El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
Although war events continue to threaten the security of supply, the oil market seems immune to specific events, as well as to the repeated and contradictory announcements from Central Banks about interest rates and their potential effect on energy demand. Hence, prices, recently, have experienced relatively low volatility. The price of Brent Crude Oil has moved within a narrowband lately: between $81/bbl and $84/bbl.
Middle East
Attacks on shipping continue to occur. Earlier this week, a Belize-flagged British cargo ship, the Rubymar, was hit by two missiles while sailing in the Gulf of Aden, near the Bab el-Mandeb Strait, and the crew had to abandon ship. The ship is being towed to the Port of Djibouti, but it is unknown if it will be able to stay afloat during the voyage. On Thursday, an attack was reported on a Palau-flagged cargo ship called the Islander.
This past Saturday, the United States and Britain attacked 18 Houthi targets in Yemen, in response to a recent increase in the rebel group's attacks on ships in the Red Sea and the Gulf of Aden. The Houthis denounced “American-British aggression” and vowed to continue their military operation in response.
Israel has not begun its final attack on Rafah, where the remainder of Hamas forces are believed to be taking refuge. Either because of the complexity of coordinating this large-scale operation, which requires the handling of more than a million civilians, or because of the pressures that the US is exerting to stop it. On the other hand, negotiations are taking place in Paris and Qatar between the two sides, in an attempt to establish a ceasefire before the start of the holy month of Ramadan.
Russia-Ukraine
Two years ago, Russia launched a large-scale attack on Ukraine, displacing millions of people and destroying homes and businesses across the country. The number of military and civilian casualties during the conflict is difficult to establish, given that they are considered state secrets by both sides. According to some estimates, Russian forces have suffered around 315,000 casualties, including dead and wounded. On the Ukrainian side, there is talk of casualties of an order of magnitude smaller, but it is impossible to verify these reports. In any case, important losses with nothing to show in return.
The US has announced a package of more than 500 sanctions against Russia later this week following the death of opposition leader Alexei Navalny and continued aggression against Ukraine. It is still too early to evaluate the effect they may have on the global oil and gas market.
Economy
Meanwhile, the US Federal Reserve has given indications that it is in no rush to begin lowering interest rates. Two of its directors gave contradictory opinions this week about an early reduction in rates, which once again put the forecasts of lower oil demand in motion, putting pressure on prices.
We, on the other hand, think that supply is more limited than any reduction in demand that could be induced by restrictive policies. The most relevant factor is the behavior of US oil production, which has been almost two months below the record of 13.2 MMBPD, reported in November 2023, with no signs of increasing soon.
Regarding China, we can mention two important factors. One factor encouraging optimists is strong domestic travel data for the start of the Year of the Dragon. Figures show 474 million domestic journeys were made during the eight-day break that ended on Sunday. That was more than 34% more than last year and 19% above pre-pandemic levels in 2019.
As for international travel, about 13.52 million inbound and outbound trips were recorded during the holidays, a 2.8-fold increase over the same holiday period last year, according to the National Immigration Administration.
Elsewhere, China's Central Bank attempted to catch markets off guard with a surprise monetary easing, including interest rate cuts, in a bid to revive the building sector, which remains one of the most influential drivers of the Chinese economy.
Thus, given that the war fronts had relatively little activity that affected the supply and distribution of hydrocarbons, it was the concern of the monetary restrictions for a longer period that marginally eroded crude oil prices. At the close of the markets on Friday the 23rd, Brent and WTI crude oil were trading at $81.62/bbl and $76.49/bbl respectively.
This relative price weakness can be misleading. Some market analysts, such as Goldman Sachs and Standard Chartered, agree with us that supply fundamentals and geopolitical elements suggest a higher crude oil price than the market indicates. Brave is who bets against the opinion that the prices reflect.
In other news
· Chord Energy Corp. (NASDAQ: CHRD), an operator in the Montana and North Dakota basins, has agreed to merge with Enerplus Corp. (NYSE: ERF) in a deal valued at $3.7 billion in stock and cash, continuing a wave of asset consolidation in shale oil and gas production basins. The result of the merger will be a leading producer in the Williston Basin in the northern US.
· According to the Baker Hughes report, the number of active drills in the US showed a modest increase of 5 units over the past week, mainly in land operations.
· Royal Dutch Shell (NYSE: RDS.A) announced it will withdraw from a MunmuBaram floating offshore wind project in South Korea, adding to the list of oil companies withdrawing from the segment. Shell decided last year to abandon its plan to reduce its oil production by 1% to 2% annually, partly because it has concluded, like other oil companies, that renewable energy projects are not delivering the desired returns.
· Occidental Petroleum Corporation (NASDAQ: OXY) is exploring the sale of Western Midstream Partners (NYSE: WES), a US gas pipeline operator, valued at $20 billion. The divestiture would help OXY, which is backed by Warren Buffett's Berkshire Hathaway, to cut the heavy debt it has accumulated due to acquisitions.
VENEZUELA
Political/Economic Situation
Perhaps the most curious news of the week was the agreement reached between Haiti and Venezuela to settle the debts that the Caribbean country acquired through the agreement known as Petrocaribe. The Maduro regime agreed to receive $500 million as full payment of a debt of $2.3 billion that Haiti had with Venezuela.
In the Petrocaribe plan, created in the years of the oil boom of the first decade and a half of the century, more than 200 Mbpd of crude oil and products were delivered by PDVSA to Caribbean islands, with financing that almost turned them into gifts. In addition to some staple products as partial payment, the Venezuelan government “bought” their political support in international organizations such as the OAS. In a historical irony, impoverished and undercapitalized Venezuela considers it an achievement to receive, from one of the poorest countries in the world, what is now a symbolic payment.
This unexpected income clarifies the origin of the funds used by the regime in recent economic management, in terms of being able to stop the deterioration of the monetary sign and, therefore, reduce inflation. It also explains the multiple trips of Vice President Delcy Rodríguez to other Caribbean countries, presumably, to structure payments like the one in Haiti.
On the political front, mutual accusations of who is to blame for breaking the Barbados agreement became more intense. However, talks continue about returning to negotiations. The regime may have the objective of misdirecting the new US negotiators and trying to ensure that OFAC License 44 does not expire. We still do not have a clear route to the presidential elections.
Hydrocarbon Sector
The arrival of 2.0 MMBBLS of Ural crude oil from Russia was announced, after five years without oil exchange with that country. This occurs in part due to the interruptions in maritime transport in the Red Sea that led the Russians to look for more distant buyers for their crude oil, and to the window of opportunity presented by the suspension of the supply of Iranian condensate to Venezuela. The continuity of this supply could be affected by the recent additional sanctions imposed on Russian oil, the transport, and the financial system behind these transactions.
Power outages appeared again, and the shortage of diluent affected PDVSA's production. This last problem will probably be resolved with the arrival of light crude oil from Russia.
It was also known that the MTBE plant (octane booster used in gasoline), in the José Antonio Anzoátegui petrochemical complex, was put into operation. Its production will be used to increase the octane rating of the gasoline produced in the refineries, improving gasoline production.
Crude oil production during the week was 762 Mbpd, distributed geographically as follows:
· West 140 (Chevron 56)
· East 148
· Girdle 474 (Chevron 88)
· TOTAL 762 (Chevron 144)
National refineries processed 191 Mbpd of crude oil and intermediate products. Gasoline production was 59 Mbpd and 76 Mbpd of diesel. The domestic gasoline market continues to depend on product imports through barter with Chevron and European companies and, therefore, is vulnerable to the reinstatement of sanctions.
Crude oil exports for February continue to focus on achieving exports slightly above 600 MBPD of crude oil and 55 MBPD of products.
Guyana announced that it will not approve additional exploration activity in the undelimited waters between Venezuela and Guyana until the International Court publishes its ruling. Venezuela welcomed the Guyanese announcement, although our interpretation of the announcement is that the exploratory activities that Exxon and its partners will carry out will continue in the eastern part of the Stabroek block.
CITGO.
In another interesting turn of events, the New York State Court of Appeals ruled, on February 20, 2024, that the Constitution of Venezuela does apply to the PDVSA 2020 bonds. In particular, the pertinence of the prior control that the National Assembly had to exercise so that PDVSA could transfer 50.1% of the shares of CITGO Holding, Inc. as collateral.
The Court of Appeals addressed the issue as a continuation of the litigation presented by the ad hoc administrative board of PDVSA, in 2019, in the court of the Southern District of New York, questioning the validity of this debt operation. Since then, the lawsuit has been highly criticized by some opposition parties and prominent Venezuelans, who considered it a waste of resources and with no chance of success.
The Court's decision, as it indicates, does not guarantee a final victory for PDVSA, but it does shift the risk over time and creates better conditions for a negotiated solution between the parties. Dr. Jose Ignacio Hernández has written in La Gran Aldea about the history and implications of this legal decision.
Energy Transition
Biofuels[1]
The transition to an energy system that reduces the carbon footprint is one of the greatest challenges facing humanity in the 21st century. Among the various technological solutions that can contribute to this transition, biofuels represent a renewable option with great potential yet to be exploited. In principle, biofuels seem to be an almost optimal energy alternative: produced from organic matter, known as biomass, which contains carbon absorbed by plants through photosynthesis, when used to produce energy, the carbon is released during combustion and returns to the atmosphere. If more biomass is produced, an equivalent amount of carbon is absorbed, in a kind of quasi-virtuous circle:
History
Early civilizations used wood as a fuel source for heating, cooking, and lighting – even today, two billion people use wood as their primary source of energy. The discovery of how to produce alcohol through fermentation also dates back thousands of years, and alcoholic beverages were among the first biofuels used by human societies.
In the 19th century, Rudolf Diesel, the inventor of the diesel engine, advocated the use of vegetable oil as fuel for his engine. At the beginning of the 20th century, the use of biofuels decreased significantly. However, concerns about oil shortages in the 1970s later led to renewed interest in biofuels as an alternative energy source.
Brazil was one of the pioneers in developing modern biofuel industries in the 1970s and 1980s. Gasoline blended with ethanol produced from sugar cane became a standard transportation fuel. Biodiesel production from soybean and other oils also grew significantly. In the United States, federal programs that began in the late 1970s promoted the production of ethanol from corn and other crops.
Many countries began promoting biofuels in the 1990s and 2000s to reduce dependence on imported fossil fuels, improve energy security, and reduce environmental impacts. Ethanol and biodiesel production experienced significant growth in this period. Second-generation biofuels using non-food crops and agricultural residues also saw increased research and investment.
Technologies
In general, three generations of biofuel technologies are defined:
- First-generation biofuels. Made from food crops such as cereals, sugar crops, and oil seeds, with well-established production technologies, these are the most common. Some examples are corn ethanol, sugar cane ethanol, soy or palm biodiesel, and biogas.
- Second-generation biofuels. Made from lignocellulosic biomass raw materials, and non-food vegetable dry matter. It also uses inedible parts of food crops. Some examples are cellulose ethanol and biomass diesel.
- Third-generation biofuels. Derived from microalgae biomass. Even in the demonstration and pilot phase of development, algae can produce more oil per acre than conventional oil seed crops. Some examples are algae biodiesel, aviation fuels, and biocrude. IATA has set targets of 2% biojet use by 2025 and 10% by 2030 under its sustainability program. However, achieving these goals will require a substantial increase in production.
Biofuels have grown to become an important source of renewable energy in many countries. Several factors drive this growth. Global production of ethanol and biodiesel reached well over one hundred and sixty billion liters in 2020.
Locally produced biofuels reduce dependence on imported oil and create markets and jobs in agricultural regions. On the other hand, biofuels such as ethanol and biodiesel work with existing engines and distribution infrastructure. Additionally, biofuels burn cleaner than fossil fuels and can reduce greenhouse gas emissions, especially in their advanced forms, and are competitive at relatively moderate oil prices.
The rapid growth of biofuel production has raised concerns about potential conflicts with food production and land use. These concerns center on two key issues:
Diverting cropland or food products such as corn and vegetable oils toward biofuel production reduces their availability to food and feed markets. This impacts food prices. Global ethanol production uses about 5% of the world's grain supply. Biodiesel uses 20% of the vegetable oil supply. Although critics argue that biofuels divert agricultural resources from feeding a growing world population. Proponents argue that net food production continues to grow and keep pace with demand.
Increasing the production of biofuel crops can displace existing agriculture and lead to the conversion of forests and grasslands into new cropland. Indirect changes in land use, in response to the demand for biofuels, can contribute to deforestation and the release of carbon stored in soils and vegetation, nullifying the anticipated decarbonization benefits. Modeling and accounting for these indirect impacts of land use change on emissions remains complex and controversial.
The attached table summarizes the approximate annual production volumes of the largest global producers of ethanol and biodiesel. The data provides insight into the main players and current production scales in these important biofuel markets.
Country | Biogasoline production Total: 1855 Mbpd | Country | Biodiesel production Total: 1003 Mbpd |
USA | 54% | USA | 24.5% |
Brazil | 28.6% | Indonesia | 18.8% |
China | 3.5% | Brazil | 10.8% |
India | 2.8% | Germany | 7.0% |
Canada | 1.6% | China | 4.1% |
Thailand | 1.2% | Argentina | 3.7% |
France | 1.1% | Netherlands | 3.6% |
Argentina | 1.1% | Spain | 3.5% |
Germany | 0.7% | France | 2.8% |
Others | 5.4% | Others | 21.1% |
Source: ENI World Energy Review 2023[2]
As in all energy issues, economics plays an essential role. Feedstock costs account for up to 70% to 80% of total biofuel production costs. Therefore, the sustainability of raw materials and optimization of the supply chain are essential. At oil prices below $60-$80 per barrel, first-generation biofuels such as corn ethanol and soybean biodiesel struggle to compete without subsidies. Advanced cellulosic ethanol and biomass-based diesel can become profitable at prices between $80 and $100 per barrel of oil. Compared to other renewable energies such as solar and wind, biofuels benefit from taking advantage of existing engines, infrastructure, and distribution. But power generation costs per kWh are even higher.
Biofuels are already playing a significant role as a renewable alternative to petroleum-derived fuels. With continued innovation and supportive policies, they can continue to deliver greater environmental and economic benefits. But to realize their full potential, sustained research, development, and investment in advanced biofuels integrated into overall sustainable energy systems will be needed.
According to the International Energy Agency (IEA), in the short term, almost two-thirds of the growth in biofuel demand will occur in emerging economies, mainly India, Brazil, and Indonesia. Policies in all three countries are also based on energy security considerations, as increased use of biofuels will offset some oil imports. India imported 87% of its crude oil supply, and Indonesia's net imports accounted for 20% of supply in 2021. Brazil is a net exporter of crude oil but still imported 19% of its gasoline and diesel in 2021.
While the use of biofuels for transportation and power generation continues to evolve, in the long term, the IEA projects, in its Net Zero scenario, that the use of biomass (wood and organic waste) for heating and cooking food will disappear in emerging economies. If we judge by the rest of the IEA projections, this will be difficult to materialize.
[1] The information for this section was compiled with the help of Claude.ai and other sources referred to in the text.
