EL TALADRO AZUL - Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
The two big OPEC+ producers, Saudi Arabia, and Russia, seem to be playing in tandem to prop up oil prices. The Saudis announced their intention to maintain their voluntary production cuts until September, or longer, if necessary: while the Russians announced that they will restrict their exports in September. These two announcements and a robust demand were enough to propel oil prices, maintaining the upward trend of the last six weeks.
The report of the unusual drop in US crude inventories of 17 MMbbls, which is probably a correction to previously reported figures, indicates a less comfortable market than previously reported. On the other hand, the Ukrainian attack on Friday, August 4, on the Russian oil terminal, Novorossiysk, in the Black Sea, caused the closure of the port, affecting oil shipments; two Russian ships were seriously damaged and had to be towed to port to stop them from sinking. This has generated understandable nervousness in the oil market, adding “fuel” to prices.
Saudi Arabia is pushing hard with its strategy of tightening oil production to increase prices. Not all the members of the cartel agree with this maneuver, since it is interpreted not as an action aimed at benefiting the group, but as a strategy designed to benefit the ambitious development projects of the Crown Prince. The members of OPEC+, in their virtual meeting on Friday, analyzed the prospects for oil demand, limiting themselves to publishing a statement informing that they would adjust production levels depending on market conditions.
This warning from OPEC+ comes in an environment in which oil demand does not seem to give way, remaining at 102 MMbpd, but with prospects that, at some point, the continued restrictive policy of the Central Banks will erode demand. Uncertainties surrounding China's economic growth complement the factors that mitigate demand growth.
The Chinese economy expanded by 6.3% in the second quarter of 2023, showing faster growth compared to the 4.5% registered in the first quarter, but falling short of analyst projections of 7.3%. Beijing has restricted stimulus measures to the economy because, among other things, local government debt has skyrocketed. The latest economic indicators presented a mixed picture: retail sales increased at a much slower pace, while industrial production growth accelerated. The urban unemployment rate was unchanged at 5.2%, but youth unemployment hit a new high of 21.3%. So, for now, China does not appear to be a driver of demand.
In the US, the risk rating agency, Fitch, announced a reclassification of the US debt, downgrading it from AAA to AA+. In May of this year, Fitch had placed the AAA rating under negative observation, on discussions in Congress on debt limits and which almost left the administration in a situation of default.
Fitch downgraded the United States debt, citing fiscal deterioration over the next three years and renewed debt ceiling negotiations that threaten the government's ability to pay its bills. It is the second most important rating agency after Standard & Poor's to strip the US of its triple-A rating. The decision was cataloged, mainly by the Biden administration and its associates, as untimely and risky due to the harmful effects that could trigger globally. Furthermore, bankers of the stature of Jamie Dimon, chief executive of J.P. Morgan, criticized the move, even calling it “ridiculous”. In a television interview, Dimon declared that “it (the downgrading) really doesn't matter that much” because it is the market, not the rating agencies, that determines borrowing costs. But despite the criticism, the news rocked the markets.
US non-farm jobs numbers, reported this Friday, August 4, indicated an increase of 187,000 in July, below what was expected. The unemployment rate remained at 3.5%. Most of the jobs created are in the health care, social assistance, financial activities, and wholesale trade sectors. The data seems to indicate that the labor market is cooling-off enough to support a possible soft landing for the world's largest economy.
Also in the US, the reduction in drilling activity continues. Baker Hughes reported a net reduction for the week of 5 units. This time, the reduction coincides with a reduction of 11 rigs in the rest of the world, which corresponds to a combination of increased activity in Algeria, Ukraine, and Saudi Arabia, but reductions in Colombia, Canada, Ecuador, and Guyana.
Thus, the supply is limited by the combination of OPEC+ cuts, general production capacity decline due to lower generation activity, and unanticipated limitations due to accidents, and war, among others.
In short, the developments of this first week of August had a net positive effect on the oil market. At the close of the markets on Friday, August 4, the marker crudes were trading at $/bbl 86.24 and $/bbl 82.82 for Brent and WTI respectively. The highest prices since mid-April 2023.
Other news of interest for the energy market:
· A recent US government report shows that subsidies for renewable energy producers doubled between 2016 and 2022, accounting for nearly half of all energy-related federal support in that period. Renewable energy subsidies increased to $15.6 billion in fiscal year 2022, from $7.4 billion in fiscal year 2016. Most of those subsidies (70%) took the form of tax incentives.
· Trafigura Group, and its operating partner Chemaf SA, have announced that they need to increase the financing of their copper and cobalt project in the Democratic Republic of Congo, due to a considerable increase in the investment budget:-more than 30%, according to information from Bloomberg.
· Guyana, the latest country to become an oil exporter, has again postponed the date for its first competitive auction of new offshore blocks, delaying the licensing round, for the third time, to September 12. The delay is due to the search for the optimal “modern regulatory framework”. I hope that the government understands that the perfect is the enemy of the good, a concept upon which politicians from many countries have stumbled.
· The situation in Libya is improving – The Libyan National Oil Corporation announced that ENI and BP would lift their force majeure in Libya and resume exploration activities in the western regions of the country.
· Saudi Arabia and Kuwait reiterated on Thursday that the natural gas resources in a field under dispute with Iran: “are the exclusive property of the Kingdom of Saudi Arabia and Kuwait. The two countries have full sovereign rights to exploit the resources of the area,” the Saudi press agency said, reporting a statement by the Saudi Foreign Ministry. The dispute sparked earlier this year when Iran announced plans to start drilling in the field, which they call Arash, while Kuwait and Saudi Arabia call it Durra.
Energy transition
Copper, the indispensable metal
Every time we flip the switch to magically displace the darkness in our room, turn on the washing machine or listen to music, not to mention activate the X-ray machine, or the spectrograph, or charge the ubiquitous cell phone, we are being benefited by the flow of electrons along the conductor wire that connects us with one of the greatest wonders of modernity: electricity. All of this is made possible thanks, among other reasons, to a modest and quiet but indispensable protagonist: copper, from which most of the cables that conduct electricity are made.
The widespread use of copper by ancient societies seems to originate in the Neolithic period. The shiny, reddish-brown metal was used in jewelry, tools, sculpture, bells, vessels, and death masks, among other things. Its importance in human development gave its name to the Copper Age, better known today as the Chalcolithic.
In many regions of the ancient world, copper was readily found in its metallic form, albeit in relatively small quantities. This metal was first used in the Balkans, the Middle East, and the Near East between 8,000 and 3,000 BC. Over time, Egypt and Europe adopted this practice and began creating their copper artifacts. Due to its softness and malleability, copper was an ideal material for the production of luxurious decorative goods.
Copper was made even more useful by mixing or alloying it with other materials or metals to make an alloy of higher strength. Thus, brass arose, an easier material to melt, which was formed with copper and zinc. And bronze, which was made by joining copper with arsenic, antimony, or tin.
The development of bronze was an important milestone in human history, as it allowed for the creation of more durable and versatile tools and weapons than those made of stone or other materials.
The Bronze Age (3300 to 1200 BC), characterized by the widespread use of the novel metal, revolutionized human societies and laid the foundation for new technological advances in metallurgy and civilization in general. It is not difficult to imagine the legendary Achilles at the gates of Troy wearing his bronze armor and sword, which, according to Homer in the Iliad, was made at the request of his mother, the goddess Thetis, by the god of fire, Hephaestus.
With the onset of the Industrial Revolution in the 18th century, copper became an integral part of the development of modern infrastructure, transportation, and communication systems. Copper's malleability and corrosion resistance also made it a preferred material for roofing, plumbing, and coinage.
In the early 19th century, the British scientist, Humphry Davy, made significant contributions to the field of electromagnetism. He conducted experiments with electric currents and demonstrated that copper wires were highly conductive, leading to their use in early telegraph systems.
However, it was Michael Faraday, a British scientist, who made groundbreaking discoveries about the suitability of copper for electrical applications. In the early to mid-19th century, Faraday conducted extensive research on electricity and magnetism. He formulated the laws of electromagnetic induction and discovered the concept of electric and magnetic fields.
Faraday's work paved the way for practical applications of electricity, and he was the first to demonstrate the use of copper wires in the transmission of electrical power. His experiments and discoveries laid the foundation for the development of electrical engineering and the widespread use of copper in electrical systems. His work led, among other things, to the development of the electric motor, ubiquitous in our present and future.
Copper processing is a complicated process that begins with mining the ore (containing less than 1% copper) and ends with sheets of 99.99% pure copper, called cathodes. In the contemporary era, copper mining and production methods have evolved significantly. The most commonly mined types of ore are copper oxide and copper sulfide. Copper oxide, although more abundant, is a low-grade mineral that can be mined near the surface. Copper sulfide has a higher copper content than copper oxide, but is more expensive to process.
The two main methods of extracting copper are open-pit mining and underground mining. Open pit mining involves the removal of waste and waste material to access copper ore below the surface. This method is more common and cost-effective for mining low-grade copper deposits. On the other hand, underground mining is employed when higher-grade copper ores are present deeper in the earth. This method requires tunneling into the ground to access the valuable mineral.
The copper extraction process involves several stages, including crushing, milling, and concentration of the ore to obtain copper concentrates. These concentrates are then smelted at high temperatures to separate the copper from impurities, resulting in blister copper. The most common types of ore, copper oxide, and copper sulfide, undergo two different processes, hydrometallurgy (wet) and pyrometallurgy (dry), respectively, due to the different chemistries of the ore. Since a mine is unique in its mineral composition, concentration, and quantities, mine planners must determine the most economical and cost-effective processing of the mineral. When economically feasible, a mine may extract both types of copper ores; where this is not possible, mines will only process copper oxides or copper sulfides.
In any case, the financial, mechanical, and chemical effort of mining and refining copper is considerable, and although it is not our focus here, it is important to understand the scale of the operation. For example, the typical extraction ratio in an open pit copper mine is usually greater than 3:1, that is, 3 tons of waste must be removed for every ton of copper-bearing rock. Assuming that the ore grade is typically less than 5% for copper, from one ton of rock, only 50 kg of the metal can be obtained (not counting refining losses); the rest is also added to the waste that the mine must handle.
According to Copper.org, an average single-family home uses 200 kg of copper. If we use the relationships described above, that family is responsible for the extraction of more than 12 metric tons in a mine in Chile or Peru.
An energy system powered by non-fossil energy technologies is very different from one powered by traditional hydrocarbon resources, especially in terms of its intensive use of metals. Photovoltaic cells, wind farms, and electric vehicles, to name a few examples, generally require many more metals in their manufacture and utilization than their traditional counterparts.
A typical electric car requires six times more minerals than a conventional car, and an onshore wind farm requires nine times more mineral resources than a natural gas power plant. In particular, an electric vehicle (EV) requires almost 2 and a half times the amount of copper as a gasoline-powered car, in addition to other minerals such as lithium and nickel that are only used by the EV.
In the various energy transition scenarios that are talked about, the demand for copper increases significantly. Most of this new demand is associated with the growth of electric vehicles and new transmission networks, as well as the massive deployment of solar and wind energy.
According to the International Copper Study Group , around 20 million metric tons (MMtm) of copper were produced in 2021. Chile is the largest producer (28%), followed by Peru (11%), China (9%), and Congo; Latin America produced 8.7 MMtm, 41% of the total. On the other hand, the copper used in final products is the product of refining processes; in 2021, China, Chile, and Japan produced more than 50% of the volume of refined copper.
The same publication reports that in the same period, world copper reserves were of the order of MMtm 880. Chile (26%), Australia (13%), and Peru (11%) appear as the countries with the largest volumes of reserves. The United States Geological Survey (USGS) estimates that the identified and undiscovered resources add up to around 5,600 MMtm.
Although as of today, there seems to be enough supply to satisfy the demand for copper in the short term, in the medium and long term the story seems different. According to the IEA, existing mines face challenges beyond 2024: Chile faces declining ore quality and water shortages, while protests by local communities could disrupt Peruvian supplies. Furthermore, the agency notes that the lack of new large-scale, high-quality projects indicates that the growth rate of production may slow after 2024.
This implies that the market could have a shortage if demand increases due to the recovery of the Chinese economy and the acceleration of energy transitions, which would, of course, have long-term price implications.
According to the vision of the Royal Bank of Canada (TSE: RY), at the present rate of growth of EVs, renewable energy, and new transmission lines, a potential supply shortfall of 10 MMtm can be foreseen by 2035.
Fortunately, copper is easily recyclable. It is estimated that two-thirds of the 690 million tons of copper produced since 1900 are still in productive use. And that a third of the annual demand is covered by copper from recycling.
In short, copper will continue to be the conducting artery of the electricity industry, regardless of which model of energy transition, we assume. And it represents, for Latin America, an opportunity for the future. While at the same time, it represents one of the most important balance loops in the energy transition scenarios since their materialization largely depends on their supply.
Venezuela
Political Events and Others
The progress of the primary election process organized by the opposition, coupled with the consolidation of potential voters behind the campaign of Mrs. María Corina Machado Parisca (MCM), is leading the regime to extreme reactions. MCM's campaign acts have, occasionally, been met with violent attacks by regime supporters. The Chavista governor of Trujillo state announced recently that if MCM sets foot in his state, she will be run out, by violent means if necessary. It is important to be attentive to these types of threats and actions since they could unleash political violence hitherto not experienced in the country.
Meanwhile, public services continue to affect citizens and the economy in general. The rationing of electricity, water, and natural gas, added to the deterioration of people’s purchasing power, fuels widespread discontent in the population. Although this has not yet spilled into major unrest, due to social control, repressive actions, and other measures of force used by the regime, it is not a completely improbable scenario.
The erosion of the purchasing power of the population is directly related to the growing inflation, largely due to the devaluation of the currency. At the close of transactions on Friday the 4th, in the parallel market the exchange rate reached Bs./$33.9, a devaluation of 6.4% last week.
Hydrocarbons Sector.
At the end of July and the first days of August, the sector's expert media, including Bloomberg, Reuters, TankerTrackers, and different private sources, published numerical information regarding production, refining, and export levels. The variation in crude oil production figures is unusually wide, between 700 Mbpd to 808 Mbpd, depending on whether the sources refer to PDVSA’s reports to OPEC or the secondary sources used by the cartel. Regarding exports, the reported figures range from 550 Mbpd to 870 Mbpd, numbers that are generated by the companies that monitor tankers and consider the levels of processing in the refineries and the inventories in the terminals and may include or not exports different to purely liquid hydrocarbons.
In any case, there are some components of this soup of numbers that seem uncontroversial:
· Chevron's joint ventures produce around 125 Mbpd and export approximately 150 Mbpd when including the volume of diluent used in some of those exports.
· Refinery runs have increased of late, with occasional processing activity at all four major refineries.
· Refining activity reduced the volumes of crude oil available for export and increased the availability of products (mainly fuel oil) for export.
· Of the exports, excluding those of Chevron, only 38% generate foreign currency for the regime, the rest are barter or debt payment.
With this introduction, let's see the best estimate for the different areas of the Venezuelan oil industry.
Production: July production closed at an average of 722 Mbpd, while the first week of August averaged 724 Mbpd, geographically distributed as follows:
· Period: July 2023 1st Week August
· West: 115 (Boscán 52) 114 (Boscán 52)
· East: 153 153
· Belt: 454 (Chevron 73) 457 (Chevron 75)
· Total: 722 (Chevron 125) 724 (Chevron 127)
Of the total of 722 Mbpd average production for July, 70% comes from Joint Ventures, and the remaining 30% is produced by PDVSA.
Refineries: According to some news outlets, the 4 main refineries were operating sometime in the last few days. An average of 298 Mbpd of crude oil and intermediate products were processed during the month of July, which required a complex and inefficient movement of hydrocarbons between the East, West, and Center, to adapt to the processing diets at each refinery. It was also publicized that this unusual multi-refinery processing activity had managed to produce some 130 Mbpd of naphtha, used to blend into gasoline. With the commissioning of the 4 refineries, the processed volume increased from 254 to 340 Mbpd.
Barely a week after the announcements above, the catalytic cracking processes at the Amuay and Cardón refineries were paralyzed due to mechanical and power problems, according to union sources and people close to the operation. Thus, gasoline production is once again at levels below domestic demand.
Exports and Imports: After analyzing the different sources and comparing them with our calculations, we estimate that in July 560 Mbpd of crude oil was exported, as well as 83 Mbpd of products. The destinations of the crude were: 152 Mbpd to the US, 65 Mbpd to Europe (ENI/Repsol barter), 54 Mbpd to Cuba, and 289 Mbpd to China, through the traditional mechanisms of barter with Iran and sale through PDVSA‘s opaque supply chain.
Of the 152 Mbpd exported by Chevron, 56 Mbpd were Boscán crude, 25 Mbpd Hamaca crude, and 71 Mbpd Merey crude (44 Mbpd crude from the belt mixed with 27 Mbpd diluent). We estimate that during the month of July, PDVSA amortized some $92 million of the outstanding debt with Chevron. Total income from the sale of crude oil and products in July was $414 million.
Finally, a press release from Canadian oil company New Stratus Energy (TSX.V - NSE) announced that it has signed initial agreements with GoldPillar International Fund SPC Ltd, a private company based in the British Virgin Islands, which in turn says it is in negotiations with PDVSA to establish joint ventures.
This would give New Stratus Energy access, through GoldPillar, to an agreement with PDVSA to operate oil and natural gas assets in Venezuela. The initial assets would comprise four onshore fields in the eastern basin of Venezuela, where “due to infrastructure erosion and a lack of capital investment, production since 2017 has been minimal”, New Stratus Energy said in its statement.
The Canadian oil company said a deal could be signed by the end of August, with initial work starting in October. The names of the four fields were not disclosed, only that they are located in the Eastern Basin of Venezuela and that they date from the 1950s and 1960s. These are probably fields whose previous private partner (partner B) left or was removed from the joint venture to which it was assigned.
It is not clear if these operations require OFAC licenses, since they are not North American companies. However, the so-called secondary sanctions could apply.
