The Peter Zeihan Podcast Series - A New Player in Global Oil Markets: Guyana || Peter Zeihan

Episode Date: September 2, 2024

*This video was recorded prior to Peter departing on his backpacking trip in July. Guyana is a country we don't hear about too often, but its rise as an oil producer has earned it some air time. In particular, we'll be looking at the implications this carries for global oil markets. Full Newsletter: https://mailchi.mp/zeihan/a-new-player-in-global-oil-markets-guyana

Hey, everybody, Peter Zine here, coming to you from Colorado. And today we're going to do something in the Western Hemisphere that is not the American political system. We're going to talk about Guyana, of all things. Guyana is a small, well, the best word to use is stateslet on the northern coast of South America. It has historically just, well, not mattered at all. It's in the middle of the tropics. It's bounded by the Amazon. There's not a lot going on there until in the late 20s.

2010's, someone found oil. And back in 2018, this place produced nothing. And today, it's producing about 600, 650,000 barrels a day. ExxonMobil is the operator for pretty much the entire thing. They are, just this week started their seventh expansion, which the intent of all of this is within five years to get them up to 1.4 million barrels per day. So from the point of view of like the big producers, you know, your Russia's, your Americas, your Saudis, This isn't a huge amount of oil, but give you an idea of scope.

I mean, this is more that Iran is exporting right now and puts it above countries like gutter or Libya. Anyway, pros and cons, if you are in the eastern hemisphere and you are concerned about oil security and you should be, this is, of course, a great sign. One of the issues we're seeing with the Ukraine war is that the Western countries have bit by bit, ratcheted down on tech transfer to Russia. And oil extraction technology is one of those things. The goal here was to strangle the Russian economy so that it can't afford the war. And in part by doing this, they started with things like price caps and then going after shipping insurance and now going after the shadow fleet of tankers that are trying to get around

the sanctions and all that works. But ultimately, they have not taken steps to this point to actually destroy the ability of the Russian state to produce the oil in the first place. I mean, some on the margins, like the technology required for offshore has basically been denied the Russians, but the Russians were not big offshore producers, so that just affected things at the margins. What really makes Russia go is labor and tech transfer. Over the last 25 years, the Russians have gone from a Soviet-style system that sloppily

produced a lot of crude at relatively easy fields to a more focused system that uses more technology to more clearly produce crude at more advanced sites. And today, I'd argue that probably two-thirds of Russia's oil production comes from that latter group. So you either have foreign techs or people who are trained abroad using technology that is 100% imported to produce from fields that the Russians could not produce from by themselves. Now, when the Ukraine war started, most of the major services companies, groups like Halliburton, for example, cut their contracts, cut their losses, withdrew from the system, but they did two things. Number one, they sold their local subsidiaries to their employees

who were Russian nationals, and so basically retain an under-the-table connection to them. And number two, they pre-sold a couple years worth of gear to allow these new subsidiaries to continue operating. And that has meant that Russian output has remained steady this entire time. What we're seeing now is a couple things. Number one, the Europeans have largely separated themselves from the Russian energy complex at this point. Yes, the crude is still flowing. Yes, it's going to third countries who are refining it and sending it back to Europe. I don't mean to suggest the exposure is zero.

But bit by bit by bit, the Europeans have been taking more and more crude from, say, Western Hemisphere productions, most notably U.S. shale crude. and so the degree of exposure there is a lot less than it was two years ago. Second, we've seen the last of the pipelines that cross Ukraine start to fluctuate for legal and operational reasons. The Ukrainians have always said that when the contracts with Russian oil and natural gas companies expire, they're going to turn those pipelines off. Oh yeah, and yes, yes, yes, two years into the war marked by sexual assault and genocide

and kidnapping, the Europeans have leaned on the Ukrainians to keep oil and natural gas pumping across Ukraine into Europe. Well, that ends by the end of this year. And in fact, earlier this month, we got cutoffs in those lines going to Slovakia, Czech Republic, and Hungary. Now, a little side here. The Czech Republic and Slovakia have managed to get an exemption in order to get these sanctions through two years ago.

But they have been assiduously working to find replacement supplies and build replacement infrastructure. Hungary, which is basically acted like a bag of dix, when it comes to all things Ukraine, has not. And now they're finding themselves without oil and natural gas. So there's a story within a story here for the Europeans, but that's a topic for another day. Anyway, bottom line is, with the exception of Hungary,

everyone has pretty much weaned themselves off the Russian stuff. And so now the time has come for the Europeans to discuss, as they are, how do you actually kill the Russian energy sector? And you do that by stopping the tech transfer. At the moment, it is legal for third parties, most notably China, to buy this equipment and send it on to the Russians. So the Europeans are now discussing how they expand the sanctions regime so that doesn't happen. And considering that the Europeans are already in the early days of a pretty knockdown

dragged out trade war with the Chinese, this is a very powerful lever for them in any number of ways. Basically, if you can get the Europeans to force the Chinese to sell the Russians down the river, they might maintain a little bit more market access to the European market, which is exactly what the Chinese need to avoid their own economic breakdown. So this is real. This is probably going to happen in the next few months. And as that happens, we're going to see more problems in the Russian energy complex as they just can't get this stuff to market.

Now, that means if you are someone in the Eastern Hemisphere and all of a sudden the five to seven million barrels per day of crude and crude related products that the Russians produce and export starts to wobble having an extra million, million and half barrels of a medium sweet crude coming out of a Guyana suddenly becomes very, very attractive. And if you're European, this is a really nice match because the crude that comes in from Russia is a medium sour blend. The crude from Guyana is a medium sweet blend. It's not too far off what their refineries were designed to process. So if you're European, you now have a backup plan. The downside is for American producers. The shale sector in the United States is significantly

different by any number of metrics from global oil norms. Most crude and most of the world is relatively heavy and relatively sour, meaning it's kind of thick and viscous and has a lot of contaminants in it most notably sulfur. U.S. light sweet shale is different. Because you never had the crude migrating through rock formation, it never picked up contaminants. And because it's trapped at almost the moment of the formation within the rock strata, never had a chance to mix with anything to get thick and gooey. So it's light, it's sweet, it's basically the consistency of a nail polish remover.

And, you know, that was great at first, but, you know, once you start producing, you know, 8 million barrels a day of it, and that has all hit the market in the last 15 to 20 years, you basically super saturate the market for demand at that kind of point. And the Gyanin stuff is not too far removed. it's definitely heavier, it's definitely more sour than the light sweet crude coming out of Texas and the Permian and everything. But it's not so far removed that it is competing in a fundamentally different product bracket. So if you're an American shale producer, you basically are selling into a super

saturated market in the United States right now and you're trying to export this crude to the wider world to get a better price point. Well, now you have roughly a million, million and a half barrels of competition coming from Guyana. So ironically, Exxon's new project has made the economics of shale just a little bit worse. I don't think anyone's going to be broken over this. And you've made the security of Europe quite a bit better. Whether or not that is a win for you, depends, of course, which side of the pond you happen to call home.