El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
The first two weeks of 2024 have seen a continuation of the geopolitical risks that the conflict between Israel and Hamas introduces to the Middle East region, which raises the probability of disrupting oil and gas supplies from this part of the world.
The escalation of tensions, both in the Red Sea and the Persian Gulf, led the US and the UK to intensify their attacks against Houthi positions, under the umbrella of the so-called “Guardian of Prosperity” operation. Indeed, the US and the UK, with logistical collaboration from other countries, attacked the Houthis' military infrastructure in Yemen on Thursday night and then again on Friday, specifically targeting radars missile launch sites, and drones, in response to increasing attacks on commercial and military vessels, creating anxiety and disrupting global trade. The Houthi response, as expected, was defiant, announcing more attacks and warning that "all US and UK interests have become legitimate war targets." The Houthis also chose to ignore the UN Security Council resolution, demanding an end to attacks on shipping.
Further raising regional tensions, the Marshall Islands-flagged US oil tanker, the St. Nikolas, carrying Turkish-owned Iraqi crude, was seized by the Iranian navy in the Gulf of Oman in retaliation for the seizure, by the US, of 1 million barrels of Iranian oil last year.
The deteriorating security situation in the area spurred several tankers to divert from the Suez Canal. The Danish shipping company, TORM, joined the ranks of European companies that avoid transiting the Red Sea. So, the geopolitical risk premium once again raised oil prices and freight rates for all types of vessels. While the shipping industry is leaning toward avoiding navigation through the Bab el Mandeb Strait, the effects on the oil industry (and even more so on liquefied natural gas) are just beginning to be felt and could get worse.
Global maritime trade represents most international transactions and has been exposed recently to a growing number of conflicts. It is enough to remember the problems caused in the Black Sea, by Russia's invasion of Ukraine, to the transportation of oil, grain and the destruction of assets; Chinese threats to transit in the South China Sea; the multiple threats by Iran to close transit through the Strait of Hormuz; the attacks against underwater gas pipelines in the Baltic Sea and the attacks by pirates on the coast of Somalia. If international cooperation does not guarantee free transit in international waters, the world economy will suffer serious consequences.
If Israel's war with Hamas continues to escalate, with the involvement of Iranian-backed rebel groups, all regional maritime trade could be impeded; a script that sows anxiety in the market players. In its typical “I didn't do it” stance, Iran condemned Western allies' attacks on Houthi bases, warning that it fuels "insecurity and instability" in the region. The Ministry of Foreign Affairs of Iran stated that "These attacks are a clear violation of the sovereignty and territorial integrity of Yemen, and a violation of international law", and called on Western powers to seek a ceasefire in Gaza, which they say is the source of instability.
The ripple effects of the war between Israel and Hamas raise the risk of plunging the region further into an expanded conflict and dragging Washington into the kind of military action it has wanted to avoid, especially in a presidential election year. The response of Iran, which until now has been reluctant to become directly involved in a conflict with the US, is the dominant variable. If its stance were to change, it could impact oil supplies and potentially drag the region into a general conflagration with serious consequences. However, although the market seems more nervous than at the end of 2023, it seems to think that the probability of the conflict extending is still very low. In any case, what is at stake in this scenario is the partial or total interruption of the transport of around 12% of the total oil marketed by sea, and 8% of LNG shipments; volumes transiting through the Suez Canal.
On the other major war front, Russia/Ukraine, which is almost two years old, there is stagnation on the military front, except for some Ukrainian advances in Crimea, while Western support for Ukraine appears to be weakening. The US has suspended military aid to its ally, pending Congress approval of additional funding and aid; Some analysts think that the Biden administration, given the dynamics of its re-election and other military obligations, such as the conflict in the Middle East, could stop supporting Ukraine with the same enthusiasm.
All of this works in Putin's favor and weakens the Biden administration. This new situation could push Ukraine to negotiate with Russia and indirectly to the eventual regularization of oil and natural gas movements of Russian origin – a situation that is still uncertain.
Regarding oil fundamentals, despite several publications predicting a situation of surplus supply, our analyses indicate that demand continues to grow: it currently stands at 102.1 MMbpd; while supply, also increasing, remains below that demand: it currently stands at 100.9 MMbpd, even factoring in the additional 130 MBPD produced by OPEC+, despite the extension of the cuts, 400 MBPD in production incremental from Brazil and Guyana, and the US producing above 13 MMbpd. Global demand is being supported by the sustained and growing development of Chinese petrochemicals. This imbalance is visible in the movement of global crude oil inventories, which ended in 2023 with the lowest levels in the last five years.
The gap between demand and supply, as we have been postulating, is the product of restricted levels of upstream investment, as can be concluded from the Baker Hughes report of countries showing perceptible changes in the number of active drilling rigs. The US leads with a drop of more than 150 units in the last year.
On the other hand, the final 2023 US Consumer Price Index (CPI) report offered few surprises. The headline CPI rose 0.3% in December, slightly higher than consensus expectations and driven by slightly stronger growth in energy prices in the month. European statistics show a similar behavior; this could delay the expected dismantling of the restrictive policies of central banks and their potential effect on energy demand. On the contrary, the low temperatures that the Northern Hemisphere has experienced, starting this weekend, will impact the demand for fuels, especially gas.
As it was, oil prices reacted to the geopolitical events described, reaching over $80/BBL in terms of Brent Crude, but then gave up gains as market operators tried to price the additional risk to the oil supply. oil, as well as, evaluate the meaning of the US inflation figures. At the close of the markets on Friday, January 12, Brent and WTI crude oil were trading at $78.29 and $72.68/BBL, respectively.
VENEZUELA
Political/Economic Situation
The resolution of electoral issues continues in political limbo. On the one hand, the delay of the TSJ in deciding the case of the disqualification of María Corina Machado, and on the other, the CNE has not published the electoral schedule and the international observation plans, despite the commitments of Barbados. Both issues represent important obstacles for the opposition, but, on the other hand, their lack of definition protects the regime from an eventual departure from power. Venezuela is one of the many countries that will hold presidential elections this year, but it is the only one in which the date of the event is unknown.
Another year with two parliaments. The National Assembly of 2015 renewed Dinorah Figuera and her two companions as its board of directors for a new period. In parallel, the authorities of the National Assembly (2020) of Chavismo ratified its board of directors.
On the economic side, it is highlighted that the fundamental objective of the regime focuses on intervention in the foreign exchange market, even sacrificing the supply of the internal fuel market. In effect, it was possible to control the exchange rate at around 36 Bs./USD, which remained with a modest decrease during December, which resulted in a reduction in the inflation figure, year after year, to 196%. This policy of generating additional cash, at the expense of shortages in the domestic fuel market, does not seem sustainable during an election year. Could it be that they have in mind to postpone the elections? the lack of electoral definition and the economic adjustments point in that direction.
However, the exchange rate began to slide again during the first days of January.
Hydrocarbon Sector
Oil activities in the operational aspect have shown relative normality; Only in the supply of fuel to the domestic market and in export placements were perceptible changes evident.
The Minister of Oil, Pedro Tellechea, once again spoke of production goals greater than 1.0 MMBPD of crude oil, and in his presentations, he mentions the drilling of 161 wells during 2024, figures that do not seem compatible with the national reality.
Crude oil production during January averaged 754 MBPD, geographically distributed as follows, in MBPD:
· West 136 (Chevron 55)
· East 151
· Orinoco Belt 467 (Chevron 82)
· TOTAL 754 (Total Chevron 137)
Two drilling rigs are being assembled at PetroIndependencia and are estimated to begin drilling a multi-well cluster in early February. With the incorporation of these units, the total number of active drills would increase to 4.
Chevron continues to bring in diluent for its Merey-16 crude oil blending operations, and has more recently used some of the Hamaca upgraded crude oil as a supplemental diluent.
Venezuelan refineries processed 186 MBPD of crude oil and intermediate products, with a yield in terms of gasoline and diesel of 63 and 72 Mbpd respectively. Gasoline imports were limited to 31 Mbpd through barter operations. This reduced number of imports was insufficient to supply the domestic market; the regime considers these imports as a drain on foreign currency earnings.
Crude oil exports remain around 500 MBPD of crude oil and about 80 Mbpd of products. This last item includes shipments of asphalt under an agreement with Global Oil, owned by the North American oil magnate, Harry Sargeant. This company is also related to the eventual purchase of Venezuelan crude oil for Curaçao, where they maintain a small asphalt production operation, but says they have plans to reactivate the Curaçao refinery, one of the largest oil refineries in the Caribbean, and thus establish an alternative route so that Venezuela can export more oil.
Crude oil exports, during the first 11 days of the year, were destined for China, the US, India, and Cuba. Despite exports to India, which were supposedly made at market prices, the official published prices do not reflect this as such; Perhaps the costs of the intermediation chain that was established when crude oil was sanctioned remain in force. During the first months of the year, greater volumes are expected to be placed in the refining system of the Gulf of Mexico, Texas, Louisiana, and Mississippi.
The issue of natural gas supply to Colombia has arisen again, but it has not gone beyond statements. Meanwhile, in the Dragon Field gas supply project to Trinidad, negotiations continue to agree on the sale price of Venezuelan gas. Likewise, contact has been established with the Trinidad authorities to study the viability of a joint development in the Loran and Manatee fields, in the southeast of the island.
The US Supreme Court declined to hear the CITGO case, so the auction process for PDV Holding shares will take the courses determined by the Delaware Court unless the White House extends its protection of the company. In any case, the Supreme Court's refusal to admit the case (which did not rule on the merits of the issue) was taken out of context by actors with political agendas. All the legal problems that CITGO has been battling are the exclusive product of the irrational indebtedness of the Chavista administrations and the non-payment of those debts.
Energy Transition
Cobalt[1]
A versatile and crucial metal in various industries, cobalt has garnered global attention due to its critical role in emerging technologies. From its essential role in lithium-ion batteries, driving the electric vehicle revolution, to its presence in advanced alloys for the aerospace industry, cobalt plays an unavoidable role in the modern world.
Cobalt is a hard, shiny, silvery-gray metal that has been used by humans for centuries. Cobalt is a chemical element with the symbol Co and the atomic number 27. Cobalt is found in the middle of the group 9 transition metals, between iron (Fe) and nickel (Ni). Other group 9 elements are rhodium (Rh), iridium (Ir), and ruthenium (Ru); all transition metals with similar properties.
The early history of cobalt
While cobalt-containing compounds were used to color glass and ceramics as early as 2500 BC in Egypt, the metallic cobalt was not isolated as an element until 1735 by the Swedish chemist Georg Brandt.
The name cobalt comes from the Germanic word "kobold ", which means goblin or evil spirit. This name originated in the 16th century when cobalt-bearing ores thwarted miners' attempts to extract copper and silver. When they smelted these minerals, the cobalt compounds released toxic fumes and produced no precious metals, leading miners to believe the minerals were cursed.
Cobalt played an important role in the early development of the chemical industry. In 1780, Swedish chemist Torbern Bergman observed that cobalt could form a pigment by reacting with arsenic - Bergman's experiments confirmed the earlier studies of George Brandt, who had difficulty getting the scientific community to believe his claim about the discovery. of the element-. This discovery led to the first commercial application of a cobalt compound as a pigment, called cobalt blue or "Thenard blue" after the French chemist Louis Jacques Thenard, who developed an improved preparation process in 1802. Cobalt blue became a popular pigment used in glass, ceramics, and paints.
In the early 20th century, three key modern developments occurred that shaped cobalt's role today:
- Stainless Steel - In 1913, English metallurgist Harry Brearley discovered that adding 12 to 15% chromium to steel made it resistant to corrosion. Further additions of nickel and cobalt optimized the properties of this "stainless steel."
- Alnico Magnets – In the 1930s, American physicist George W. Elmen discovered magnetic alloys containing aluminum, nickel, and cobalt that formed the basis of powerful permanent magnets called alnicos. This paved the way for modern electronics and engines.
- Superalloys: In the 1940s, metallurgists developed nickel-based super alloys reinforced with cobalt and other metals for use in high-temperature jet engines and gas turbines. This enabled a new generation of aircraft engines and land-based power generation turbines.
In this way, cobalt established itself as a key ingredient in alloys and compounds vital for industrialization and development in the 20th century. Additional applications included rechargeable batteries, catalysts, and wear-resistant coatings. In the 1960s, cobalt was produced in substantial quantities in mines in the Democratic Republic of the Congo, Canada, Russia, Australia, and Zambia.
In the 21st century, the lithium-ion battery sector has become the largest consumer of refined cobalt. As the production of electric vehicles and wearable electronics increases, demand for cobalt skyrockets. Cobalt is a key component of lithium-ion battery cathodes and provides greater energy density and stability compared to other formulations. The main key reasons why cobalt is useful for batteries are:
- High-energy density: Cobalt allows lithium-ion batteries to store more energy per unit of mass compared to other chemistries. This results in longer run times and ranges for electric devices and vehicles that use these batteries.
- Thermal stability: Cobalt helps stabilize the cathode structure and allows lithium-ion batteries to operate at higher temperatures without degrading. This makes the batteries safer and extends their life.
- Capacity retention: Cobalt prevents the cathode from undergoing structural changes that reduce the battery's capacity over time. Batteries with cobalt maintain their charge capacity better after hundreds of charge/discharge cycles.
- High voltages: Cobalt allows lithium-ion batteries to operate at higher voltages (3.6-3.7 V) than batteries without cobalt. Higher voltages allow for more powerful batteries.
- Adhesive properties: Cobalt allows the lithium compound of the cathode to adhere strongly to the aluminum sheet of the current collector. This adhesive property improves the overall performance of the battery.
Today, more than half of cobalt production is mined in the Democratic Republic of the Congo in Central Africa. Political instability and unethical mining practices in the Congo have led to a push to diversify cobalt supplies by mining in other countries and recycling cobalt. The main producing countries are shown in the table below:
Source: https://pubs.usgs.gov/periodicals/mcs2023/mcs2023-cobalt.pdf
Major companies involved in cobalt mining and refining include Glencore (Switzerland), China Molybdenum (China), Vale (Brazil), Sherritt International (Canada), and Sumitomo Metal Mining (Japan). The main manufacturers of lithium-ion batteries that consume significant amounts of cobalt are Panasonic, LG Chem, Samsung SDI, and SK Innovation.
There is increasing pressure on these battery and car companies from consumers, governments, and NGOs to ensure their cobalt supply chains are ethical and sustainable. This is driving initiatives such as the Cobalt Institute’s Cobalt Industry Responsible Assessment Framework to address issues such as child labor, safety standards, and environmental impacts around cobalt mining. More attention is also being paid to recycling cobalt from spent lithium-ion batteries as the use of electric vehicles increases.
Future perspective
Going forward, cobalt demand is expected to continue growing steadily at 4% to 6% annually as electric vehicle adoption accelerates in the 2020s and beyond, according to International Energy Agency Scenarios.
Given that more than 50% of mined cobalt production is concentrated in the Congo, diversification of the supply chain will be essential. This will come from new mining projects in countries such as Australia, Canada, Russia, and Morocco along with recycling efforts.
In summary, cobalt's unique combination of properties such as high-energy density, thermal resilience, and capacity retention make it an indispensable component of high-performance lithium-ion batteries for modern electric devices and vehicles. Reducing cobalt content remains a challenge for researchers trying to reduce battery costs.
On a specific note, cobalt prices have plummeted in the last year and demand growth has slowed just as a wave of new supply floods the market. After reaching a four-year high of $40 per pound in May of last year, cobalt has fallen to $17 per pound, extending a long history of boom-and-bust price cycles.
Some hope growing demand from the electric vehicle (EV) sector would change that dynamic, but not all battery inputs are created equal when it comes to the bullish narrative around “green” metals. Cobalt has lost share to lithium as the Chinese electric vehicle market, in particular, pivots toward cobalt-free battery chemistry, and fears of supply shortages have been replaced by expectations of surpluses in the coming years.
[1] The information for this section was compiled with the help of Claude.ai, chat.openai.com, and sources referenced in the text.
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