The Unstoppable Rise in Prices

 El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA     

M. Juan Szabo y Luis A. Pacheco      

 

The Unstoppable Rise in Prices

According to the Jewish calendar, this last weekend began the year 5784. According to tradition, when the sun sets on Friday, “Shanah Tova” is wished, to predict a good year. The oil market, in sync with these omens, continues with good news for producers and bad news for consumers.

The positive macroeconomic data coming out of China has managed to erase the gloomy outlook that the country projected on the oil market; but also, completely reversed oil market bearishness and confirmed the upward trend that oil prices already had from the previous week, in reaction to the reduction of inventories.

China's economy showed signs of rebounding in response to central government stimulus to boost manufacturing and consumer spending; which added to a summer travel boom and a lower-than-anticipated urban unemployment rate. Manufacturing production and retail sales grew between 4.5% and 4.6% year-on-year, exceeding expectations. Additionally, Chinese refining runs showed record levels, exceeding 15 MMbpd. Even so, it is early to confirm a sustained recovery trajectory.

Oil prices have been on a solid upward trend since early July, when Saudi Arabia announced a voluntary 1.0 MMbpd cut, which it subsequently extended until the end of the year. This was followed by Russia announcing an export cut of 300 MBPD, which has also been extended until the end of the year.

Additionally, markets were boosted this week after reports from OPEC, IEA, and EIA gave bullish market projections. OPEC estimates a supply/demand deficit of more than 3 MMbpd for the fourth quarter if production continues at current levels. This is a situation that has been forewarned by some, but the market was obsessed with the demand destruction that a possible recession could cause.

In another change in trend, it appears that US oil companies decided to react to the rise in prices. Baker Hughes reports that 9 drilling rigs were activated this week, which, although not many, maybe a hint of things to come. These are active drills in unconventional oil basins. In effect, these drills are intended to generate traditional production, which is more durable over time and, therefore, will obtain faster benefits from rising prices.

In the US, oil prices have once again become a hot political topic, as this week's CPI data showed that in August the price of gasoline increased by 10.6%, largely contributing measured at the monthly increase in inflation of 0.6%.

President Biden promised, in a speech last Thursday, to “lower gas prices again.” It would appear that Biden expects to achieve that with increases in foreign crude oil production while reinforcing his policies against domestic production. Meanwhile, the electric vehicle (EV) industry is experiencing sales problems for these vehicles. Consumers are worried about the relatively short autonomy in a country accustomed to long trips, as well as the lack of charging infrastructure to allow for the smooth operation of these vehicles. At least in the short term, these issues will remain on the radar.

With all the above elements factored into the determination of demand, currently close to 104 MMbpd, another historical record, according to OPEC and our projections, demand at the end of the 2023 year could reach 105 MMbpd. At the same time, the supply is around 101.4 MMbpd, depending on the source consulted.

Thus, even though prices experienced a slight decline due to profit-taking before the weekend, the Brent and WTI crude markers, at the close of the week, on Friday, September 15, were trading at $94.27/bbl and $91.2/bbl respectively. Prices have risen, since the beginning of July, an impressive 25%.

Generally, OPEC avoids talking about price targets and limits itself to saying that its mandate is to balance oil markets. However, there is an implicit interest in the group to maintain a price range of between $95/bbl and $100/bbl by the end of the year.

The general director of international marketing of the Kuwaiti state company KPC, Sheikh Khaled Ahmad al-Sabah, commented in an interview, “With the political situation, because now we have supply and demand, but also a political influence on prices, putting everything That in the equation I think $80-90/bl is really, the just and fair price, for the market.”

Some news of the week directly or indirectly related to the oil environment are:

·      Mexican Energy Minister Rocío Nahle promised that Pemex's new Dos Bocas refinery will begin operating at full capacity this year. The refinery has suffered delays and cost overruns estimated at $3.6 billion or even more. The refinery is one of the emblematic projects of the Mexican president, Andrés Manuel López Obrador, and his “energy independence” policy.

·      The state of California is suing oil companies BP, ExxonMobil, Chevron, Shell, and ConocoPhillips and the industry's umbrella group, the American Petroleum Institute (API). The state says the companies have a long-standing pattern of misleading the public about the risks associated with fossil fuels, causing billions of dollars in damage to communities and the environment, according to a complaint filed Friday. This is not the first of this type of lawsuit, but perhaps the riskiest for the oil industry to date.

·      Bernard Looney's resignation as BP’s chief executive is the latest in a corporate saga that has seen three of its last four chief executives leave prematurely over the past two decades: John Browne, Tony Hayward, and now Bernard Looney. Although interim CEO Murray Auchincloss told employees in a video address that the company's strategy has not changed, we will have to wait for the next person in charge.

·      Guyana received bids for eight of the 14 offshore oil and gas exploration blocks it bid for in its most recent bidding round. The South American country wants to expand its energy industry and incorporate new operators to make the business more competitive. ExxonMobil (NYSE: XOM), Hess Corp. (NYSE: HESS), China's CNOOC and a consortium of TotalEnergies (EPA: TTE), Qatar Energy, and Malaysia's Petronas were confirmed to have submitted bids.

·      TotalEnergies announced this week its intention to begin detailed engineering studies for its discovery in Block 58, offshore Suriname. The announcement was made during a visit by TotalEnergies CEO Patrick Pouyanné to Suriname to meet with President Chandrikapersad Santokhi. The company expects to make a final investment decision by the end of 2024, with a potential first oil planned for 2028.

·      Saudi Arabia/Aramco is diversifying its international investment portfolio. After its recent acquisition of 10% of Telefónica in Spain, Aramco has just announced the purchase of 100% of the shares of Esmax Distribución SpA, in Chile. The company, valued at $2.2 billion, operates Petrobras fuel distribution in that country. The transaction is subject to authorization from the Chilean government.

Energy Transition

Refining or the art of converting stone oil in progress

 

For centuries, people knew about the existence of crude oil spread throughout different regions of the world. For centuries, no one knew what to do with it: farmers considered it a nuisance; others used it as waterproofing or bottled it and sold it as medicine. It was not until the second half of the 19th century, with the discoveries of oil in Ontario, Canada, and Pennsylvania, in the USA, that the need to innovate and find uses for this new raw material emerged.

 

Determining who is the first to do something is often a difficult task and generally produces incomplete results: innovations are often the convergence of different individual ideas. In any case, the literature points to the American Samuel Kier as the person responsible for building the first commercial refinery in Pittsburgh, Pennsylvania, in 1853. This first refinery used a still with a capacity of five barrels in a batch process. Kier had been experimenting with crude oil for several years before building its refinery. In 1852, he developed a process to distill crude oil to produce kerosene for lighting – coinciding with the decline in the use of whale oil as the preferred lighting.

 

From those modest origins in the 19th century, through a process of innovation and incremental development, motivated by the demand for increasingly complex products, for very varied uses, today's sophisticated, complex facilities were developed.

 

Currently, the crude oil refining industry converts crude oil into a wide range of products, including liquefied petroleum gas, naphtha, gasoline, kerosene, aviation fuel, diesel fuel, fuel oil, lubricating oils, wax, asphalt, and raw materials. raw materials for the petrochemical industry. Products derived from petroleum refining are an integral part of our lifestyle. It is possible to affirm that oil refining has deeply impacted our evolution and that even today, in energy transition scenarios, it continues to be one of the main drivers of the economy, and price fluctuations affect entire economies.

 

According to the EIA, on average, U.S. refineries produce, from a 42-gallon barrel of crude oil, the following:

 

• About 19 to 20 gallons of motor gasoline; 11 to 13 gallons of distillate fuel, most of which is sold as diesel fuel; and 3 to 4 gallons of jet fuel. More than a dozen other petroleum products are also produced at the refineries, including liquids that the petrochemical industry uses to make a variety of chemicals and plastics. To achieve the necessary savings and satisfy the growing demand for products, a refinery operates 24 hours a day, 365 days a year.

 

Oil refining is a cyclical business that follows and responds to the demand for petroleum products: boom cycles are followed by tight cycles. Global refining contracted during the pandemic years as demand collapsed. The end of the pandemic, together with the start of the Ukraine-Russia crisis at the end of February 2022, reversed that trend and the refining economies are going through one of their boom cycles: In June 2022, the global compound margin reached levels of 30 dollars per barrel. So far, 2023 has turned out to be a year of relatively lower margins, between $5 and $10 per barrel.

 

According to the International Energy Agency (IEA), Global oil refining capacity stands at around 101 million barrels per day (MMbpd) as of 2023. This capacity is spread over more than 700 refineries around the world.

 

The countries with the greatest oil refining capacity are:

 

United States: 18.1 MMbpd

China: 17.8 MMbpd

India: 5.8 MMbpd

Russia: 5.7 MMbpd

Saudi Arabia: 5.5 MMbpd

 

The consulting firm, reports that a new wave of entirely new projects will be launched in the coming years; mainly in Africa, Latin America, and the Middle East, which will bring some relief to the tight balances of the current market.  Between 2023 and 2027, they expect an additional 4.4 MMbpd of new distillation capacity to come online. The new capacity will reduce shortages of local products in specific markets (in Africa), integrate into petrochemicals (China), or upgrade local crude to convert it into higher-value products (Middle East).

 

Of course, that is now and the immediate future. Going forward, the refining and petroleum industry, in general, faces a major challenge as the world transitions to a lower-emissions energy future; Governments and consumers are increasingly demanding alternatives to petroleum-based fuels. The migration of the transportation model to electric vehicles or other fuels, undoubtedly, represents the greatest threat to the refining industry in the long term and will require innovation and new strategies.

 

The refining industry will be forced to modify its operation. It can focus on the production of cleaner fuels, such as biofuels and hydrogen. These fuels can help reduce emissions and meet the demand for cleaner energy sources. These technologies could help the industry become more sustainable and meet the regulatory demands of governments. Some refiners are investing in new technologies, such as carbon capture and storage, to reduce their emissions.

 

As the world transitions to cleaner energy sources, demand for petroleum-based fuels is expected to decline. However, this evolution will not be symmetrical nor will it happen overnight. Oil will continue to be a major source of energy for transportation, and it will take time for renewable energy sources to become more widespread. In places like Europe and the Northern Hemisphere, the use of electricity for vehicles will be common, and we may see the disappearance or transformation of the refining fleet. But in regions of the Southern Hemisphere, combustion engines will remain much longer and will require cleaner fuels such as biofuels or perhaps demand synthetic fuels. This will also force the oil industry into a more strategic conversation with the auto industry.

 

The oil refining industry faces a major challenge but also has several opportunities to adapt to the energy transition. By focusing on the production of cleaner fuels, investing in new technologies, and partnering with other industries.

 

Oil refining capacity can be used to produce a variety of alternative products in addition to traditional fossil fuels. These products include:

 

• Biofuels: Biofuels are fuels produced from biological materials, such as crops. Biofuels can be used to replace fossil fuels in a variety of applications, such as transportation, heating, and electricity generation.
• Hydrogen: Hydrogen is a clean fuel that produces no greenhouse gas emissions. Hydrogen can be used for vehicular transportation, generating electricity, and producing other chemicals.
• Industrial chemicals: Industrial chemicals are used in a wide range of applications, from the manufacturing of consumer products to the production of medicines. Oil refineries can produce a variety of industrial chemicals, such as plastics, fertilizers, and pesticides.

 

In this last line, oil companies are intensifying their efforts to increase petrochemical production. In the Saudi city of Yambu, for example, two state-owned companies, Saudi Aramco and Sabic, are planning a new complex that will produce 9 million metric tons of petrochemicals each year, transforming Arab light crude oil into lubricants, solvents, and other products.

 

These changes are happening across the global industry. Several Chinese companies are building factories that will convert about 40% of their oil into chemicals such as p-xylene, a basic component of industrial chemicals. ExxonMobil began expanding petrochemical research and development as early as 2014.

 

These alternative products offer the oil industry the opportunity to survive the energy transition. As demand for fossil fuels declines, refiners can shift their production toward these alternative products.

 

But even the petrochemical route is not a permanent solution for the hydrocarbon industry. Other threats are already on the horizon, although the longer term, including the so-called “green chemistry”, but that is another story.

 

In 1885, John D. Rockefeller wrote to one of his partners: “Let the good work continue. We must always remember that we are refining oil for the poor and that they should have it cheap and good.”

 

Venezuela

Political and Other Events

The vice president and the oil minister of Venezuela, followed by President Maduro, traveled and ended their visit to China without much to be happy about. It was thought that the main objective was to manage a potential increase in Chinese oil activities in Venezuela and, of course, about the debt that Venezuela maintains with China, which amounts to about $12 billion. Although the activities of the Chinese national company, CNPC, continue through the Mixed Company PetroSinovensa, its growth plans have been abandoned: plagued by non-payments, corruption, and administrative complications that not even Chinese patience could endure.

The Joint Declaration that the parties issued at the end of the meetings, full of diplomatic commonplaces, does not mention oil or new financing. It is possible, then, that if incremental investment activity was discussed, it may have been tied to the total cancellation of amounts owed: undoubtedly China's priority.

A campaign has been observed in the media sowing several ideas: an imminent lifting of OFAC sanctions; progress in natural gas export projects; licenses to export Venezuelan crude oil and even the peremptory start of activities, similar to those of Chevron, at the head of other oil companies.

That news would certainly be positive, but the chances of it materializing in the short term are remote. If the regime's willingness to give concrete signals about verifiable conditions for fair and transparent presidential elections does not change, little can be expected. On the other hand, a moderate opening of the oil sector could be the last opportunity that is presented to the regime to be able to finance the budgetary requirements of an electoral year.

Meanwhile, the structural crisis in services continues to mark the country's reality. During the last week, numerous electrical instability events have affected daily life; Even the Caracas metro had to be paralyzed to avoid greater evils.

Hydrocarbons Sector.

The second half of September began with some elements that impacted the oil production stability of the last two weeks, both upstream and downstream.

Production: Electrical problems and diluent logistics reduced production by 20 Mbpd compared to last week. Production during the last week averaged 722 Mbpd, distributed geographically as shown below:

•      West:          119 (Boscán 51)

•      East:           154

•      Belt:           449 (Chevron 73)

·      Total:          722 (Chevron 124)

Refining: In Paraguaná, the Amuay refinery is paralyzed for all practical purposes. Cardón is operating, but with problems in the recently started catalytic cracking unit (FCC), and in other process units that we have not been able to identify. So gasoline production is in a critical situation, but not enough to avoid sending gasoline to Cuba, surely to maintain mobility on the island during the summit of the Group of 77, which Maduro attended upon his return from China.

So, the lines at service stations became endless given the severe rationing that has been applied to the majority.

Exports: During the first half of September, 295 Mbpd were shipped indirectly, with final destination China; to Cuba 51 Mbpd, and to the USA 134 Mbpd.

The increase in prices has partially compensated for the lower export volume, so Chevron participated in the exchange market through private banks with around $70 million. Exports of products have been destined mainly to Cuba; therefore, it does not add to foreign exchange earnings.

In a separate news story, it was announced in Trinidad that Shell is seeking environmental clearance for the Manatee natural gas project. The Manatee field is part of the Loran-Manatee transboundary discovery, shared by Trinidad and Venezuela. The countries negotiated for years to jointly develop the field but never signed an agreement. Venezuela later reportedly agreed to allow Trinidad to independently develop its portion of the promising field. If the Shell project is executed, the foundations for future claims for resources produced without due unification would be laid.