El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
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.
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