El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo y Luis A. Pacheco
The expiration of futures contracts for October, the taking of profits at the end of the month, the idea that Saudi Arabia could begin to reverse its production cuts to avoid a price increase that could kill demand, plus the threat of closure of the federal government, seems to have put a brake on the dizzying growth of oil prices. A $95/bbl price for Brent Crude Oil has become a temporary resistance level, even though numerous bullish catalysts are still there.
One of these catalysts is the crude oil inventory at the Cushing, Oklahoma storage center; where, incidentally, the “spot” price of WTI crude oil is formed. Inventory is reported to be at its lowest level in more than a year due to strong refining and export demand, and is very close to minimum operating levels. This drop is just part of the continuous fall in US crude oil inventories reported by the EIA.
Prices have generally trended higher for the week after a slow start was followed by a mid-week surge that took Brent above $/bbl 97 and WTI above $/bbl 95, but the momentum faded on Thursday. Crude oil futures fell slightly on Friday, amid concerns over the potential shutdown of the US federal government, with marker prices retreating from new highs recorded during the Thursday session.
It is possible that the rally in oil prices will show exhaustion or resistance as it approaches $/bbl 100, perhaps a sign that the market views it as a psychological barrier; although in the past, psychology has not been entirely useful as a deterrent.
However, the predominant characteristic of the market continues to be the supply/demand asymmetry, which, according to OPEC forecasts, could leave a supply deficit of more than 3 MMbpd by the end of the year. At the same time, there are concerns that relatively high oil prices will begin to destroy demand, as well as fuel inflation, and lead to further increases in interest rates.
At this time, it is not likely that OPEC+, at its next meeting, scheduled for November, will change the policy maintained recently. Some observers see the cuts by Riyadh and Moscow as a strategy in the face of what they perceive as fragile global demand. However, as we have mentioned in previous installments, we maintain that the cuts are due to the need to produce at less demanding operational levels – in the Saudi case—and simply not having more barrels—as in the Russian case.
Russia, for example, is going through a period of financial hardship and economic problems due to the enormous cost of the war, which is draining the country's resources. This diversion of funds leaves little investment capacity in the oil sector, whose income has fallen substantially, and which results in lower production potential.
Nor is it observed that North American companies are trying to contribute to the supply. This week, Baker Hughes reported a further reduction in active drilling rigs: another 7 units were taken out of service. Longer term, the Biden administration's five-year plan to auction new offshore oil and gas leases will not include any processes in 2024 and will feature just three in the final four years of that period, the fewest of auctions in the program's history, according to Interior Secretary Deb Haaland, in a clear attempt to appease environmentalists.
Additionally, some volumes of crude oil that were considered as a supply base case will continue to be closed, as is the case of Kurdish crude oil from northern Iraq. Both Ankara and Baghdad have agreed to resume pumping and export through the Ceyhan terminal, but Turkey does not seem in any hurry to start the process until a final agreement on compensation is reached. Volumes also remain deferred in Libya and Nigeria, and to a lesser extent in the US, due to a court decision that postpones the reactivation of production on offshore platforms in the state of California, US.
This marked and persistent lag in supply in relation to demand is causing bridges to be built between governments and authorities, supposedly hostile to fossil fuels, and the oil industry. After Norway approved almost $20 billion in new oil developments, it has now been Britain's turn to give the green light to Equinor (NYSE: EQNR), the Norwegian state oil company, to move forward with one of its most important oil and gas projects in years: the North Sea Rosebank field. The British government believes that energy security is its priority, despite opposition from environmentalists. Wednesday's announcement comes after Prime Minister Rishi Sunak reviewed his government's plans to meet its net-zero emissions commitments by 2050, a move critics say could also encourage other countries to slow down. their climate ambitions.
On the other hand, China is publishing apparently positive economic information. not enough to consider significant increases in demand, but neither does it suggest a potential adverse effect on the markets. Government stimuli to the economy, as well as the elimination of export quotas that the government assigned to independent refiners, will end up being reflected in oil fundamentals.
Finally, the International Energy Agency (IEA), in its most recent report , emphasized its downward revision of oil demand for the last three quarters of 2023 (-250,000 BPD), as a result of what it calls: “persistent macroeconomic headwinds, evident in a deepening manufacturing decline.” But at the same time, it announced that it had to retroactively revise upwards the historical demands for 2020, 2021 and 2022, and the projections for 2024, foreseeing a growth of 6% between now and 2030. In any case, the IEA must review its estimates for 2023 given that the oil demand is about to reach levels of 104 MMbpd. These ambiguities in the IEA reports weaken their influence on the market, which is after all their objective.
At the last minute, it was announced in the US a bipartisan provisional agreement to avoid the closure of the federal government. The agreement excludes aid to Ukraine and gives 45 days to reach a final agreement.
Thus, on Friday, September 29, the prices of marker crude oil closed at $/bbl 92.20 and $/bbl 90.70 for Brent and WTI respectively. At closing the typical gap between the two marker crude oils closed due to the low inventory situation that is occurring in Cushing, Oklahoma, which pushes up WTI versus BRENT.
“Offshore” Atlantic South America: Much Ado About a Lot
In an environment where the world economy demands more and more oil and gas, while the IEA recommends not making investments in new projects, in the context of its Net Zero 2050 route, the Atlantic façade of South America emerges as an archetypal scenario where the contradictions of the energy transition are played out.
South America, a continent that has historically been a source of the raw materials that have driven the economic development of the rest of the world, without benefiting completely from the exploitation of those resources, seems unwilling to be told what it should or should not exploit, especially when those natural resources are its best opportunity to improve its situation.
The already well-established discoveries of “Pre-Salt” crude oil in Brazil warned of the existence of accumulations in that part of the world. The most recent discoveries of offshore Guyana, as well as growing exploration in Suriname, underline the existence of a geological “ play ” different from the Pre-Salt. In addition, it is also worth mentioning that Petrobras has obtained environmental permission to explore its Equatorial Margin, which is what the area of the Atlantic coast at the mouth of the Amazon is called, which would further extend this Atlantic strip.
The impressive results of the explorations carried out in the deep waters of Guyana (+1700 meters) and Suriname (+1000 meters), have confirmed the existence of a new oil province in the northernmost part of the Atlantic coast.
According to current geological models, the Guyana-Suriname oil province, like the rest of America, was part of the ancient supercontinent Pangea, which began to disintegrate during the Early Jurassic, approximately 200 million years ago.
As an interesting fact, it is thought that one of the main hydrocarbon-generating rocks in the Guyana – Suriname Basin is the Canje shale, of Lower Cretaceous age, about 105 to 115 million years old: older than the generating rocks in Venezuela and Trinidad: La Luna, Querecual, and Naparima Hill, which date from the Upper Cretaceous, 90 to 95 million years ago.
Guyana – a new frontier.
Guyana's Atlantic coast is home to one of the most prolific oil provinces discovered in the 21st century. The exploratory success achieved in the Stabroek block by the consortium led by ExxonMobil (NYSE: XOM), has transformed Guyana into the country with the highest economic growth in the world and has raised expectations of social transformation and sustainable development for a nation that until a few years ago struggled against endemic poverty.
The Cooperative Republic of Guyana, created in 1970 after its independence from the British Empire, is a country of enormous ethnic complexity, extremely poor, at least until now, and with border disputes with all its neighbors; The most relevant of these disputes, due to its size (159,542 square kilometers, equivalent to 74% of its territory), is the dispute with Venezuela.
The dispute, originating in colonial times, has never really been resolved and has limited economic activity and mineral exploitation in the claimed area, which includes the corresponding territorial sea. Today, as Guyana has become the fastest-growing oil province in the world, the legal and geopolitical battle over the territory has resumed. But that's a story for another time.
The first exploratory steps
Guyana has a long history of failed exploration activities, on and offshore, but limited to its continental shelf where, despite numerous wells drilled, only non-commercial quantities of hydrocarbons were found. The interest of oil companies waned until a new type of geological model was confirmed in Africa, which seemed analogous to its counterpart in South America (remember Pangea); The model includes the continental slope with its canyons, the abyssal plain and allowed to postulate potential stratigraphic and structural accumulation traps – an indispensable component in modern exploration.
As technology developed for more complex seismic surveys and ultra-deepwater drilling, there was renewed interest in this type of play.
Next generation exploration
At the time of the signing of the first concession allocation contract between Guyana and Exxon Corp. in 1998, the Stabroek block covered almost 15 million acres, that is, 2.5 times larger than what it now occupies. However, in 2000 the oil company recognized that the block was established in a disputed area and abandoned work until 2008.
Around 2008, 3D seismic surveys covered most of the continental slope and abyssal plain predicted by the geological model. In 2015, ExxonMobil and its partners announced a major discovery (Liza-1 well) in the Stabroek block, which confirmed the validity of the geological model.
As of 2020, Guyana had seven oil blocks under active lease, of which six have had exploratory activities.
Blocks with offshore exploratory oil activity in Guyana
Block | Start of concession | Size (km 2 ) | Operator |
Stabroek | June 27, 2016 | 26,806 | ExxonMobil |
Kaieteur | April 28, 2015 | 13,535 | ExxonMobil |
Exchange | March 4, 2015 | 6,100 | ExxonMobil |
Kanucu | 14 May 2013 | 6,525 | Repsol |
Orinduik | January 14, 2016 | 1,801 | Tullow |
Demerara | February 12, 2013 | 4,000 | CGX & Frontera |
Corentyne | November 17, 2012 | 6,200 | CGX & Frontera |
Source: “Hess Corp Investor Presentation.”
Undoubtedly, the greatest success has been achieved in the Stabroek block, with an unprecedented exploration success rate, making Guyana a leading hydrocarbon province. Currently, the concession of this block is shared by Esso Exploration and Production Guyana Limited, (a subsidiary of ExxonMobil) with 45%; Hess Guyana Exploration Ltd., (subsidiary of Hess Corp.) with 30% and Nexen Petroleum Guyana Limited (subsidiary of China National Offshore Oil Company) with 25% participation.
26 discoveries of proven commerciality have been made, all in the Stabroek Block: Liza, Li, Payara, Sonoek, Turbot, Ranger, Pacora, Longtail, Hammerhead, Pluma, Haimara, Tilapia, Yellowtail, Tripletail, Mako, Uaru, Yellowtail 2, Redtail, Whiptail, Pinktail, Cataback, Lau, Fangtooth, Patwa, Lukanani and Barreleye. According to ExxonMobil and its partners, the developments are profitable, with a Brent price between $30 and $35/bbbl. Obviously, at current prices, accelerated development of these resources is justified.
Record production increase
The quality of the deposits and ExxonMobil's project execution capabilities contributed to the exploitation phase being carried out at a record pace. The operating consortium, together with the Government of Guyana, selected the first discovery, Liza, to be the first to be developed. This development is conceptualized in phases, through floating production, storage, and offloading units (FPSO). The first FPSO, Liza Destiny, began production in December 2019, just four years after discovery. The second unit, Liza Unity, began production in February 2022. A third FPSO, Prosperity, is already preparing to start production from the Payara discovery before the end of this year.
Well over 11 billion barrels of what were previously called reserves have been confirmed which now officially correspond to recoverable resources, which has made it possible to plan ten FPSOs to develop the fields of this block and bring production to around 2.0 MMbpd. When that figure is reached, Guyana will be the second-largest producer in the Western Hemisphere south of the Rio Grande.
Currently, around 400 Mbpd of light crude oil is produced in Guyana, which will increase to 600 Mbpd in early 2024 and 1.2 MMbpd in 2027, through the addition of three additional FPSO units for the Yellowtail development and Uaru discoveries. and Whiptail. The block's projected growth exceeds any other deepwater development in the world, including those achieved in the Brazilian Pre-Salt, Angola and the Gulf of Mexico.
Not all companies exploring in Guyana have suffered the same fate. Neighboring the Stabroek block is the Corentyne block, where CGX/Frontera recently completed a $300 million two-well exploration program. Although both wells reported the presence of hydrocarbons, neither could be properly evaluated due to operational problems. The company has not reached a conclusion on the commerciality of the oil and gas found, or whether the findings justify drilling appraisal wells.
The trend of discoveries made in Guyana continues in Suriname, where several discoveries similar in nature have been announced. This confirms the enormous potential of this basin, which until the 21st century was off the radar of explorers.
Current situation
Oil activity in Guyana continues. A new competitive bidding process was carried out in 2023, the result of which was recently announced. ExxonMobil and Hess Corp, TotalEnergies (TTEF.PA), and Qatar Energy were among the oil companies bidding in another auction of 14 other oil and gas exploration blocks. Details of that auction have not yet been revealed.
In terms of development activity, ExxonMobil, and its partners plan to spend $13 billion on a sixth offshore oil project to develop the Whiptail project.
As is natural in exploration, not everything is successful. ExxonMobil and Hess Corp recently pulled out of the Kaieteur block in Guyana after disappointing results, transferring their interests to Ratio Guyana Limited and Cataleya Energy Limited, which originally held the exploration licenses. ExxonMobil has also drilled three non-commercial wells on the smaller Canje block.
To date, the government has received around $3.4 billion in taxes and royalties and the activity has created almost 5,000 jobs in the country.
This economic boom has its downsides since it tends to upset macroeconomic balances. The government seeks to protect the country from the well-known "Dutch disease", which occurs when there is an economic boom associated with the rapid influx of foreign currency, as is happening in Guyana. The result can be an economy with an overvalued currency, large imbalances, and little sectoral diversification.
To mitigate this situation, Guyana has established a fixed exchange rate against the US dollar, to prevent the Guyanese dollar from appreciating too much, and established a macroeconomic stabilization fund in 2019 (modified in 2021), called the Sovereign Wealth Fund or Fund of Natural Resources, managed by the Bank of Guyana. According to the law, the objectives of the fund are: 1) ensure that revenue volatility does not lead to volatility in public spending; 2) ensure that income from natural resources does not lead to a loss of competitiveness of the economy; 3) fair intergenerational wealth transfer; and 4) finance national development priorities, including green economy initiatives. It differs from Norway, which is mainly an intergenerational savings fund. Countries like Guyana—with its infrastructure deficiencies and social problems—require prudent administration, but different from that of the Norwegian case.
The Natural Resources Fund already has close to 1.5 billion dollars, despite the short life of oil production in Guyana. However, Guyana has suffered from political instability and, therefore, there is a latent risk that the rules of the game will change.
Guyana stands out today as the most active and attractive oil basin globally. As a country, it will have to travel a path to development full of economic, political, and social difficulties.
Venezuela
Political Events
The regime's attention and action remain focused on imploding or postponing the opposition primary elections. The new CNE (lectoral authority), after meeting with members of the opposition National Primary Commission (CNdP), proposed an agenda in which the primary election should be postponed to November 19 to have the technical collaboration of the CNE. The offer has divided the opposition. Some candidates opposed to accepting the proposed “aid,” because the CNE lacks impartiality. In particular, Mrs. Machado, the candidate with the best chance of winning the primaries, is totally opposed to accepting the offer.
In what appears to be an attempt to replicate the prisoner exchange and release of funds achieved between Iran and the United States, contacts are reported between the president of the National Assembly, Jorge Rodríguez, and the White House envoy, Juan González, with Qatari authorities serving as mediators, just as they did in the case of Iran.
Economically, the control of public spending and interventions in the exchange market, partly by Chevron, has managed to keep the Bs/$ exchange rate essentially constant, slowing the growth of inflation. However, economists specialized in the matter predict a deterioration in the value of the national currency as the government increases public spending.
Regarding the border conflict with Guyana, the diplomatic rhetoric has toned down. Maduro proposed a face-to-face meeting with the Guyanese president to negotiate.
Hydrocarbons Sector.
In this last week, little has changed in the Venezuelan oil industry, where electrical problems are already a constant and have become a structural obstacle for the reduction of deferred production.
As the final quarter of 2023 begins, expectations focus on drilling results at PetroMonagas joint venture, with the operation of the only two active drills in the country, the recovery of wells in the Franquera/Tomoporo area, and the potential for changes in OFAC licenses.
Production: the average production for the week was 731 Mbpd, distributed geographically as shown below:
• West: 125 (Boscán 54)
• East: 153
• Belt: 453 (Chevron 75)
· Total: 731 (Chevron 129)
Chevron achieved its highest weekly production since it took operational control of the joint ventures of which it is part, since the beginning of the year 2023.
Refining: Venezuelan refineries processed 312 Mbpd of crude oil and intermediate products. The catalytic cracking unit (FCC) of the Cardón refinery was restarted and is operating at low capacity, but contributing to somewhat alleviate the problem of gasoline shortage. This week, a tanker from Italy unloaded at the Amuay refinery with naphtha and gasoline components.
Exports: Exports for the month of September averaged 505 Mbpd, of which 64 Mbpd came from inventories. Chevron brought 138 Mbpd of crude oil to the US in three segregations: 52 Mbpd from Boscán, 55 Mbpd from Hamaca and 22 Mbpd from Merey, which includes 7 Mbpd of imported diluent. 316 Mbpd sailed to China , containing 14 Mbpd of imported diluent; Cuba received 23 Mbpd and 28 Mbpd were part of the barter with ENI/Repsol.
Finally, it is interesting to note that while the Maduro administration complains to the government of Guyana for granting oil exploitation rights that could be in disputed waters, they obviate the fact that the company Shell (LON: SHEL) received from the government of Trinidad the required permits to develop the Manateenatural gas field. This reservoir, which crosses the border between Trinidad and Venezuela, has resources on the Venezuelan side (Lorán) that almost triple the estimated volumes on the Trinidad side (Manatee). However, Venezuela allowed Trinidad to develop its resources independently.
There are two reasons that advice against the convenience of the Venezuelan decision: 1) since it is free gas, the control of the volumes extracted through wells on one side is difficult and will allow the initial energy of the global reservoir to be used to obtain production rates higher than those that would be achieved later on the Venezuelan side; 2) The optimal development of gas on the Venezuelan side (Loran) is through Trinidad's infrastructure, so it is logical that there should be joint exploitation, as was planned before this new position of the Venezuelan regime.
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