Prices on all crude markers are up 30% from the beginning of this week, following the announcement by Saudi Arabia of convening an urgent OPEC and non-OPEC conference, including the Russian Federation, to discuss «an equitable agreement to restore balance to the oil markets,» according to the official Saudi agency SPA.
This OPEC+ meeting, which will be held on Monday, April 6 by videoconference, given the travel restrictions of COVID-19, has had oil contract operators making profits all day long, and the price goes up pending a production cut agreement as a result of the meeting.
Brent oil traded at the close of Europe at $33.53 and WTI at $27.36 a barrel, +38% ($11) and 27% ($7) higher than at the beginning of this week, respectively.
Trump to the rescue of the price.
Since Thursday, the market has been reacting to announcements of talks between the three major oil producers, Russia, Saudi Arabia and the US, to seek an agreement to stabilize the market and the announcement of the Kingdom of Saudi Arabia’s call.
These conversations and coordination activities between the large producers have been led and stimulated by the American President, D. Trump, who, in an unusual position for the United States, has advocated an agreement to recover oil prices; prices which, after his initial reactions of satisfaction with the reduction in the price of fuel in the United States, are evidently affecting his own sector of shale oil production, and consequently, the American economy.
Yesterday, Thursday April 2, President D. Trump issued messages on the social network Twitter that stimulated the rise of up to 35% of WTI and 47% of Brent at the beginning of the day.
In the first one he said:
“I Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” And then he tweeted: «it….. Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!». These tweets from Mr. Trump, followed by Saudi Arabia’s announcement of an urgent OPEC+ meeting for the following week and statements by Russian authorities today that it, «would agree to make production cuts to stabilize the market» and the Russian President V. Putin’s statement that «a cut of 10 million barrels is possible,» have given support to the significant rise in the crude price markers, taking them to a level of 25 dollars for WTI and 30 dollars for Brent, in just two days, which we could qualify as the «premium» or the «Trump effect.»
How much and who is going to cut their oil production?
The first question that should be asked is: how much oil needs to be cut at present?
In just one month, the drop in oil demand has been dramatic because of the effects of COVID-19 on the economy. While before the OPEC meeting, the organization estimated an increase in oil demand of 900 MBD by 2020, immediately after the OPEC+ meeting, which ended without agreement, the organization reduced its estimate to a growth of only 60 MBD.
However, last week, the IEA and other private agencies began to estimate a drop of 1.5 million barrels a day in March alone, and most agreed on a loss of demand estimate of between 10 and 20 million barrels a day of oil. The dimension of the drop in demand for oil and fuel is closely related to the recession that the world economy has entered due to the effects of COVID-19, where 3 billion people are affected by restrictions on movement in China, Korea, India, South Africa, Europe, the United Kingdom, Canada and the United States, in addition to the paralysis of important sectors of manufacturing, services, tourism and air transport, among others.
That’s why, probably advised by officials from the Department of Energy, President D. Trump mentioned in his tweets yesterday a 10 million barrel cut that could go as high as 15 million barrels.
Russian President V. Putin also mentioned today, Friday, that a cut of 10 million barrels, «is possible.» If we set a cut of that magnitude as the goal of the agreement to stabilize the price, that is, a 10% cut in world oil demand, the second question is who will make that cut?
The biggest cut made by OPEC was in December 2008, when it agreed to a 4.5 million barrel per day cut, to contain the fall in price, a product of the US housing crisis, when it plummeted from $140 a barrel to $40 a barrel in less than 6 months.
At that time, the OPEC countries as a whole produced 32 million barrels a day, 45% of world’s oil production (1.36 Algeria, 1.90 Angola, 0.24 Congo, 0.51 Ecuador, 0.30 Equatorial Guinea, 0.23 Gabon, 4.06 Iran, 2.28 Iraq, 2.68 Kuwait, 1.72 Libya, 2.02 Nigeria, 9.20 Saudi Arabia, 2.57 United Arab Emirates, 2.96 Venezuela), while Russia produced 9.6 million and the USA produced 5 million barrels.
But the situation in OPEC today is very different. Its production is 27 million barrels a day, 28% of world oil production, but the volumetric participation of its members has changed after more than 10 years of crude political readjustments in the region, including wars, invasions, sanctions and the ungovernability of some of its founding members. Thus, by the end of February, the production of the OPEC countries was as follows: (1 Algeria, 1.3 Angola, 0.30 Congo, 0.12 Equatorial Guinea, 0.19 Gabon, 2.08 Iran, 4.59 Iraq, 2.66 Kuwait, 0.10 Libya, 1.78 Nigeria, 9.68 Saudi Arabia, 3.04 United Arab Emirates and 0.76 Venezuela).
From the numbers given above, it seems that not many countries, with the exception of the Persian Gulf monarchies, will accompany Saudi Arabia in a larger cut than the already agreed 1.5 million barrels a day of oil at the last meeting on March 5. Russia will now have to assume the cut of 500,000 barrels a day, which it did not want to accept on March 6th at the OPEC+ meeting, and which marked the beginning of the price war with Saudi Arabia.
If, a month later, the two big producers, Russia and Saudi Arabia, decide to leave behind their arrogance and geopolitical interests and agree to a cut similar to that proposed just a month ago (that is, 2 million barrels of oil per day), they would still be taking away 8 million barrels to reach the indicated number of 10 million cut indicated by Trump and Putin.
It is clear that the effort of such a large cut in production must be accompanied by producing countries, beyond OPEC and non-OPEC, which should include countries such as the USA, Canada, Norway, Mexico, Brazil, among others.
While Canada has indicated that it would accompany a production cut, the US, through President Trump himself and Larry Kudlow Director of the National Economic Council, indicated today that the US would not cut its own oil production, based on doctrinal considerations as well as the Anti-Trust laws. In other words, President D. Trump hopes that the effort to cut production will be made by «others,» especially Russia and Saudi Arabia.
Interestingly, despite this position of the US federal government, oil regulatory authorities in both Texas and Oklahoma have pointed out the need for producers in their respective states to reduce their production.
We return here to the point that we have always maintained, if OPEC does not exist, or loses the capacity to regulate the market, others will do so, either as the Rail Road Commission in Texas did at the beginning of production in North America, or as the transnational companies, the 7 sisters, did before OPEC existed.
The burden of the cut, to reach the 10 million barrel target, must then fall on the big producers, Saudi Arabia, Russia and the US. Today, Saudi Arabia stated that it hopes that the production cut to stop the price fall and stabilize the market must involve a wider group of producing countries, beyond OPEC+.
We will have to wait for the development and outcome of the OPEC+ meeting to see what agreement is reached, but obviously what is decided there, in case of a robust agreement in OPEC+ and other producing countries (it seems unlikely that this effort will be accompanied by the US), only removes one of the destabilizing elements of the market: the price war and the excess of oil volumes in the market, but the main factor of market destabilization remains active: the fall of the world economy and the collapse of oil demand.
Beyond oil, COVID-19 continues to hit industrialized economies and rapidly expand around the world. To date, the number of people infected with the coronavirus has reached 1,066,706, with 56,767 deaths. In the U.S., cases are increasing rapidly, with 261,438 cases and 6,699 deaths reported today.
The real economy continues to be affected by travel restrictions, internal displacement, suspension of supplies, and the paralysis of industrial and manufacturing activity. There is no estimate of how or when the pandemic will end, which is having a downward impact on most stock markets, despite massive financial support from governments and central banks around the world.
There is also an increase in massive requests for assistance from large aviation companies, oil producers, manufacturers, as well as the cancellation of investments, and the reduction of costs and expenses of large international corporations.
An indicator of the deep impact of the COVID-19 in the United States is the increase in requests for unemployment assistance by 6.6 million, according to the U.S. Department of Labor, today, which makes one fear that the American giant points to the worst scenario of reaching 20% unemployment. The same is happening in Europe, where millions of jobs have been lost, to which the European Union has responded with massive economic aid to try to protect the population’s consumption capacity.
It seems that the economic downturn caused by the COVID-19 is still far from being stopped, and it is expected that this year 2020 will be a year marked by a great recession.
Crude Oil Production
In Venezuela, the most relevant news at the end of March was the announcement of the departure from the country of the Russian giant Rosneft, PDVSA’s partner in E joint ventures in important projects in the Orinoco Oil Belt, in addition to having the right to exploit and export the gas reserves located in the north-east of the country.
In a still confusing operation, without proper information to the Executive and the National Assembly, Rosneft transferred its assets and rights to a Russian company, 100% owned by the government, not yet identified. This operation, by changing actors and operators, in addition to not complying with the authorizations of the Executive and the National Assembly, as established in the Organic Law on Hydrocarbons, will affect the continuity of operations in these important projects for the country.
The other relevant news was Chevron’s announcement to cancel oil service contracts in the country, citing a decision to reduce costs due to the fall in price. However, there are comments that this decision is linked to the likelihood that OFAC will not extend the license granted to Chevron to continue operating in the country, especially in light of the increased tensions between the two governments following the serious accusations by the U.S. Department of Justice against the President of the Republic, the Chief Justice of the Supreme Court, the Minister of Defense and two other government ministers. Three of those accused of drug trafficking, corruption, and terrorism are members of PDVSA’s Comptroller’s Commission.
During the month of March, Venezuelan oil production showed a decrease of close to 100 MBD compared to February, with an average month of around 650 MBD. This production reflects not only the volumes of crude oil extracted, which are reported by OPEC, but also the volumes of condensate and natural gas liquids.
The decrease in the volumes produced was generated as a consequence of the increase in crude oil inventories, fundamentally due to the distancing of the companies Rosneft Trading and TNK Trading International, after the sanctions announced by OFAC. This situation left PDVSA without the main tools used in recent months to transport and commercialize its crude, leaving in the operation only companies with briefcases of people close to the government, who not only have a dubious reputation, but also a limited capacity to move significant volumes in a depressed international market such as the one we have been observing since the appearance of COVID-19.
Of the 650,000 barrels of average production for the month, about 60%, or about 360,000 barrels, come from the joint ventures that were created as of 2006.
The Orinoco Belt was the most affected area during this period, registering a production of 360 thousand barrels per day. The decrease of over 100,000 barrels with respect to the February average is directly due to the increase in crude oil inventories as a consequence of the reduction in the marketing capacity of PDVSA’s most important segregation: Merey-16. However, at the time of writing this bulletin, some dispatches have been made, which has allowed the production of the Belt to be temporarily above 400 thousand barrels per day.
Meanwhile, production in northern Monagas was affected in the last two weeks of March, as a result of the explosion on the 20th at the Carito Flow station in Monagas state. This fire directly caused a 30 MBD decrease in crude oil from the Carito and Pirital fields, and indirectly in the production of extra heavy crude oil from the Belt, which is reflected in a decrease in volume of its usual diluent. Production from the Oriente, together with that generated in the country’s western basin, averaged close to 290 thousand barrels per day.
An important detail regarding the production of the month of March is associated with the decisions taken by two of the most important partners in the joint ventures and the impact that these decisions could have on the volumes that PDVSA will produce from now on. This is the case of Chevron and Rosneft, which decided to close all their existing service contracts and sell all their assets in the country.
The joint ventures in which Chevron and Rosneft participate as partners together produced 270,000 barrels per day, which represents approximately 35% of total production during the past month. Therefore, one must be very attentive to the volumetric impact that the departure of Rosneft and the cancellation of service contracts by Chevron may have on PDVSA’s production, since the data reveals the dependence that it has on the role of the joint ventures, given the destruction of the industry’s own capacities that the government of Maduro has faced.
The situation of the GAS.
Venezuela has reserves of 197 GGP of gas, placing it in 8th place worldwide. Of this gas, 165 PCBs are onshore and are mostly associated with oil, and 32 PCBs are offshore, being free gas.
Despite this resource base, gas production has fallen along with the collapse of oil production and the cancellation or divestment of offshore gas projects.
The volume of gas produced in Venezuela currently stands at 5,800 MMPCD, a drop of 1,592 MMPCD from production at the end of 2013.
Anaco’s production reaches only 480 MMPCD, a drop of 4,038MMPCD compared to its production at the end of 2013. Production continues to fall, as the deflation of the deposits is maintained. The drilling of the last six years has not reached more than 10% of volumetric success, and its production is exhausted in less than three months. On average, production per well does not exceed 0.8 MMPCD, and new boreholes do not exceed 0.3 MMPCED. In Anaco there is a high level of inefficiency, mainly due to a high absence of personnel, lack of equipment, spare parts, and the deterioration of working and living conditions of workers.
Gas production in northern Monagas reaches 4,770 MMPCD, of which more than 1,500 MMPCD are flared into the atmosphere. This situation is produced fundamentally by the gas/oil ratio in these fields, added to the state of collapse of all the high-pressure gas injection plants, which are stopped, due to lack of maintenance and the suspension of gas collection and compression projects.
The project to hand over the management of gas from the east of the country to Shell, announced by the government on August 25, 2018, turned out to be a failure due to the disagreements and conflicts between this transnational company and PDVSA Gas. Likewise, the joint project with Trinidad and Tobago and Shell to manage the gas in the Dragon Field, in the north-east of the country, was suspended due to disagreements in the management of the project and the U.S. sanctions.
The Mariscal Sucre gas project, indispensable to guarantee the country’s gas balance, was cancelled by the government of Maduro, and its fields were handed over to the Rosneft company, which announced its withdrawal from Venezuela last week.
In the west of the country, the gas situation is alarming, as the sharp drop in oil production has minimized the extraction of associated gas. In addition, more than 350 MMPCD are being vented or flared, keeping thermoelectric plants without gas supply and the Ana María Campos petrochemical plant in El Tablazo, which has been totally shut down for more than two years.
In the Gulf of Venezuela, in the west of the country, the offshore gas license in the Cardón IV block, operated by ENI and Repsol, is producing 550 MMPCD and 8000 BPD of condensate, which is subsequently mixed with the currents of the Cardón refinery in Amuay. PDVSA gave up its participation in this project, so it has now become a buyer of Venezuelan gas. On the other hand, European operators have had problems receiving payments for the sale of gas to PDVSA, due to the company’s revenue problems, which have resorted to paying with oil shipments.
Communal gas and propane gas
The situation of gas for domestic consumption is as follows:
The LPG (Propane + Butanes + Natural Gasoline) is produced in the cryogenic plants of Ulé, Bajo Grande, San Joaquín, Santa Bárbara, and Jusepín, the latter located in the east of the country, and whose production is transported through polyducts to Jose, where it is finally fractionated into propane (cylinders), butanes, and natural gasoline.
The Occidental Ulé and Bajo Grande plants, which used to supply gas from gas bottles in the west of the country, are now stopped due to lack of gas, and do not produce liquefied petroleum gas (LPG). Thus, all the propane gas they distribute is transported by ships from Jose, both to Bajo Grande and Ulé, to supply the Andes, the western Llanos, Lara, Zulia, and Falcón. At this moment, the only rented vessel that makes the propane cabotage, transports at least 30.000 barrels to Cardón in the Paraguaná Refinery Complex, where operates the LPG filling of Cardón, with only capacity to dispatch 20 LPG gandolas per day to supply the referred area.
In addition to this, in 2019, the propane tank located in Bajo Grande exploded, with a capacity of 200,000 barrels, so it no longer has a propane reception and storage system, thus affecting the distribution on the West Coast of Lake Maracaibo, part of Los Andes, and Falcón.
The Ulé plant does not extract LPG, much less fractionate it, so it only functions as a gas filler, which is fed by propane from the Salt Mine storage yard, located 30 km away. La Salina’s cooling system is so inefficient that it vents more than 50% of the gas it receives from Jose.
For its part, the Ulé truck filler is only dispatching 20 trucks per day out of an installed capacity of 45 trucks per day, which represents less than 50%.
In the western region, fortunately more than 400,000 people, including subscribers and illegal connections, are supplied with methane gas between Maracaibo, Mara, San Francisco and Cabimas, which reduces the impact that the propane deficit would cause in this sector of the population.
At the El Palito refinery, located in the state of Carabobo, in the center of the country, there is also a propane gas truck filler. This, however, is not operational either. The lack of production at the refinery, and the absence of facilities to receive propane by cabotage, make it impossible to dispatch LPG from the aforementioned filling site.
In the east of the country, LPG production from cryogenics has decreased considerably, reaching only 78,000 barrels per day, due to two fundamental reasons: on the one hand, the loss of rich gas due to the lack of collection infrastructure and operating codes, and on the other hand, the decrease in the wealth of the gas received. Both factors are a consequence of the operating scheme in northern Monagas that favors oil production and the large amount of gas that is lost to the atmosphere.
The cryogenic plants in the east are working at just under 50% of their capacity. Moreover, they will not be able to make up the shortfall, caused by the 37,000 BPD decrease in crude oil production as a result of an explosion last week at the Punta de Mata facilities.
Propane gas production in Venezuela depends entirely on production in Jose. There are no other production possibilities than these to satisfy demand. The lack of infrastructure in northern Monagas makes it impossible to increase production.
The fractionation plant in Jose, generates only 30,000 barrels per day of propane (bottles), leaving 7,000 barrels per day for Gas Comunal. Since January of this year, no propane ships have been received from abroad, since PDVSA Comercio y Suministro has not been able to honor payments, let alone maintain propane imports.
Gas Comunal was transferred to the various governorates of the country for the distribution operations of LPG cylinders for domestic consumption. However, PDVSA is still responsible for operating the fillers. Thanks to this transfer, in most cases, the workers of Gas Comunal were laid off and now it is the governments that carry out these operations, sometimes appealing to a virtual privatization of the service.
The operations of Gas Comunal depend on three key factors: firstly, the availability of propane; secondly, the transport units, better known as tanks; and thirdly, the distribution units. Of these factors, propane is insufficient and generates shortages, and heavy transport units are stopped due to faults in more than 40% of the units. At the national level, there is a perceived lack of supply, especially in rural areas where people have already resorted to cooking with firewood.
Caracas has more than 450,000 subscribers and users of methane gas, which is supplied by pipeline, but it is still vital to deliver gas in cylinders to supply popular areas. Due to mobility restrictions, it is very difficult to replace the 10 kilo units, which are the ones that mostly supply families in the neighborhoods of the capital, so the shortage of LPG is felt more strongly.
It remains the main problem facing the population in light of the presence of the coronavirus in the country. The refinery system is not processing crude oil and is not capable of satisfying internal demand, despite the fact that it has fallen from 650 MBD in 2014 to only 120 MBD today, the result of a 63% accumulated drop in GDP.
There is no gasoline because the Paraguaná Refining Complex, with a processing capacity of 1.3 million barrels a day, is operating at only 10% of its capacity. The Puerto La Cruz Refinery, with a processing capacity of 200 MBD is paralyzed and the El Palito Refinery, with a capacity of 140 MBD, is also paralyzed. In addition to the diversion of funds and the budget cuts to which the refinery system has been subjected since 2015, its management and technical staff, who operated these refineries after the 2002 oil sabotage, have been displaced, removed or taken prisoner for political reasons.
The fuel shortage is aggravated by the impossibility of importing fuel, both because of the lack of resources and because of US sanctions. Moreover, the presence of U.S. military vessels in the Caribbean area, close to the Venezuelan coast, discourages any import of fuels and additives.
The shortage of fuel is a structural problem due to the operational collapse of PDVSA, after being subjected to a permanent policy of persecution and imprisonment of its technical and management personnel, as well as the departure of more than 30,000 workers due to the deterioration of work and quality of life, and the militarization of the company.
It seems that the government’s incapacity and ferocity against PDVSA and its workers will be the fundamental factor in its exit from power.
The country continues to be impacted by the severe political, economic, and social crisis. The Venezuelan oil industry not only cannot escape this situation, but has been the epicenter of the struggle for power among the political factors that dispute control of the country.
The rescue of the oil industry and PDVSA’s operational capacities will necessarily involve a change in the country’s political situation, the exit of Maduro and the re-establishment of the Constitution and laws, in order to re-establish popular sovereignty over our affairs. This is a key element in order to be able to undertake the recovery of the oil sector, which is vital for the recovery of the national economy.
In the midst of the most severe economic and social crisis of our contemporary history and the most absolute poverty and defenselessness of our people, winds of war are blowing. Hopefully, wisdom will prevail, selfish interests will be put aside and it will be taken into account that in order to tackle the solution of the tremendous difficulties and challenges that we have before us, we must look for a political solution, which does not compromise our sovereignty, nor take away from us the only instrument we have to get out of this crisis: oil.