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MAY 31, 2022 // THIS WEEK'S TOPIC: U.S. ENERGY MARKET
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This Trader’s Corner is going to conclude our series on evaluating how the U.S. is doing in replacing Russian crude and refined fuel supplies and helping to supply Europe. Unfortunately, the study has revealed painstakingly slow progress by the U.S. and Europe in taking long-term steps in replacing Russian energy.
Instead, the primary response has been to release 240 million barrels of crude from strategic reserves. The U.S. is releasing 180 million barrels over six months, or 1 million bpd. Our analysis showed that the U.S. has increased crude exports by 675,000 bpd since Russia invaded Ukraine despite crude still being in short supply. About 300,000 bpd is being used to overcome the U.S. shortfall in supply. Essentially, we are working on borrowed barrels with little progress in having a long-term replacement.
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In last week’s Trader’s Corner, we lamented the fact that we were seeing little action by governments in the U.S. and Europe to increase their own hydrocarbon production to be better prepared when the reserve releases have run out. In fact, most of the action has been to limit hydrocarbon production even more and tout the need for renewable energy. We are all for renewable energy development from both an environmental and national security standpoint. But the reality is the timeline is far too long.
The question is not if approximately the same amount of hydrocarbons are going to be used in the short term regardless of Russia's invasion of Ukraine. There will be. It is not if you can replace Russia’s hydrocarbons with renewables in the next six months; you can’t. The realistic question is: Do you want to use Russia’s hydrocarbons and help them financially wage war, or do you want to produce your own hydrocarbons until the capacity to replace Russia’s hydrocarbons with renewables is in place in a few decades? Actions to date have suggested the latter.
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Mercifully, last week, a government finally took action that seems to suggest it is willing to address the situation with more than political rhetoric. The United Kingdom placed a 25 percent levy on oil and gas company profits. The revenue will be used to help lower the cost of energy for consumers. When we read that part, we could only conclude there would be harm to the oil and gas industry in the United Kingdom at a time it can least afford it. But there was a caveat in the legislation. Oil and gas companies can significantly reduce the amount of the levy but only by investing in projects that increase oil and gas production in the United Kingdom.
We admit that we do not know if this will indeed increase oil and gas production in the United Kingdom and overall help keep its oil and gas industry healthy and effective at a time when it is most needed. All we can do is applaud the fact that a government seems to understand the issue at hand and is taking action to try to address it. Of course, the action was met with harsh criticism from activists. But isn’t it clever that government has provided itself cover by saying it is using the levy revenue to help consumers? That potentially puts those opposed to the legislation on the back foot in trying to garner support.
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We want to give the U.S. government kudos for actions it announced last week. The U.S. Treasury Department announced that on Friday it renewed a license to Chevron Corp. to operate in U.S.-sanctioned Venezuela through the end of November. This allows Chevron to preserve assets in Venezuela. Previously, it had authorized Chevron to engage in talks with Venezuelan President Maduro’s office and the state oil company PDVSA through November as well. These are steps that could lead to a broader license for Chevron that would allow it to produce and export to the U.S. more Venezuelan crude.
We view these developments strictly from a U.S. energy security perspective. We certainly understand the position of not wanting to support the Maduro government. The U.S. recognizes his opposition as the elected government.
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Why is this a significant development? Historically, Venezuela has been a key source of heavy crude for the U.S. The U.S. has not built a new refinery since 1975. New capacity has only been added to existing facilities. The bulk of our refining capacity was built when the U.S. imported most of its supply from Venezuela, Canada and the Middle East. Crude from those sources was heavy, so refineries were designed to run the crude available to them. Altering the refineries would take billions of dollars and a great deal of time.
Most of the growth in U.S. crude production has been light crude. In fact, we are oversupplied light crude, and that is what we export. Despite all the light crude production, we still need heavy crude for our refineries to run properly. Heavy crude was coming from the same sources until the previous administration put an embargo on Venezuelan crude when the Maduro government failed to concede power after an election. This was one reason the U.S. was sourcing heavier crude from Russia. Then, the current administration put an embargo on Russian crude imports. This has left the U.S. struggling to get the heavy crude it needs.
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We would like to see our government doing more to encourage U.S. oil and gas production, but at least this action shows an understanding of the issue related to heavy crude supply. We are not sure Chevron’s negotiations with the Maduro government will lead to a positive outcome, but at least there is some hope that it will. Would it be nice to have the Keystone XL pipeline operational so that an additional 300,000 bpd of heavy crude from Canada would be available? Yes. But it’s not, and it would take years to complete even if the political opposition to it were overcome. So, pursing an avenue that could lead to heavy crude from Venezuela in a matter of months is realistic.
Perhaps the pursuit of Venezuelan crude is not what anyone wants. Perhaps no more than anyone wants more oil and gas production in the United Kingdom. But the need for both is the reality, and now there is at least the inclination that reality thinking is starting to emerge.
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About Cost Management Solutions
Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.
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