THE OIL MARKET ONE YEAR AFTER THE RUSSIAN INVASION OF UKRAINE
The international oil and gas market has been extraordinarily impacted by the Russian invasion of Ukraine on February 22, 2022 and the massive sanctions imposed by the US, UK, Canada and the EU against the Russian Federation, its economy and oil industry.
The epicenter of this change has been Europe, on whose eastern façade – and traditional oil and gas supply corridor from Russia – a multidimensional war is taking place that has become extremely complicated and where no diplomatic solution is yet in sight.
In Europe, the region that is the seat of large industrialized economies and a net importer of energy, the criterion of “energy security” prevailed –above any economic consideration and in close alliance with the US. as a strategic position of the North Atlantic bloc, deciding to break all economic and political ties with Russia, impose severe economic sanctions, stop importing Russian gas and prohibit or block the supply of oil and derivatives, thus introducing a powerful political element that has provoked the deglobalization or destructuring of the international oil and gas market in just one year.
Based on this political decision, the large consumers in Europe renounce the supply of oil and gas from their traditional supplier –in this case Russia– as they consider it unreliable and even an enemy, replacing it with oil from the Middle East.
VARIATION OF EU IMPORTS OF CRUDE CRUDE FROM MIDDLE EAST COUNTRIES AND RUSSIA
(jan-feb 2022 vs oct 2022)
For its part, the Russian Federation, the second largest oil and gas producer in the world, has sent its oil shipments, displaced from the European market, to Asia –granting discounts of up to 40%–, mainly to China and India (large consumers and exporters of derivatives).
RUSSIAN (URAL) OIL SHIPPING TO CHINA AND INDIA
In this redesign of oil flows, Russia, in addition to its shipments to large consumers in Asia, is selling oil to other producing countries in the Persian Gulf, who prefer to use these volumes of lower quality crude at discounts, to process them in their refining system and supply their own domestic market, while they export their own crude (of better quality) and derivatives to the market premium of Europe.
The destructuring of the oil and gas market in Europe, has had global repercussions, producing great changes, which appear to be structural and permanent, in the international energy market.
Now the large producing and consuming countries are grouped into political blocs and economic –on many occasions antagonistic– that guarantee their own “energy security” all of which has politicized, as never before, the oil market in the midst of a permanent sharpening of geopolitical tensions between the now called “autocratic” and the so-called “democratic countries”, new political categories that seem to open a new type of “cold war”, which is not marked by ideological differences or antagonistic economic models, but by economic competition and the geopolitical supremacy of the large economies or capitalist blocs.
In this vertiginous process of change, both producers and consumers have entered into the deployment of new and aggressive strategies and alliances, to ensure and restore flows of oil and gas, in a market with restricted supply and strongly demanded by the needs of the world economy.
The destructuring of the oil and gas market during 2022 has had important consequences on the world economy that was recovering from the collapse suffered as a result of the COVID-19 pandemic between 2020-2021, affecting the large industrialized economies, requiring large volumes of fossil fuels, by keeping the price of oil and gas up, and affecting energy supply chains, which is one of the engines of the inflationary phenomenon, one of the main threats of recession or slowdown in large economies developed in Europe and the United Kingdom.
The consequences, in the short and medium term, of this accelerated process of destructuring of the international market for oil and gas, have yet to emerge clearly, especially in the field of competitiveness of the industrialized economies of Europe, now with higher costs in their energy matrix, and the consolidation –yet to be seen– of the new geopolitical blocs and flows of oil and gas that have emerged from this crisis.
From economic destabilization to political destabilization
The world oil market was subjected to a profound destabilization of its fundamentals as a result of the COVID-19 pandemic that caused the fall of the world economy in 3.5%, which resulted in the collapse of the oil market, with a drop of 10 mbd in demand, which coincided or with an oversupply of oil products of the “price war” between Russia and Saudi Arabia, just after the failure of the meeting of the OPEC+ on March 5, 2020. As a consequence, the price of the oil collapsed to trade at -34 dollars a barrel on April 20 of that year, after the collapse from Cushing’s in Oklahoma, while inventories reached all-time high levels and the economy was in shock, due to the massive confinement measures, travel restrictions, paralysis of industrial activity and commerce.
This extraordinary situation of economic origin, which destabilized the oil market, was overcome by the determined intervention from OPEC+ and the massive production cut of 9.7 mbd, initiated in May 2020, which allowed inventories to be drained and to wait for the recovery of the economy, which began to take place in an unstable manner in the second half of 2020 and acquired a firm recovery trend during 2021.
As we have indicated -based on the close monitoring of the market that we carried out throughout this period and whose analysis we published in our successive Oil Reports of that period-, the performance of the OPEC+ It was not only decisive in stabilizing the fundamentals of the oil market, but also confirmed the full validity of the Organization and the principles that gave rise to its creation, including the need for producing countries to intervene and regulate the oil market, as this is a natural resource, owned by the producing countries, which is running out and must be preserved by intervening in its supply and prices.
Now the situation of destabilization of the oil market is much more complex and dangerous because it does not depend on technical and economic aspects of its foundations, but rather obeys the geopolitical aspects (including the economic and military interests) of the great powers and blocs that confront, in which all parties and interests involved in the conflict have used energy – oil and gas – as a political weapon. In political or strategic decisions in the current global situation, and in the oil market in particular, there is no rationality of any kind and they are motivated by geopolitical interests and confrontational scenarios that, in many of the conflicting capitals, even go so far as to consider the annihilation of the opponent.
Thus, at the end of 2021, when the world economy had stabilized, resuming its growth and that of the oil demand, and the performance of theOPEC+ managed to restore the balance of the fundamentals of the oil market and the price, it had to face the Russian invasion of Ukraine on February 24, 2022, the most serious – and unexpected for many actors – situation of political and military tension in this century, which occurred in the heart of the industrialized economies of Europe and which involves Russia, the world second largest producer of oil and gas.
By January 2022, before Russia’s invasion to Ukraine, the fundamentals of the oil market were already in equilibrium., with a projected demand for that year of 100.8 mbd, with a level of commercial inventories, from the countries of the Organization for the cooperation and the Economic Development (OECD), which stood at 2,677 million barrels, with a reasonable coverage of 59.3 days, while the supply of oil with located at 98.5 mbd; while the massive production cuts of the OPEC+, started in 2020, had been scheduled to end in August 2022,all of which indicated that the year was projected with a market in balance between supply and demand.
However, all the specialized sources in the sector agreed that this projected market equilibrium for 2022 was narrow, especially on the supply side, since the producing countries and large international oil companies had seen their capacity to oil production due to disinvestment in exploration and oil production, between 2020-2021, as a result of both the world economic crisis during the COVID-19 pandemic, and the strong lobby against the development of fossil fuels and in favor of the energy transition.
In other words, Russia’s invasion of Ukraine and the massive economic sanctions and restrictions on Russia’s oil and gas supply come at a time when there are no surplus oil volumes to supply growing demand and sustain economic growth. world, nor to replace Russian exports (in the event of a collapse in its oil production), which has been the stated objective of the US and the EU, after the imposition of sanctions and the restrictions on trade in oil and gas from Russia.
It is for this reason, fundamentally of geopolitical origin, the price of oil reached prices between $120-127 a barrel in the months following the invasion of Ukraine. The market expected the imminent collapse of Russian oil production – which did not happen – which allowed the price to fall in the second half of the year, supported by growing concerns about demand, especially due to the performance of the Chinese economy due to the problems derived from the massive cases of COVID-19 that arose with force in the Asian giant, for which the average price during the year 2022, for the Brent and WTI markers, it was located at 99 and 94 dollars a barrel, respectively.
BRENT AND WTI QUOTES *
However, the most notable event in 2022, and one that has largely kept the market balanced, has been the resilience of Russia’s oil production, which has remained at an average level of 9.8 million barrels per day (mbd ), only 200 mbd below the average of 10 mbd before the war, a 2% impact that does not indicate the collapse that many analysts expected.
RUSSIA OIL PRODUCTION (2022)
In this scenario of extreme politicization of the oil market, the position of the OPEC+ has been not to get involved in the geopolitical conflict, so their decisions have been strictly adjusted to the technical elements of the market, this, despite strong pressure from the US and Europe, so that Saudi Arabia and the Persian Gulf monarchies will press within OPEC to increase their oil supply and cause the implosion of the existing Cooperation Agreement with Russia and other Non-OPEC countries.
The OPEC+ has maintained its unity and at its meeting last October, when it decided on a cut of 2 MMBD with respect to its production base of 42.1 MMBD (without Iran, Libya and Venezuela, exempt from cuts in their production), announcing its next Conference of Ministers for June 2023, which is a clear signal to the market that the Organization sees no need to increase its crude supply in the short term.
In this scenario, the US administration has abandoned, or at least postponed, its policy of «Green Deal”, maximizing the production of oil and gas from his country, which was located, at the end of 2022, in 12.3 MMBD of oil and 3 billion cubic meters of gas per day (BCMD).
US OIL PRODUCTION *
In addition to this, the US administration has released 200 millions of barrels of oil since the month of march of 2022 of its strategic reserve (SPR),averaging 680 thousands of barrels per day (MBD) of supply to the market, with the intention of lowering the price of oil, replacing volumes of Russian oil -especially in its own market– and stimulate the increase in North American production given the need to replenish reserves.
To meet the objective of weakening Russia to the extreme and collapsing its oil production, the White House has sought ways to stimulate its domestic production, without assuming the political cost of abandoning its policy of dispensing with fossil fuels, proposing a safe business, with minimal risk, especially to producers of “Shale Oil”, where the US administration buys the surplus production of its country to replace the SPR.
However, this strategy is compromising coverage security levels, because if the 26 million barrels of oil were released, announced by the White House for 2023, the SPR will be below 350 million barrels as of July of this year, which, according to estimates by the US Energy Information Administration (EIA), would be its lowest level in 40 years.
UNITED STATES STRATEGIC RESERVES EVOLUTION
(1980 – February 2023)
The «Price Cap»
A distorting element of the fundamentals of the oil market,on the supply side,is the decision on December 4 of the EU and adapted by the G7, to impose a «Price Cap” on Russian oil, that is, consumers decide to impose a ceiling on the oil price. A fact that hits a fundamental principle of the oil market.
Consumer countries seek to intervene the oil market to control prices, ignoring the fact that oil is not a commodity, but a natural resource, whose right to regulate production and maintain its appreciation, through the price that belongs to the countries producers and not consumers; it is the practice of consumers, in the first half of the 20th century, when the poster of the «seven sisters» manipulated the oil price.
Fighting this practice has been precisely one of the reasons that led to the creation of OPEC in September 1960, and after the so-called «OPEC revolution» in the 1970s, constituting, since then, a fundamental principle that producing countries are not willing to give up.
Thus, the «Price Cap”becomes –de facto– a blockade on Russian oil which, added to the blockade and sanctions on Iranian and Venezuelan crude, constitute political decisions that continue to impose restrictions on the supply of oil, in a market where there are currently no surpluses in the supply.
The “Price Cap” imposed on Russian oil has not been effectively activated, since it is being sold at significant discounts of up to 40%. The “Ural” oil segregation has been quoted between November and February between 57–46 dollars a barrel; however, the problem lies in the principle that is intended to be violated and the non-acceptance by the producers of said mechanism for consumer intervention in the oil market.
This is why spokesmen for the Russian Federation, including President Vladimir Putin himself, have declared that they prefer to cut their oil production before accepting the imposition of the “Price Cap” mechanism; on February 21, the Deputy Prime Minister of Russia Alexander Novak announced that his country will cut 500 mbd of its production starting in March, in addition to the last cut of 2 mbd agreed by the OPEC+ last October.
The gas war
This process of destructuring the energy market of 2022 has had a great impact on the gas market in Europe, since, unlike the oil market, the gas market does not have as much elasticity in the supply chain, due to the characteristics of this natural resource and the Europe’s dependence on Russian gas, which constituted a 40% of its consumption before the war and that is carried out fundamentally via gas pipelines.
The political decision of the EU to reduce or cut Russian gas supplies, has caused a process of fracture of the energy gas market, where European countries their imports from Russia have ceased, –abandoning a traditional source of supply for more than 50 years–, to drastically change the origin and nature of its gas imports by increasing pipeline supplies from North Africa and Central Asia, as well as Liquefied Natural Gas (LNG) supplies from the US., and the Middle East.
As a result, the gas market in Europe has changed radically in just one year. according toQuarterly Report (3rd quarter 2022) on the European Gas Markets, published by the European Commission on January 22, between July and September 2022, of the total gas imported by the EU, 61% was received via pipeline and 39% via LNG, a very significant variation compared to 2021, when gas imports by pipeline stood at 83% and LNG supply at 17%.
SOURCES OF GAS IMPORTS FROM EUROPE
Between January and September of last year, exports from Russia to Europe by gas pipeline have shown an annual fall of 48%, from 109 billion cubic meters (BCM) at 58.6 BCM; while LNG imports from the US, Qatar and Nigeria increased by 58.7% with the US supplying 53 BCM, showing an increment annual rate of 203%.
So Europe –in just one year– has broken its dependence on Russian gas to depend on gas supplies from the US (a country that has become the world’s leading LNG exporter) and, to a lesser extent, from Qatar , as well as the traditional gas supplies from North Africa, mainly Algeria. As for Norway, it went from being the second largest gas supplier to the EU in 2021 with 23.5% to being the first in the third quarter of 2022 with 28%.
The new geopolitical and military situation in Europe, the threats to the supply and the change in countries of origin and type of supply had a strong impact on the price of gas in the European continent, which reached historical levels of 345 Euros per MWh in August 2022.
GAS PRICE IN EUROPE
2022 – 2023
The extraordinary rise in the price of gas in Europe experienced in 2022 derives from three fundamental factors: (1) speculation and the war premium in the face of the prospect of shortage of gas supplies; (2) the overhead of gas supplies via LNG (the price of LNG supplies from the US was located between January and October 2022 at a monthly average between 130 and 360 dollars per MWh) and (3) the massive gas purchases carried out by European countries to feed inventories up to a level of 90% (reached and exceeded in October 2022) in winter forecast.
The increase in the price of gas in Europe has affected its economic performance, with a drop of 1.8 points compared to 2021, both due to the rise in costs of its fundamental primary energy, and due to the effect on inflation that in December 2022 stood at 9.2% year-on-year according to data from the European Statistical Office (Eurostat).
BREAKDOWN OF THE PRICE OF GAS PAID BY DOMESTIC CUSTOMERS IN EUROPEAN CAPITALS AND ANNUAL PRICE VARIATION (%)
Since the end of 2022 and the beginning of 2023, prices have fallen significantly to be below 100 Euros per MWh, a 71% drop in price compared to the maximum levels of last August.
The fundamental reason for this drop is due to the fact that EU gas inventories reached levels higher than 90% in October, November and the first 15 days of December 2022, keeping, Currently, at a comfortable level that is above the60%, according to data from Gas Storage Inventory from Gas Infrastructure Europe (AGSI – GIE).
This increase in gas inventories in Europe was possible thanks to the increase in the share of LNG in the market, which –due to its higher costs in relation to gas transported by pipelines–what constituted a factor that makes gas prices more expensive during 2022, a factor that at this time at the beginning of the year does not exist due to the comfortable level of inventories.
On the other hand, the demand for natural gas has been restricted both by the energy saving policies applied in Europe, as well as its high costs, in addition to the fact that the winter season has not been as severe as expected in the continent.
The prices of natural gas were located on February 28 at 47 MWh, a price well below the prices of 2022, but still 300% above the prices that were being registered in Europe until April 2021.
The structure of the price of gas in Europe has yet to be defined, due to the greater participation of LNG in the new European market and the impossibility of replacing in the short term the volumes traditionally imported by gas pipelines from Russia with traditional suppliers from North Africa and Middle Asia.
For its part, Russia, although it was still able to supply more than 20 BCM of gas via LNG to Europe in 2022, has been redirecting its LNG shipments to the Asian market and is accelerating its interconnections via gas pipelines to supply other markets, especially China, This is a complex task, which will take several years to complete.
In turn, between the Asian and some European economies, which have the majority of long-term contracts for the supply of LNG with Qatar and other producing countries,A race has been unleashed to ensure and increase supplies via LNG in anticipation of the strong competition that now exists from Europe in the search for alternatives to Russian and Chinese gas, after the COVID-19 restrictions that affected its LNG consumption during 2022.
LNG VOLUMES WITH LONG-TERM SUPPLY CONTRACTS BY COUNTRY
Geopolitics of Hydrocarbons
The current geopolitical situation and the process of deglobalization of the hydrocarbons market, as a consequence of the political decisions following the Russian invasion to Ukraine, has caused the accelerated rearrangement of the market; regrouping large exporters and consumers into blocks of antagonistic geopolitical interests, where large producers are displaced from their traditional markets –natural–, while large consumers seek to guarantee their supplies in a market with restricted supply.
Biden’s administration, faced with geopolitical imperatives in Europe, postponed its “Green Deal” and its policy against the development of fossil fuels, stimulating the production of oil and gas to achieve its political and economic objectives.
With the entry into force of the EU blockade on the supply of Russian oil and fuels, Europe changes a traditional supplier and is looking for others, in a market where the supply is limited and there are not enough volumes to replace Russian oil with volume or quality.
These changes have brought immediate, short-term economic effects for Europe, reflected in a slowdown in the economy and an increase in inflation derived from the increase in the cost of energy while, in the medium and long term, the new energy market situation it will establish the new prices and costs of energy, and their impact on the competitiveness and economic growth of the region.
At the same time, Europe went from dependence on Russian gas to dependence on North American gas, supplied via LNG and, to a lesser extent, North African gas, via the Mediterranean. This structural change translates into a more expensive and immature market, without supply elasticity, where traditional LNG supplies are committed to long-term contracts with Asian economies, subtracting LNG volumes from the market in the short term. from the USA, Qatar and Russia.
Although the US or the monarchies of the Persian Gulf are currently more reliable energy suppliers for the EU than Russia, the central aspect is that the continent imports more than 95% of the oil and gas it needs for its consumption, dependence that cannot be overcome with its own production –due to the non-existence of natural resources–, nor with renewable energy, given its high degree of industrialization and consumption.
For their part, China, India and the Asian economies –countries and regions, net importers of energy– seek to ensure their supplies of oil and LNG, given the new geopolitical situation in Europe, becoming large buyers of Russian oil displaced from Western markets and signing new agreements to expand and secure supplies.
BEGINNING OF 2023
The oil market began 2023 in a stable manner, similar to the final months of 2022; however, it remains subject to great tension, as a consequence of the complex geopolitical situation derived from Russia’s invasion of Ukraine, which has marked the international scene since February 2022.
Despite the sanctions and the ban on the supply of Russian oil in Europe, USA, Canada and UK, the market is in balance, with world oil production for the first month of 2023 at 101.7 mbd of oil according to the OPEC’s February MOMR, with demand exceeding 101 mbd, according to the same source.
The stability with which the market closed in 2022 has been maintained during the first two months of this year, with prices that move within a band between 80-86 dollars a barrel for Brent and between 74 and 80 dollars for WTI, price band in which the prices are located since November 2022.
Despite the stability of the market in 2023, the market is under permanent tension due to elements of uncertainty in the fundamentals of the market: on the supply side, military events and geopolitical tension in Europe derived from the Russian invasion of Ukraine and uncertainty regarding its development; on the other hand, Russia’s ability to sustain its production levels and prevent its oil industry from collapsing in the face of sanctions on its economy and the massive restrictions and bans on its oil and gas exports.
On the demand side, since the end of last year, there have been warnings of a sharp slowdown in the US, UK and EU economies, the persistent inflationary problem and the measures to restrict currency that may affect the increase in demand. On the other hand, China, the great engine behind the increase in oil demand, continues to make efforts to recover its economy, after the contraction of 1.8 points in its growth economic in 2022, experienced last quarter of last year, as a result of the resurgence of COVID-19 experienced between February and December of last year.
Oil price markers opened the year with a slight downward trend, due to uncertainties regarding the world economy for 2023 and the behavior of China’s demand, affected by the restrictive measures of its Zero-Covid policy, which, despite having been repealed last December 7, has continued to affect the consumption of the world’s second largest oil importer.
This trend, however, was reversed in the second half of January, when prices recovered their quotations, closing the month at 85 dollars a barrel for Brent and 78 dollars a barrel for WTI, with the price fluctuating in a band between 78-88 dollars a barrel, values which were maintained in February.
At the close of February, price markers were trading higher at $83.95 and $77.4 a barrel for Brent and WTI, respectively, reflecting fears of supply shortages in the face of the new round of sanctions on Russian oil and products, as well as the strong pressure being exerted on traders, banks and insurers to refrain from trading with Russia.
MARKER FUTURES QUOTES
BRENT Y WTI *
(November 2022 – February 2023)
The OPEC Market Monitoring Report for the month of February estimates a global demand for 101.26 MMBD for the first quarter of 2023, with an estimated annual average of 101.87 MMBD, an increase of 2,3 mbd compared to 2022. This estimate is similar to that of the International Energy Agency IEA (101.9 MMBD), with an annual growth of 2 MMBD compared to their own estimates.
On the other hand, EIA projections show an annual average demand of 100.5 mbd, 1.4 mbd below OPEC data.
All specialized agencies and organizations in the sector estimate that demand will be above 100 MMBD, a historical maximum level in the oil market, which clearly indicates that fossil energies continue to be the fundamental engine of the world economy.
Although these demand estimates are made at the beginning of the year and there is still uncertainty and definition of some scenarios, it is most likely that, despite the slowdown expected for this year in the US, UK and EU economies, they will not enter into recession and the growth capacity of the Chinese economy and other Asian economies will keep world demand rising, to reach over 100 MMBD.
WORLD OIL SUPPLY
Regarding the data accumulated in 2022, OPEC, the IEA and the EIA agree that world oil supply, between January and December 2022, increased by 3 MMBD, while demand increased by 2.54 MMBD, which reflects the effort of producers to keep the market in balance, as well as the tightness of the market, if we consider that the supply includes the volumes of crude released by the North American SPR.
OPEC oil production increased by 1.5 MMBD, between May and October 2022; since November, the group has executed an effective cut of more than 800 MBD.
Russian production recovered 650 MBD between April and June of last year, stabilized over 9.7 MMBD since then; while US production has remained above 12 MMBD since August of last year, increasing its production by 800 MBD from May 2022.
Oil, liquids and condensates production
According to OPEC data, in its monthly report (MOMR) of theFebruary 14th,world production of oil, liquids and condensates, for January 2023, stood at 101.7 MMBD, showing a monthly increase of 600 MBD.
However, both the EIA and the IEA show lower production levels compared to OPEC data by 700 MBD and 900 MBD respectively.
Crude, condensates, LNG and Unconventionals
World oil production
World oil production (without condensates, NGL and Non-conventional) in January 2023 was 82.3 MMBD, of this production to the countries of the OPEC+ a volume of 42.5 MMBD corresponds to them, 51.6% of world oil production, which clearly indicates the importance and strength of the group.
World oil production in January presented a drop of 900 MBD compared to world production in October 2022, which reflects the last production cut agreed by the OPEC+ on September 5, 2022, which entered into force on October 1.
WORLD OIL PRODUCTION
According to data from the latest OPEC MOMR, the oil production of the 13 member countries, for January 2023, stood at 28,876 MMBD, with a drop of 49 MBD compared to December and 682 MBD over the production registered in October. of 2022.
Saudi Arabia, Iraq, Kuwait and the UAE, executed a joint effective cut of 970 MBD, which means that they produced 71 MBD above the reduction target defined for these 4 countries:1,041 MBD, which corresponds to 81%of the total approved for OPEC members.
OPEC’S COUNTRIES PRODUCTION
(Based on secondary sources)1
OPEC production in January was 70.89% (20.471 MMBD) concentrated in the Persian Gulf countries (excluding Iran); and 13.88% (4 MMBD) in African countries (excluding Libya); while the three countries exempt from production cuts (Iran, Libya and Venezuela) accounted for 15.2% (4.31 MMBD), of which Iran accounted for 60%.
OPEC PRODUCTION BY COUNTRY GROUP
Thus, the monarchies of the Persian Gulf and Iraq have the greatest weight within the Organization, where Saudi Arabia has the leadership of the group and together with Russia, the leadership of the OPEC+.
VARIATION IN THE RANKING OF OPEC’S
(2013 vs. 2023)
Thus, in 2013 the ranking of OPEC producing countries was –in decreasing order– the following: (1) Saudi Arabia, (2) Iraq, (3) Venezuela, (4) Kuwait, (5) UAE, (6) Iran, (7) Nigeria, (8) Angola, (9) Algeria, (10) Libya; while in 2023, the ranking of OPEC producing countries is –in decreasing order– the following: (1) Saudi Arabia, (2) Iraq, (3) UAE, (4) Kuwait, (5) Iran, (6) Nigeria, (7) Angola, (8) Algeria, (9) Libya and (10) Venezuela.
It can be seen how the group of Persian Gulf countries positioned themselves as the leaders in the ranking of producing countries, while Iran was able to climb back to (5) place, while Venezuela -which has experienced a debacle- went from (3) place to the last (10) place in the ranking of OPEC producing countries, surpassing only the small producing countries of Africa (Gabon, Equatorial Guinea and Congo), whose combined production barely reaches 500 MBD.
According to OPEC’s MOMR data, Russia’s oil production as of January stood at 9.7 MMBD, holding steady above this level since June of last year, despite the strong sanctions and blockades to its oil industry in force since June of last year.
RUSSIA OIL PRODUCTION (January 2020- January 2023)
The resilience of Russia’s oil production has been one of the most notable events throughout 2022 and a factor of great uncertainty for the market as it is the second largest oil and gas producer in the world.
Despite all the predictions of Western think tanks and analysts, Russia’s oil industry has managed to resist the massive economic and financial sanctions, as well as the blockade on its exports that have the declared objective –both by the US and the EU– of causing Russia’s oil production to collapse, which, in light of the current market situation, would be a disaster for that country, for the international oil market and the world economy.
Russia’s oil production demonstrated its resilience when it managed to rebound its levels by 1.2 million barrels per day from May 2020 (when the OPEC+ cut took effect and production fell to 8.9 MMBD) to February 2022 when production stood at 10.1 MMBD.
Like Saudi Arabia and the US, the Russian oil industry managed to keep its production capacities safe from the effects of the economic crisis during the pandemic years and the disinvestment in exploration and production activities that have hit other oil producing countries.
Although throughout 2022 Russia’s oil production remained above 9.8 million barrels per day, economic sanctions and the withdrawal of Western oil transnationals from major production projects in Russia may have a medium and long-term effect on the country’s production capacities, which is still difficult to estimate and has not yet been reflected in production volumes.
So far Russia has been able to maneuver amidst the sanctions and restrictions imposed on the sale of its oil and oil products.
Throughout 2022 it has used all its capabilities and allies to direct large volumes of oil displaced from Europe and the USA to the Asian market, mainly China and India, where, despite sales with large discounts of up to 40% in price, it has obtained significant economic resources to maintain its operations.
Thus, since the beginning of the war, until February 12, 2023, China has made purchases of 62.2 billion euros in Russian fossil energies, of which 51.2 billion (82%) are for the supply of Russian oil and oil products, becoming the world’s largest importer of hydrocarbons produced in the Eurasian giant..
With the entry into force of the Price Cap«, as of December 6, the segregation of crude oil «Ural” Russian oil has been trading below $60 a barrel, which, according to the same terms of the sanctions imposed by the EU, did not prevent its commercialization.
In both cases, the sale at a discount and the adjustment of Ural crude to the Price Cap show that Russian producers prefer to place their crude and build new markets, albeit at a lower price, than to stop or abandon their production activity as American shale oil producers did at the time, during the COVID pandemic (2020-2021).
The most obvious impact on the price has been suffered by «Ural» crude, the most important Russian export segregation, displaced from the European market which, after being quoted at 90 dollars a barrel during the first half of 2022, closed the year with quotations of 57 dollars a barrel, a drop of 37% of its value, causing Russian oil export revenues to fall from 430 million euros a day in November last year, to 277 million on February 12, 2023.
How far the Russian oil industry can adjust to declining revenues, especially after the losses accumulated during the collapse of the pandemic, is a matter that remains to be seen.
That is probably the reason for the announcement made by Russian Deputy Prime Minister Alexander Novak about cutting production by 500 MBD in response to the EU-imposed «Price Cap». Although the announcement may be motivated to defend the price of Russian crude in the market, it may also be due to an optimization of Russian production and its markets, adjusting to a new production floor concentrated in crudes with lower costs and better market prices.
In any case, the oil market, short of supply and facing a rising demand, will continue to adjust to the current situation to receive Russian oil cargoes. Consumers are not in a position to do without them.
The latest weekly report from the EIA, dated March 1st, shows a production of 12.3 MMBD at the close of the week of February 24, showing stability in this new production level reached, after having increased 980 MBD during 2022.
Since August of last year, production has been above 12 MMBD, between September 2022 and January 2023 oil production has remained between 12.3 – 13.4 MMBD. The EIA projects that North American production will close the year at 12.6 MMBD.
US OIL PRODUCTION *
(January 2020 – January 2023)
The latest weekly report from the EIA, dated March 1st, shows a production of 12.3 MMBD at the close of the week of February 24, showing stability in this new production level reached, after having increased 980 MBD during 2022.
Since August of last year, production has been above 12 MMBD, between September 2022 and January 2023 oil production has remained between 12.3 – 13.4 MMBD. The EIA projects that North American production will close the year at 12.6 MMBD.
As of December 2022, OECD countries’ commercial inventories (oil and products) stood at 2.768 billion barrels, up 117 million barrels from December 2021, but 95 million barrels below the 5-year average (impacted by the COVID-19 pandemic) and 158 million barrels below the 2015-2019 period.
Meanwhile, U.S. commercial inventories (oil and products) stood as of January 31, at 1.235 million barrels showing a recovery of only 45 million barrels, relative to January 2022.
The levels of both OECD and US commercial inventories show the tightness of the market, due to the restriction of supply and the increase in world demand.
IN OCDE COUNTRIES AND USA
(January 2014 – January 2023)
Commercial inventory levels, both the OECD and the US, have undergone an extraordinary «draining» process with respect to their historical maximum levels reached during the COVID pandemic. This drainage was made possible by the OPEC+ cutback policy implemented between 2020-2022. Today, inventories show levels that still reflect the tightness of the market, due to the restriction of supply and the increase in world demand.
Venezuela, an oil country par excellence, with a century-old oil industry is experiencing the worst crisis in its history, mainly as a result of the collapse of its oil production and its national oil company PDVSA, between 2015-2023.
VENEZUELA’S HISTORICAL PRODUCTION
(1922 – 2022)
The origin and causes of this collapse, unprecedented in any oil country, have been duly recorded and pointed out in articles, documents and testimonies by various sources, but nothing has been able to justify the destruction of the powerful Venezuelan oil industry.
The government’s successive interventions in PDVSA since 2015, accompanied by political persecution, imprisonment and exile of its directors, managers and workers; the militarization of the company in 2017; the departure of more than 30 thousand specialized workers from the industry; the dismantling of the oil infrastructure; the abandonment of plans and projects; the absence of a Development Plan; the massive diversion of the company’s budgetary and operational resources to other priorities or purposes of the government; as well as successive and erratic Boards of Directors appointed in PDVSA made up of political personnel, without any qualifications to hold such high positions, have led to the collapse of the company, have been part of the causes of the generalized deterioration of the national oil industry.
The operational collapse of PDVSA occurred as from 2015, has dramatically affected its oil and gas production capacities, in addition to those of processing and refining, as well as the country’s oil exports, which has deprived the country of the oil income that, until 2013 meant 93% of the foreign currency income, causing the fall of 82% of the national economy and plunging Venezuela into a generalized collapse, in a deep economic and social crisis.
This situation does not seem to have a solution as long as the severe political and legitimacy crisis of the government of Nicolas Maduro persists, which has demonstrated its inability to lead the most important sector of the national economy, repealing the policy of Full Oil Sovereignty (which proved its effectiveness between 2002-2014) and which has acted in violation of the current legal and constitutional framework of hydrocarbons.
For all these reasons Venezuela, a founding member country and once a pillar of OPEC, has been on the sidelines both of the Organization, as well as of the international oil market. For this reason, the country has not only been unable to participate in OPEC+ efforts to contribute to the stability of the market, nor has it been able to benefit from the market recovery experienced as of 2021, nor from the extraordinary rise in prices experienced in 2022 and projected for 2023.
Stagned oil production
OPEC’s Oil Market Monitoring Report (MOMR), dated February 14, placed Venezuela’s oil production at 686 thousand barrels per day for the month of January, an increase of 20 MBD with respect to the month of December.
VENEZUELA’S OIL PRODUCTION
The country’s oil production remains stagnant at the same level it averaged in 2022, 11% below the average production of 2019 and 77% below the average production of 2013.
Since 2017, the Venezuelan government has not published data on the oil industry, nor has it audited the financial statements; there is no oversight of the oil activity by the Ministry of Petroleum, nor publication of its official data.
Therefore, the best available information to which access is available is the data from specialized sources of the international oil market used by OPEC, which are known as OPEC’s «secondary sources».
Secondary sources consulted by OPEC for its oil production report have been denying the repeated announcements made by the government since 2017, after the militarization of PDVSA, that the country’s production would reach «at least» two million barrels per day.
On February 20, 2020, the Venezuelan government created the «ARA» Commission, with the express purpose of recovering oil and fuel production in the country. On April 26 of that year, Tareck El-Aissami, a criminal lawyer with no experience whatsoever in the oil sector, with drug trafficking charges and international arrest warrants, was appointed as Minister of Petroleum.
Although he is the least indicated candidate to take charge of the most important sector of the country, he is nevertheless President Maduro’s right hand man.
To date, the «ARA» Commission has not presented any plan to recover the oil industry, other than the privatization and delivery of the operating areas and facilities to elements of the private sector linked to the government, this has been done illegally and in secret, using for this purpose the so-called «Anti-Blockade Law», approved by the extinct Constituent Assembly of 2018, the same has vices of nullity for being unconstitutional.
The course of action of the government and the «ARA» Commission has been contrary to the Constitution and the Organic Law of Hydrocarbons, therefore, the hydrocarbons sector has been stripped of the legal framework that gives it legitimacy and value for the future.
OIL PRODUCTION OF VENEZUELA
(2002 – january 2023)
According to internal PDVSA information, the current Venezuelan oil production of 686 MBD is composed as follows: 446 MBD (65%) corresponds to the Orinoco Oil Belt, 140 MBD (20%) comes from the fields in the north of the state of Monagas and 100 MBD (15%) originates from the fields in the Maracaibo Lake basin, in Zulia state.
It is important to note that as a result of the abandonment and inoperability of the Belt’s Crude Upgraders located in the north of Anzoátegui State in the José Antonio Anzoategui Industrial Complex, 50% of the Belt’s extra-heavy crude production is exported as DCO (Crude Diluted with Naphtha), an off-spec crude whose commercial value is low compared to Merey Crude (our flagship segregation), and with a high production cost, where the imported Naphtha required to extract the extra-heavy crude from the Orinoco Oil Belt is lost.
Additionally, more than 85% of the current production depends on the Mixed Companies or the so-called Integrated Hydrocarbons Services Alliances (ASH) -previously known as Joint Services Agreements (ASC)-, the latter, an illegal figure that does not exist in the Organic Law of Hydrocarbons.
Thus, the production with PDVSA’s own effort, which in 2013 represented more than 65% and in 2017 54% of the country’s total production, is currently close to a meager 10%, which means that not only have they destroyed the production volumes but they have reduced to its minimum expression the capacity of the Venezuelan State to generate oil revenues, turning PDVSA into a Contract Administration Agency instead of an operator, as was denounced at the time.
The situation of stagnation of Venezuela’s oil production does not seem to have a solution in the short term. The government has placed its hopes for an increase in production in the transnationals that -in an illegal manner- are taking oil out of the country according to the terms of the US OFAC License and not according to the Organic Law of Hydrocarbons of the country.
However, the same Chevron CEO, Michael Wirth, in a statement he made on February 28, which fell like a bucket of cold water to the government’s propaganda machinery, made it clear that the production of the US oil company in Venezuela is at 50 MBD and that they aspire to reach a maximum level of 90 MBD, mainly due to the «political risk» of the country.
On the other hand, the new president appointed to head PDVSA, another military officer (this time a colonel), with no experience in the oil sector, took office on January 6th and, in his tour of PDVSA’s dismantled facilities, «announced» that one (1) drill will be reactivated in the Orinoco Oil Belt, where, according to the same official, not one (1) single drill has been carried out for more than 4 years.
Taking into consideration that, under optimal conditions, drilling a production well in the Orinoco Oil Belt takes between 10 and 14 days, depending on the area, and that in Venezuela, in order to maintain a production of around 1 million barrels per day, it is necessary to connect a minimum of 30 wells per month, it is evident that we are very far from the recovery of oil production announced by the government, for which at least 100 additional drills must be activated, and all maintenance and subsoil activities must be carried out in order to raise production to levels above 1 million barrels per day.
Oil sovereignty defeat, Maduro’s legacy
Last November 26, the Office of Foreign Assets Control of the United States Department of the Treasury (OFAC) issued General License 41, in which Chevron was authorized to restart production operations in Venezuela, and at the same time ordered to dispose of the Venezuelan oil it extracts, without paying royalties or taxes to the Venezuelan State, as well as the payment of dividends to PDVSA as majority shareholder of the Joint Ventures in which Chevron participates, while deciding that the oil extracted by Chevron be sent to the United States.
What is alarming is not the U.S. interventionism embodied in the aforementioned License (which is already serious), but the fact that the Venezuelan government accepted and celebrated the License granted to Chevron, which implies the disregard, by the Venezuelan government, of the Organic Law of Hydrocarbons and the Constitution of the Bolivarian Republic of Venezuela.
Thus, 6 days after the License was granted, the Venezuelan Minister of Petroleum, Tareck El Aissami, on behalf of the government, assumed the terms of General License 41 in substitution of those established in the Organic Law of Hydrocarbons and signed secret production agreements with Chevron, where, in addition, the US corporation was given the operational control of the Petropiar upgrader, located in the Petrochemical Complex of José Antonio Anzoátegui, in Anzoátegui state, in the eastern part of the country.
All these agreements have been made behind the country’s back, in violation of the Organic Hydrocarbons Law and the character of Public Interest Contracts, as all contracts related to primary hydrocarbons activities are defined, for which reason their terms and conditions must be of public knowledge and approved by the National Assembly, otherwise they lack legitimacy and are null and void for all purposes.
These new agreements, as pointed out by Chevron’s CEO, Michel Wirth, will not significantly increase Venezuelan production as the Venezuelan authorities and the pro-government media euphorically affirm, fundamentally due to the deterioration of the oil industry and the related sector, in addition to what Mr. Wirth points out as the «political risk» of the country, that is, the Maduro government itself.
It is enough to remember that the maximum production reached by the joint ventures in which Chevron participates -Petropiar, Petroboscán, Petroindependiente, Petroindependencia-, was 273 MBD, reached in 2013, without the infrastructure and market limitations that exist today. By 2022, the combined production of these companies was, approximately, between 90 -100 MBD, that is, their maximum growth potential, if the limitations imposed by License 41, which obliges them to produce only in the areas in which they participated in 2019, are met, is 170 MBD.
Chevron has the interest to put as much pressure as possible on a weak government such as that of Venezuela, with the objective of radically changing the Constitutional reserves that govern the sector, with respect to the effective control and participation of the State in the oil industry and the Organic Law of Hydrocarbons.
Meanwhile Chevron, the second most important North American transnational, with profits in 2022 exceeding 35 billion dollars, will take as much Venezuelan oil as it can and will enjoy the extraordinary profits granted to it, not only by the Venezuelan government, with an illegal exception of royalty payments and an unusual «Tax holiday», but also due to the price of oil in the market, which remains at around 80 dollars per barrel.
These agreements signed by the Venezuelan authorities and the concessions made outside the law, generate a terrible precedent, a huge setback in our centenary oil doctrine and institutionality, where any private capital company -especially the transnational ones- may demand from the Venezuelan government that the agreements and participation in Venezuela be signed under the same terms and conditions that were made with Chevron; this absolutely irregular and illegal situation will be corrected as soon as the Constitution and the laws of the Bolivarian Republic of Venezuela are reestablished in full force and effect.
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