VOLATILITY FOLLOWS UNCERTAINTY

  El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA   

M. Juan Szabo and Luis A. Pacheco

The French economist Louis Bachelier commented at the beginning of the century “… the price that the market considers most probable is the current price: if the market judged otherwise, it would not quote this price, but another price higher or lower.” Written another way, prices will not change if the expected happens, it is the unexpected that causes prices to move. The market quickly incorporates new information and revalues the price of the stock or commodity: the volatility of the markets is then a reflection of the frequency with which the expected does not occur.

With this theoretical lens, it can be postulated that the volatility of oil prices this past week is the result of changing information, which the market did not expect – but which it also interprets randomly. In today's oil market, an explosive mix of economics and geopolitics, an event that can look like a bearish turning point ends up, hours later, driving the price up, when the market interprets the information differently.

For example, at the beginning of the week, the market interpreted, based on rumors, that OPEC+ was preparing to make additional production cuts, which allowed prices to rise slightly. However, new rumors soon emerged indicating the existence of differences of opinion within the oil coalition to reach an agreement on quotas by 2024, causing the markets to fall on Wednesday; once again, a reaction to the unexpected. This downward push did not last long, and oil prices reversed their upward course. A classic example of how, in times of nervousness, the interpretation of the unexpected volatilizes the market's responses.

Market nervousness is mainly due to information being generated faster than it can be analyzed and assimilated, creating uncertainty: Russia/Ukraine war, Israel/Hamas war, attacks on US military targets in between East, temporary ceasefire in Gaza with hostage exchange, results of the meeting between Biden and Xi, Milei's victory in Argentina, Venezuela/Guyana tension - a world in flux at the speed of social networks.

The differences within OPEC+ seem to be the same that were aired in their last meeting. West African producers are unhappy with quotas that limit their production. In parallel, the United Arab Emirates (UAE) is pushing to increase its production, to justify the investments made this year. Saudi Arabia is unhappy because it considers that it has been doing most of the heavy lifting this year, with an additional voluntary cut of 1 MMbpd, while not all producers are meeting the agreed quotas: Oman, Bahrain, and Nigeria, overproduce, while Kazakhstan, Mexico, Malaysia over-comply.

Russia is content to observe. With production slowly declining, Russia is maximizing the export of its crude oil at prices above the limitations imposed by sanctions. This is thanks to the use of an extensive fleet of “ghost” tankers that bypass the controls imposed by the European Union and the United States. So any OPEC+ agreement that could support higher prices is in Putin's interest.

To learn what OPEC+ decides about quotas, we will have to wait until the 30th of this month, when the group's virtual ministerial meeting will be held. It is likely that the differences between those who want and cannot, and those who can and will not, will be settled in a way that transmits unity and redistributes the allocated and voluntary cuts in a way that conveys order to the market. We do not believe that Russia or Saudi Arabia will be willing to make any additional sacrifices to achieve a unanimous decision.

But the thing to remember is that whatever the deal and the immediate market reaction, it won't change the current fundamentals of the oil market, which continue to depend on the outcome of the race between demand and supply. For now, demand remains robust despite facing greater obstacles than supply. The biggest obstacle that the supply has not been able to overcome has been that of underinvestment.

On the other hand, neither the US nor Canada can, for now, affect the demand/supply equation. Elsewhere in the Americas, Guyana began production from the Payara Field using a third floating production unit (FPSO), appropriately named Prosperity. With this addition, Guyana's production is set to reach 650 Mbpd in the second quarter of 2024. However, this increase is insufficient to compensate for the expected production declines in Mexico and Colombia – Venezuela remains an unknown.

Regarding the challenge that central banks face in controlling inflation, everything indicates that, in the case of the Federal Reserve (FED), there is confidence that what is coming is the dismantling of the restrictive monetary policy. Meanwhile, what is perceived from Europe is that the European Central Bank (ECB) is not yet prepared to declare victory against inflation, therefore, another increase in interest rates is not ruled out, which gives signs of demand contraction to the oil market.

This being the case, one wonders: why are prices falling if the fundamentals and geopolitical events point in the opposite direction? There is no complete or correct answer to this question. However, we believe that one of the reasons for this behavior is that the world economy, subject as it has been to restrictive adjustments that have affected the regions with the big energy demand, has not yet shown the signs of recovery (or of avoiding a recession) that market actors would expect to see to change their negative perception of oil demand.

At the market close, on Friday, November 24, the Brent and WTI crude markers were trading at $80.58/BBL and $75.54/ BBL, respectively, the fifth consecutive week of decline. If we look at the prices of the last twelve months, to have a broader perspective of the highs and lows, the average price of Brent has remained around $82.5/BBL, which still represents an attractive price for both producers and consumers.

On a side note, the electoral victory of Javier Milei in Argentina could change the prospects of the important Shale Oil and Gas province in that country. Milei has announced plans to reduce the size of the State and the privatization of public companies, including the state oil company, YPF.  The first reaction of the markets already showed initial approval.

VENEZUELA

Political Events.

The economic and political needs of the regime have forced it to coexist with an ambiguity that is unusual for a left-wing Latin American regime. On the one hand, there is the anti-imperialist discourse of the sixties, where the US is the origin of all the evils that overwhelm us and that has led the regime to have alliances with all the countries that oppose the North Americans. On the other hand, there is the search for the liberalization of economic sanctions to be able to access the desired North American investment and its oil market, where Venezuelan barrels should earn more dollars. The active intervention of the multinational Chevron in the national economy, providing up to a third of the foreign exchange market, and the effect that its oil activity has had on production, also shows the regime navigating that uncomfortable sea between its supposed ideology and the benefits of negotiating with the “enemy”.

Another example of this double face is how the regime, while negotiating with Washington, manages to present ExxonMobil, and the president of Guyana, Mohamed Irfaan Ali, as agents of “Yankee” imperialism, allied against Venezuelan interests in their territorial claim. Even more curious is that the regime fails to mention that Chevron and the Chinese national company, preferred partners of PDVSA, are in turn partners of ExxonMobil in Guyana – perhaps it is because ExxonMobil, which in the past has sued PDVSA for expropriations of its assets, it is easier to sell as an enemy.

As the date of the referendum on the Guyana Esequiba dispute approaches, the regime tries to stir the masses by appealing to nationalism. It also becomes clear that the objective of the referendum has never been to provide elements that will help Venezuela in the territorial dispute, but rather, to use it as a divisive tool and try to mask the hard blow they received from the opposition primary elections and the continuing humanitarian crisis.

Regarding the regime's compliance with the Barbados agreements, there has been little progress. On the contrary, the regime's statements become increasingly aggressive and harsh against the accords, but we must assume that private conversations continue behind the political hubbub.

US government officials insist on the dangers of falling out of alignment with the Barbados agreements. Francisco Palmieri, in charge of the Venezuelan diplomatic mission from the United States Embassy in Colombia, maintains that: "If there is no progress on important issues by the end of the month, we cannot say that the agreement is working."

On the economic side, one cannot report any material changes related to the relaxation of sanctions. For now, most of the public expressions of the actors in the oil sector have been more aimed at positioning themselves for a possible expansion of the activity, than at proposing specific projects, except for Maurel & Prom. The regime has continued its strategy of low public spending, which has allowed them to intervene strongly in the foreign exchange market and keep the parallel exchange rate at 37 BS./$.

The president of Colombia, Gustavo Petro, visited Caracas again this week, but the issues discussed have left more questions than answers. An alliance between PDVSA and Ecopetrol, the Colombian state company, was mentioned, something that has little technical or economic basis, and that has been questioned in the neighboring country. There is talk of buying gas from Venezuela, which, at least in the short term, is more of a wish than something real.

Hydrocarbons Sector.

During the meeting organized by the Petroleum Chamber, on November 22, the vice minister of hydrocarbons, Erick Pérez, indicated: “Venezuela’s current production is 850 Mbpd.” (only 786 Mbpd are reported to OPEC). “PDVSA is making short-term production scenarios… the goal is to reach one million barrels per day, of course, that is linked to the diluents for the Orinoco Oil Belt, once we can have the diluent in volume and quality, then we could achieve that goal.”

Increasing production under current conditions is a steep hill to climb. As we have analyzed before, electrical failures, insecurity, and the regulatory and fiscal framework, among other barriers, remain unaddressed. It is curious, then, that the only limitation mentioned by the authorities is the availability of diluents, at a time in which the import of diluents is authorized and is happening in the case of Chevron and the exchanges with ENI/Repsol.

In any case, crude oil production is stabilized. The national refining system continues to have operational problems, and the attention has shifted to exports, as their real financial potential has not materialized despite the licenses.

Production: The last week of November shows the highest level of production in the last 7 weeks, 751 Mbpd, mainly due to an increase in PetroMonagas Production. The geographical distribution is shown below in Mbpd:

·      West                135 (Chevron 54)

·      East                 151

·      Orinoco Belt    465 (Chevron 82)

·      Total                751 (Total Chevron 136)

Merey 16 crude oil and DCO continue to be prepared, depending on the light crude oils available and the types of diluents.

Two drilling rigs continue to operate at PetroMonagas, and two additional rigs are close to being mobilized to the PetroIndependencia JV, where they will begin drilling early next year.

Increasing production potential, especially from a period dominated by decline, is not an easy thing, so we think that talking about 900 Mbpd of production by the end of 2024 is easier said than done.

Refining: The national refining system is processing and reprocessing 275 Mbpd of crude oil and intermediate products, resulting in 65 Mbpd of gasoline, around 75 Mbpd of diesel, and some kerosene to complete the throughput of white products.

The barely 65 MBPD per day of low-octane gasoline does not satisfy even half of the domestic demand. To try to cover this gap, imports are being used, as evidenced by the volumes received and to be received of gasoline brought by ENI/Repsol, and more recently by Chevron.

Exports: Analysts who have included the change in destination and price applicable to crude exports since the approval of General License 44, to estimate foreign exchange earnings, will have to shift their calculations until perhaps the end of the year or longer. Structuring the financial/banking framework so that the Central Bank receives these benefits has been complicated. For example, it is reported that PDVSA sold crude oil in the Shanghai market in virtual yuan, whose conversion to dollars or Euros could be complex, in which case it would have to be collected in kind.

The volumes demanded by PetroChina could have similar financial characteristics. Additionally, sales to private refiners in China (sometimes called coffee makers) have been complicated by the new price scenarios, as Russia, Iran, and Venezuela are trying to raise prices, which limits the economic attractiveness of the crudes for these low-complexity refineries.

For now, the export pattern of recent months is maintained: Chevron, ENI/Repsol, and Cuba will continue to represent volumes of 145 Mbpd, 36 Mbpd, and 25 Mbpd respectively; an incremental volume of barter with Chevron could be added. The remaining volumes, about 278 Mbpd, have to navigate this world of “traders”, banks, currencies and prices, to be marketed under better conditions than the current ones.

 

Energy Transition

The Power of the waves

 

You only have to walk along the coast on any given day and see the waves breaking against a pier or being in a boat rocking at the mercy of the sea, to realize the energy contained in the waves – anyone who has had the experience of going to a marine facility, whether in the distant North Sea or nearby Lake Maracaibo, has experienced the unpredictable fury of the Greek god, Poseidon.

 

Waves form when wind blows over the surface of open water in oceans and lakes, a physical phenomenon that begins as small surface ripples caused by air friction. This “roughness” intensifies friction, giving way to gravity waves. The higher the height of the waves, the greater the amount of energy they can extract from the wind, so positive feedback occurs. The height of the waves depends on three parameters of the wind, which are its speed, its persistence over time, and, finally, the constancy of its direction.

 

The idea of harnessing wave energy dates to the late 19th century when early inventors filed patents for wave-powered devices. In Napoleon's France, researcher Pierre- Simon Girard obtained a patent, in 1799, for a machine he and his son had designed to mechanically capture the energy of ocean waves; They thought that wave energy could be used to power pumps, sawmills, and the like. An interesting summary of the development of these ideas in 19th century Spain can be read in “The Pioneers of wave energy in Spain ”, which illustrates how the developments of solitary inventors advanced in parallel to their peers in Northern Europe.

 

The mid-20th century saw increased interest in renewable energy sources, including wave energy. In 1940, the first known patent for a wave energy device was granted to Yoshio Masuda in Japan. The device consisted of a navigation buoy powered by wave energy and equipped with an air turbine. Many people consider Masuda to be the father of modern wave energy conversion technology.

 

The end of the 20th century marked a more concerted effort to develop wave energy technologies. In the 1970s and 1980s, after the oil crises in the Middle East, several experimental wave energy projects were initiated in countries such as the United States, Japan, and the United Kingdom. The 1990s and early 2000s saw increased research and development in the field of wave energy. Several prototypes and pilot projects were implemented to test the feasibility and efficiency of different wave energy conversion technologies. Countries with significant coastlines, such as the United Kingdom, Portugal, and Australia, became key players in wave energy research and development.

 

The kinetic energy (analogous to wind energy) from waves can be harnessed and converted into electricity using various technologies. Below, we summarize some of those technologies :

 

• Point absorbers: These are floating structures that move up and down with the sway of the waves. The vertical movement drives hydraulic pumps, generating electricity.

 

• Oscillating Water Columns (OWC): OWC systems use the rise and fall of water levels within a chamber to generate air movement, which then drives a turbine connected to a generator.

 

• Attenuators: These are long, multisegmented structures that align with the direction of the waves. The segments move independently, generating electricity through relative motion.

 

• Overflow devices: These devices use wave energy to push water into a reservoir. The stored water is then released, analogous to a dam, driving turbines and generating electricity.

 

• Pelamis Wave Energy Converter: Also known as a "sea serpent," this device consists of interconnected cylindrical segments that flex with the movement of the waves, converting the movement into electricity.

 

Ocean waves contain tremendous energy. The EIA estimates that the theoretical annual energy potential of waves off the coast of the United States amounts to 2.64 trillion kilowatt-hours or the equivalent of approximately 64% of total US commercial-scale electricity generation. US in 2021. The western coasts of the United States and Europe, and the coasts of Japan and New Zealand, have potential sites to harness wave energy.

 

Wave energy has several advantages as a renewable energy source:

 

Unlike wind, wave patterns are relatively predictable, making it easier to forecast power generation and integrate it into the power grid effectively. Unlike solar and wind energy, wave energy is relatively consistent, as ocean currents and wave patterns tend to be stable over time.

 

The energy density of waves is significantly greater than that of wind, meaning that a smaller installation can generate a substantial amount of electricity. Additionally, wave energy converters are often located offshore, reducing their visual impact on landscapes, and minimizing conflicts with other land uses.

 

While wave energy holds great promise, some challenges and limitations must be addressed for its widespread adoption:

 

• Developing reliable and cost-effective wave energy converters is a complex task that requires advances in materials, engineering, and technology.

 

• The harsh marine environment poses challenges for the durability and maintenance of wave energy devices as they must resist corrosion, biofouling, and extreme weather conditions.

 

• The initial costs of installing wave energy infrastructure can be high, making it difficult to achieve widespread adoption.

 

• The installation and operation of wave energy converters can have environmental impacts, including alteration of marine ecosystems and possible effects on coastal erosion.

 

In sum, as the world faces the urgent need to move away from fossil fuels, wave energy represents a promising avenue for clean and sustainable energy generation, offering numerous advantages such as predictability, consistency, and high energy density.  Harnessing the energy potential of the oceans significantly is today an almost utopian goal. The projections that the IEA makes of its growth in its Net Zero 2050 scenario seem unattainable today. However, as technology continues to advance, addressing challenges such as technical complexity and high upfront costs, wave energy, along with wind, has the potential to play an important role in the global transition to an energy future, more sustainable.

LOWER OIL PRICES, INERTIA OR MYOPIA?

  El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA   

M. Juan Szabo and Luis A. Pacheco

Oil prices continue to show polite indifference to geopolitical risks and the tightness between supply and demand. For the fourth consecutive week, crude oil prices closed lower than the previous week and dropped to their lowest level since July.

In the USA, the combination of unflattering economic data, ambiguous oil inventory reports, and a cooling labor market pointed to a possible reduction in energy demand. And while both OPEC and the International Energy Agency (IEA) revised their oil demand forecasts, citing record Chinese consumption and resilient economies, oil market participants focused on rising crude oil inventories in the United States and record American oil production, reinforcing the negative sentiment that dragged down oil prices.

On the other hand, the multiple geopolitical flashpoints, risky as they are, are not moving the prices up. The Israel-Hamas war, the Russian war on Ukraine, Iranian-origin attacks against US military targets in Syria and Iraq, and Hezbollah and Yemen's Houthi firing missiles and drones at Israel do not appear to be on the market’s radar. All these armed conflicts, limited to their region, constitute a high-risk situation in which any miscalculation, in one or more of them, could trigger a confrontation that would seriously affect the supply and transportation of crude oil and products.

A possible explanation for this strange market reaction is the presence and interests of the two superpowers, the US and China, which, particularly in this situation, have overlapping interests, for different reasons. It is in China's interest that supplies from the Middle East and Russia are not affected, as they are the source of much of its hydrocarbon imports. On the other hand, the US wants to avoid at all costs a reduction in global supply to avoid, less than 12 months before the presidential elections in that country, shocks in domestic prices. For now, these countries have become the guarantors of supply stability in the region, reducing the risk of interruption, which manifests itself as a reduction in the geopolitical risk premium that the market should be including.

Nevertheless, military activity in the region continues to intensify. There was an intense exchange of missiles from the Golan Heights between Hezbollah and Israel. A US destroyer shot down a drone aimed at Israel originating in Yemen. The epicenter of the activity is in the north of the Gaza Strip, where Israeli forces are searching for and finding underground shelters and weapons depots in hospitals and schools.

The crude oil and product inventory reports in the US, reported by the EIA in its first publication after having updated its technological platform, indicate a significant increase in crude oil inventories, accompanied by drops in oil products stocks – in a magnitude similar to the growth of crude oil. Normally, a rise in crude oil inventories indicates a fall in demand, but a fall in product inventories points in another direction; an alternative explanation is that there is a bottleneck in refining, which is not the case since the percentage of refinery utilization has not changed – we will have to wait for the new information platform to stabilize.

The meeting between the presidents of the US and China in California, the first in a year, was the most anticipated political event of the week. The meeting was held under very particular circumstances. It is not only the tense geopolitical situation but also that both leaders, Biden and Xi, came to the meeting facing complex domestic problems. In Xi's case, China's economy has not shown the expected recovery, and this weakness has created social tensions that Xi now has to manage, not to mention rumors of purges in the upper echelons of the communist party. In the case of Biden, the president faces high disapproval from the electorate and is dealing with two wars, Ukraine, and the Middle East, which do not have easy solutions. Although the conflicts are not his making, managing them is becoming a budgetary and political problem. We must add to the mix China's claims over Taiwan and sovereignty over the China Sea.

The two leaders discussed various thorny issues, including wars in Ukraine and the Middle East. Biden would like to see China use its influence with Iran to prevent the Israel-Hamas war from widening, and he was expected to press Xi to use his leverage to stop North Korea from supplying weapons to Russia.

At the end of the meeting in California, there was no joint statement or joint appearance before the press, and the modest agreements that were publicized made it clear that their fundamental interests and objectives were very different. President Xi described it succinctly by saying, “Planet Earth is big enough for the success of the two countries.” The Chinese media was very positive about the meeting, even though Biden, in a press conference after the meeting, called Xi a dictator.

The State Department announced that in the meetings it had reached an agreement with its Chinese counterparts in which they committed to "accelerate the replacement of coal, oil and gas in electricity generation" with green energy sources such as wind and solar. But this agreement, in which both nations also committed to "sufficiently accelerate the deployment of renewable energy in their respective economies through 2030," was criticized by experts for its possible impact on US consumers. For one, China rarely complies with international agreements, and that country would benefit inordinately from said agreement since it controls much of the world's green energy supply chain.

OPEC+ has not revealed the considerations to be discussed at its next meeting, but rumors spread on Friday that some OPEC members are pushing for deeper cuts at the Nov. 26 meeting in Vienna, although Saudi Arabia will likely require credible commitments from other members on production and meeting quotas before taking any action.

However, the market is betting that OPEC+ will not extend production cuts. We believe that OPEC+ will not have the need or temptation to increase its cuts. In its monthly report, the cartel slightly revised its 2023 oil demand growth forecast by 20,000 barrels per day (bpd) from last month's estimate, and now forecasts that global oil demand will grow this year by 2.5 million barrels per day, thanks to upward revisions to China's oil demand in the second half. By 2024, global oil demand is expected to grow by a healthy 2.2 million bpd.

However, if prices remain close to or below $80/BBL (Brent), Saudi oil minister Prince Abdulaziz would be eager to pull another “trick” out of his hat and catch off-guard the financial actors who liquidated long positions to go massively “short”, whom he accuses of speculative ploys.

In the same vein, some analysts maintain, and may have convinced the market, that the US will continue to increase its production despite the reduction in drilling rigs, which are down to 618 units - a drop of 164 in the last twelve months. However, we are of the idea that there has not been such sustained growth, but rather a maintenance of the “status quo” with an average crude oil production of 12.1 MMbpd this year (13 MMbpd including condensates). The theory of continued growth based on drilling efficiency, now that the DUC inventory (wells drilled but not completed) has essentially been exhausted, does not have much support until the benefits of the synergies of the recent mergers (ExxonMobil-PIONEER and Chevron-Hess) begin to develop their investment plans.

Thus, during the week, prices reacted to very specific actions: 1) the liquidation of positions in the futures market, largely caused by the sharp increase in crude oil inventories in the US, and 2) concerns about demand growth.

Already into Friday, there was a significant recovery in prices as market fundamentals remain solid: demand of almost 103 MMbpd, while supply, including a recent increase of 320 Mbpd, barely reaches 101.8 MMbpd, an imbalance of 1.2 MMbpd. OPEC and the IEA agree in forecasting growth in demand, although they differ significantly in the growth rate and its persistence over time.

Thus, at the market close, on Friday, November 17, Brent Crude was trading at $80.61/BBL, while WTI was trading at $75.89/BBL, another strange and downward week.

 

VENEZUELA

Political Events.

The Venezuelan political environment continues to cause unease. The regime focuses its attention on two issues: 1) the understanding of what it means to comply or not with the Barbados and Doha agreements, including the warnings issued by the White House about the duration of the recently granted licenses; 2) the border dispute with Guyana and the litigation that the neighboring country is pursuing in the International Court of Justice. Both issues seem to have little political momentum, but the regime uses them to distract its followers.

In the first case, Maduro and his chief negotiator, Jorge Rodríguez, are proposing a kind of poker game with the White House to find out whether they are “bluffing.” Both parties have a great interest in ensuring that things do not get out of control. The US requirements are relatively simple. On the one hand, they demand that all opposition candidates (María Corina Machado, who is leading the polls) be qualified for the 2024 elections; to be exact, the Americans say that there must be an active process for qualification before the end of November. On the other hand, they demand that political prisoners, including US citizens, be released.

Both of these were part of the conditions agreed upon in the context of the Barbados agreements and subsequent OFAC licenses. At that time, the signatories did not expect the level of participation or results of the primaries, which ended up surprising the regime, the opposition, and the White House negotiators.

The regime may end up complying with what was agreed in terms of releasing some political prisoners, but we do not see any openness regarding the lifting of the disqualifications, at least regarding María Corina Machado, given the high level of approval that she has generated in all sectors of the population.

The regime is counting that the US, despite all warnings, is not willing to reinstate sanctions to the status before October 18 of this year. The reality is that General License 44 and the negotiations on illegal migrants partially solve two problems for the White House: 1) the deterrent effect on the continued flow of emigrants, by agreeing to repatriate illegal emigrants to Venezuela, a process that is already underway, and 2) some incremental crude will reach the US market. If the US keeps its threats fuzzy (despite the continued mention of November 30 as a breaking point), the regime will continue to buy time and benefit from additional oil revenues.

If the US decides to dismantle the licenses granted, it will probably do so by non-renewal, which allows the regime to use the incremental funds over the next six months to finance its political campaign. The US has the tools to apply pressure but has doubts as to the usefulness of using them – in a few days, we will be able to clarify what the US position is.

Regarding the border dispute with Guyana, the regime tries to hide the responsibility that falls squarely on President Chávez, who neglected to act timely on the territorial dispute with the neighboring country. In 2005, the then-president of Venezuela visited Georgetown and promised not to interfere in development activities in disputed areas.

Now, with the referendum scheduled for December 3, the regime is trying to rewrite history and appear, to the Venezuelans, as the defender of the country's sovereign rights, when it is its years of inaction that have led to the present crisis.

In the economic sphere, the policy of intervention in the currency market, thanks in particular to the role of Chevron, has been successful: the exchange rate remains at levels of 37 Bs/$ for the parallel dollar. We will see if the diversion of shipments to markets with better yields compensates for the decline in prices.

Hydrocarbons Sector.

The operational activity had mixed results. Crude oil production remained constant but refining and exports have been affected by the changes in marketing strategies permitted by LG 44.

Production: The average crude oil production this week was 746 MBPD, very similar to October and the first days of November. The geographic distribution is shown below in MBPD:

·      West                            134 (Chevron 54)

·      East                             151

·      Faja del Orinoco          461 (Chevron 80)

·      Total                            746 (Total Chevron 134)

The small reduction in the Orinoco Belt is the result of operational problems of diluent handling. Merey 16 crude oil and DCO continue to be produced, depending on the light crude oils available and the types of diluents.

Two drilling rigs continue to operate at PetroMonagas, but incremental production barely offsets the field's natural decline.

Refining: The volumes of crude oil and intermediate products processed in national refineries have suffered little change, stumbling because of the availability of processing plants.

However, the gasoline situation is changing significantly due to the arrival of imported gasoline and gasoline components. Indeed, a tanker arrived at the Amuay refinery to unload about 250 MB of these products, as part of the barter agreement with ENI/Repsol. It is also announced that Chevron will bring a similar cargo to be unloaded in El Palito, complementing a cargo of 540 MB of heavy gasoline unloaded in Jose. These imports will be mixed with domestic gasoline to maximize availability. In evidence of the latter, two Cuban tankers with gasoline were dispatched to that island.

Exports: Chevron continues to be consistent in exporting around 145 MBPD of crude oil. The rest of the exports correspond to crude oil in barter with Europe, about 36 MBPD, and the volumes sent to Cuba, about 26 Mbpd. The rest of the exportable crude oil, which until recently was sent to China through the tortuous paths of intermediaries, has had multiple suitors. Several of the large trading houses with access to tankers have made offers to PDVSA to export directly to the markets of their preference. The information has been very scarce, but the difference in the prices that PDVSA would receive is important. It remains to be seen how the system used for sanctioned crude oil is replaced by a more transparent one. 

OFAC LICENSES OR OIL PRODUCTION AS MAGIC

 El Taladro Azul  Published  originally in Spanish in LA GRAN ALDEA   

M. Juan Szabo and Luis A. Pacheco

With few exceptions, most Venezuelan politicians have never been interested in trying to understand the operational, commercial, and geopolitical complexities of the oil industry; a curious behavior given the critical dependence of the national economy and its governments on the ups and downs of that industry. They have mostly thought of it as an activity akin to the opening and closing of a tap of an underground stream of black gold. 

This oversimplification, a product of the lack of real interest beyond the income they enjoyed from oil, has resulted throughout our history in decisions aimed more at adding to the political interests of the governments in power than at the development of a modern industry, that could compete in the difficult international market whilst being interwoven with the national productive apparatus, like Norway or Texas, just to name the best-known examples. Perhaps the closest that the political establishment has come to designing an oil industrial policy, in the post-nationalization era, was when they decided not to oppose (rather than support) the Oil Opening in the nineties, pressured as they were by the current economic and fiscal crisis of the time.

Nothing that happened in the 20th century compares to the ignorant recklessness of the oil policy of the government of President Hugo Chávez Frías, who made a concerted effort to make the oil industry, and in particular PDVSA, a partisan instrument. To control and subjugate the state company, PDVSA, Chávez created a continuous crisis since his access to Miraflores, which ended with the dismissal of more than eighteen thousand employees, including managers, technicians, and administrative staff in 2002-2003 – we are sure that the crisis had other solutions. Little did Chávez understand, or care, that with his actions he was compromising the future, not only of the company but of the country.

Later, now under partisan control of PDVSA, and for the same reasons, Chávez expropriated contracts, assets, and operating companies. The repercussions are still being felt in the precipitous drop in crude oil production and products, the financial crisis, and the destruction of PDVSA's moral and operational fabric: “It killed the goose that laid the golden eggs,” as the saying goes. None of his advisors understood the complexities of the hydrocarbon industry or in the worst case they did, but they cared little, again politics above national well-being.

In this same order of ideas, currently, there is a belief in Venezuela, shared by some businessmen, analysts, politicians of the regime, and a significant number of members of the political opposition, that a random political decision, in this case, the temporary liberalization of OFAC economic sanctions, constitutes a kind of magic wand, which in combination with the appropriate incantation, will result in an increase in oil and gas production to levels that only the imagination of believers can limit.

But let's not believe that this new version of “El petróleo sale solo” is limited to our latitudes. Judging by certain statements from Washington, there are also those in the north who subscribe to this chimera and sell it as a real possibility to the tenant of the White House.

In part, this belief is based on the recent history of Chevron's activities in Venezuela. Since OFAC granted General License 41 at the end of November 2022, to allow Chevron to resume its operations in Venezuela, it seems they found a way to contradict those who do not believe in magic.

General License 41, coupled with a contract that has not been made public between the North American operator and PDVSA, allows Chevron to operate the joint ventures in which it participates (PetroBoscán, PetroIndependencia, PetroPiar and PetroIndependiente), and also allows for the crude oil produced in them to be sold in the USA market; what Professor José Ignacio Hernández has called a de facto privatization of PDVSA.

When it was evident that license 41 was in the process of being issued, Chevron closed production at the Boscán Field, citing market and storage limitations. It was a legitimate strategy to enhance the results of the activities authorized under the new license, and thus show an almost doubling of production from 70 MBPD in October 2022 to 130 in March 2023, although the bulk of the difference corresponded to the simple reopening of the Boscán field. The rest of the growth came from the reconditioning and maintenance of the fields with the efficiency of Chevron and not the inefficient bureaucracy of the JV managed by PDVSA. From that date until today, only about 12 new MBPD have been added to the production of Chevron's JV in Venezuela.

This “success” of license 41 has underpinned the belief that OFAC licenses can, like a “magic wand,” make the oil industry revive. Without entering into the discussion about the effect of the sanctions on the Venezuelan oil industry – a sterile discussion – the truth of the matter is that something more than a lifting of sanctions is needed to return to some form of healthy growth. The destruction of the oil industry is a consequence of many other things. Let us remember that crude oil production has been in decline since long before the sanctions and the factors that caused this disaster are still present.

The boundary conditions that determine the oil operation, which have nothing to do with OFAC sanctions, such as reliable electrical supplies, presence of armed gangs and guerrillas in the national territory, vandalism, corruption, and legal uncertainty, stand today, as before, as an insurmountable obstacle in the path to recovery. Furthermore, the present institutional and fiscal oil arrangement makes Venezuela one of the least attractive oil provinces for investment by international operators. Without substantive changes in those boundary conditions, which will take time and real political change, which today is still only a hope, the magic is unlikely to work, despite the easing of sanctions.

If we analyze the different combinations of political/economic events and overlap the different directions that the liberalization of sanctions may take, we can outline four well-defined scenarios, that should illustrate the difficulty facing the attempts to recover the oil industry.

The most pessimistic scenario, called “Mas de lo Mismo,” (More of the Same) is characterized by continued political instability, resulting from the actions of an unpopular and inefficient regime trying to cling to power, which precipitates the cancellation of OFAC licenses, with production of oil continuing to slip. The “Crisis Recurrente” (Recurrent Crisis) Scenario corresponds to a negotiated and slow transition, to avoid the licenses from being revoked, but the effect is muted because those who can invest in the recovery continue to perceive a very high country risk. Crude oil production has a slight rebound.

The “Gatopardo” (Leopard) scenario, in which a political transition materializes, but without the political consensus that is required to break with dogmas about state control. Some sectors insist on not modifying the current institutional framework and cling to the statist idea of recovering the industry via PDVSA, today financially and operationally bankrupt. This will tend to empty the State coffers and limit the growth of hydrocarbon production well below its real potential.

Finally, the scenario called “Nuevo Horizonte” (New Horizon), where the political, institutional, and fiscal changes are made, and the industry is energized by the participation of national and foreign private capital. In this scenario, in a reasonable period (say 8 years), production returns to the levels it had twenty years ago – after an investment of around 100 billion US dollars - which will be large-scale sorcery.

As an illustration, we show in the graph that follows the crude oil production levels corresponding to each of these scenarios. In the curves, we can see that the licenses alone have a short-term effect if it is not coupled with the changes that we already mentioned.

 

These scenarios, rather than predictions, are educated guesses to communicate that for “magic” to work, conditions are needed that do not exist today.

The combination of the lack of institutions, governance, and transparency, coupled with the widespread idea that recovering the oil industry is a matter of granting a few licenses, is a true disgrace for Venezuela, as it creates a mirage that will disappoint. Suppose we add the belief of certain international actors that Venezuela can, without structural political change, become a crucial piece in the international oil chessboard. In that case, we lose one of the greatest levers that exist today for the recovery of democracy.