EL TALADRO AZUL Published originally in Spanish in LA GRAN ALDEA
07/11/2023
M. Juan Szabo and Luis A. Pacheco
In a week during which there was an avalanche of news that “normally” moves oil prices, the oil market seems to have had barely the time to process it and assimilate the implications. In the end, what appears to have influenced the price movement is the perception that the Israel-Hamas conflict appears to be contained, with sporadic clashes with Hezbollah in the Golan Heights. This, together with some economic figures, moved the crude oil markers downward.
Hostilities in the Middle East have been concentrated in the northern part of Gaza. The Israeli army has surrounded a good part of the Hamas militias and is trying to destroy part of the network of tunnels under the city. To the south of the strip, the evacuation of refugees is being allowed, on a restricted basis, through the Rafah crossing, controlled by Egypt. The export of gas to Egypt from Israel's Tamar field has also been reactivated. So the geopolitical risk premium that had been added to the oil price since the beginning of the conflict has all but vanished. The market is taking this conflict calmly, since, for now, it does not seem to carry disruption or significant changes in either supply or demand.
However, the danger of escalation remains latent. Hezbollah leader Syed Hassan Nasrallah, in a televised statement, claimed that his militia is engaged in cross-border fighting with Israel, warning that further escalation on the Lebanese front is a real possibility. However, he did not make a declaration of war against Israel and sought to separate Iran from the initial attack. The US has warned Hezbollah, and its main sponsor, Iran, not to get involved in the fight, and maintains the presence of its warships in the Mediterranean as a deterrent.
Meanwhile, in the US, the release of US employment data showed weaker-than-expected job creation and a slight rebound in the unemployment rate from 3.8 to 3. 9%, the oil futures market showed a drop again. China's economy expanded at an annual rate of 4.9% between July and September, beating analysts' forecasts of around 4.5%, official data show. But that was much slower than the previous quarter's 6.3% annual growth rate.
Other news, which usually affects market sentiment, went almost unnoticed. We are referring to the decisions of the Central Banks of the USA and England to maintain interest rates at their current levels, indicative of caution against a possible recession, especially in England. Brazil's central bank cut its benchmark interest rate by 50 basis points on Wednesday, for the third consecutive time, and once again signaled more of the same for its upcoming meetings, but also warned of an "adverse" external context for emerging economies.
Data related to crude oil demand and supply has been mixed. On the demand side, crude oil and product inventories in the US showed a slight increase, and the recovery of the Chinese economy gave signs that it was slower than expected. Overall, global economic growth, with marked exceptions, appears to languish in response to monetary restrictions. On the supply side, OPEC shows a modest increase in production: 27.90 million barrels per day (bpd), according to Reuters, 180,000 bpd more than in September. However, when including the partners in what we generically call OPEC+, the situation is different and shows a small reduction. For their part, Saudi Arabia and Russia have announced that they will comply with planned oil cuts, even amid tension in the Middle East.
Meanwhile, US production remains essentially constant at 12.7 MMbpd, despite the EIA reporting record levels of 13.1 MMbpd. Regarding drilling activity, the situation is not very different from previous weeks: according to Baker Hughes, in the US the reduction in the active fleet of drills continues, this week 7 additional units were paralyzed. The paradox of fewer drills and more production is explained by some experts as an increase in efficiency, and by others, as a different way of accounting for condensate.
In the rest of the world, some important countries, such as Saudi Arabia, UAE, Algeria, Libya, and Norway, are activating units, with a net total of 22 additional drills internationally.
Other market factors, that in a less complex scenario will impinge on oil prices, appear to be passing under the market's radar. The relative weakening of the US dollar and the approval by the US House of Representatives of a bill to toughen sanctions on supporters of Hezbollah and Iran, whose crude exports have rebounded under the indulgent gaze of the Biden administration, are mooted by the flood of news.
Thus, crude oil prices, after a week with a lot of volatility, reached the market close on Friday, November 3, with an unexpected drop for the second consecutive week. Brent Crude was trading at $85.23/BBL at the close, while WTI was trading at $80.89/BBL.
Crude oil prices are today below levels before the Hamas attacks on Israel, which raised concerns about a broader regional conflict that could impact oil supplies from the Middle East. We think that this scenario is still on the map of possibilities.
ENERGY TRANSITION
Nuclear Energy. The Power of the Atom versus the Fear of Humanity
Nuclear power has been a controversial energy source since its inception in the 1950s. On the one hand, nuclear power plants generate electricity without emitting greenhouse gases, like fossil fuel plants. On the other hand, concerns about safety and radioactive waste have limited the growth of nuclear energy globally. There are pros and cons of using nuclear energy that must be carefully weighed as we plan for society's future energy needs.
The history of nuclear energy begins at the end of the 19th century with the discovery of radioactivity by Henri Becquerel, a French physicist, in 1896. Thus begins nuclear physics, which seeks to understand the properties of atomic nuclei. In 1905, the German physicist, Albert Einstein, published his revolutionary theory of special relativity. This laid the foundation for the famous equation E=mc2, which he proposed in a paper later that same year. This equation shows that mass and energy are interchangeable: a small amount of mass can be converted into an immense amount of energy, the theoretical basis for the possibilities of nuclear energy.
In 1932, British physicist James Chadwick discovered the neutron, which revealed the potential of nuclear fission: splitting atomic nuclei to release enormous amounts of energy. From 1939 onwards, Einstein's theories helped inspire other scientists to begin exploring nuclear chain reactions. This research eventually led to the development of nuclear reactors and atomic bombs during the Manhattan Project in the 1940s.
After World War II, attention focused on civilian applications of nuclear fission. In 1954, the Obninsk Nuclear Power Plant in the USSR produced electricity for commercial use from a nuclear reactor for the first time. Just three years later, the Calder Hall plant opened in the United Kingdom as the first large-scale nuclear power station to feed into a public electricity grid.
During the 1960s and 1970s, nuclear reactors were rapidly built around the world, especially in the United States, Canada, the United Kingdom, France, and Japan. Nuclear power was considered an abundant source of constant and reliable electricity to meet growing demand. However, some major accidents, notably the merger of Three Mile Island in 1979 in the United States, began to shake public confidence in nuclear safety. This concern increased exponentially after the Chernobyl disaster in Soviet Ukraine in 1986, still considered the worst nuclear accident in history. In the 1990s, the growth of nuclear energy slowed substantially in many countries due to economic factors and public opposition. However nuclear technology continued to advance, and new reactor designs focused on efficiency and safety.
Nuclear energy is based on the process of nuclear fission: atoms split to release enormous amounts of energy. This occurs inside the reactor core of a nuclear power plant. The core contains Uranium-235 fuel rods immersed in water. Uranium atoms split when bombarded by neutrons. These neutrons collide with other U-235 atoms, causing them to split in a chain reaction. Each fission releases 200 MeV (1 MeV = 10 6 eV = 1.6 x 10 -13 Joules) of energy—It's not much, but of course, elementary particles are quite small. The heat energy thus generated is used to heat water and convert it into steam, which spins a turbogenerator to produce electricity. After passing through the turbine, the steam is condensed back into water and recycled through the plant.
The chain reaction is controlled by control rods, which absorb excess neutrons. The water circulating the core also regulates temperature. In the case of a shutdown, all control rods fall completely into the core to stop fission. The remaining heat is removed by the circulation of coolant.
The main advantage of nuclear energy is its ability to reliably generate large amounts of continuous electricity. Nuclear power plants do not depend on variable sources such as wind or sunlight, giving them capacity factors of 90% or more. This means that they can operate 24 hours a day, constantly and at almost full power. In contrast, renewable sources like solar and wind can only generate electricity 10 to 30 percent of the time. Nuclear power is also extremely energy-dense: the amount of electricity produced from a given amount of fuel is much greater than that from any other source. For example, a uranium pellet the size of an eraser can produce as much energy as 149 gallons (0.56 m³) of oil. With finite supplies of fossil fuels, uranium provides a more sustainable long-term energy solution.
The risk of accidents is very low, and modern reactor designs have multiple safety systems. Death rates from nuclear power accidents are orders of magnitude lower than deaths from coal, natural gas, hydropower, and even solar and wind power (per unit of electricity generated).
The downside is that nuclear waste disposal remains a challenge. Spent fuel rods contain radioactive isotopes with long half-lives, requiring insulation for thousands of years. No country has yet established a permanent repository for this waste. Current protocols involve in situ storage for years, which are then buried at great depths. Critics argue that this is simply passing the problem on to future generations. More research into reusable fuel cycles and breeder reactors could help mitigate the waste problem in the long term.
Nuclear proliferation is another common concern: that greater access to nuclear technology could lead to the development of nuclear weapons. However, modern reactors have built-in safeguards, such as low-enriched uranium fuel, that make diverting material for weapons nearly impossible; although these safeguards are not insurmountable.
The high initial costs of building nuclear plants also limit their adoption, as one plant can cost between $5 billion and $9 billion. However, once built, they have low fuel and operating costs and have a useful life of 40 to 60 years. Political incentives such as loan guarantees and tax credits have been aimed at facilitating financing. Some next-generation reactor designs are also designed to be smaller and cheaper.
Nuclear power today supplies around 10% of the world's electricity, led by the United States, France, and a growing nuclear workforce in China. However, the Fukushima nuclear disaster in 2011, following a tsunami in Japan, reminded the world of the risks if things go wrong. The use of nuclear energy remains controversial. However, it still generates huge amounts of carbon-free electricity in many countries. With concerns about climate change rising, some see nuclear energy as making a comeback thanks to its role as a stable source of clean energy.
In terms of environmental impact, nuclear energy has advantages and disadvantages compared to fossil fuels. It does not emit greenhouse gases, but uranium mining and enrichment do require energy. Nuclear power plants also use large amounts of water for cooling. However, new reactors can reuse and recycle water to reduce consumption. In general, nuclear energy has a much smaller water and land footprint than alternatives such as coal or natural gas.
According to the International Energy Agency (IEA), Nuclear energy, with around 413 gigawatts (GW) of operational capacity in 32 countries, contributes to the mitigation of climate change. It avoids 1.5 gigatons (Gt ) of global emissions and one hundred and eighty billion cubic meters (bcm) of global gas demand per year.
In short, nuclear energy is a complex issue with reasoned arguments on both sides. Atomic energy provides abundant and reliable electricity, without carbon emissions. But challenges around waste, security, costs, and weapons proliferation remain obstacles. As with most problems, there are trade-offs. But nuclear technology continues to improve, and most experts agree that nuclear power will have to play some role in a carbon-free energy future. What that balance will be remains an open question. Any long-term smart energy strategy will likely involve a diverse mix of generation sources, including new nuclear power, to ensure affordability, reliability, and sustainability as we work towards a net-zero CO₂ society.
VENEZUELA
Political Events.
The political/economic debate in Venezuela continues to grapple with the overwhelming results of the opposition primary elections on October 22. The regime, taken by surprise, has started a campaign to try to delegitimize the most democratic act in recent times. It began with judicial persecution of the organizers of the primaries, followed by the actions of the Electoral Chamber of the Supreme Court of Justice of Venezuela. The Court ordered the suspension of the results of the elections organized by the National Commission of the Primaries, where the candidate María Corina Machado was selected. National and international reactions have been one of rejection of these acts, not only because of their legal inconsistency but because, in general, they are considered a violation of the spirit of the recent agreements signed in Barbados.
The alleged violations of the agreements raise a series of questions about the real intentions of the Nicolás Maduro regime and its ability to comply with what was agreed. And, about the firmness of the reactions of the US authorities to these violations. Let us remember that the cornerstone of the Barbados agreements is the liberalization of sanctions by the US government in exchange for progress in achieving free, transparent, and verifiable elections.
As announced by the Secretary of State, Anthony Blinken, his administration will evaluate, before the end of November, the compliance of the Venezuelan regime with what was agreed in Barbados. And will consider whether it should act regarding the licenses as a pressure measure to maintain the course of the democratic route. We must not forget that the US is not a signatory, but it does have the key to the North American oil market.
The Biden Administration has several possible ways to react. From the most extreme, canceling all licenses as of December 1, which seems unlikely, to the non-renewal of GL44 (the license that deals with hydrocarbon activities) after six months. Even considering the importance that the Biden administration assigns to the potential effects of Venezuelan illegal migrants and Venezuela as a crude oil supplier, one could think of a simple reprimand to be an expedient solution; we must wait for what role the opposition plays, now with MCM as leader, in these negotiations.
The flexibility contained in GL44 has resulted in an unusual interest in lifting Venezuelan crude oil. US refiners would be interested. PetroChina made an offer to acquire 8 MMbbls/month. India wants Venezuelan crude if it's cheap enough (who doesn't?). Also, some intermediaries interested in continuing their business with PDVSA, and companies that want to participate in the barter of crude oil to reduce debts, have expressed interest.
However, given the state of the Venezuelan oil industry, there is a finite number of barrels to market after meeting the volumes that Chevron allocates to the US — to be precise there would only be around 350 MBPD if the regime is willing to end shipments to Cuba and local refineries remain handicapped.
The investment necessary to restore the industry to some semblance of normality has not reacted with the same dynamism as commerce. Until now there has been little interest in investing in the oil sector by PDVSA's partner companies in Joint Ventures (EM); except for Maurel & Prom, who announced their intention to increase production at the Petroregional del Lago EM.
Hydrocarbons Sector.
The month of October was very particular, even within the particularity of Venezuela. As a result of maximizing exports in September, to generate additional cash, October exports fell below our forecasts. Inventories were depleted and some cargo commitments scheduled for that month could not be met: dozens of tankers are anchored around the José terminal waiting for oil.
Baker Hughes reports that active rigs in Venezuela increased to two, presumably due to the return of the second rig at PetroMonagas after major maintenance.
Production: After averaging 746 MBPD during October, the month of November began with the same numbers, but with a slightly different geographic distribution, as shown below:
· West: 134 (Boscan 54)
· East: 151
· Faja del Orinoco: 461 (Chevron 80)
· Total: 746 (Chevron 134)
Chevron's production reached 134 MBPD. The PetroPiar upgrader started up again and is the only one of the four that “upgrades” crude oil from the belt, producing Hamaca Crude. The other upgraders are in operational mode of mixing Merey Crude or DCO, producing intermediate products, or completely out of service, as is the case of the PetroSanFelix upgrader.
Refinement: The largest refining complex in the country, the Paraguaná Refining Complex (CRP), is processing just 130 MBPD, due to a fire in one of its distillation towers: This level of processing is considered severely suboptimal, with several of its units processes out of service: the two catalytic crackers, among others. At the El Palito refinery, even the distillation unit is undergoing maintenance, and only processes intermediate products received from other refineries. The Puerto la Cruz refinery has increased its processing level to 90 MBPD of light crude oil, which in turn limits the production of Merey crude oil. Gasoline shortage persists throughout the national territory.
Exports: October exports closed with a lower average than estimated, since at least 3 October shipments had to be rescheduled due to lack of crude oil. The month's export ended at an average of 480 MBPD of crude oil, of which 149 MBPD correspond to volumes destined for the US, managed by Chevron; 266 MBPD were destined for the Asian market, with destination China; 36 MBPD were exchanged for fuel and debt reduction, and 29 MBPD were sent to Cuba.
The volume of crude oil exported to the US through Chevron is the sum of 50 MBPD of Hamaca segregation, 53 MBPD of Boscán segregation, 28 MBPD of Merey 16 segregation, and 18 MBPD of DCO crude oil. About 40 MBPD of products were also exported mainly residual fuel.
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