EL TALADRO AZUL - Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
OIL LOSES TRACTION ON UNCERTAIN TERRAIN
It never ceases to surprise us that the oil market, always full of surprises, surprises us. It is enough that we begin to believe that this or that trend is sufficiently established for reality to take us out of the comfort that we had or that we wanted. Since May, the oil futures market has established an upward trend in prices, and world oil inventories spoke of a tight supply as they continue to decline, while demand is at record levels.
Today, the market sentiment is not as positive as it was a couple of weeks ago. The minutes of the US Federal Reserve (FED) latest meeting, show that some Federal Reserve officials remain concerned about the pace of inflation and said they could further rate increases may be necessary in the future unless conditions change. The minutes also show that within the institution, there is no unanimous on further rate increases. Add to that the worrying news coming out of China about the state of its economy, and it's not entirely surprising that oil prices have reacted negatively.
Indeed, concerns rose over the performance of China's real estate market after the Evergrande Group, one of China's largest real estate companies, filed for bankruptcy. This seems to underscore the fact that the world's second-largest economy, which has grown on the back of the construction of buildings and infrastructure, may be dealing with more than just a slowdown in its post-COVID economic recovery.
The oil market fears that the slower economic activity in China will be reflected in lower demand for crude oil, which would add to the slack supply generated by strict monetary policies in the West. Investors seem to be hoping for the government to stimulate the economy beyond the cutting in interest rates announced by the People's Bank of China.
On the other hand, these signs of financial stress in the Chinese real estate sector are making markets in general nervous, due to the contagion that this situation could mean in other sectors of the economy. There are those who fear that the situation could lead to a situation similar to the collapse of Lehman Brothers in 2008, since the macroeconomic headwinds and payment defaults on certain financial instruments have also spread to the banking industry. This has generated liquidity concerns in the sector of the "Shadows Banks" (Banks that are not governed by the regulations of traditional banks).
According to Reuters, for example, the state-backed Zhongrong International Trust, one of the largest “shadow banks”, reportedly defaulted on some of its obligations to investors as its parent company faces cash flow restrictions. Likewise, the developer company Country Garden is at risk of non-compliance. While Country Garden's total liabilities of $191.7bn are only 59% of Evergrande's, its project portfolio is 3,121 properties, located in all provinces of China, compared to Evergrande's around 800, which may pose a larger threat.
Understanding the situation is complicated because analysts have a feeling that the data coming from China could be manipulated or incomplete; as in the case of the youth unemployment rate, which reached a record of 21%, according to figures published last week, causing China's National Statistics Office to suspend its publication.
News from the US this week was mixed and did little to help oil markets. On the one hand, the drop in crude oil inventories and the continued reduction in oil activity, showing a reduction of 12 rigs in drilling activity (Baker Hughes), should push prices up. On the other hand, the Energy Information Administration (EIA) forecasts that crude oil production will average, in 2023, 12.8 MMbpd, a record, which should push prices down. There appears to be growing confidence that the world's largest economy can avoid recession and that mitigates, for now, market concerns.
Meanwhile, OPEC+, particularly Saudi Arabia, is “watching from the sidelines”, and we have no doubt that if next week the price recovery seen last Thursday and Friday does not continue, it will extend its cut until the fourth quarter.
As it was, oil prices were moving sideways, but on track to end a seven-week winning streak. After being rattled by the Fed minutes and the Chinese news, oil prices managed to orchestrate a small rally on Thursday and Friday. Prices at the close of the market on August 18 set down at $/bbl 84.8 and $/bbl 81.25 for Brent and WTI crudes respectively; levels lower than last week's close but recovering some of its dynamism.
Other news of interest for the energy market:
· The North American oil company, Occidental Petroleum (NYSE: OXY), announced the purchase of Carbon Engineering, a clean energy company based in Canada, for $1,100 million, as part of its plans to reduce CO₂ emissions. Vicki Hollub, OXY’s CEO, said she agreed to acquire the Canadian direct air capture company because: “We have always believed that global partnerships and cross-industry collaboration would be required to deploy DAC (Direct Air Capture) infrastructure at the scale required to make a climate-relevant impact.” “Together, Occidental and Carbon Engineering can accelerate plans to globally deploy DAC technology at a climate-relevant scale and make DAC the preferred solution for businesses seeking to remove their hard-to-abate emissions.”. In parallel, the Biden administration selected OXY's carbon capture project, south of Corpus Christi, as one of two projects that will receive up to $1.2 billion in federal funding to support the development of carbon technology absorption of carbon from the atmosphere.
· Chile's state-owned copper company CODELCO has announced the appointment of Rubén Alvarado, the company's third CEO in a year, as it struggles to reverse a slump in its production and profits. With debt of $19 billion and rising, the stakes for bondholders are ever higher. Production has hit the lowest level in a quarter century, costs have skyrocketed, and ore grades continue to fall, threatening its status as the world's number one producer, even as copper prices soar.
· As the upstream community hails the discovery of the Venus 1-X well off the coast of Namibia, which may go up to 6 billion barrels, Impact Oil & Gas , a key partner in the project led by TotalEnergies(NYSE: TOT), said the cost of development is well beyond its ability to finance and that it would look to sell its 20% stake.
Energy transition
Hydrogen: a key factor in the energy transition
Thus, begins in the book of Genesis (1: 1-5) the biblical account of creation.
If we ask Claude.ai or ChatGPT to write a similar paragraph, but from the point of view of the “ Big Bang ”, we would get something similar to the following :
“In the beginning, about 13.8 billion years ago, all the space, matter and energy of the Universe were compacted in an extremely hot and dense singularity. Suddenly, this singularity began to expand rapidly in a gigantic explosion known as the Big Bang, giving birth to time and space... As it expanded, the Universe cooled enough for the first protons and neutrons to form. After a few minutes, the protons and neutrons merged to form nuclei of hydrogen and helium, the lightest elements .
Hydrogen (H, by its chemical symbol), is not only the lightest and most abundant chemical element in the universe , constituting approximately 70% of all matter, but it is also called to play a leading role in the Transition energetic. Hydrogen is a colorless, odorless, and tasteless gas under normal conditions, and it occurs in nature combined with other elements, not as a pure gas.
Hydrogen gas was first identified as a single substance by the English scientist Henry Cavendish in 1766 . Cavendish investigated the chemical properties of acids and bases, focusing his work in the “ flammable air ” that was produced when certain metals reacted with acids. Cavendish did not fully understand that flammable air was a chemical element. That atomic theory came later.
In 1783, the French chemist, Antoine Lavoisier, showed that hydrogen combined with oxygen makes water, confirming Cavendish's identification of the gas as a unique element. Lavoisier gave the gas its modern name “hydrogen”: “hydro” which means water and “gen” which means generator.
It wasn't until the 1970s that hydrogen began to be seriously considered as an energy solution. The oil crisis of that decade led governments and researchers to search for alternative energy sources. One idea was to use electricity from nuclear power plants to split water (H₂O) into hydrogen and oxygen through electrolysis. The hydrogen could then be used as a fuel or as a means of energy storage.
It wasn't until the 1970s that hydrogen began to be seriously considered as an energy solution. The oil crisis of that decade led governments and researchers to search for alternative energy sources. One idea was to use electricity from nuclear power plants to split water into hydrogen and oxygen through electrolysis. The hydrogen could then be used as a fuel or as a means of energy storage. This renewed interest laid the foundation for hydrogen research and development for decades to come.
Hydrogen has several key attributes that makes it attractive as a sustainable energy carrier. As an energy source, hydrogen releases only water vapor when used in a fuel cell or is burned with oxygen. It can be used to store and transport energy from intermittent renewable sources such as solar and wind. Burning hydrogen provides high temperatures, ideal for industrial processes. And hydrogen fuel cells make it possible to generate power efficiently, with low or no emissions.
Today, hydrogen is classified based on its production method. Brown hydrogen: refers to hydrogen produced from fossil fuels, mainly coal, through older methods that generate high emissions. Brown hydrogen has the largest carbon footprint. Blue Hydrogen: this is hydrogen produced from natural gas through steam reforming of methane. The process captures and stores carbon dioxide emissions underground, creating fewer emissions than conventional hydrogen production. Green Hydrogen: This is hydrogen produced through electrolysis powered by renewable electricity such as solar or wind. Electrolysis splits water into hydrogen and oxygen using an electric current. Green hydrogen results in virtually zero carbon emissions
For hydrogen to have a significant impact as a clean energy source, substantial investments in infrastructure and technological innovations are required. Distribution infrastructure, such as pipelines, must be built to move hydrogen from production sites to end users. Cost reductions are also needed for hydrogen production, storage, transportation, and fuel cells.
If these challenges can be overcome, hydrogen could emerge as an important pillar of a decarbonized global energy system by the middle of this century. It can provide a solution for sectors that are difficult to electrify, such as heavy industry (steel, cement) and heavy transport. Currently, most of the hydrogen goes to industrial uses such as oil refining and fertilizer production.
These are some of the main hydrogen producers worldwide:
— Not surprisingly, as in most facets of the energy transition, China is currently the largest producer and accounts for about a third of world production, 33 million metric tons (2021). China produces hydrogen mainly from coal through gasification.
— The United States is the second-largest producer of hydrogen. Most of the production comes from natural gas, and part from coal. 10 million metric tons (2020).
— Europe: the main producers include Germany, France, the Netherlands, and Belgium. Hydrogen production relies primarily on natural gas, as well as some electrolysis using renewable electricity.
— Saudi Arabia: a major producer of hydrogen from natural gas and hydrocarbons. The country aspires to become a relevant exporter of blue hydrogen.
Key companies involved in hydrogen production include industrial gas providers such as Air Liquide, Linde, and Air Products, energy companies such as Shell, BP, and Suncor, and engineering companies such as Siemens. As the demand for clean hydrogen increases, production is expected to grow globally and as hydrogen gains ground in the energy transition, more companies, especially oil and gas, will take a leading role.
Venezuela has competitive advantages for being a producer of blue hydrogen, as it has significant resources of methane gas and geological structures (depleted reservoirs) where to inject the resulting CO₂, either as part of enhanced recovery or as final sequestration.
According to the International Energy Agency, hydrogen demand reached 94 million tons in 2021, recovering above pre-pandemic levels (91 MT in 2019) and containing energy equivalent to approximately 2, 5% of global final energy consumption. Most of the increase came from traditional uses in refining and industry, although demand for new applications grew to around 40,000 tonnes (60% more than in 2020, albeit from a very low base); annual growth of more than 5% is estimated.
Much of the increased demand for hydrogen in 2021 was met by hydrogen produced from fossil fuels, meaning there was no benefit to mitigating emissions. Low-emission hydrogen production was less than 1 MTt in 2021, coming almost entirely from plants using fossil fuels with carbon capture, utilization, and storage (CCUS ).
Although in concept, the use of hydrogen would be key to generating power with reduced emissions, the truth is that technological advances and policy decisions are required for this potential to materialize in the coming decades, not only for its generation but also for transport and storage.
Venezuela
Political Events and Others
The Venezuelan political/economic situation is at a crossroads. Insufficient domestic tax collection and stagnant oil revenues represent problems for the regime, which must finance public spending in the run to the 2024 presidential elections: avoid further devaluation of the Bolívar; try to control inflation; keep growing wage protests in check; and mitigate the deterioration of public services (electricity, water, and health).
The regime has intervened significantly recently in the foreign exchange market, which, added to Chevron's usual contribution to the market, has mitigated the devaluation of the Bolívar. During this week of August, the depreciation in the parallel market only reached 0.7%, keeping the monthly variation almost constant at 6.4%.
Hydrocarbons Sector.
The slight improvement in crude oil production, compared to previous weeks, but at the expense of further deterioration of the environment, deserves a brief explanation. Indeed, in the western part of the country, there appears to be an uptick in the volume of oil spills on the eastern shore of Lake Maracaibo, which is almost inevitable when putting damaged infrastructure back to work. In the north of Monagas state, the inhabitants report a greater volume of gas vented and flared, a result of reactivating oil wells without having the additional capacity to handle the associated gas; by the way, that gas would help alleviate the chronic gas shortage if handled properly.
Production: This week's oil activity managed to increase production both in the west, where some 3.0 MBPD of additional production was recorded on the east coast of Lake Maracaibo. Likewise, in the Tejero area, in Monagas state, some light crude wells were opened. These wells, which produce from reservoirs whose pressure has dropped vertiginously, produce more and more gas associated with crude oil, a gas that is sadly vented. Thus, the production for the week was 739 Mbpd, geographically distributed as shown below:
· West: 124 (Boscan 52)
· East: 158
· Sash: 457 (Chevron 75)
Total: 739 (Chevron 127)
Chevron's production remained stable, with a slight increase at PetroPiar, in the Orinoco belt, which allowed it to send 54 Mbpd to the Jose upgrader, producing 51 Mbpd of Hamaca crude. The remaining crude, 21 Mbpd, was blended with 10 Mbpd of diluent to produce 31 Mbpd of the Merey 16 segregation.
Refining: As expected, the simultaneous operation of the four main refineries could not be sustained, according to information from sources close to the operation, later confirmed by union sources. The Amuay refinery had to be stopped, although the reasons are not known. Meanwhile, in neighboring Cardón, efforts to start up the FCC catalytic cracking plant continue, but so far without much continuity. Consequently, the processing of crude oil and intermediate products dropped to 260 million Mbpd, and gasoline production continues at levels below the domestic market requirement.
Exports: The lower level of processing in the refineries opened the door to a temporary increase in exports. Chevron's exports to the US are averaging 144 Mbpd for the month, which could vary on tanker handling and logistics at Venezuelan terminals. The segregations exported by Chevron include 48 Mbpd from Boscán, 66 Mbpd from Hamaca, and 28 Mbpd from Merey 16 (which includes 9 Mbpd of diluent). If exports to the usual destinations of China, Cuba, and barter with Europe are added to these volumes, the exports will total 520 Mbpd, which can be expected to increase if failures in national refineries continue.
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