INDEX
PRICE
Oil price quotations closed the month of November upwards. The first week of December maintains this trend and records the highest levels since March, before the beginning of the pandemic.
The prices have been boosted by the successive announcements of the commercialization of several vaccines against Covid-19 at the end of this year1, as well as by the outcome of the OPEC+ meeting, which, after several days of postponement to try to reach consensus, finally reached an agreement to make the production cut in force since August more flexible by only 500 thousand barrels per day, instead of the 5.8 thousand barrels per day that were foreseen in the original DoC.
On November 25, Brent prices reached the highest level of the month2, with 48.40 dollars per barrel and, on November 27, WTI traded at 45.92 dollars per barrel, a recovery of 34% and 29% respectively, in comparison with October 27, when prices fell before the «second wave» of Covid-19 and the new confinement measures in the main economies of the world.
The first week of December, prices were again driven by the results of the OPEC+ meeting, recovering their quotation by 4% after the losses registered by the postponement of the meeting at the beginning of the week trying to reach some agreement.
On Friday, December 4, 20033, the Brent and WTI benchmarks traded at $49.14 and $46.04 a barrel, respectively, their highest values since March 2020.
Today, Tuesday, December 8, prices fell slightly4, with the Brent and WTI trading at the close of the markets in Europe at $48.56 and $45.45 a barrel respectively, given further upsurges in the cases of Covid-19 contagion which has generated announcements of new restrictions on mobility in the U.S. and Europe.
OIL PRICE TREND
BRENT AND WTI
(October – December 2020)
OPEC Basket
The average crude in the OPEC basket recovered in November with an increase of 20%, compared to the end of October, surpassing the price band of 40 dollars per barrel and approaching the prices of March 2020. As of November 25, the basket of crudes is above 46 dollars per barrel. In the first week of December, the upward trend continues; on December 4 it reached 48.35 dollars per barrel5.
PRICE OF THE OPEP BASKET
(October-December 2020)
Future Prices
Prices on futures contracts are trading at record levels on Friday, December 4, driven by OPEC+ results. The Brent and WTI markers increased by 1%, to $48.71 and $45.64 a barrel respectively, reaching their highest mark in the last nine months, as shown in the following graph by Bloomberg.
VARIATION OF FUTURE PRICES
(December 2019 – December 2020)
Futures contract prices move out of the «Contango» structure, when Spot cargo prices were up to $4.00 barrel lower than futures cargo prices, to enter the «Backwardation» structure, as the latest futures quotes from both Brent and WTI are approximately $1.00 barrel higher than Spot quotes.
PRODUCTION
The OPEC+ meeting culminated on December 4, after several postponements6, with an agreement that seeks to reconcile internal differences, especially between Saudi Arabia and the United Arab Emirates, close allies in the Gulf.
The Saudis are trying to maintain and extend the validity of the August cuts meanwhile, UAE is trying to make the August cuts even more flexible and to respect what was initially agreed by OPEC+ on April7 of a production increase of additional 2 million barrels per day by January 1, 2021, during 16 months.
At the meeting, chaired by Russian Oil Minister Nikolai Shulginov, OPEC+ reached an agreement to increase only 500,000 barrels of oil per day starting in January 2021 and to hold monthly meetings of the ministers of the member countries to monitor the evolution of the market.
This increase, according to statements by Iranian oil minister Bijan Namdar Zanganeh, «should not have an influential effect on the market in terms of lowering prices, since producing 500,000 barrels is not a large quantity»8. In the same sense, the Russian Deputy Prime Minister for the Energy Sector, Alexander Novak, declared, «we have agreed to increase only 500,000 barrels per day because we understand that 2 million in the market would not be safe, so a gradual growth is a good solution that allows us to essentially evaluate and target the market every month«9.
There is concern among some of the OPEC+ countries that oil demand will not be enough to absorb the additional production of the group after the OPEC+ cuts take effect, coupled with the stabilization of production in the US and the extraordinary recovery of production in Libya; countries that, in November, according to data from the US Energy Information Administration (EIA) and the Libyan National Oil and Gas Corporation (NOC), increased their oil production by 500 thousand barrels per day and 700 thousand barrels per day, reaching levels of 11 million barrels per day and 1.1 million barrels per day, respectively. All this additional oil supply, once again, raises the spectre of over-supply that characterized the first quarter of the year.
Meanwhile, other OPEC+ countries are facing serious problems in their economies due to the combined effect of both the Covid-19 and the drop in oil revenue and production cuts. This situation, although it affects most of the countries of the group, has been strongly argued by the United Arab Emirates, a close ally of Saudi Arabia, which, following the collapse of production in Venezuela and Iran, has become one of the most important members of OPEC.
Saudi Arabia’s objective is focused on maintaining the cuts and the restriction in the oil supply to drain the inventories, both commercial and those of strategic reserves of the large consumers, to bring them to the average levels of the last five years, a basic condition for maintaining the recovery of prices. The objective of the United States is to make the production cuts more flexible and increase its oil exports, to face its internal commitments and recover the large investments it has made in the framework of its strategy to increase its production levels and achieve greater participation in the oil market.
Despite these differences, OPEC+ agreed to a much smaller increase by January 2021 than foreseen in the April agreements, leaving the agreed cuts at 7.2 million barrels per day, 1.4 million barrels per day less than initially planned.
The meeting attendees, in addition to agreeing on monthly meetings at the ministerial level, agreed to maintain the policy of «compensating» production from countries that did not meet their cut quotas set in April, which affects Nigeria, Iraq, Angola and the UAE.
In November the market was surprised by the significant increase in production levels obtained in Libya after the entry into force of the agreements of September 18 and October 23, between the government of the National Agreement, located in Tripoli, and the National Army of Libya, Khalifa Haftar, next to the Parliament of the East, in Tobruk, which allowed the lifting of the blockade on production and exports Libya. As the NOC authorities announced, the North African country has significantly increased its production, from 156,000 barrels a day in September to 1.04 million barrels a day in November, an increase of 567% in two months.
On the other hand, oil production in the US stopped falling for 11 weeks, between 28 August and 6 November, stabilizing at 11 million barrels per day10, and recovering the level of production activity in May, reflected in the number of active drills of 246 units for 4 December.
We have to wait for the publication of the OPEC Monthly Market Monitoring Report (MOMR) for December to estimate the current world oil production; however, with the production data for October and the information available from both Libya and the US, we could estimate that world oil production is above 87 million barrels of oil per day, 3.5 million more than the production at the end of July, before the beginning of the flexibilization of the OPEC+ cuts for August.
After the first day of the OPEC+ meeting, on November 30, the president of the OPEC Conference and Algerian minister of energy, Abdelmadjid Attar, declared that «there are signs at the end of the tunnel»11 for the oil market, estimating that the world economy will recover by 4.4% in 2021 and that the oil demand will have an annual increase of 6.1 million barrels per day in 2021, all based on the optimism generated by the announcement of the international pharmaceutical laboratories that at the end of 2020 and throughout 2021, the vaccine against COVID-19 will begin distribution.
However, the World Health Organization warned of a «third wave»12 of infections during the first months of 2021, which maintains expectations of restrictions on movement, travel and economic activity for a still important period, until the effective distribution of the vaccine or vaccines against Covid-19 is achieved.
Why are the Saudis and the UAE facing off in OPEC?
Since last week, the internal confrontation between the positions of Saudi Arabia and the United Arab Emirates, two of the organization’s biggest producers and close political-military allies in the Persian Gulf, has intensified, transcending outside the meetings of OPEC ministers.
The public was shocked by the strong comments made by Saudi Arabia’s oil minister, Abdulaziz Bin Salman, when he complained to his colleague, Suhail Mohamed Faraj Al Mazroui, the UAE energy minister, about his country’s violations of the quota cuts set out in April’s OPEC+ agreements.
Following such claims, the UAE, through Minister Al Mazroui, apologized and excused itself, arguing that «the peak demand for electricity in the summer within the UAE required an increase in oil and gas production»13, and then pledged to «compensate» those volumes in the following months. For the first time, the UAE violates OPEC production quotas.
At the last OPEC+ meeting, the same impasse between the two countries occurred again, when the UAE pressed for more flexible cuts, in contrast to the position of the Saudi minister. After postponing the meeting several times, a compromise solution was reached, which we commented on above.
It is clear that all the OPEC+ countries are under strong internal pressure due to the decline in oil income, not so much because of the price, which remains at satisfactory levels at any time, but because of the volume of cuts that have been implemented during this year and the effects that the Covid-19 pandemic has had on their economies.
However, both the Saudis and the Emirates are under additional pressure, derived from their commitments to investors who have participated in the various processes of partial privatization of their national oil companies.
Within OPEC, the experience lived internally when the process of oil opening in Venezuela in the 1990s placed the national company PDVSA at the head of the direction of the country’s oil policy, a policy that no longer responded to national interests, but rather to the interests and commitments of the oil investors that entered the sector in that process of privatization. Venezuela became a factor of conflict and disunity in the organization when it pressed for a volumetric policy against a policy of defense of price, it was the Venezuela which qualified OPEC as «a club of Pinocchios,» a situation which President Chavez put an end to after the II Summit of Heads of State and Government of OPEC in Caracas14 in 2000, and when he resumed the policy of defense of price within the framework of the development of the policy of Full Oil Sovereignty.
In this case, the situation is being reexamined in a completely different scenario, with a blocked Iran and a Venezuela that has reduced its production capacity and its ability to influence OPEC. The actors on this occasion are Saudi Aramco and the Abu Dhabi National Oil Corporation (ADNOC).
Both companies have been the object of partial privatization programs, which oblige them to comply with commitments made to investors, who press for the dividends promised by the respective governments as an incentive to continue attracting the interest of international capital; dividend promises, made regardless of the situation of the international oil market and the results of the respective companies.
In the case of Saudi Arabia, the Kingdom decided, within the framework of the plan «Saudi Vision 2030»15, promoted by Crown Prince Mohammed bin Salman, to put up for sale, in November 2019, 5% of the Saudi oil giant Saudi Aramco, to obtain more than 100 billion dollars of private capital, with a preference for the US, Canadian and Japanese investments. It managed to privatize 1.5% of the company, with the participation of local investors of private capital and funds from Saudi public institutions.
Within the dividend policy promised in the Initial Public Offering (IPO), the dividends will be a minimum of $75 billion per year, at a rate of $18.75 billion per quarter, from January 2020 to December 2024.
Therefore, the Kingdom’s oil policy was concentrated this year 2020 on the conquest of new markets and the increase of production, policy and needs that were reflected in the country’s position within OPEC.
This was one of the main reasons for the price war between Saudi Arabia and the Russian Federation in March this year. Russia, which in turn responded to the economic needs of its own company Rosneft, was opposed to any kind of agreement with the Saudis.
The “price war”16, unfortunately, coincided with the Covid-19 pandemic and the consequent collapse in the price of oil, in a market where demand plummeted, but where the largest producers were “at war”, flooding the oil market.
The situation of the oil market throughout the year has affected the economic performance of the Saudi company. According to the financial report for the third quarter17 of 2020, Aramco had a net income of 11,789 billion dollars, which represents a deficit of almost 7 billion dollars, to cover the payment of dividends to shareholders. In the second quarter of the year, the deficit for the same concept was 11.8 billion dollars.
Because of this, and to comply with the commitment assumed in the Public Offering of Shares, dividends, royalties and taxes to the State fell 30% in the third quarter of 2020, since the 2019 IPO established that dividends, royalties and taxes to the State may be reduced, if necessary, to cover the payment of dividends to shareholders of public funds and private capital.
Saudi Arabia, however, was unable to attract the international capital it expected, but rather Saudi Funds and Capitals, so the management of its commitments can be done in its institutional framework, with greater flexibility, which allows it to develop its own, particular strategy of maintaining the cuts, although gradually making them more flexible as an impulse in August, to defend the price and improve the performance of the company, thus fulfilling, without major difficulties, its commitments to the investors, keeping the business attractive to attract international capitals in future privatization rounds.
But the situation in the UAE has changed since the privatization of the Abu Dhabi National Oil Corporation (ADNOC) and its subsidiaries have been greater (more than 40% of its subsidiaries) and because it has managed to attract international private capital.
On June 23, a state-owned company from the United States sold 49% of its subsidiary ADNOC Gas Pipeline Assets LLC to the SNAM18 consortium, made up of private American, Canadian and Korean capital, plus the Singapore Sovereign Wealth Fund and the Ontario (Canada) Teachers’ Pension Plan Fund, for a value of $20.7 billion. In turn, ADNOC received a $10 billion advance from SNAM as payment for the 20-year lease on its 51% stake in ADNOC GAS Pipeline.
Before that, in February 2019, after creating the subsidiary ADNOC Pipeline Oil – Sole Proprietorship LLC, operator of 18 pipelines, 60% owned by ADNOC and 40% by the US investment companies Kohlberg Kravis Roberts (KKR) and BlackRock, the state-owned Emirati leased its participation to these companies until 2042, for an advance on account of profits of $4 billion19.
Also in 2019, in January, ADNOC sold to the Austrian oil company OMV and the Italian company ENI, 20% and 15% shares, respectively, of ADNOC Refining, with a refining capacity of 992 thousand barrels of oil per day, importing 70% of the processed oil. Likewise, a commercial joint venture was created with the same distribution of participation, to supply the markets of Asia, Africa and Europe. The total investment of ENI and OMV was 5.8 billion dollars, with a «strong policy of attractive dividends20» in favor of both European companies.
The Abu Dhabi National Oil Company (ADNOC), the oil company of the United Arab Emirates (UAE), where 20% of the company is owned by private investment capital, states in its Dividend Policy21 that the dividend on the 2020 shares, some $700 million22, was paid in October of this year and the other half will be paid in April 2021. In turn, the 2021 dividend will be paid half in October 2021 and the rest in April 2022. Beginning in 2022, the company expects the dividend payment to be 75% of the net distributable income.
At the end of September, the Emirate oil company, affected by the market situation this year as much as Aramco and all the oil companies, presented accumulated liquidity of 1.08 billion dollars in cash and 756 million dollars in an unused credit line, with a net profit of 181 million dollars.
On the other hand, ADNOC must capitalize all subsidiaries that have sold, in the last 4 years, part of their shares to local and international private capital, for a value of nearly 29 billion dollars.
Because of these commitments and the exposure to risk with foreign capital, the UAE has less flexibility in managing its strategy and is more urgent than the Saudis to be able to produce and export more oil. This is reflected in the country’s positions within OPEC, which respond to the interests and needs of the ADNOC, which are in contradiction with the policy of defending price and are more oriented towards a volumetric policy, an anti-OPEC policy.
A new situation in Libya
The National Oil and Gas Corporation of Libya (NOC) announced on December 1 that it had agreed, with the French oil company Total, to rehabilitate the Mabruk oil field and resume production23, which would add 300 thousand barrels of oil per day to the production of 1,036 million barrels per day reported on November 7. Already on November 30, NOC had agreed, with the Italian ENI, to guarantee24 the level of production recorded on November 7.
This could bring Libya’s production to 1.3 million barrels of oil per day, making it the 7th largest producer within OPEC. In turn, with that level of production, the North African country would be impacting world production, generating a global increase of 1%, taking as a reference the October production published by OPEC.
As for the market within OPEC, Libya remains Europe, hence the interest and recent meetings of the NOC with ENI and Total, as well as the creation of Sarir Oil Operations with the participation of Germany’s Wintershall.
Since September, NOC’s CEO, Mustafa Sanalla, has met with the ambassadors of Germany, Italy, Spain and the United Kingdom, countries with which he has agreed to invest in the sector and participate in the recovery of production.
The recovery of oil production was also noticed in the country’s coffers, presenting oil revenues of 619 million dollars on November25, informed the NOC. In only 30 days, Libya saw its oil income increase by 340%.
USA
US production, according to the Energy Information Administration’s (EIA) weekly report of December 2, was 11.1 million barrels of oil per day for the week of November 27, managing to maintain the expected production level of 11 million barrels per day for the second half of 2020, which was reached the previous week.
With this, the United States managed to stabilize its production, as operations in the Gulf of Mexico were normalized and almost 500 thousand barrels per day were recovered, following the inconveniences caused by the hurricane season in August, September and October.
On the other hand, oil producers in shale wells are making conservative decisions, after Joe Biden’s electoral victory was confirmed as the new US president starting January 20, 2021, in order not to generate expenses and to make production profitable.
US Drilling Activity
Oil drilling activity continues to increase; according to Baker & Hughes26, recording operations in 246 wells as of December 4, 5 more than on November 27, the highest number of active wells since May 15.
Shale well production appears to be stabilized, adding a new activity, week after week, which offsets the activities of the wells drilled but not completed, and those that are completed, in Rystad Energy’s information. According to the Norwegian consulting firm, production from shale wells27 will reach 6.5 million barrels per day by the fourth quarter of 2020, estimating an average of 7.5 million barrels per day in 2020, which would represent a fall of 3.1%, 235 thousand barrels per day, compared to 2019.
For Rystad Energy, the US oil companies are aiming to increase the profitability of shale well production and decrease expenditures to the minimum necessary, predicting a 7%-9% contraction in capital spending by 2021, as well as a 3% drop in production, with the understanding that the biggest cut in shale well spending and production was made in 2020, provided that the price of WTI ranges from $40-45 a barrel.
DRILLING ACTIVITY IN THE U.S.
(March-October 2020)
POST COVID-19 ECONOMY
Political and economic changes are taking place in the international arena, in the face of a post-Covid world. New commercial blocks in Asia, the victory of Biden in the USA, Europe, Brexit, China, climate change, the green economy and its impact on the oil market, as well as the strategic re-adjustment in the Mediterranean between Russia and Turkey, the Middle East and the new reality in Asia, as well as the regions that are lagging: Latin America and Africa, are elements that we will be dealing with successively in the Bulletins due to their evident impact on the economy and the geopolitics of oil.
1. The New Asian Commercial Block
The Regional Comprehensive Economic Partnership
On November 15, after eight years of negotiations, China and 14 other Pacific nations signed one of the most far-reaching regional free trade agreements in the world, of which the U.S. is the major absentee, by the decision of the U.S. administration itself, which withdrew from the TPP talks in 2017.
The Regional Comprehensive Economic Partnership (RCEP)28 is a free trade agreement between the ten member states of the Association of Southeast Asian Nations, ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and five states in Asia and Oceania, with which ASEAN already has free trade agreements (Australia, China, Japan, New Zealand and South Korea).
The treaty was signed during the last ASEAN Virtual Summit and it is estimated that it will come into force, after ratification by the respective parliaments, in no more than two years.
The RCEP is a trade agreement involving more than 2.2 billion people, and the largest in economic terms, representing 32% of the global Gross Domestic Product (GDP) (USD 27.4 billion), greater than the GDP of the United States (USD 20.5 billion) or the European Union (USD 18.8 billion).
The other major absentee from this regional pact is India, which abandoned negotiations last year because of its differences with China and because it preferred to explore trade agreements with developed countries with large markets, such as the United States and the European Union (EU), where Indian products and services would be more competitive.
The RCEP is a Beijing’s diplomatic achievement that seeks to strengthen its weight in the region and expand its trade agreements, articulating an agreement of these dimensions with important traditional U.S. allies in the region, such as Japan and South Korea, at a time of great tension with the U.S., both because of the dispute in the China Sea, and because of the trade war between the two countries.
It is important to remember that this initiative comes after the Trans-Pacific Partnership Agreement (TPP), concluded in February 2016 during the administration of Barack Obama, never came into force after the departure29 of the United States in January 2017 upon the assumption of the administration of Donald Trump, which claimed that the TPP favored the growing presence of China in the Asia-Pacific region, so it could not be ratified and never came into force.
The TPP was a more ambitious agreement from a trade perspective and many of its elements were priorities for the United States, but not for other negotiating partners, such as investor-state dispute resolution; particularly regulations on oil and gas developments.
RCEP’s objectives include: reducing and eliminating tariffs among its partners, opening up trade in services, and promoting investment to help emerging economies improve their position vis-à-vis the rest of the world. In this way, transaction costs are reduced for companies in the bloc, allowing them to export their products to all countries under the agreement. It includes few aspects related to intellectual property and excludes environmental, labor or state enterprise subsidy considerations, which were premises in the U.S. approach to the TPP.
The implementation of this Agreement will make it easier for transnational companies that want to avoid the trade barriers imposed by the Trump administration after its dispute with China, to avoid them by making agreements with the other countries, instead of moving the production back to North American soil. Lower tariffs and uniform rules of origin, as established by the RCEP, increase the advantages of operating in the countries that have signed the agreement, since it also facilitates the flow of goods to and from China.
It is unclear what the Biden administration’s role will be concerning the agreement once he assumes office in 2021, as it is yet unknown what its position will be to China. At the time, the TPP was criticized by both Republicans and Democrats, considering that under the agreement U.S. companies were too exposed to foreign competition.
President-elect Joe Biden has said he will wait a while before negotiating new trade agreements, as he first wants to focus his energy on the pandemic, economic recovery and investment in U.S. manufacturing and technology. For the moment, the United States will be absent from both the RCEP and the successor to the TPP, leaving the world’s largest economy outside of the two trade groups that comprise the world’s fastest-growing region. On the other hand, the RCEP will be able to consolidate China’s position as Southeast Asia’s economic partner, to the detriment of Japan and Korea, putting the world’s second-largest economy in a better position to continue to shape the region’s trade rules.
2. Oil demand, have we reached the peak?
There are doubts among some specialists and advisors to large oil companies about the recovery of world oil demand to pre-Covid-19 levels, i.e., a demand of 100 million barrels per day.
In its «Energy Outlook»30 of Monday, December 7, British Petroleum estimates that the world consumption of oil reached its «peak» at the beginning of this year and that the impact of the Covid-19, will cause a change in the energy matrix of the planet, wherein, «in the best scenario,» the current levels will be maintained for some time.
It is based on this type of approach and some public policy decisions that some large oil companies, especially European ones such as BP, Total, ENI, have decided to make large investments in the production of «clean energy» other than oil and gas.
We believe that world demand for oil will recover to its pre-Covid-19 levels and that it will do so sooner than expected. This does not mean that there will not be a rationalized and more efficient use of hydrocarbons, them, with a greater awareness of climate change and the need to reduce emissions of carbon dioxide into the atmosphere.
The green economy will make uneven progress in an unequal world, having its epicentre in Europe, where the environmental issue has a great political force and where the development of transport infrastructure, the size of urban conglomerates and the prevailing economy allows a faster transition to a green economy.
However, in the remaining industrialized economies, which concentrate large urban and industrial conglomerates, with long distances and insufficient logistics and transport infrastructures, such as the US, Russia, China and other large Asian economies, the race to recover their economies and the low price of oil will stimulate an extraordinary consumption of oil and gas.
Even in Europe, large industrialized economies such as Germany, France and Italy will continue to require hydrocarbons, especially gas, in the absence of an alternative energy source. The development of large gas infrastructure projects, such as that which would feed Russian gas to Germany and Europe, or the development of the «East Med» gas pipeline for Italy and the Mediterranean, are clear signs of strategic decisions in this sense.
The alternative to the use of hydrocarbons for the heavy industry sector is nuclear energy; traditional plants or small modular reactors (SMR), capable of producing 300 MW or less, but the risk of atomic energy after the Chernobyl and Fukushima disasters has led large industrialized economies, such as Germany, to take severe decisions to restrict and ban it.
On the other hand, the poorer countries or those with a lower level of economic development in Latin America, Africa, Asia and even Eastern Europe will always try and have the right, to use and increase the consumption of oil and gas to leverage their development. This is the case, among others, with Mexico, Brazil, South Africa and India, and even European countries such as Poland, which have expressed their opposition to the «zero emissions» targets for 2030 of the European Economic Commission’s proposal31.
WORLD ENERGY MATRIX
The world energy matrix shows that there is still more than 12% of «biomass» consumption in the world; that is, wood and other fuels of vegetable origin, which indicates that these are poor populations and countries that do not have access even to the consumption of hydrocarbons; countries also with very low per capita energy consumption, which will eventually have, and have the right to have, access to the consumption of the most economical energy available: oil and gas, to satisfy their needs and achieve their human development.
Based on these considerations and the fact that there are still 1.74 trillion barrels of proven oil reserves and 48.8 trillion cubic meters of gas on the planet, that we believe that the use of hydrocarbons as a source of primary energy will continue to play an important role in the world economy, particularly in a post-Covid-19 world, where the economy needs to recover and when abundant volumes and production of cheap oil and gas are available.
3. «UK’s «Green Industrial Revolution
On November 18, British Prime Minister Boris Johnson presented an ambitious ten-point plan for a «green industrial revolution»32, covering clean energy, transport, nature and innovative technologies, which seeks to create up to 250,000 jobs through 12 billion pounds (USD 16 billion) of government investment. This is in addition to hosting the 2021 UN Climate Summit (COP26) in Glasgow, Scotland.
The plan is based on the following:
- Offshore wind power: quadrupling the current amount up to 40 GW by 2030
- Hydrogen: generating 5 GW of low carbon hydrogen production capacity for industry, transport and households, and to develop the first city heated entirely by hydrogen.
- Nuclear: promoting large-scale nuclear power as a clean energy source.
- Electric vehicles: supporting the transition to electric vehicle manufacturing in British plants.
- Public transport, cycling and walking: as the most attractive ways to get around and invest in emission-free public transport.
- Jet Zero and greener shipping: support for the transition of aircraft and ships to zero emissions.
- Homes and public buildings: more energy-efficient infrastructure.
- Carbon capture: become a world leader in technology to capture and store emissions, to eliminate 10 million tons of carbon dioxide by 2030.
- Nature: plant 30,000 hectares of trees each year.
- Innovation and finance: develop the cutting-edge technologies needed to achieve these new energy ambitions and transform the City of London in the global center for green finances.
Prime Minister Boris Johnson said33 that his 10-point plan, «will create, support and protect hundreds of thousands of green jobs, as it moves toward» zero-net by 2050. The latter concept refers to offsetting greenhouse gas emissions by removing an equivalent amount of them from the atmosphere (such as when trees are massively planted to sequester carbon). This ambitious plan, to be carried out with the support of public funds, seeks to send a clear signal to British companies to invest within the United Kingdom, in the post-Brexit economic context.
4. US Government Transition, Economy, Diplomacy and Environment
President-elect Joe Biden’s administration is taking shape after his transition team began revealing the first nominations for cabinet and other senior positions, which presents a glimpse of what his government might be like.
Among Biden’s, most important nominations are Janet Yellen34, the first woman to lead the Federal Reserve, to be the next Secretary of the Treasury, Antony Blinken35, a seasoned diplomat and former Obama undersecretary of State, to hold the portfolio of the State Department, and Obama’s former Secretary of State, John Kerry36, for the newly created role of Presidential Special Envoy for the Environment; the latter as a clear message of the new administration’s commitment to Climate Change and the Paris Accord. Also, Biden endorsed Dr Anthony Fauci37, to remain as Head of the U.S. Institute of Allergy and Infectious Diseases, appointed him as Chief Medical Advisor to the President and included him on the White House team to fight Covid-19.
Other designated persons were: Alejandro Mayorkas38, as Secretary of the Department of Homeland Security, the first Latino to lead this office, whose appointment is interpreted as a change in the current aggressive immigration policy; Avril Haines39, as Director of National Intelligence, the first woman in this position; Ron Klain as Chief of Staff, Jake Sullivan as National Security Advisor, and Linda Thomas-Greenfield as Ambassador to the United Nations.
With the nominations of Janet Yellen, Antony Blinken and John Kerry, President-elect Biden is pointing to his priorities: the fight against Covid-19, the recovery of the economy and the return of the United States to multilateralism and the Paris Agreement.
ECONOMY
The USA new aid package.
The U.S. Congress is in intense political negotiations to approve the interim funding measure that would prevent the government from closing
and give legislators more time to negotiate emergency coronavirus stimulus legislation amid a deepening economic crisis.
A proposal by a bipartisan group of senators for a $908 billion aid package that includes emergency assistance for small businesses, unemployment benefits, and funding for distribution of the Covid-19 vaccine is under discussion for approval.
Negotiations on a $1.4 trillion overhead package are taking place in conjunction with negotiations to approve the aforementioned aid package.
If this new package is approved, it would add to the $2.2 trillion approved in aid to the economy during 2019, an unprecedented amount in the country and which has put pressure on the increase of inflation in the country and the depreciation of the dollar against the euro ($1.21 per euro).
Disagreements between Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin over the use of resources to support the economy during the winter are part of the factors that have driven the purchase of non-dollar currencies and higher-yielding assets outside the United States
COVID-19
As of December 8, the pandemic has reached 67.8 million people worldwide40 and 1.5 million deaths, while 44 million people have recovered. The United Kingdom granted emergency approval to the Pfizer/BioNTech41 vaccine against COVID-19, becoming the first Western country to allow its health service to begin massive inoculations, which began on Monday, December 7th.
In the United States, Dr Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID) and White House chief of COVID-19, endorsed by President-elect Biden, said that wave after wave of cases may be experienced in the coming weeks, following Thanksgiving Day meetings and travel42 in the U.S. On Tuesday, December 1 alone, there was a record 2,500 deaths in 24 hours and more than 180,000 new infections, with 99,000 people hospitalized.
Moderna, the U.S. pharmaceutical company, applied to the Federal Drug Administration (F.D.A.), for authorization of its coronavirus vaccine for emergency use43. If approved, its application could begin to reach Americans as early as 21 December.
France plans to launch its massive vaccination campaign against COVID-19 between April and June 2021, although the most fragile and vulnerable groups will be prioritized by early 2021, while Italy and other European countries have also announced the availability of vaccines for the population from January 2021.
In the UK, health workers, volunteers and the military began administering the Pfizer/BioNTech vaccine on December 8, intending to vaccinate more than 20 million people in a few months.
In China, the large-scale launch of coronavirus vaccines is being prepared, where local governments are placing orders for experimental vaccines to be manufactured domestically, with the challenge of reaching the country’s 1.4 billion people.
To date, more than 1 million health care workers and people considered at high risk of infection have received such experimental vaccines under emergency use permits, although researchers have yet to disclose how effective their vaccines are and possible side effects. Chinese health officials reported that they will be able to manufacture 610 million doses by the end of this year and up to 1 billion by 2021.
The Chinese pharmaceutical industry has five vaccines ready from four of its laboratories, of which three (Sinopharm, Sinovac and CanSino) are testing their products in Argentina, Bahrain, Brazil, Egypt, Arab Emirates, Indonesia, Jordan, Mexico, Morocco, Pakistan, Peru, Russia, Saudi Arabia, and Turkey. This list will soon be extended to several Southeast Asian countries and Serbia.
Japan, whose hospitals are on the verge of collapse because of positive cases, will provide free coronavirus vaccines to all its residents under a recently approved bill. The country has secured 60 million doses of Pfizer’s vaccine, 25 million more from the Modern biotechnology firm and 120 million doses of AstraZeneca’s vaccine.
For its part, Russia announced that it will begin to apply the vaccine massively and free of charge to its entire population, after applying it to those most at risk and health sector workers.
All indications are that the race is now on for the distribution and vaccination of billions of people to contain the spread of Covid-19 and eventually eliminate the pandemic that has hit the world throughout this year 2019.
In this phase, the problems of storage logistics must now be overcome, which poses a severe problem for the Pfizer vaccine that requires temperatures of -70º Celsius, the distribution chain and the priorities of each country. This phase will also have to face the challenge of making the vaccine available to the most vulnerable sectors and to poor countries, which cannot undertake this type of massive public health operation.
This means that this phase, because of its complexity and scope, will probably take up much of the first half of 2021 and with it the normalisation of economic and transport activities. Only then, depending on how quickly the various players react, especially in the industrialized economies, will we see a sustained recovery in global oil demand.
DEMAND
Although no new estimates on the behavior of world demand have been published, OPEC, the IEA and the EIA maintain their forecasts that demand will only recover as of the year 2021, to the extent that the distribution of the vaccine against Covid -19, will allow the lifting of the measures restricting transportation and commerce, in addition to the reestablishment of economic activity.
ANNUAL VARIATION IN DEMAND
WORLD OF OIL
(2019 – 2021)
Europe
Other agencies make their estimates based on the study of traffic behavior in Europe.
In a report published by Rystad Energy, they estimate that the contraction in demand in 2020 will be 10.3 million barrels a day compared to 2019, with average world consumption of 89.3 million barrels a day44.
The analysis of traffic in real time45, carried out by this agency, to evaluate the incidence of mobility restrictions in Europe, which has generated uncertainty in the market, shows that November 2020 presents a reduction of 900 thousand barrels per day with respect to the consumption registered on the same date in 2019. Similarly, due to the start of the winter season, they warn of a contraction in vehicle fuel consumption between November 2020 and February 2021.
FUEL DEMAND FOR LAND TRANSPORT IN EUROPE (2019 – 2020)
This estimated reduction in fuel demand in Europe would have a milder impact than those recorded during the first wave of the Covid-19 in April 2020, when the contraction was 40% compared to the same period in 2019.
According to this agency, the gradual recovery in demand in 2021 will reach an average of 94.8 million barrels per day and will continue to increase in 2022 to 98.4 million barrels per day. This data will continue to show a consumption below the pre-COVID-19 average of 100 million barrels per day.
China
Hopes for a recovery in demand are high in Asia, where China plays a key role. According to the November report of the National Bureau of Statistics of China,46 a record 14,147 MMBD processed in the refineries and 10.06 MMBD of production were registered in October, with which, from January to October 2020, the processed crude and the growth rate of imports increased by 2.9% and 10.6%, respectively, with a fall of 20% since June, when it registered the peak in imports of 13 million barrels per day.
IMPORTS OF CHINESE OIL
(October 2019 – October 2020)
It is estimated that in the November data, China will present an increase in its production and processing of crude oil and also in its imports, which, by 2021, would be between 8% and 6%, according to an analysis published on November 18 by Reuters47.
Preliminary data from financial reporting provider Refinity highlights that shipments tracked in November show that China would import approximately 340 million barrels of oil this month, an increase of 5% over October.
USA
Oil imports in the US increased to 5.399 million barrels during November, according to the December 2 weekly report of the Energy Information Administration,48 an increase of 7% regarding the closing of October, driven by the winter season in this country, thus recovering records similar to those of September, when they were affected by the climatic events that limited oil operations.
U.S. OIL IMPORTS
(2018 – 2020)
STORAGE
USA
In November, the storage of crude oil showed a significant decrease, approaching the records of the last five years. According to the Energy Information Administration’s48 weekly report for December 3, storage fell to 488 million barrels per day, 8% below the five-week average for March.
U.S. OIL IMPORTS
(2018 – 2019 – 2020)
Coverage days49 also show a downward trend, to 35.1 days as of November 27. Although both storage and coverage days have been reduced for November, they are at 9% and 29% above those recorded in November 2019.
This number is a very important sign of stabilization of the oil market and results in the main objective of the Saudi strategy within OPEC and OPEC+: to drain inventories, up to the average levels and days of coverage of the last five years.
VENEZUELA
The country continues to face a deep political, economic and social crisis that, without a doubt, has a strong impact on the national oil activity, a sector that until 2013 contributed 96% of the income in foreign currency to the Venezuelan treasury and that, at present, is in ruins, due to the government’s inability to manage the state company: Petróleos de Venezuela.
At present, Venezuela, with a production of only 367 thousand barrels of oil per day, occupies the sixth place in the ranking of oil-producing countries in Latin America, after having been the leader of this group only 7 years ago, in 2013, when its oil production reached 3 million barrels per day.
RANKING OF OIL PRODUCING COUNTRIES IN LATIN AMERICA
(October 2020)
Venezuelan oil production has fallen back to the levels managed during the 1930s when the country’s population barely reached 3 million and oil revenues became a decisive and influential factor in the national economy.
As the Venezuelan economist Asdrubal Batista points out in his book, “La economía venezolana entre siglos”50, between 1936 and 1980, oil revenues in the country came to represent one-fifth of Venezuela’s GDP, dividing the history of the national economy into before and after the oil exploitation boom.
On December 2, a report from the Reuters news agency indicated that, during November, oil exports could have increased to volumes similar to those of January 2020, with 639 thousand barrels per day. According to unofficial data, published by Definitiv Eikon51 a total of 24 shipments were registered during November, which sailed from Venezuela, draining inventories of accumulated production.
The destination of the shipments was Asia, related to companies linked to Russian interests. According to the report, most of them were new buyers (Xiamen Logistic Grass, Olympia Stly Trading, Zaguhan & Co, Karaznbas, Kalinin Business International and Poseidon GDL Solutions), willing to enter Venezuelan territory with transmitters turned off to carry out the operations without being traced, as a way to avoid US sanctions; a risky operation, called «black trips,» that contravenes international regulations on marine transit.
Sales are made to inexperienced operators who are willing to perform this type of operation, given the extraordinary profits obtained from the massive discounts that private operators, in charge of oil trading in the country, are giving on behalf of PDVSA, the state-owned company.
Domestic market
Although Venezuela has in its territory the largest oil reserves in the world, stored in the geological formations of the Orinoco Oil Belt, the levels of crude production have reached historically low levels, which prevent guaranteeing the needs of the current reduced internal market, which, according to unofficial figures—due to the secrecy surrounding national numbers—is barely 120,000 barrels per day: a drop of 80.4% in comparison with 2013, when it was at 612 MBD.
The decrease in domestic fuel consumption has been affected by the paralysis of economic activities in the various sectors of the country, with a drop in GDP in the last three years of 44%, for a cumulative total of 74% since 2012 and a hyperinflationary process that in 2019 reached one million per cent, according to data from the International Monetary Fund52.
By the year 2013, Petróleos de Venezuela produced 3,015 million barrels of oil per day and processed in the country 1,072 barrels of fuel per day, of which 612 MBD were destined to supply the needs of the internal market and 462 MBD were destined to exports.
VOLUME OF PRODUCTS DESTINED THE NATIONAL MARKET EXPRESSED IN MBD (2013)
Of the products supplied to satisfy the demand of the internal market, 60% were destined for the vehicle fleet, a sector that has been strongly affected by the lack of fuel production in the country, both gasoline and diesel.
In order to guarantee the supply of these products, Petróleos de Venezuela had a storage capacity of 8,291 million barrels, 17 plants for the distribution of fuels, 2,163 tank trucks, 1,695 service stations, and 11 river modules, in addition to five refinery complexes that operated at 89% of their installed capacity, providing 1.15 million barrels of products per day.
In the period 2001–2013, fuel consumption in the country registered sustained growth, reaching 612,000 barrels per day by the end of 2013.
EVOLUTION OF DOMESTIC FUEL CONSUMPTION IN VENEZUELA (2001-2020)
However, the Venezuelan government announced that Venezuela is producing the gasoline it needs «to move the country,» while the queues of vehicles to supply fuel continue to be endless, lasting for days: a harsh reality that is experienced especially in the interior of the country.
This year Venezuela has depended mostly on fuel imports from Iran, paradoxically a country heavily sanctioned by the U.S., while the government argues that it does not produce gasoline in the country because of «U.S. sanctions.»
The Iranian fuel shipments, which the government has paid for with gold, constitute only a temporary palliative to the gasoline shortage that is experienced throughout the national territory.
Venezuelans resort to smuggling fuel to cover their needs, whose costs vary depending on the amount of gasoline available in the country. When the Iranian tankers arrived during September and October, the smuggled fuel was sold at $1 per liter. However, currently, due to the high demand and scarcity of gasoline, prices per liter range from $2 to $2.50.
So far, Venezuela has not received any more gasoline shipments, so long lines persist at the fuel stations that still have some liters in stock, although most of them are closed in the interior of the country.
El Palito Refinery Paralyzed
Unofficial sources say that operations associated with the production of El Palito gasoline, located in the center of the country, were halted this week after a fire occurred at its facilities due to problems with one of the valves53.
Given this situation, the only facility producing gasoline in Venezuela is the Cardón Refinery in the state of Falcón. However, it operates at only 10% of its capacity, which is insufficient to supply the country’s fuel needs.
Parliamentary Elections Questioned
Last Sunday, December 6, the elections were held for the deputies to the National Assembly54, who will assume the leadership of the legislative branch for the period 2021–2026. These elections were held in a non-transparent manner and in conditions of illegality that caused their results to be questioned as being illegitimate.
The first reaction of the international community has been to ignore its results, as expressed by a large number of countries and regional blocs, including55: the European Union, the United States, Brazil, Canada, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Panama, Paraguay, Peru, the Dominican Republic, and Saint Lucia.
After the election of the new National Assembly, the National Constituent Assembly (NCA) will be dissolved on December 30, without having presented a new constitutional text: a purpose established in Article 347 of the Constitution of the Bolivarian Republic of Venezuela and for which it was supposedly convened by the government when it signed the decree invoking May 1, 2017.
However, the NCA has been used as an instrument of the national government to replace the previous National Assembly elected in 2015 and to legislate against the Constitution and laws in force, particularly to dismantle Venezuela’s legal oil regime.
An example of this is the Anti-Blockade Law, approved without consultation or public discussion and questioned as unconstitutional and illegal, which with the excuse of U.S. sanctions, seeks to privatize the public sector, including strategic sectors such as the oil industry, to reverse the nationalizations carried out and to transfer assets to private operators.
According to Nicolás Maduro, during a press conference before the parliamentary elections, even without knowing the results of the elections, he assured that the new National Assembly will work within the framework of the so-called Anti-Blockade Law56 and its subsidiary laws.
All these laws and actions, on which the government has based and intends to deepen the development of its economic policy, are vitiated by nullity because they are based on unconstitutional actions, promulgated by bodies that are questioned in their legality and legitimacy, such as the NCA and the National Assembly.
This Anti-Blockade Law will leave aside the discussions initiated by the national opposition for the modification of the Hydrocarbons Law, because this instrument approved by the NCA opens the doors to a fierce privatization process, facilitating the path to a more expeditious and complete—although illegal—privatization than that proposed by the Venezuelan opposition.
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