Chávez’s Threat to Cut off US Oil Supplies Falls Flat, Fails to Drive Up Prices
Hugo Chávez is up to his old tricks, threatening to shut off crude oil shipments to the US if Colombian troops enter Venezuela. (image: uk.reuters.com)
On Sunday, Venezuelan president and leading America-denouncer Hugo Chávez threatened to cut off all his country’s crude oil supplies to the US as part of on ongoing diplomatic conflict with neighboring Colombia. The Associated Press reported on Sunday that Chávez made the threat in a speech, proclaiming,
If there is any armed aggression against Venezuela from Colombian territory or anywhere else supported by the Yankee empire, we … would suspend shipments of oil to the United States!
The excerpt references the possibility of Colombian military action in Venezuelan territory that Chávez believes could take place following accusations from Colombia that the Chávez government is harboring rebel leaders. The Colombian government has made no threat of military action, and analysts believe that Chávez’s threat was more of a political maneuver than a deterrent measure. By Chávez’s logic, the United States’ alliance with Colombia would make it directly responsible for any Colombian cross-border incursions into Venezuela. The US is “the big one to blame for all the tension in this part of the world,” he said in his weekend speech. To punish American collusion with Colombia, Chávez would deny it crude oil from Venezuela, which is the fifth-largest supplier of oil to the US.
While one analyst said to the AP that Chávez’s threat is “credible,” the cutting off of oil supplies did little to cause concern in Washington and had no apparent effect oil prices. As HeatingOil.com has reported over the last several months, US supplies of crude and other petroleum products are at very high levels—high enough to take up any slack in supply caused by a sudden reduction in imports that would otherwise send prices for heating oil and gasoline higher. The American driving season is also winding down, meaning oil demand will begin to taper off in the near future. Furthermore, as the Wall Street Journal reported on Tuesday, if Chávez’s threatened embargo came to pass, other oil-exporting nations would be happy to step up:
From the U.S. point of view, the impact would be very minor, as Saudi Arabia or Kuwait would jump at the chance to fill the gap with their ample spare capacity.
This time around, it appears Hugo Chávez’s attempt top shake up global oil prices and put a scare into the US government amounted to nothing. But don’t expect that to make him think twice before making a similar announcements/threats in the near future. Chávez has enjoyed many political spoils as a result of attacking the US, and as he continues to do so, he will more often than not use the only effective weapon in his arsenal: oil.
Brazil Gives Big Boost to Gas-to-Oil Technology
Gas flare (r.) and example of a gas-to-liquid reactor (l.) that can fit on a FSPO vessel. It looks like a chemical processing plant dropped onto a raft. (image: epmag.com and r3sciences.com)
Brazilian oil company Petrobras is aggressively financing technology that will convert flare gas, a byproduct of oilfield production so named because it is commonly disposed of by continuous burning during drilling operations, into a synthetic and commercially viable form of crude oil.
It may seem surprising that natural gas, a valuable natural resource, is emitted in great quantities as a consequence of oil extraction only to be thrown away like garbage. When underground oil is subjected to high pressure, gas dissolved in the liquid escapes through a separate pipeline valve that reaches the surface. Yet, the practice of combusting this “associated gas” as quickly as possible (i.e. gas flaring) has become standard for decades in oilfields too remote from potential markets or transport infrastructure to take advantage of the fuel’s value. Official estimates place the global amount of gas squandered in this way annually at ¼ of the natural gas consumption in the US. Though technology does exist for converting this gas into liquid crude oil, initiatives pursued by Petrobras-financed companies Compact GTL (UK-based) and Velocys (Ohio-based) aim to create equipment compact enough to fit on Floating Production Storage and Offloading vessels used in offshore drilling.
Layers (top) separating the Tupi oilfield from the water's surface. For reference, keep in mind that the world's tallest building (bottom), the Burj in Dubai, is just under 1000 meters. (image:oildrum.com and amitbhawani.com)
The ability to conduct a gas-to-liquid process onboard drilling modules is very attractive to Petrobras, which this year plans to begin production on Tupi, the world’s largest oilfield that just happens to sit underneath 2 kilometers of water and 4-5 kilometers of rock and salt. The project is almost prohibitively expensive, and converting superfluous gas to oil would be a critical offset for the expected losses that come from poking holes in the wrong parts of the seabed, a necessary part of locating a drill location.
Thinking big, it’s logical that oil from surplus gas could supplement profits for unconventional oil projects such as shale oil and oil shale, of which the world will only be seeing more in the future.
The development of viable gas-to-oil technology would not only provide revenue that would offset the costly trial-and-error stage of deepwater oil drilling, it would solve offshore drillers’ problem of what to do with excess gas. Since 2002, gas flaring has come under worldwide scrutiny because of its significant contribution to global warming. The World Bank’s Global Gas Flaring Reduction partnership (GGFR) estimated in 2009 that 1.5% of the world’s total carbon emissions comes exclusively from gas flaring. Any technology that reduces carbon emissions by that magnitude is a benefit for the entire planet.
German chemists Franz Fischer and Hans Tropsch in the 1920s first pioneered the science of creating liquid oil from coal, which was later extended to gas stocks. The process required reacting natural gas with hot steam to form a synthesis gas of carbon monoxide and hydrogen. When passed over a cobalt catalyst, the gaseous hydrocarbons mix with ions and grow into longer chains, forming a wax within seconds that is easily converted into diesel. Previously, large reactors were required to process the large amount of heat produced by the reaction, but companies Compact GTL and Velocys are able to build a compact system because of their use of microchannels, which allow heat to be distributed more efficiently, reducing the temperatures and reaction time involved and shrinking the size of the unit.
Synthetic oil contains less sulfur and pollutants than naturally occurring crude oil. When produced from biomass, synthetic fuel is called biofuel, but most biofuel production processes involve a chemically different and less direct method than the synfuels conversion. In the late 1970s, the development of synfuels was slated to receive $88 billion in support over 20 years from the US government, but was later cut by the Reagan administration due to low oil prices and skepticism about the technology’s effectiveness.
Falklands Dispute Reemerges Over Offshore Oil Drilling
As the Ocean Guardian (left) makes its way from Scotland to the Falklands, rising tensions bring to mind a previous conflict between Britain and Argentina, the Falklands War of 1982 (right). (image: timesonline.co.uk and chandrakantha.com)
British efforts to drill for oil off the shores of the Falkland Islands, an overseas territory in the South Atlantic only three hundred miles from Argentina, have reignited tensions between the two countries. While developments seem unlikely to end in a replay of the Falklands War, the brief and bloody conflict in 1982 between Britain and Argentina over the Falklands’ soverignty (the Argentines call the islands the Malvinas), a war of words has escalated.
Royal Dutch Shell first drilled wells offshore of the Falklands in 1998, but halted further exploration out of concerns that the price of crude at the time, only $10 a barrel, made that activity unprofitable. Now, with oil prices between $70 and $85 a barrel, London-based Desire Petroleum is leading efforts to transport a drilling rig called the Ocean Guardian to the North Falkland Basin, reports the BBC. The Times of London says some analysts think there could be as much as 60 billion barrels of oil in the islands’ offshore territory.
The Buenos Aires government has threatened to detain ships passing through Argentine waters on their way to the Falklands, and could be trying to shore up its fading popularity by appealing to nationalist interests. London’s Telegraph has quoted Argentina’s foreign minister Jorge Taiana calling British actions illegitimate: “[What they’re doing] is a violation of our sovereignty. We will do everything necessary to defend and preserve our rights.”
Venezuela Devalues Currency, Increasing Oil Revenue
President Hugo Chávez speaks in front of a portrait of the namesake of Venezuela’s recently devalued currency, the Bolívar. (image: ameriquelatine.msh-paris.fr)
To buttress the Venezuelan economy against collapse, President Hugo Chávez has announced a severe devaluation of the country’s currency, the New York Times reported on Friday. Since the global financial crisis of 2008 brought down the price of oil, Venezuela’s biggest national export, the country’s economy has suffered severely, contracting by 2.9 percent in 2009. Chavez hopes that a devalued currency will make Venezuelan exports more competitive in foreign markets while simultaneously increasing revenue from oil exports.
Chávez said he will create two different exchange rates for the nation’s currency, the bolívar. One rate, which sets 4.30 bolivars to the dollar, will be applied to most imported items, like cars and construction materials, while the other rate, at 2.6 bolivars to the dollar, will affect essential items like basic foods and hospital equipment. Presumably the government will also continue to subsidize food, medical care, and fuel costs, which should help struggling Venezuelans cope with the potential inflation brought about the devalued currency.
Pemex Oil Output to Increase After 7-Year Decline
In 2011 Pemex’s oil production will be back on the rise. (image: thefastertimes.com)
On Tuesday, Bloomberg reported that Mexico’s state-owned oil company Petroleos Mexicanos, or Pemex, forecasts a reverse in its seven-year decline in oil production. Pemex expects to 2.55 million barrels a day in 2011, an increase of over 50,000 barrels per day from its forecast for 2010 production. Optimistic that newly found crude deposits will be able to replace and surpass older fields, Pemex hopes to end a long period of declining production, which cost the company approximately $23.4 billion last year alone. That is a staggering amount when one considers that oil profits fund nearly a third of the Mexican government’s budget.
Mexico’s expected increase in production coincides with growing oil production Brazil, Russia, Iraq, Nigeria, and Kazakhstan, sometimes called the BRINK countries, which anticipate bringing new oil fields online and dramatically boosting their oil output. If output does increase in all these countries there will be considerably more oil on the market, and prices could drop as global supplies outpace demand.
Rising Oil Output Protects Against Crude Price Spikes
A steady flow of crude is a buffer against sudden changes to demand or access. (image: upstreamonline.com)
Last week, militants threatened oil supplies in Iraq and Nigeria, two of the world’s most beleaguered crude producers. Typically, the prospect of conflict in either country, no matter how fleeting, would be enough to trouble the market and create a sizeable spike in global oil prices. This time around, however, crude prices rose only 70 cents, to end the week at a modest $73.36 a barrel, a sign that the oil sector’s growing capacity to shrug off sudden losses in production will, at least for the moment, keep crude prices stable.
According to an article published on Sunday by the Wall Street Journal, several major oil producers have improved production capacity in recent months, ensuring a steady supply of crude despite the occasional disruption. Earlier this year, Saudi Arabia said it increased its production capacity to a record 12.5 million barrels a day, while Qatar will soon ramp up the capacity of its offshore Al Shaheen oil field to 500,000 barrels a day (about three times the current capacity of Iraq).
Why OPEC’s “Perfect” Oil Price Could Backfire
Saudi Arabia’s oil minister, Ali Al-Naimi, called oil prices “perfect” but they may breed competition. (image: nytimes.com)
In the world according to OPEC, $75 is the magic number for a barrel of oil. According to Amy Myers Jaffe at the Houston Chronicle, OPEC’s thinking goes like this: seventy-five dollars is enough to maintain investments in difficult-to-reach oil such as deep water and tar sands oil, assures that oil producers can fund national budgets, and allows investors to profit. And since the global economy is currently recovering, albeit slowly, with $75 oil, OPEC figures that $75 is not that damaging to the recovery. American drivers are still driving with $75 oil, and Chinese drivers are buying cars.
But, Myers Jaffe says, this is wishful thinking. She says there are two reasons why $75 is, in fact, too high.
Brazil Set to Become Latin America’s Biggest Oil and Gas Producer by 2011
Brazil: known for sun, sand, and now oil wells. (diario portuario via flickr.com)
What country may be Central or South America’s number one oil producer in a few short years? Mexico? Venezuela?
No—Brazil. Mexico and Venezuela may outproduce Brazil now, but that’s poised to change. A combination of increasing Brazilian oil production and declining oil production in Mexico and Venezuela may lead to an inversion in the Latin American hierarchy of fossil fuel production.
As the Wall Street Journal reported on December 17, Brazil has recently made major offshore petroleum and natural gas finds. Much of the new reserves lie deep under the ocean floor, in “subsalt” formations that pose significant technical challenges to drilling. However, improvements in drilling technology and methods, combined with crude prices that make oil production attractive even at great expense, have made deep reserves economically viable. These new reserves—one field alone is estimated to hold between 5 and 8 billion barrels of oil—greatly add to Brazil’s existing proven reserves of 12.6 billion barrels.
Citizens Energy Oil Heat Fund Gets $40,000 Donation
BNY Mellon’s donation to Citizens Energy will help 150 households heat their homes. (image: smsold.com and energyandutilityconference.org)
CNN Money reported yesterday that BNY Mellon has donated $40,000 to Citizens Energy, a Boston area non-profit that delivers heating oil to elderly and low-income households in Massachusetts through its Oil Heat Fund. The Mellon grant is expected to provide fuel for at least 150 households through the winter.
Citizen’s Energy is perhaps best known for its controversial partnership with Citgo-Venezuela. Citgo is the American distribution outlet for Venezuela’s state-run oil company. Some say that the program is a pulpit for Venezuelan president Hugo Chavez’s socialist politics, as well as a vote-getting strategy for the Democratic politicians involved. However, in 2006, when 13 US senators petitioned all of the major oil companies for help supplying heating oil to low-income residents, Citgo was the only company to step forward.
In any event, the support of programs like Citizen’s Energy will be needed this winter, as applications for state heating assistance, usually supplied through Low-Income Home Energy Assistance Program (LIHEAP) programs, are up across the northern states. In Vermont alone, applications for the winter are expected to exceed 27,000 households for the season, 1,000 more than last year’s record, even though the price per gallon for home heating oil has halved since then.
Analyst Sees Crude Between $65 and $75 for Next Three Months
Neil Atkinson of KBC Market Services. (image: cnbc.com)
In a CNBC video posted on Wednesday, KBC Market Services analyst Neil Atkinson said the price of oil is in for a not-so-tumultuous future, at least in the coming months. Atkinson predicted a fairly stable crude market ahead, saying he thinks the price of oil will loom in the $65 to $75 range for the next three months. Other experts have also been predicting a downturn in crude prices, but many did so with a more dramatic outlook.
The Wall Street Journal’s Liam Denning gave his forecast earlier this week, calling for a significant drop in crude prices in the next decade as production—especially in emerging oil markets like Brazil and Nigeria—ramps up. While Denning’s prediction is more long term—and focuses on big-picture changes in global oil supply and demand—Atkinson sees stability in the immediate future, and thinks price stabilization will happen in part because demand estimates from emerging markets like China and Latin America have been too high.
Oil Supply Could Lower Oil Prices in Next Decade
WSJ logo. (image: mclaughlinquinn.com)
In a video on the Wall Street Journal digital version, columnist Liam Denning explains that the next decade will not belong to the oil bulls but, rather, the oil bears. The big shift in the market, according to Denning, will be in supply.
The story of oil in the past decade is linked to the intense demand from emerging markets like Brazil, India, Russia and China. Demand from the BRICS, as this collection of countries has been dubbed, in conjunction with political unrest—ranging from the war in Iraq to the national turmoil that besieged Nigeria—worked to, as Denning put it, “keep barrels off the market.”
But the days of high demand and low supply are over, he says. Looking ahead, the so-called BRINK countries—Brazil (now the 15th largest producer of oil in the world), Russia, Iraq, Nigeria and Kazakhstan—could increase oil production earlier than expected and this could bring down the price of oil as more crude flows into the market.
Mexico Prepares for Falling Oil Prices, Hedges Oil Exports
Agustin Carstens, Mexico’s Finance Minister, has hedged his country’s oil exports for the second year. (image: wikipedia.org)
Mexican officials were wise to distrust last year’s high crude prices. Believing prices would eventually fall, Mexico hedged all of its 2009 oil exports at $70 a barrel, which cost the oil exporter $1.5 billion dollars. According to the Financial Times this move paid off handsomely, resulting in over $5 billion in profit when the price of oil collapsed. On Tuesday, the Houston Chronicle reported that Mexico will be making the same move for the second year in a row in order to protect itself from price fluctuations. This time, Mexico “bought put options to sell crude for $57 a barrel.”
In a nutshell, a put option gives a seller the right to sell a product at an agreed-upon price. This gives the seller insurance in the case of a sharp drop in prices, and in exchange for this insurance the seller pays a fee. In this case, Mexico has bought options to sell its oil at $57 a barrel. Ultimately what Mexico has done is insure itself against the possibility that crude prices could drop substantially next year. Mexican Finance Minister Agustin Carstens asserts that this year’s hedging is not motivated by hopes of another massive payoff but is merely an insurance policy, noting “if we don’t collect any resources from this transaction, it’s OK with us.”
How the Price of Oil Can Rise While Supply Increases
Offshore oil platforms—like this one in Brazil—are part of the huge cost of drilling newly discovered deepwater oil fields. (image: artdiamondblog.com)
Like most businesses, the oil industry would seem to operate according to a basic economic model, which most of us—while not economists—can easily understand: when supplies increase, prices decrease. For the general population, this model is so time-honored and well-tested that it might as well be written alongside Newton’s laws of physics, a veritable dictum of nature. According to this model, news of freshly discovered oil reserves—say, in Brazil, the Gulf of Mexico, or, most recently, off the shore of New Zealand—ought to inspire in us confidence that, with an enlarged global oil stock, we can expect lower prices, at least as long as demand (the third factor in the classic equation) doesn’t suddenly outstrip supply.
Then again, even Newton’s laws have been challenged, giving way to theories more complicated and disconcerting. In an article published on Wednesday, the Sydney Morning Herald debunks the old supply-demand model that has, for many of us, governed our common-sense view of the oil market. The article argues convincingly—if counterintuitively—that even as new oil reserves are tapped, the price of oil may continue to increase. It is the immense cost of extracting oil from these new reserves—many of which lie miles beneath the ocean floor, making them exceedingly difficult to reach—that will keep prices high even as supplies grow. Without higher prices, it wouldn’t make sense to spend all the money to get that next barrel of oil. So much for simple supply and demand.
Shell Pioneers Oil Exploration Off Guyana in South America
(image: state.gov)
Shell has begun nudging its way into Guyanese offshore oil exploration. On Wednesday the Wall Street Journal reported that the oil giant will begin exploring for oil near the South American country in hopes that they will discover reserves similar to those of the Jubilee field in Ghana. Though it may seem nonsensical as the entire Atlantic Ocean separates South America from Africa, researchers are hopeful given that the two continents were once united prior to millions of years of continental drift.
The theory that the same oil-bearing geological formations may exist on both sides of an ocean has similarly directed attention to Angola after the 2007 discovery of the Tupi oil fields in Brazil. As HeatingOil.com reported on October 19, Brazil is now the world’s fifteenth largest oil producer and the second largest in South America following Venezuela.
According to HeatingOil.com, oil prices are primarily determined by two factors; production and consumption, and market trading activity. Should exploration in Guyana pay off, this could quickly turn one of the world’s most under-explored areas into the newest hotspot, resulting in high supplies that could moderate, and possibly lower, heating oil prices.
