El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo y Luis A. Pacheco
Paracelso (1493-1541), a Swiss physician, alchemist, and astrologer, classified the permanently mentally ill into three categories. One of them, the lunatics, were those whose illness originates from the Moon and whose manifestations are related to the phases of the satellite. This week, the "Super Blue Moon", the second full Moon during the same month to coincide with the perigee of the satellite orbit, seems to have given a touch of madness to the oil market.
A less whimsical explanation is that the continued reduction in US crude inventories, which generally reflects what is happening with supplies in the rest of the world, indicates a market in production deficit. This reality has yet to be neutralized by the potential reduction in demand that one can infer from the Chinese economy and from the attempts in the large economies to slow down the economy to tame inflation.
It has become evident that there is an imbalance between supply and demand, which may be becoming structural; at least, the market is reacting based on that perception.
Regarding the Chinese economy, market players seem to give the benefit of the doubt to the authorities of the Asian giant, who have begun to act in various ways to stimulate the economy, including the rescue of the largest Chinese real estate bank. Relatively reliable signs arrived this week indicating that the services sector is growing modestly and the manufacturing sector somewhat stagnant, but in the sights of the central government to stimulate it. For example, the official PMI manufacturing index rose to 49.7 in August from 49.3 in July but remained marginally in contractionary territory.
Regarding the Central Banks, the words of Jerome Powell, president of the Federal Reserve System (FED) from Jackson Hole, were harshly criticized. Even though Powell accurately described the current inflation situation, he distributed the blame to everyone but himself. There is little doubt that the post-pandemic stimulus and its duration are also to be blamed for inflation. In any case, the market maintains well-founded hopes that the FED will pause its interventions.
Recent statistics related to employment in the US record an increase in the unemployment rate from 3.5 to 3.8% and a modest creation of new jobs, which seems to indicate a slowdown in the economy on the way to the hoped "soft landing." We may be in the presence of a situation in which the same event can be bad and good at the same time. Rising unemployment is bad news for the health of the US economy. Still, it can also be interpreted as a deterrent to maintain or at least pause the interest rate review process, which is good news for markets in general.
Multiple factors have aligned to adversely affect oil supply in recent days:
· OPEC+, led by Saudi Arabia and Russia, appears to have agreed to extend current production/export cuts until the end of the year. This strategy has yet to be officially confirmed. Still, the market interpreted the remarks by Russian Deputy Prime Minister Alexander Novak and Saudi Arabia's position as an agreement in principle. By the way, we note that Iran's crude exports are down from the 3.0 MMbpd reported last week, which could indicate some behind-the-scenes deal with its “new friend” Saudi Arabia or that Iran's floating inventories are running out (not including the large volume stored in China, classified as “bonded” (oil that has not passed through Chinese customs and is not being used, so it does not yet violate US sanctions.)
· Data from the US Energy Information Administration (EIA) also mirrored the situation, showing a 2.4% drop in US commercial crude inventories, the lowest level this year. Oil inventories were also down at Cushing, Oklahoma, the storage and delivery center for WTI crude, to levels below 30 MMbbls, a level last seen in January of this year.
· This week, the Baker Hughes reviews of active rigs in the US and internationally coincide in direction. During August, 67 drilling units were shut down worldwide: 58 in North America (including 9 in Canada) and 9 in the rest of the world. This trend of reduced activity does not contribute to closing the gap between demand and supply. The effect of such reduction will be felt as a loss of production capacity in the future.
· It is important to note the result of the ITT referendum in Ecuador, not only because of its impact on the oil industry in that country, but because of the contagion effect it may generate in other countries. We refer to the Ishpingo, Tambococha, and Tiputini oil fields, commonly called ITT, located within the Yasuní National Park. ITT production is currently around 50 MBPD, but plans indicated significant development in the area—During the government of President Rafael Correa (2007-2017), there was a failed initiative not to develop subsoil resources in exchange for international financing. After many years of successful oil exploration and development in the Amazon region, Petroecuador will suspend activities due to the results of the national referendum on August 20, in which 59% of voters opted not to continue these operations. This decision is postulated on the belief that oil activity affects indigenous communities, animals, some supposedly endangered species, and possible environmental damage.
· One also has to consider the hurricane season in the Gulf of Mexico. Although hurricanes hitherto have taken paths that do not materially compromise oil and gas production, this season's two hurricanes, Harold and Idalia, have caused preventative shutdowns of more than 125 Mbpd.
· In the African Republic of Gabon, a coup deposed President Ali Bongo, who is under house arrest. The events unfolded after the country's electoral body announced that Bongo had won a third term but under strong accusations of fraud. The military closed borders and dissolved state institutions. Gabon is an OPEC member, producing about 220 Mbpd at the time of the military coup. Although they are relatively minor volumes, the market is watching the development of the situation with concern.
Meanwhile, on the other side of the equation, demand has remained immune to weak US economic indicators, disappointing European results with rising inflation, and slower Chinese growth. As expected, the demand at the end of August was 103.5 MMbpd. Despite their uncertainties, Chinese crude oil imports have remained relatively high.
On September 1, Brent crude oil was trading at $88.99/bbl at the close of the markets, while its North American analog, WTI, closed at $86.05/BBL. An increase of 4 and 6 $/bbl compared to the previous week, in terms of Brent and WTI crude oil, respectively. In short, the oil market reacted to the demand/supply asymmetry, taking prices to the highest levels of the last five years, except for the first months of the Russian invasion.
Energy Transition
Wind power
“At this point, they came in sight of thirty or forty windmills that there are on that plain, and as soon as Don Quixote saw them he said to his squire: “
"Fortune is arranging matters for us better than we could have shaped our desires ourselves, for look there, friend Sancho Panza, where thirty or more monstrous giants present themselves, all of whom I mean to engage in battle and slay, and with whose spoils we shall begin to make our fortunes; for this is righteous warfare, and it is God's good service to sweep so evil a breed from off the face of the earth."
"What giants?" said Sancho Panza.
"Those thou seest there," answered his master, "with the long arms, and some have them nearly two leagues long."
“Look, your worship,” said Sancho; “what we see there are not giants but windmills, and what seem to be their arms are the sails that turned by the wind make the millstone go.”
“It is easy to see,” replied Don Quixote, “that thou art not used to this business of adventures; those are giants; and if thou art afraid, away with thee out of this and betake thyself to prayer while I engage them in fierce and unequal combat.”
Thus, begins chapter VIII of “Don Quijote de la Mancha” (1605), one of the best-known episodes of Cervantes' work. In his distorted vision of reality, the protagonist sees the windmills as giants and is willing to risk his life to fight against them. Sancho Panza, more realistic, can see that the windmills are not giants.
Reality
The origins of using wind as an energy source or aid in navigation date back to ancient civilizations. The invention of the sail was the most important event in the history of navigation: it originated in the year 3500 BC. C. in the Red Sea or the Persian Gulf, although it would be the Greeks, Phoenicians, and Arabs, who probably learned to navigate from the Egyptians, who would create their fleets to dominate the Mediterranean.
The oldest-known windmill is in Nashtifan, in Iran. The mills have a horizontal design; the transmission shaft is vertical, and the turning panels are horizontal. It is estimated that these mills were built between 500 and 900 AD. C., which makes them the oldest windmill in the world. These mills were used for tasks ranging from grinding grain to pumping water. The most famous in Europe are the Kinderdijk windmills: they are a group of 19 windmills located in the Province of South Holland (Netherlands), built in the 18th century to drain the Alblasserwaard polder.
It was only at the end of the 19th century and the beginning of the 20th century that wind energy acquired a new dimension with the advent of electric power. The first electricity-generating wind turbine was designed and built in 1888 by the American inventor Charles F. Brush, a milestone in the transition from mechanical applications to the production of electrical energy. The oil crisis of the 1970s sparked renewed interest in wind power as countries sought alternatives to fossil fuels. This revival led to significant advances in turbine design, efficiency, and capacity.
A wind turbine is a mechanical device designed to convert the energy of the movement of the wind (kinetic energy) into mechanical energy, the rotational movement of an axis. Then, this mechanical energy is converted into electricity in the turbine generators that are then connected to the network or stored in batteries. The key components of a modern wind turbine include the blades or blades, the rotor, the nacelle, or house, and the tower.
The nacelle houses a generator connected to the rotor through a gearbox. As the rotor turns, it drives the generator, converting mechanical energy into electrical energy through electromagnetic induction. Advanced control systems ensure the turbine is optimally aligned with the wind direction. At the same time, safety mechanisms protect it from extreme weather conditions.
As a key player in renewable energy, wind power has made remarkable progress over the years thanks to continuous technological innovation. However, this journey has been challenging. From tackling intermittency issues to pushing the boundaries of turbine design, the wind power industry has proven resilient in the face of adversity, constantly evolving to meet the demands of a changing energy landscape.
In general, most wind turbines operate with three standard blades. The decision to design turbines with three blades is an engineering compromise. A single blade would be the optimal number for energy performance. However, this is not a practical option for turbine stability. Two blades would offer greater energy efficiency than three but would have problems. Two-bladed wind turbines are more prone to violent oscillations. Naturally, this wobble would create more stability problems for the turbine, putting pressure on the turbine components, causing them to wear out over time and become increasingly less efficient. Any number of blades greater than three would generate greater wind resistance, slowing down electricity generation and thus becoming less efficient than a three-blade turbine.
On the other hand, there is a trend to build taller and larger diameter wind turbines. Wind speed tends to be stronger and more constant at higher altitudes. Tall turbines can take advantage of these wind speeds, generating more electricity and making them more profitable. Tall turbines can be designed with longer blades, allowing them to operate at lower rotational speeds for the same power output, with lower noise levels, which addresses concerns about noise pollution in residential areas. This logic applies to the growing trend of installing offshore wind turbine farms.
The largest wind turbines in the world until now are:
Turbine Name | Rotor diameter (m) | Capacity (MW) | Rotor center height(m) |
MingYang MySE 16-260 | 260 | 16 | 199 |
GE Haliade-X 12MW | 220 | 12 | 185 |
Siemens Gamesa SG 14-236 DD | 236 | 14 | 176 |
VestasV236-150 | 236 | fifteen | 175 |
China Three Gorges Corporation 16MW | 252 | 16 | 195 |
As turbines have become larger and larger, engineering challenges related to materials, structural integrity, and transportation present themselves. Engineers continue to explore novel materials, such as carbon fiber composites, that offer strength and lightness, allowing for larger rotor diameters without excessively heavy blades.
A wind turbine is made of a basket of materials, which mostly depend on the fossil fuels that the turbine is supposed to eradicate due to the energy and raw materials required to build, transport, and install the turbines[1].
The average percentage of each material in a typical wind turbine varies by manufacturer and turbine model. Below is a general breakdown of the most common materials used in wind turbines and their average percentage by weight:
Steel: 66-79%; Fiberglass: 11-16%; Iron or cast iron: 5-17%; Copper: 1%; Aluminum: 0-2%; and Others: 0-5%. The other 0-5% of the turbine is made up of various materials, including epoxy resin, plastics, electronics, lubricants, and paint.
According to the Global Wind Energy Council (GWEC), wind power generated around 7.6% of global electricity in 2022, up from 6.6% in 2021 and 3.5% in 2015. The total installed wind power capacity worldwide was 906 gigawatts (GW) at the end of 2022. China is the leading country in installed wind power capacity, with 395 GW. The United States is in second place with 139 GW, followed by Germany with 67 GW.
In the energy transition process, wind energy will play an important role. However, as the figures indicate, it still has a long way to go—the issues of intermittency and energy storage. In the same way, the intensive use of large areas, both land and sea, the energy in its manufacture, and the environmental impact on bird communities and animal species will be issues to resolve as their participation in the energy matrix increases.
"A slight breeze at this moment sprang up, and the great sails began to move, seeing which Don Quixote exclaimed, "though ye flourish more arms than the giant Briareus, ye have to reckon with me."
Venezuela
Political and Other Events
The leading actor in Venezuelan politics and economy has turned out to be the fate of economic sanctions and their total or partial lifting. In the US, this process is the responsibility of the executive branch. Still, it is not without political oversight by the legislature. This week, that "check and balance" became apparent when a bipartisan group of senators wrote a letter to Secretary Blinken reminding him that the Venezuelan regime has engaged in harmful policies and practices endangering any fair and verifiable electoral process. The letter signatories view with concern the news and comments from the representatives of the Biden Administration, who appear to be making concessions to the Maduro regime without a tangible counterpart.
There are growing reports that some oil companies have applied for licenses from the Office of Foreign Assets Control (OFAC), which were under consideration.
An example of the policy change in the White House is the revision of the "Comfort Letter" granted to ENI and Repsol to allow the currently authorized swap to include fuel imports and payment of the accumulated debt. A second step could be an extension of Chevron's license (GL 42) to allow for investments. The specialized media have already reported that the North American company plans to start a well-drilling campaign.
For the Venezuelan regime, despite its anti-Western chatter, obtaining these benefits represents significant leverage to carry out its electoral politics. Indeed, the increased oil production and activity, coupled with substantial price improvements, if they manage to shift part of oil exports to non-sanctioned destinations, could represent an increase in foreign exchange earnings of more than $2.7 billion, equivalent to a 22% increase in income by 2024. As the phrase attributed to Henry IV says, “Paris is well worth a mass.”
However, we believe that this scenario still has many obstacles to overcome, particularly the unwillingness of the Maduro regime to guarantee reliable and verifiable democratic elections.
Hydrocarbons Sector.
Again, it was a week without major events in the national oil field. Perhaps most notorious was the arrival at the terminal of the Cardón refinery of a shipment of 330 Mbbls of naphtha from the Milazzo refinery in Italy, as part of the extended conditions of exchanging Venezuelan crude with ENI/Repsol.
Production: The last days of August and the beginning of September maintained an almost constant production. Production for the week was 744 Mbpd, geographically distributed as shown below:
West: 129 (Boscán 53)
East: 156
Orinoco Belt: 459 (Chevron 75)
Total: 744 (Chevron 128)
Chevron's production reached 128 Mbpd, the highest since the OFAC license was enacted.
Refining: The four refineries are operational but limited in gasoline production. The naphtha from Italy will be used to make gasoline for domestic consumption, which may mitigate the shortage but could also trigger smuggling, given that Colombian fuel prices have increased.
Exports: 22 shipments of crude oil and three shipments of products were loaded in Venezuelan ports during August, representing an export of 540 Mbpd and 45 Mbpd of crude oil and products, respectively.
310 Mbpd were destined for China, 168 Mbpd for the US market, 39 Mbpd for Cuba, and 23 Mbpd for Europe (Spain).
Chevron's exports were 168 Mbpd, of which 132 Mbpd correspond to the production and mix of the Boscán, Hamaca and Merey segregations, and 36 Mbpd to exported inventories. Of the total 19 Mbpd correspond to diluent.
We estimate that PDVSA's debt to Chevron, using the prices prevailing in the Gulf of Mexico, was reduced by $92 million during August.
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