Originally published in Spanish in La Gran Aldea July 4, 2023
M. Juan Szabo [1]and Luis A. Pacheco[2]
The oil market, always reactive to both good and bad news, seems to be navigating, in the face of the changing and often contradictory signals from the world economy, in a price labyrinth of complex resolution.
The dynamics of recent weeks continue to be repeated. Is it about supply or is it about demand? The market is torn between, on the one hand, what sometimes looks like a crusade by central banks to slow economic growth, and, on the other, a continued decline in global oil production capacity despite signs of a robust demand; a contest in which neither has a clear advantage.
But it turns out that the two trends are not independent of each other. The more interest rates are raised to limit economic growth and indirectly reduce the demand for oil, reflected in lower prices, the lower the levels of investment, undermining reaction capacity of the supply side, which should lead to higher prices.
In this confusing market, the slow recovery of the Chinese economy, which generates a lower demand for oil and pushes down oil prices, could somewhat slow down the aggressive monetary policy of the central banks – but is uncertain.
In the circular logic scenario in which we operate, the drop of 9.6 MMbbls in crude inventories, accompanied by an additional reduction in active rigs (-8) in the US, provided only a modest increase in oil prices.
To make the picture even more complex, the US, the world's largest economy, shows oil figures that hardly signal an impending recession:
· US exports reached 5,338 MMbpd, up from 4,543 MMbpd last week and 3,572 MMbpd a year ago. This is a change of 17.50% from last week and 49.44% from a year ago.
· US gasoline and distillate stocks fell 7% and 14% respectively, versus the 5-year seasonal average.
· Total oil demand averaged 20.2 MMbpd, 1.3% more than in the same period last year; gasoline demand reached 9.4 MMbpd, 4% higher than last year.
· Aviation fuel utilization increased 9.6% compared to the same period last year, global air travel is reaching all-time highs, poised to exceed pre-pandemic levels.
A very “sui generis” “recession” without a doubt.
The oil supply will continue to be significantly reduced: in the US due to the reservoirs natural decline and lack of investment; in Saudi Arabia due to a voluntary cut that could be extended over time [3]; and Libya appears to be heading for a shutdown due to political turmoil. OPEC+ continues strangely silent in the face of what, for now, has been the failure of its production cut strategy.
At market close on Friday, London-traded Brent Crude was up 0.8% to $75.4/bbl for the week, a gain of 1.5% for the month; this year it has lost almost 6% of its value.
WTI crude, which is listed in New York, rose 1.4% on the week and 0.8% for the month; this year it shows a loss of almost 3.5%.
In the natural gas market, prices, after skyrocketing to unexpected levels due to the Russian invasion of Ukraine and the sanctioning responses from Europe, have returned to their pre-invasion levels, close to $3/MMscf (million standard cubic feet).
This “normalization” results from the orderly replacement of a large part of the volumes of Russian natural gas, which practically monopolized the European market. The redistribution of supply sources: increased purchases of Liquefied Natural Gas (LNG), increased purchases of natural gas from Africa and the Middle East, a mild winter, diversification to nuclear, renewables and coal, have all managed to fill the vacuum created by the energy crisis in 2022. At the end of the day, the supply of Russian natural gas has fallen to a fifth of what it once was, mainly exported to China via the “Power of Siberia” pipeline . Russia has also had to maximize domestic consumption of natural gas, and free up exportable liquid hydrocarbons.
In this context, the news from Norway, sometimes the paradigm of an oil country leading the energy transition, start making sense. According to Reuters, the Norwegian government approved going ahead with the development of 19 oil and gas fields, with investments of more than 18.51 billion dollars, part of the country's strategy to extend production in the coming decades.
The Norwegian government, in response to criticism from environmentalists, says Norway's oil and gas resources are essential to Europe's energy security and will be needed for decades to come. An example of the difficult balance between decarbonization and the realities of the global energy system.
Finally, if we ask ourselves how is the energy transition progressing, some global numbers may shed light on the process:
· The share of fossil fuels in global primary energy demand fell slightly from 82.3% in 2021 to 81.8% in 2022.
· The share of renewables increased from 6.7% in 2021 to 7.4% in 2022, an increase concentrated in developed countries and China.
Energy transition
Why don't we freeze to death?
In 1824, Jean-Baptiste Joseph Fourier, a French mathematician and physicist, published a work entitled "Remarques generate them sur les températures du globe terrestrial et des espaces planetaires" . In that work, Fourier postulated that the Earth's atmosphere acted as a "veil" that trapped some solar heat. Thus, he gave the initial answer to the question of why the planet is not as cold as the surrounding space.
Fourier used experiments and mathematical calculations to show that the atmosphere was transparent to shortwave solar radiation, but opaque to long wave infrared radiation emitted by the Earth. This implied that a fraction of the heat absorbed by the planet did not return directly to space, but remained trapped in the atmosphere, generating an increase in global temperature. However, Fourier stopped short of proposing the source of this absorption.
It was John Tyndall (1820-1893), an Irish physicist, who experimentally identified this mechanism by determining the infrared radiation absorption properties of various gases (1829): nitrogen, oxygen, water vapor, carbon dioxide, ozone, and methane. Their main result was that the main gases in the atmosphere, oxygen (21%) and nitrogen (78%), had no significant absorption, while water vapor was the strongest absorber and emitter of infrared radiation.
The seasoned reader will realize that neither CO₂ nor methane played a significant role in Tyndall's model, which attributed the greatest warming effect to water vapor. Although small amounts of hydrocarbons and CO₂ could have a significant effect, it would be other authors who would later expand these investigations [4].
Methane
Although it is CO₂ that monopolizes most of the news on climate change and potential global warming, in this installment we will highlight the role of its co-star, methane.
Methane is a colorless and odorless gas, which is made up of one carbon atom and four hydrogen atoms (CH 4 ), it is the simplest hydrocarbon and is the majority component of natural gas. Methane is highly flammable and is found in various natural sources and human activities.
In nature, methane is produced through biological and geological processes. Natural sources include wetlands, swamps, termite mounds, the digestive system of ruminant animals, and the decomposition of organic matter under anaerobic conditions , among others.
In addition to natural sources, methane is emitted through human activities. Major methane contributors are the fossil fuel industry , agriculture (especially cattle ranching and rice cultivation), waste management (landfill and wastewater treatment), and biomass burning.
The emissions and therefore the concentration of methane in the atmosphere are much lower (1/200 of those of CO₂) and it has a shorter life than CO₂ (around 12 years). However, due to the peculiarities of how its molecule interacts with infrared radiation, it absorbs much more energy while in the atmosphere: over a 20-year period, methane absorbs more than 80 times the energy of a comparable volume of CO₂.
Over 100 years, each additional molecule of methane in the atmosphere is 30 times more powerful in warming than one molecule of CO₂. So even though methane emissions are only 0.8% of CO₂ emissions, they have a disproportionate influence on warming.[5]
Turkmenistan case
The International Energy Agency (IEA) estimates that the oil and gas sector emitted around 70 MMt of methane (approximately 2.1 Gt CO₂-eq ) in 2020, just over 5% of global energy-related greenhouse gas emissions [6].
Although the proportion seems small, its impact is important, as explained above. Therefore, any effort to reduce these emissions is not only welcome as part of the operational responsibility of oil and gas companies, but is an economically attractive proposition.
According to the IEA, while the oil & gas industry can and should continue to work in this direction, government standards and regulations will be crucial in removing or mitigating the obstacles that prevent companies from getting started and going further. They identify three types of obstacles that deter companies from taking full advantage of these opportunities: information, infrastructure, and investment incentives.
As an example, Bloomberg Green reported the meetings of technicians from the US and Turkmenistan, to implement reductions of what can be considered some of the worst methane emissions in the world.
Bloomberg estimates that, if all the gas that leaks or vents in Turkmenistan is recovered or flared, and the European Union's standards for coal mine emissions come into effect, it would have a climate effect equivalent to removing approximately 290 MMTm/year of CO₂.
According to the calculations of the group of experts in energy Ember and the Bloomberg agency, this action is equivalent to eliminating the emissions of Taiwan, the main manufacturer of chips in the world and the twenty-first polluter globally.
Similar projects should be implemented in countries with a high degree of methane emissions, such as: China, Russia, Mexico and Venezuela. The IEA has published a report and roadmap to work on the reduction of these emissions in oil and gas production operations , also for the extraction of coal .
Although the fossil fuel sector can and should continue to work in this direction, government rules and regulations will be crucial to remove or mitigate the obstacles that prevent companies from moving forward with these high-impact projects.
Venezuela
Politics
Probably the event with the greatest repercussion in the country and internationally is the disqualification from holding public office of Mrs. María Corina Machado (MCM), which officiously announced by the Comptroller General of the Republic. Mrs. Machado clearly leads the opinion polls for the primary elections that will choose the Venezuelan opposition candidate for the 2024 presidential elections.
These new signals from the Maduro regime could put pressure on the Biden administration to consider suspending current licenses under the sanctions regime; in particular, the GL41 granted to Chevron. A measure of that nature would withdraw more than $100 million per month of income, that is, 25% of the currencies that barely keep the deterioration of the Bolívar and the acceleration of inflation under control.
Additionally, of economic and political relevance, the Court of Appeals of the United Kingdom, dismissed the allegations presented by Central Bank of Venezuela, related to the control of the gold deposited in the Bank of England vaults. The court ruling is based on the doctrine of "one voice": at the time the first instance decision was published, England recognized Juan Guaidó as interim president of Venezuela.
On the other hand, in the US, PDV Holding, CITGO's parent company, finally managed to get Rosneft , the Russian oil company, to hand over the certificate of 49.9% of CITGO shares it had in its possession. The shares were pledged to the Russian company, in 2016, as collateral for an advance payment agreement of 1.5 billion dollars; an operation that the Venezuelan opposition considered illegal at the time.
Hydrocarbons Sector.
Production: This last week , crude oil production has suffered a decline due to the explosion in El Tejero (in the eastern region of the country). Weekly production averaged 698 Mbpd, geographically distributed as follows:
· West: 102 (Boscán 49)
· East: 149
· Belt: 447 (Chevron 71)
· Total: 698 (Chevron 120)
·
A reduction of 13 Mbpd of light crude in the North of Monagas, partially offset by an increase of 3 Mbpd in the Franquera Field on the Eastern Shore of Lake Maracaibo.
Production from Chevron's joint ventures averaged 120 Mbpd, in line with the maintenance and reconditioning efforts they have been deploying.
Refining: 210 Mbpd of crude oil and intermediate products were processed in national refineries, reporting a lower level in the Puerto la Cruz refinery due to the deduction of the availability of light crude oil. The El Palito refinery continues trying to stabilize its processes, even though PDVSA announced that the refinery covers a fifth of the national demand is covered. As of last week, the Paraguaná refining complex, is delivering a mixture of naphtha and reformate that is being sold at local service stations, and a little more diesel, probably due to the start-up of a distillation unit in Amuay.
The gasoline shortage has not changed, hours and sometimes days in long queues are required to refuel throughout the national territory, except in Caracas and to a lesser extent in Valencia.
Exports: Crude exports from Venezuelan terminals have followed the usual pattern of closing the month with an increase: The monthly average increased to 530 Mbpd of crude: 34 Mbpd to Cuba, 30 Mbpd to Europe, 136 Mbpd to the US. , exported by Chevron, and 330 Mbpd to Asia with final destination China.
Information from China explains the accumulation of inventories and the difficulty of placing sanctioned Venezuelan and Iranian crude oil in the Chinese market. Customs in Shandong, a coastal province in China, began to release the millions of barrels of oil from Venezuela and Iran that were being held at ports due to inspections that halted imports.
The restriction began with cargoes renamed “Bitumen Blend” and handled through Malaysia to evade sanctions and quotas from Shandong's private refiners. Chinese customs will issue new specifications that these blends have to meet. Almost all of these shipments are of Venezuelan origin, including those that appear on paper to come from Iran.
Finally, the Russian state-owned company, Roszarubezhneft, is requesting from PDVSA a similar treatment to the one agreed with Chevron, to recover debt from PDVSA. It is about $3.5 MMM corresponding to PDVSA's debts with the MS, and an additional $1.5 MMM for a loan that is not being repaid. The five JV's where Roszarubezhneft participates produce around 70 Mbpd as a whole, of which the only one of any size is PetroMonagas.
[1] International Energy Analyst
[2]Nonresident Fellow Baker Institute
[3] At the close, Saudi Arabia announced the extension of the cut until August.
[4]This basic summary is based on the book The Physics of Climate Change , Lawrence M. Krauss, Post Hill Press , 2021
[5] Unsettled : What Climate Science Tells Us, What It Doesn't, and Why It Matters . Steven E. Koonin . 2021
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