Oil and Coal Production Making a Comeback on International Markets

If you haven’t been following the energy markets this year, then you have missed out on a lot of market volatility and geopolitical trends. That’s why I firstly want to suggest an Energy writer for Reuters, John Kemp, whose newsletter I’ve been following to make sense of what’s happening in the global oil and gas markets.

You can stay up to date in the energy sector by subscribing to John Kemp’s newsletter here.

Here’s a fact to get us started: Fossil Fuels were designated as the most tweeted term — at 446 mentions — on Twitter exploration trends in Q1 2022.

Let me paint a picture for you. First, the G-7 announced an oil price cap on Russian oil, which went into effect on December 5. Then, OPEC+ announced that it would cut its oil production output by 2 million bpd in October. This news came on the heels of United States President Biden’s visit to Saudi Arabia to try to amend differences in the strategy relationship between the US and Saudi Arabia.

Another point of contention is in shale oil production in the US. According to Hess CEO, John Hess, “OPEC is back in the driver’s seat.” He framed this statement under the backdrop of declining shale oil production in the US, which, according to John Kemp, had transformed the availability and price of oil in global markets from 2009–2019. In 2022, however, it is expected that U.S. production of shale oil would only rise slightly to +0.7 million bpd.

Energy experts wholly agree with CEOs that OPEC is back in the driver’s seat in terms of the global oil supplies and energy market prices linked to OPEC production capacity.

While other companies seek to profit handsomely from the G7’s oil price cap of Russian seaborne exports of oil and the European Union’s embargo of Russian crude oil and petroleum products, such as ExxonMobil, as the giant U.S. oil and gas producer and retailer now wants to lean on the risks associated with European dependency on Russia for its vital natural gas imports.

According to data and analysis compiled by Seeking Alpha, “This creates a once-in-a-generation opportunity for Exxon Mobil to expand its presence in the natural gas business at Russia’s expense.”

No doubt, in Q3 2022 alone, XOM’s earnings surged to $18.7 billion. So it’s not like the company doesen’t have the amount of capital to invest in natural gas production capacity.

But natural gas production is linked to developments in Liquified Natural Gas (LNG) infrastructure investments and technologies, which I’ve already written about extensively in Areas & Producers with Politicization of Oil, Coal and Natural Gas Are Playing A Greater Role in Industrial Policies and Energy Supplies Around the World.

For now, let’s keep the focus on oil and coal production (more on coal in the next section).

An event that is not being followed very closely by media sources is the upcoming meeting between China’s Chairman Xi Jinping and Saudi Arabia’s Crown Prince Mohammed bin Salman at the so-called Chinese-Arab summit on 6 December 2022 in Riyadh. What this means for oil production on international markets has yet to be clarified, but it could mean that OPEC seeks to keep prices stable on energy markets as China recovers from its Covid-19 pandemic lockdowns, hurting the country’s GDP growth and industrial production in unprecendented ways since China’s rise in the global economy.

On the other hand, the US military and defense analysts are growing more fearful about China-Saudi Arabia ties, as it has been reported in the Pentagon’s annual “China Military Power” that China is increasing military cooperation and engagement with other Middle East countries such as Iraq.

This is relevant to global oil supplies. Countries with increased leverage over oil markets are more likely to use this advantage to achieve political ends. The First Arab-Chinese Summit signals a change in the thinking on Saudi Arabia’s control over oil production, and how they wish to court China as a major oil importers. Increasing military and defense ties would be a big step, though I don’t think that’s the overall concern here.

A bigger concern is how and to what extent China is going to roll out its Belt and Road Initiative (BRI), where the Middle East and North Africa (MENA) is poised to play a pivotal role in linking up supply chains and transport routes throughout the European, African and Asian continents. A successful roll out of the BRI in MENA would be benefical to OPEC oil supplies and exports. China would need ALOT MORE oil, and the supply chains would improve the prospects of getting more oil moved around North Africa, set to become one of the world’s next industrial and energy hubs.

I digress on the geopolitical trends, which are quite significant to oil and coal production on international markets. According to sources speaking to CNN, the upcoming meeting between President Xi and Crown Prince MBS is a “milestone” for China’s engagement with MENA countries.

Indeed, I already pointed out the critical aspects of China’s BRI in MENA, but this meeting also symbolizes how fast the times are changing in respect to geopolitical trends and industrial policies. To know more about what’s happening here, I highly suggest this article from Oil Price.com about regional oil competition between Iraq and Saudi Arabia.

The next big topic is on offshore oil production in South America, particularly Guyana and Venezuela. I’ve already written extensively about how FLNG and FPSO are signs of surging demand for oil & gas products in Areas & Producers with Politicization of Oil, Coal and Natural Gas Are Playing A Greater Role in Industrial Policies and Energy Supplies Around the World.

The US government has been in talks with the Venezuelan government since March 2022 about lifting sanctions against the country’s crude oil exports. Chevron is the big player in Venezuela, while its competitor ExxonMobil is producing crude oil like crazy in Guayana after increased demand from European countries took the place of Russian crude oil exports.

In order to allow Venezuela to export more of its crude oil, the US government is asking Venezuelan President Maduro to resume talks with opposition leaders and to hold free and fair elections in 2024. However, opposition leaders in Venezeula have also called into question any proposed deal agreed between Venezuelan leaders and American goverment officials on the basis of Chevron’s license to operate in Venezuela, which, according to Juan Guaido, could reveal legal obstacles for the preliminary technical service agreement reached between Chevron and Venezuela’s state-owned PDVSA.

It was finally announced on 23 November 2022 that Chevron would be given approval to begin its oil operations and trading in Venezuela after agreeing to resume high-level discussions in Mexico City, Mexico. Following succesful talks in Mexico, Chevron was officially granted a US lisence to expand oil production in Venezeula to export more crude oil to the US markets on 26 November 2022.

One of the most significant details of the agreement was to prevent PDVSA from receiving any proceeds from Chevron’s sales volumes of Venezuelan crude oil. Indeed, it looks like the agreement was not only a big win for US oil producer Chevron, whose competitor is knocking crude oil exports out of the park with another planned FPSO from SBM Offshore in Guyana scheduled to arrive to Exxon’s offshore production facility per the details of the two companies’ memorandum of understanding (MoU).

It was also a big win for Venezuela’s political opposition leaders, who were asking for concessions themselves, and most likely testing the will of the US’ political demands on Maduro’s government, of which the administration has had a tight control over crude oil exports from its state-owned producer PDVSA.

ExxonMobil’s offshore oil production in Guyana will continue to be a tour de force in energy markets in the long game of geopolitics for decades to come. I already wrote extensively in Areas & Producers about how the Guyana case reveals that Crude Oil pipelines are not a forgone conclusion as the spearhead of global economic activity.

There were two significant elections held in South America this year in Brazil and Columbia.

Firstly, I would like to introduce Dr. Luisa Palacios, Senior Research Scholar at the Center on Global Energy Policy and former Chairwoman of Citgo Petroleum Corporation. In an interview with Columbia Energy Exchange, she pointed out how lifiting sanctions on Venezeula’s oil production would have a bigger impact on emerging markets than US and European crude oil and natural gas markets, as the issues of energy affordability and energy security would remain a paramount importance for Latin American countries going foward.

But now I want to turn the attention solely to Columbia’s oil and coal production, which has become a hot political issue ever since newly-elected President Gustavo Petro won the 2022 elections with 50.47% of Columbian voters. When President Gustavo assumed power on 7 August 2022, he vowed to stop issuing new oil permits to producers in Columbia at once.

Readers should be aware of Columbia’s energy security dilemma.

For instance, according to data from the Energy Information Administration (EIA) Columbia had previously relied on hydroelectric power for more than 80% of its overall energy power generation prior to 2020 — when drought caused Columbia to boost imports of natural gas.

Then, Glencore made a big move at the beginning of the year when it acquired the remaining 66% stakes from BHP and Anglo American for $588 million in January 2022, giving Glencore full ownership of the Cerrejón mine. The massive pop in the industrial EBITDA was attributed to Glencore’s thermal coal operations during record prices of coal market price benchmarks, including the acquisition of the Cerrejón coal mine located in La Guajira, Columbia.

It’s been reported by many news agencies and media outlets that Glencore is having an amazing year in terms of its profits from the Global Commodity Supercyle. As one of the world’s largest miners and commodities traders, the company’s exposure to thermal coal, crude oil and critical metals such as cobalt and zinc, has brought Glencore’s profit margins to exceedingly new highs.

Since Glencore is one of the only companies that still has a full-fledged coal business, it has given the company extreme flexibility to give investors more returns through corporate buybacks and dividends. This reveals the old dilemmas about how shareholders shape the narratives around oil & gas production scenarios in the global economy. I already wrote extensively in Areas & Producers about the dilemma of a revitalized Coal industry which requires much deeper collaboration between countries and industry than ever before for the success of the Energy Transition.

The uptick in coal production activities caused United Nations Secretary-General Antonio Guterres to come out in opposition to coal’s big comeback on international markets in August 2022. Meanwhile, coal producers argued that thermal coal is in high demand around the world since it is a cheap and reliable source of power generation in countries that are struggling to meet its domestic elecricity demand.

It was also repoted in gCapitan that declining volumes of cargo traffic through the Port of Rotterdam were being offset by a rise in LNG and coal supplies through the port, since coal and LNG were largely going to Europe making up for the loss of Russian energy exports. According to Chief Executive Allard Castelein, “The total volume makes it seem as if it is business as usual in the port, but the big changes, especially with respect to LNG and coal, indicate that the energy landscape has changed dramatically.”

This trend led to Denmark producer Orsted to restart coal operations in October 2022 amid a crisis for European energy supplies before the winter 2022/23 season.

According to the trend, coal is still being viewed as a viable fossil fuel for industrial production in the global economy, in addition to a reliable domestic source of energy power generation. For example, it was announced during the G-20 Summit in Bali, Indonesia, that coal production from G-20 countries had attracted $20 billion in government-supported investments for energy supplies in 2021.

Writing for Eco-Business (of Reuters) Robin Hicks analyzed how important the decarbonization focus has become in South East Asia. In the article, Hicks write that Indonesia’s industrial sector is being overlooked as one of the region’s largest greenhouse gas (GHG) emitters. According to this analysis, more efforts should be put forth by international companies and the global community to decarbonize industrial production in Indonesia.

As a way to lead a greater effort for the entire Southeast Asia region, both ExxonMobil and Chevron announced plans to expand into the Carbon Capture and Storage (CCS) markets with new projects to live up to commitments they have made on getting to Net Zero. Thailand’s PTTEP also announced the country’s first CCS project.

In fact, Exxonmobil and Chevron serve as fantastic examples to explain how vital industry and government collaborations are for a successful energy transition. The two supermajors are both working with Indonesia’s PT Pertima to find adequate solutions for lower-carbon emissions production through carbon capture utilization and storage (CCUS) and promote energy security and independence in Indonesia. Exxon has even proposed building an ASEAN carbon capture network that will connect the entire region with low carbon energy solution to industrial production.

In conclusion, by looking at what’s happening in the overall energy sector — e.g. market volatility and geopolitical trends — US sanctions and investments in global clean energy technologies could be the biggest forces for oil and coal production on international markets going foward.

There are three big events happening in oil and gas markets that are extremely counter-productive to clean energy investments: US Senators Marc Rubio’s and Rick Scott’s bills to ban oil and gas exports and imports from China, Venezuela and Iran; increasingly higher prices for renting offshore oil and gas rigs for offshore oil and gas production; and Warren Buffet’s increasing stakes in US oil and gas producer Occidental Petroleum.

On the surface, these three events might seem, in some ways, good for future investments in clean energy technologies. I offer three explanations below for why that is not the case.

1. I argue that more sanctions on oil exports/imports from China, Venezuela and Iran will add more significance to increasing coal production, as it is a cheaper and more reliable source of fuel and power generation — a win-win by many developing countries’ standards. Many of those countries — ranging from Latin America to North Africa — are particularly vulnerable to higher energy prices which are often correlated with food prices. If coal is available, and cheap to produce, then you can expect more of it on international markets to alleviate domestic concerns for food insecurity.
2. Since offshore oil and gas producers have increasingly more power over the upstream energy sector, they are likely to be facing higher prices for their equipment and services. Just look at SLB, Haliburton and Baker Hughes — three of the US’ biggest oilfield service providers and intellectual property (IP) holders. If those companies continue to increase prices on services and technology licenses, there will be less competition in the upstream sector, which means prices can remain higher for a longer period of time. Thus there will be less producers bringing offshore oil and gas to global markets.
3. Warren Buffest increased his shares in Occidental Petroleum (OXY). This was and is a big story in stock market and financial news, as it revealed a much bigger focus on energy equities and an overall bullish environment for capital investments in the energy sector, especially in oil. However, it must be taken into consideration how much of an impact China and India will have on global oil markets. They are the biggest importers of Russian oil. But they are also competing for global industrial production capital and foreign direct investments (FDI) vis-a-vis one another. That’s why the increased attention put on the United States’ oil and gas production is not necessarily the driving factor for global energy markets going forward. This is evident in the decision of OPEC+ to decrease their oil production output in spite of competition from US oil and gas producers.

I’ll be publishing The Weekend Brief (TWB) regularly touching on aspects of the global markets (including stock markets) which are at the nexus of tech, industrials and global commodities. Please follow the publication Areas & Producers to read more content about the future of core areas and critical producers of the global economy.

Sign up for TWB newsletter here to read about how publicly-traded companies, like Wal-Mart and John Deere, are competing in the long game.