Between the uncertainty of war and the economy.

 El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA   

M. Juan Szabo and Luis A. Pacheco

The combination of the geopolitical risks with an expansion of the conflict in the Middle East, the under-supply of oil, and the recurring threats of an economic recession and its effect on the demand mark the terrain where the oil market moves.

These variables, interacting unpredictably, have kept oil prices between $88 and $90/BBL for Brent Crude, with marked volatility in response to daily news, which to a greater or lesser degree reflects the probability that the conflict between Israel and Hamas expands.

Israel seems to have delayed its campaign to counterattack Hamas. However, after an incursion last Thursday, it resumed its military activities in northern Gaza with more intensity on Friday night. The Israeli Defense Forces (IDF), with ground troops supported by fighter jets and drones, attacked anti-tank missile launch sites and underground command and control centers. Separately, US military forces in the area carried out airstrikes against two facilities in eastern Syria used by Iran's Islamic Revolutionary Guard Corps. American officials said the strikes were in response to attacks against US personnel based in Iraq and Syria.

However, to the surprise of analysts, oil prices were headed for a slight decline during the week, despite signs of escalating conflict in the Middle East.

On the economic front, the European Central Bank (ECB) left official interest rates unchanged on Thursday, after 10 consecutive increases. However, ECB President Christine Lagarde said it was premature to talk about rate cuts and did not confirm that interest rates had even peaked. She also warned about the threats that loom over the world economy, derived from the Israel – Hamas conflict.

In the world of big oil companies, a trend of consolidation appears to have begun. The mega acquisition of Pioneer Natural Resources (NYSE: PXD) by ExxonMobil (NYSE: XOM), is now followed by the announcement of the purchase of Hess Corporation (NYSE: HES) by Chevron Corporation (NYSE: CVX), and ConocoPhillips' appears to be in talks to buy the private company CrownRock LP, a prominent producer in the Permian Basin in Texas, a transaction that could be valued between $10-15 billion. As an interesting note, these two mega consolidations do not involve cash disbursement, which leaves the investment capacity of the resulting entities intact.

On the other hand, Royal Dutch Shell announced that it will reduce at least 15% of the workforce in its low-carbon solutions division and reduce its hydrogen business. This is part of new president Wael Sawan's strategy to increase profits by focusing on higher-margin projects, stable oil production, and increased natural gas production. This strategy could include acquisition transactions of companies in the industry, given the trend in its competitors.

The US economy has proven to be a difficult enigma to decipher. After more than a year of aggressive interest rate increases to cool the economy and curb inflation, the labor market continues to make progress, with GDP growing by 4.9% over the past quarter. Treasury Secretary Janet Yellen claims that such a growth rate is unsustainable, but it is not the first time that her assessments have been misplaced. The last time US bond yields rose this much and this fast, in 2007/8, the US experienced a recession, but everyone who has predicted a recession since early last year has turned out to be wrong. For now, the Federal Reserve will continue to feel pressure to keep rates high to combat price increases.

Meanwhile, the Chinese central government formalized a process for local governments to obtain loans for next year, starting in the fourth quarter of this year, which was welcomed by China's economic players, moving stock markets higher. However, earlier this month, the International Monetary Fund cited real estate problems and cut its growth forecast for China to 5% this year and 4.2% next year.

OPEC+, the dominant player in the oil market, has maintained its policy endorsed at the ministerial meeting on October 4, in which it urged member countries to strictly adhere to agreed production levels. Some member countries have not been able to achieve their production quotas – euphemistically called over-compliance. The organization will review the results and its strategy on November 26 at its next ministerial meeting.

Finally, in Guyana, they announced their 46th deep-sea discovery. This is the Lancetfish-2 Well, drilled by the consortium led by ExxonMobil.

Thus, oil prices showed strong volatility during the week, closing at levels somewhat lower than the previous week. As long as the war does not affect produced volumes and supply routes, the war premium will remain attenuated.

At the close of the markets, on Friday, October 27, Brent Crude Oil, after a recovery compared to the previous day, was trading at $90.48/BBL, while WTI was trading at $85.54/BBL.

 

ENERGY TRANSITION

Ice and Fire. Heat pumps

Heating and cooling homes, businesses, and industries require a lot of energy. In many parts of the world, indoor climate control represents one of the largest end uses of energy. Heating and cooling represent a considerable fraction of the energy consumed in the global industrial and construction sectors.

In colder northern regions such as Canada, the United States, and Northern Europe, space heating typically accounts for 60% or more of the total energy demand in residential buildings. Home heating bills can account for more than 40% of household energy costs in these cold places. Commercial buildings such as offices and hospitals also require significant amounts of heating during cold seasons.

In warmer southern climates, the picture changes, and air conditioning becomes the driving force for electricity demand. Cooling a home or business in warm regions such as the southern US, the Middle East, and the tropics can require 30-50% of a building's energy use during peak summer periods. Air conditioning use is expected to increase in developing countries as global temperatures rise.

Industrial facilities also rely heavily on heating and cooling for essential manufacturing processes. Thermal needs such as steam generation, cooling, drying, or other temperature-sensitive operations can account for 10-20% of an industry's energy footprint. Facilities typically use both primary fuels and electricity for process heating and cooling. This time we will deal with non-industrial use.

In general terms, heating technologies are based on the direct use of heat generated by the combustion of fossil fuels: gas, diesel, etc. Cooling systems are variations on the principle of extracting heat from indoor air to the outdoors by consuming energy (electricity): air conditioners, evaporative coolers, absorption coolers, and natural ventilation.

Hence, designing and operating efficient, low-carbon heating and cooling systems plays a key role in the transition to a more sustainable energy future. It is in this context that heat pumps have been rediscovered and are emerging as a cooling and heating option that is gaining popularity.

 

A heat pump uses technology like that found in a refrigerator or air conditioner. It extracts heat from a source, such as surrounding air, geothermal energy stored in the ground, nearby sources of water, or waste heat from a factory. It then amplifies and transfers the heat to where it is needed. Furthermore, it can be used to heat or cool air or water in homes, buildings, or industrial processes. It moves thermal energy in the opposite direction to spontaneous heat transfer, which is from hot to cold, by using external energy.

While no one inventor can take sole credit for heat pumps, the early history of this technology includes several pioneers who helped develop and advance the technology as we know it today.

In the 1820s, Nicolas Léonard Sadi Carnot established the key thermodynamic theory for understanding heat pumps and refrigeration. His work laid the scientific foundation for the heat transfer cycles and reversibility that heat pumps enable. In 1852, William Thomson (Lord Kelvin) devised a “heat multiplier” that used vapor compression to move heat from one place to another against the natural direction of heat flow. This pioneering device is considered the first real heat pump. In 1855, Peter von Rittinge, an Austrian engineer, designed and built the first heat pump that employed a vapor compression cycle to provide heating.

The most common type of this device is the air heat pump, which transfers heat between indoor air and outdoor air. It consists of an external coil, a compressor, an internal coil, and an expansion valve. The refrigerant fluid circulates through these components in a closed circuit.

During heating mode, the liquid refrigerant in the outdoor coil absorbs heat from the outside air, causing it to evaporate and turn into a gas. This gas is compressed, increasing its temperature. The hot gas then circulates through the indoor coil, releasing heat to the indoor air to warm the home. During cooling mode, the cycle is reversed. The indoor coil absorbs heat from the indoor air, causing the refrigerant to evaporate. It is then compressed and sent to the outdoor coil, where it condenses back into a liquid, releasing heat to the outside.

Reversing refrigerant flow is what allows a heat pump to provide heating and cool air in a single device. It takes advantage of differences in outdoor and indoor air temperatures to efficiently move heat in any direction as needed. This makes it much more energy efficient than oven heating or electrical resistance heating.

Today, the primary uses of heat pumps are heating, ventilation, and air conditioning (HVAC systems) of home and office buildings, hospitals, schools, retail stores, and other facilities; water heating; heat recovery in industrial processes; geothermal systems; dehumidification: cabin climate control in electric vehicles.

In the context of the energy transition, heat pumps have certain advantages:

·       Reduce reliance on fossil fuels for heating – Heat pumps can heat homes and water more efficiently using electricity instead of burning natural gas, oil, or propane, reducing emissions.

·       Increase energy efficiency – Heat pumps can reduce heating and cooling energy use by up to 50% compared to alternative systems.

·       Improve resilience – Heat pumps diversify energy options while using the thermal energy available in the ground or air. This provides alternatives if a certain fuel supply is interrupted and makes communities more resilient.

 

However, like any technology, heat pumps have limitations and challenges:

·       Standard air source heat pumps become less efficient and effective at very low outdoor temperatures. This makes them less suitable for icy regions without supplemental heat.

·       While heat pumps save money over time through energy savings, the initial purchase and installation cost is higher than alternatives such as gas boilers.

·       Replacing an existing heating system with a heat pump often requires electrical upgrades, ductwork modifications, and installer training.

·       In some areas, the increase in demand for electrical energy, due to heat pump utilization, may require upgrades to the utility network. This requires a modernization of the network.

 

According to the International Energy Agency (IEA), heat pumps are a critical technology for heat decarbonization and have received increasing political support in several countries recently. The agency estimates that heat pumps globally have the potential to reduce global carbon dioxide (CO₂) emissions by at least 500 million tons in 2030, equivalent to the annual CO₂ emissions of all cars in Europe today.

But as with any massive replacement, in this case of cooling and heating systems with new technology, progress is plagued by potholes. An example of this is the recent decision of the British government to postpone the obligation to replace domestic boilers with heat pumps, from 2030 to 2035, citing high costs and installation complexities in old buildings; a decision not very popular in many sectors, but with obvious electoral implications; The same decision was made regarding the prohibition of the sale of cars with internal combustion engines.

In any case, this is a technology that is here to stay, even if it takes a little more time to be massively deployed.

 

VENEZUELA

Political Events

Venezuela has not yet recovered from the surprise of the massive attendance at the opposition primary elections, which resulted in an organizational and political success. The overwhelming victory of María Corina Machado was also unexpected, obtaining 92% of the almost 2.5 million valid votes, which at this time makes her the opposition standard-bearer for the 2024 presidential elections.

However, MCM will not only have to fight against the administrative disqualification that weighs on her but will also have to overcome all the other obstacles that the regime will try to put in her way. The regime's noisy reaction to MCM's victory is a reflection of the hard political blow that the primaries represent. The attempt to prosecute the organizers of the primaries, in violation of the first article of the Barbados agreements, gives us an idea of the thorny path forward.

The political and economic media have talked a lot about the potential effects of lifting sanctions in terms of activity and incremental income for the State. As we indicated last week, due to the temporary nature of the oil licenses granted, the precedents of non-compliance by the regime, and the uncertainty regarding the valuation parameters of the Biden administration, estimating the effect of the licenses is only possible in the form of scenarios.

Under a relatively optimistic premise of full compliance with the agreements reached in Barbados, which would extend the validity of the new licenses over time, incremental activities and income can be estimated. Meanwhile, we have to content ourselves with identifying the potential contracts or deals that the parties have brought up, without being able to ensure whether they come to fruition.

So far, the process seems to have motivated interest in the oil and financial market, both due to the sale of crude oil and products, and in the bond market of the Republic and PDVSA.

In the field of operational activity, we know that Chevron continues with its plans to begin drilling early next year; Maurel & Prom appears to intend to begin the recovery of the western Urdaneta Field, located on the western coast of Lake Maracaibo, with current production of about 9 MBPD. The rest of the announcements correspond, for the most part, to cases associated with the recovery of debts in default or interest in marketing Venezuelan hydrocarbons.

Among these, we can mention the interest of ONGC (National Company of India) to participate in the commercialization of Venezuelan crude oil or products to recover more than $500 million in dividends pending since 2014 for its participation in mixed companies. On the other hand, a total of about 200 MBPD of crude oil, currently destined for China, could be redirected to the US market and even the European market, which will take a few months to implement.

The transparency imposed on the crude oil export process as a result of the original Chevron license, and the recent ones granted as a result of the agreement signed in Barbados, could be overshadowed when the actors who today participate in the “alternate” marketing route try to keep trading.

The three fundamental catalysts of the process are:

·      The Venezuelan regime's compliance with the Barbados agreements, the initial actions cast a veil of doubt on this element,

·      The Biden administration's willingness to implement its ultimatums.

·      The interest of companies and intermediaries to invest in Venezuela under the prevailing conditions.

Meanwhile, relations with Guyana have become more complicated. It is no longer just a matter of stirring the nationalist fiber of the Venezuelans, but it has even led to threats of military action in the disputed territory.

The most interesting element in the controversy with Guyana is the presence, following the acquisition of Hess, of Chevron in both production and exploration operations in new blocks. Half of the participation in the blocks in Guyana is in the hands of companies that are also partners of PDVSA: Chevron and the State Company of China

Hydrocarbons Sector.

Several PetroMonagas wells came into production, slightly raising production potential, while exports began to adapt to the opening to the most remunerative markets for Venezuelan crude oil. Thus, crude oil for condensate exchanges with Iran tend to disappear. Baker Hughes reports only one active rig in the country, Drilling for PetroMonagas.

Production: The month of October will close with an average production of 746 Mbpd, distributed geographically as shown below:

·      West:             132 (Boscan 54)

·      East:               151

·      Orinoco Belt:   463 (Chevron 79)

·      Total:               746 (Chevron 133)

Chevron's production is in line with volumes of recent months. The North American operator is starting work at PetroIndependencia (Orinoco Belt) for the start of the development drilling campaign starting in January 2024.

Refining: Although the 4 main refineries are operational and process or reprocess about 290 MBPD of crude oil and intermediate products, none are operating as they should. Amuay works as a simple distillation refinery. Cardón falls short of its gasoline production goals due to the lack of its catalytic cracking unit (FCC). El Palito practically processes intermediate products due to problems in the distillation unit, and Puerto la Cruz operates at low levels due to the shortage of light crude oil. So the national supply of gasoline will continue to depend on imports, which are now facilitated by the opening of the markets.

Exports: Exports for October are on track to average exceeding 560 Mbpd of crude oil and 90 Mbpd of products. Exports handled by Chevron averaged in October 150 Mbpd.

The changes in destination are in full development, but there are still no reliable numbers. Under the premise that 30% of the volume subject to change of destination was achieved during the month, let us remember that the licenses were published on October 18, the income from commercially sold hydrocarbons, net of debt payments and crude oil delivered in barter, It would be $630 million for October; Some $120 million would be dedicated to reducing outstanding debts with Chevron, ENI, and Repsol.