El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
If one could analyze the oil market with some measure of certainty, there would be no need to write a weekly article: an eventual analysis of the variables would be enough, reaching logical conclusions, and filing away the analysis for reference. The oil market, however, as a reflection of the desires, fears, and actions of countless actors, is far from being the open book that we would like it to be. Especially when, unlike other markets, it is influenced by geopolitical competition between producers and consumers.
Recently, fundamentals, supply and demand signals, some upward and others downward, have tended to balance. The Chinese and American economies, the future of interest rates, the conflict in the Middle East, and the Russia/Ukraine war have all been variables that the market has balanced at a price that is neither too low nor too high. But things seem to be changing.
The set of regional conflicts, without visible resolution, and in countries of relevance to the oil industry, have begun to be reflected in prices, surely due to a reactivation of the geopolitical risk premium.
Middle East
Despite Secretary of State Blinken's diplomatic tour of the region, Israel ended up rejecting Hamas's proposal for a ceasefire and appears to be preparing for a larger incursion into the city of Rafah, on Gaza's border with Egypt. Israel alleges that Hamas terrorists are hiding among the civilian population that has ended up migrating to that area and that it is today a “cul-de-sac.” The Houthis continue to harass shipping around the Red Sea, despite damage caused by joint US and UK attacks. The Netanyahu government's rejection of the ceasefire proposal was also interpreted as a rejection of US pressure to move more quickly towards a mediated agreement, and is now potentially considered a prelude to an escalation of the regional conflict.
Amid this new escalation in the region, Iraq announced that, due to repeated US attacks against Iranian-backed militant groups operating in its territory, they are considering ending the mission of the US-led coalition in that country. Furthermore, the idea that China may mediate in the conflict seems naive, at least for as long as it benefits from the conflict by purchasing Iranian crude oil at below-market prices as the Americans threaten to intensify sanctions.
Beyond the Middle East, the Russians take advantage of the fact that the issue of military aid to Ukraine is entangled in American domestic politics to intensify their actions in Ukraine. Meanwhile, President Zelensky is making unexpected changes to the military leadership, signaling that all is not well in Kyiv. The interview that Vladimir Putin gave to the American journalist, Tucker Carlson, deserves special mention. The international media has criticized it as an attempt to whitewash the Russian leader and as a sign of a possible change in policy if Donald Trump were elected president.
The US Energy Information Administration (EIA) has announced that US crude oil production, once it recovers from some shutdowns due to low temperatures, is unlikely to exceed the record level of 13.3 million b/d until early 2025. This has boosted oil prices, a topic we already discussed in depth last week.
On the other hand, oil prices faltered in response to the EIA report revealing that US commercial crude oil inventories had increased by 5.5 MMbbls last week. Conversely, figures showing that inventories of refined products fell, pushed prices upwards: gasoline stocks hit their lowest level in almost a month, while demand rose to its highest level this year. Distillate inventories in the USA fell for the fourth consecutive week, falling to 3.2 MMbbls.
Asian markets closed early on Friday for the Chinese New Year, and next week's lunar holiday means there will be no new data from Beijing. Deflationary concerns continue, as the latest data revealed that the consumer price index (CPI) fell 0.8% year-on-year in January, marking a fourth consecutive monthly decline. As we know, the Chinese economy is one of the great drivers of demand, and its economic weakness does not bode well for oil. Perhaps the central government will be compelled to take more aggressive stimulus measures.
The short-term trend is the possibility of an escalation in prices due to the strengthening of refining margins and plant shutdowns. Furthermore, supply interruptions in the Red Sea, in a conflict that is simmering, are also bullish signals.
In other news
· In the US, the number of oil drilling rigs remained the same this week, remaining at 110 fewer than this time last year.
· Venezuela is sending troops to its border with Guyana in an escalation of tensions over Guyana's recent oil boom, according to reports citing satellite images and videos released by the Venezuelan military. It is not clear whether it is shadowboxing or preparation for a conflict with a still unknown adversary.
· Occidental Petroleum (NYSE: OXY) CEO Vicki Hollub commented in an interview on the danger of an oil supply shortage by 2025 due to the global inability to replace crude oil reserves at a fast enough pace. “We are in a situation in which within a couple of years we will have very little supply,” highlighting that approximately 97% of the oil currently produced in the world comes from discoveries made in the 20th century and that globally, less than 50% of the crude oil extracted in the last decade has been replaced.
· Pemex once again delayed the start of its largest offshore development project, the Zama field, with 675 MMBBLS of recoverable resources, originally discovered by Talos Energy in 2017, at 170 meters of water depth. The Mexican state company maneuvered to become an operator without having drilled one single well. The new date mentioned is 2026. A slow program in obvious contrast to the much deeper water developments in Guyana, where initial production was achieved 5 years from discovery.
· Devon Energy (NYSE: DVN) is trying to ride the consolidation wave, beginning talks to acquire, for $3 billion cash, Enerplus (NYSE: ERF) a company with operations in the Bakken (North Dakota) and Marcellus (Pennsylvania) basin.
· At the time of writing, it was confirmed that Diamondback Energy (NASDAQ: FANG) and Endeavor Energy Resources, two active shale oil operators, reached a merger agreement valued at $26 billion including debt. The resulting company will be the third-largest operator in the Permian Basin, behind ExxonMobil and Chevron.
As it is, oil and commodity fundamentals point toward an upward trend, even though the market continues to evaluate the potential for interest rate cuts from the Federal Reserve and other central banks; as well as the difference between the demand forecasts from EIA, IEA and OPEC. A tricky scenario in which to be a fortune-teller.
Oil prices were little changed on Friday the 9th, largely consolidating the week's gains, after rising 3% on Thursday the 8th, when Israel rejected the terms of a ceasefire agreement. So, at the market close on Friday, February 9, the crude markers were trading at $82.19 and $76.84/BBL, for Brent and WTI respectively.
Political/Economic Situation
As expected, this week the central issues on the public political agenda have been the electoral schedule and the opposition's presidential candidacy, in the face of the “disqualification” of María Corina Machado.
It is difficult to imagine a fair presidential election taking place this year, and there is only speculation whether it will be held as usual in December or brought forward. The regime has mentioned dates such as the end of July and even as early as May, to disconcert the opposition and international actors and instill conflicts within the opposition, which for now remains united behind MCM.
The international reaction to the disqualification of MCM and the intensification of political persecution has been to denunciate the regime's actions. The most relevant was the decision of the European Parliament to condemn the disqualification of MCM. The parliamentarians demanded that the European Union increase sanctions against the regime of Nicolás Maduro and adopt measures against the judges of the Supreme Court of Justice responsible for the disqualification.
Despite the regime's repeated failures to comply with the Barbados agreement, US representatives appear not to have entirely ruled out a negotiated solution. In any case, the regime will try to convince the Biden administration not to let OFAC's general license 44 expire, perhaps assuming that the White House prefers to save face temporarily.
Although license 44 has not had the full impact that was expected, it has allowed the supply of gasoline, diesel, and diluent required by the domestic market to improve. It has also allowed the diversification of exports to include India at better prices than those offered by China. Various investment projects in the Venezuelan JV, and the possibility of selling Venezuelan crude oil and products at market prices, depend on this license.
ExxonMobil's announcement about the drilling of two wells northwest of the Liza and Payara developments, in the Stabroek block, offshore Guyana, helped the regime to keep stirring the nationalistic pot. This area is considered by Venezuela as non-delimited, while Guyana and the consortium partners, including importantly China, consider that the activity will be carried out in Guyana's territorial sea.
In the continuing saga between CITGO and the Republic of Venezuela creditors, it was reported this week that ConocoPhillips, CITGO's largest creditor, has submitted a bid in the judicial auction that is to determine the fate of the three refineries owned by PDVSA. This has not been confirmed by either the company or the court, but it is easy to foresee that if true it introduces a sea of additional complications.
Hydrocarbon Sector
February continues the pattern of the previous month, with electrical problems that impact the production and treatment of crude oil. At the José terminal, out-of-specification crude oil was added to the electricity downtime, delaying loading operations. The diluent continues to be rationed, affecting the Merey 16 crude oil mixing processes.
Crude oil production showed little variation compared to January, standing at 754 MBPD. Geographically distributed as follows:
· West 137 (Chevron 55)
· East 148
· Orinoco Belt 469 (Chevron 86)
· TOTAL 754 (Total Chevron 141)
·
At the Amuay refinery, in Paraguaná, an atmospheric distillation unit began operations, increasing national refining to 188 MBPD: however, gasoline production did not increase, while diesel production did show an increase from 6 MBPD to 79 MBPD. The increase in gasoline volumes via barter generated some slack in the domestic gasoline market.
Crude oil exports for February are projected at 610 MBPD, including some diluent and crude oil drained from inventories. The schedule indicates an export of 162 MBPD to the Gulf Coast of Mexico, orchestrated by Chevron. It is planned to supply 176 MBPD from Merey to India, 149 MBPD to China, 85 MBPD in European barter, and 38 MBPD to Cuba. Some 48 MBPD of products destined for Asia and Cuba would also be exported.
This level of exports, adjusted for barter and barrels that do not generate cash, would result in income from the sale of hydrocarbons of around $700 million during February.
Energy Transition
“Peak Oil” or another shale hydrocarbon revolution?
Shales are the hydrocarbon-generating rocks par excellence, but until not long ago, few adequately appreciated their importance and potential as hydrocarbon producers. However, starting in 2008, shales, particularly in the US, became the largest source of material growth in oil and gas production, being dubbed “unconventional.”
Since the 1970s, hydrocarbon production in the US seemed to be following the predictions of M.K. Hubbert, a research geophysicist for the Shell company, and creator of the “Peak Oil” theory. The US became a country highly dependent on hydrocarbon imports.
At the beginning of the 21st century, global supply was losing ground in the face of growing demand, to the point that the gap opened in 2003 and prices, during the following decade, shot up to disruptive levels for the development of the global economy. The supply limitations not only reflected the decline in US conventional production (see chart) but also the inability or unwillingness of OPEC member countries to generate material growth in their production levels. In particular, the market had considered that Venezuela's projected growth was fulfilled by the results of the Oil Opening, particularly in what was the development of the Orinoco Belt in execution during that period, but that growth never materialized.
High prices, geopolitical dependence on the Middle East, and the conditions of a market free of unnecessary regulations, encouraged the development of the technologies to extract hydrocarbons from shales: compacted sediments whose low permeability made them unattractive for commercial production purposes.
Combining two existing technologies, hydraulic fracturing, and horizontal drilling to maximize wellbore exposure to the formation, made it possible to interconnect the shale pores and create an artificial permeability system. On the economic side, the low-interest rates at that time made it easier for medium and small independent oil companies to finance these projects.
By 2007, it was obvious that we were in the presence of something remarkable: the revolution in the production of shale oil and gas, in sedimentary basins distributed over much of the US territory.
Hundreds of companies were dedicated to the purchase/rental of land located in the extensive sedimentary basins with underlying shales. The US oil business no longer required expensive exploration to search for discrete accumulations of oil (reservoirs), but rather tracts of land in the broad regional basins of these shales. However, this new type of hydrocarbon development, due to the limited volume that each well can drain and its high decline with time, requires many more wells than conventional development.
On the other hand, the massification of this type of development, which requires the injection of large volumes of water at high pressure to achieve fractures, generated great opposition from environmental groups. It was alleged that the process can contaminate groundwater accumulations and, also, increase the possibility of seismic activity. Although the evidence for the existence of these effects is quite questionable, the political debate has been intense and, in most countries, has prevented the development of similar resources.
In the following years, through the end of 2019, there was sustained net growth of more than 1.2 MMBPD per year in US production, only paused by the combination of the price war and the pandemic that characterized 2020.
During the turbulent years from 2021 to 2023, shale hydrocarbons recovered their pre-pandemic levels, but are now under a business scheme that favors not only volumetric growth, as in the first years of the revolution, but also the return to shareholders and investors.
This new scheme of managing the development of these basins coincided with an apparent deterioration, due to the maturity of the basins, of the remaining locations to be drilled, and, therefore, lower initial production from new wells. The technical explanation is relatively simple: given the large number of wells required to sustain high production levels, the new wells are closer to their neighbors and begin to interfere with them, which reduces the final recovery of each well and accelerates the decline.
The intensive exploitation of these unconventional deposits suggests that their production also has a Hubbert-like peak, and some oil basins have already shown this. However, for many, there is still technological magic in the proverbial hat, if economic and geopolitical conditions encourage it.
Indeed, in searching for greater efficiency and new technology in the shale basins, a consolidation process has infected the operating companies, and the sector is profoundly changing from medium and small-sized multi-company operations to large multinational companies. The latter not only benefit from technological, economic, and cultural synergies but are relatively impervious to changes in interest rates and oil prices. This is due to the strength of their financial balances and, no less important, their ability to invest and develop cutting-edge technology.
This transformation of the sector could be giving way to a second “shale revolution.” The first activities in this new dawn are the re-fracturing of existing wells, new wells with increasingly longer horizontal sections, deeper fractures with novel shear mechanisms, and horseshoe-shaped wells. All of these developments promise to pave the way for a new boost in the field of shale utilization, by making possible an increase in recovery. A process that ultimately brings unconventional production closer to the elements that have characterized conventional exploitation.
The Permian Basin (220,000 square kilometers in southwestern North America) is the most attractive and will be the testing ground for technologies that can give new life to other declining basins, such as the Eagle Ford. The most relevant companies in this Permian scenario are ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and Occidental Petroleum (NYSE: OXY).
ExxonMobil is growing by leaps and bounds in the Permian Basin thanks to its $64.5 billion acquisition of Pioneer Natural Resources. If the acquisition is completed (waiting for regulatory approval), ExxonMobil's production will be 1.36 MMboed (million barrels of oil equivalent per day) with plans to take it to 2.0 MMboed by early 2027. In parallel, Chevron set a quarterly production record in the Permian during the fourth quarter of 2023, averaging 867 Mboed, and plans to reach 1.0 MMboed in 2025.
In order not to be left behind, Occidental Petroleum acquired CrownRock, which will take them above 800 Mboed in the Permian Basin, above Conoco and EOG Resources, the other two large operators.
All these companies qualify as the most efficient in the industry, and their contribution will be crucial to the continuity and growth of the US Unconventional Basins. This also allows them to grow without facing the risks of investment outside the US. The projected growth may not be as spectacular as in the 2010s, but it will be enough to banish the ghost of Hubbert, for now.
No comments:
Post a Comment