientists who discovered them or established their properties, while others were named after the place where they were discovered:
Scandium (Sc)
Yttrium (Y)
Lanthanum (La)
Cerium (Ce)
Praseodymium (Pr)
Neodymium (Nd)
Promised (Pm)
Samarium (Sm)
Europium (Eu)
Gadolinium (Gd)
Terbium (Tb)
Dysprosium (Dy)
Holmium (Ho)
Erbium (Er)
Thulium (Tm)
Ytterbium (Yb)
Lutetium (Lu)
Geologically speaking, the rare earth elements are not particularly rare. Deposits of these metals are found in many places around the world, with some of them in the same abundance in the earth's crust as copper or tin. But, contrary to the latter, rare earths are never found in very high concentrations and are generally found mixed with each other or with radioactive elements, such as uranium and thorium, which makes their handling and separation complex and expensive.
The global rare earth metals market generated USD7 billion in revenue in 2021, and it is expected to reach USD15 billion by 2030, progressing with a CAGR of 9.1% during 2021–2030.
The production of rare earths involves several complex processes:
They are extracted from open pit or underground mines, just like other metals. The main producing countries are China, the United States, Burma and Australia.
The ore is crushed and ground into a fine powder to release the rare earth elements it contains, facilitating their subsequent separation.
Techniques such as solvent extraction or ion exchange are used to separate the rare earths from each other. This is tricky since their chemical properties are very similar.
Once separated, they are refined by electrolysis or calcination with acids, extracting the individual elements in the form of oxides of high purity.
Rare earth oxides can be combined with other metals to produce alloys with desired properties, such as neodymium-iron-boron magnets. Alloys and compounds are manufactured into final products such as catalysts, glass, ceramics, permanent magnets, batteries, among others.
Products containing rare earths are also recycled to reuse these materials.
The unique magnetic, phosphorescent, and catalytic properties of REE make them irreplaceable for many high-tech applications. For example, neodymium is used to make strong magnets for motors and generators in electric vehicles, wind turbines, and other clean energy applications. Europium is used for red phosphors in televisions and computer monitors. Cerium is used as a catalyst in oil refining.
Rare earths are also essential for defense technologies such as fighter jet engines, missile guidance systems, satellite and communication systems, radar and sonar systems, and more. Therefore, the US, EU, Japan and others also consider it a national security priority to ensure reliable supply chains of rare earths.
Rare earth elements are likely to continue to be an important part of our future, from quantum computing and materials science to medical applications and advances in green technology. The ongoing shifts from internal combustion cars to electric vehicles will also increase demand for rare earth magnets and batteries.
In the context of the energy transition, where the system migrates from the security of oil supply to the security of mineral supply, not only for rare earths but on a larger scale for copper and lithium, among others, the geopolitics of supply will be a significant factor when planning the deployment of new technologies.
To meet future demand, mining companies have proposed opening new mines and building new processing plants in many parts of the world. In countries that will have their own environmental and social challenges. Some plans sound outlandish, like deep-sea mining or extracting rare earths from acidic wastewater that drains from abandoned mines. These production techniques could become economically viable if a large increase in demand drives up prices or if governments decide to subsidize production costs.
Unlike oil, gold, and silver prices, rare earth element prices are hard to come by as there is no widely used public exchange for rare earths. Companies like Argus Rare Earths publish regular price assessments based on surveys of dealers, consumers, and other market participants.
Venezuela: Political Events and More
The regime, confronted with an unusually coherent behavior of the political opposition, and the growing interest around the candidacy of María Corina Machado, seems to have decided to eliminate any vestige of possible fair and verifiable elections, using the legislative power and judicial as political-partisan instruments.
Neither the secret meetings in Qatar between representatives of the Biden administration and representatives of the Maduro regime, nor the efforts of the Democratic Unitary Platform (PUD) in Washington, have succeeded in unlocking the paralyzed negotiations in Mexico. By contrast, the Biden administration is apparently tightening its treatment of sanctions as a response to the regime's non-collaboration. This ultimately will impact in the recovery capacity of the Venezuelan oil industry, which is what concerns us in these reports.
On the economic side, inflation continues to rise, and the exchange rate broke the ceiling of Bs 30/$.
According to sources close to the regime, the Ministry of Petroleum is about to increase the prices of natural gas in the domestic market, to gradually eliminate fuel subsidies. The plan is to triple the prices of this fuel to the companies and factories that use natural gas in their ovens, boilers, and heaters; they will pay $3.3/MMBTU, a significant increase from today’s price of $1.13/MMBTU.
Hydrocarbons Sector.
Production: Weekly production continues to be affected by the closure of wells as a result of the explosions at facilities in the west and east. Weekly production averaged 706 Mbpd geographically distributed as follows:
West: 101 (Boscán 50)
East: 152
Belt: 4 53 (Chevron 73)
Total: 706 (Chevron 123)
Production from joint ventures managed by Chevron (NYSE: CVX) averaged 123 Mbpd
Refining: The national system of refineries processed 225 Mbpd of crude oil and intermediate products. The Paraguaná refining complex (CRP) once again has the two catalytic cracking units (FCC) stopped, impacting gasoline production; the Cardón reformer is also undergoing maintenance. The Puerto la Cruz refinery is in limited operation due to a shortage of light crude oil, and the El Palito refinery is operating and producing about 10 MBPD of gasoline.
Exports and Imports: As is customary, exports at the beginning of the month start at moderate levels, and shipments are expected to increase in the last fortnight of the month. Crude exports barely exceed 300 Mbpd, including those handled by Chevron are lagging, but with tankers docked at or near the terminals.
During the month of June, 2.1 MMbbls of Iranian condensate were received, thus maintaining diluent inventories at normal levels. At the end of the month, it is scheduled to receive 500 Mbbls of heavy naphtha imported by Chevron to dilute its crudes from the Orinoco belt to Merey and DCO segregations. By the way, US customs documents show that a shipment of Venezuelan crude exported by Chevron was sold to ExxonMobil, this being the first purchase of Venezuelan crude from that company since the impasse with the Chávez administration.
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[1] OPEC+'s political agenda is, by definition, to extend the economic life of the resources of its member countries over time, extracting the greatest possible economic value.
[2]This section was developed with the help of https://claude.ai/chats and checked against other sources.
Note: A version of this article was published in Spanish by La Gran Aldea on July 18, 2023.
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