Venezuela’s oil production fell by another 52,000 bpd in February from a month earlier, according to OPEC’s secondary sources data.
That put Venezuela’s oil output at 1.548 mb/d for February, down 100,000 bpd since December and down 600,000 bpd from 2016. Output will almost certainly continue to head south for the foreseeable future.
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The uncertainty, then, is only over how bad things might get.
“Production is collapsing in a way rarely seen in the absence of a war,” Francisco Monaldi, fellow in Latin American Energy at the Baker Institute for Public Policy at Rice University, wrote in a new report published by the Atlantic Council. “The country is also suffering the worst economic depression ever recorded in Latin America.” GDP shrank by 16.5 percent in 2016 and 12 percent in 2017. The IMF predicts the economy will contract by another 15 percent this year.
The Atlantic Council report points out the roots of the country’s oil production problems. Former President Hugo Chavez sacked thousands of workers after a strike in 2003, decimating much of the company’s technical expertise. He partially nationalized some oil projects a few years later, leading to the exodus of ExxonMobil and ConocoPhillips from the country. Meanwhile, revenues from state-owned PDVSA were diverted for social policies, which, while they helped reduce poverty, left little for the oil company to reinvest in its operations. Output eroded steadily over time.
Falling production is compounded by the fact that Venezuela only takes in revenue on a portion of its exports. More than half of what it produces is already earmarked for China and Russia, or otherwise sold to the domestic market at a loss because of price controls. That means that out of the 1.8 mb/d that Venezuela produced in November 2017, PDVSA was only generating revenues on about 850,000 bpd in November, the Atlantic Council report concluded.
Worse, the production losses are set to continue. Half of the country’s output comes from joint ventures between PDVSA and international companies, but because PDVSA is way behind on payments to these companies, activity is taking a hit. Private firms are scaling back their operations and declining to make further investments. The rig count in the country has fallen by nearly a third since 2014.
That’s a notable problem because output from the joint ventures had held up better than production that came solely from PDVSA’s operations. With the joint ventures now suffering from declining output, overall production is in a freefall.
Another problem is that a lot of the recent production declines have come from conventional oil fields. Heavy oil production is also falling, but has done so at a slower rate. That means that over the past few years, Venezuela’s production mix has become relatively heavier, which is less profitable and harder to process (and requires imported diluents).
Production is expected to fall to something like 1.4 mb/d this year, according to various forecasts, although there is deeper downside risk. The U.S. has reportedly been considering stronger sanctions against Venezuela, whether in the form of financial sanctions, or perhaps a ban on U.S. diluent heading to Venezuela, or even a ban on Venezuelan oil imports into the U.S.
The removal of Secretary of State Rex Tillerson by the Trump administration and replacing him with current CIA Director Mike Pompeo could also result in an escalation of action against Venezuela.
The financial screws from Washington and Brussels are making things a lot worse for the Venezuelan government. “Buyers are trying to find alternative sources to Venezuela’s supplies, and banks are unwilling to give letters of credit to PDVSA,” the Atlantic Council report concluded. “As a result, Venezuelan exports to the United States, which had been relatively stable for the previous four years, collapsed in 2017.” Because PDVSA had higher margins in the U.S. market, trying to reroute oil shipments will cut into revenues. Selling oil to India or China is possible, but will require steep discounts and higher transportation costs.
A default on debt this year seems likely. Venezuela has less than $10 billion in cash reserves and over $8 billion in maturing debt. A major default could lead to the seizure of PDVSA’s oil shipments, which would plunge the company – and the country – into a much deeper crisis. “These conditions indicate a bleak scenario for 2018 and for the immediate future of Venezuela,” Francisco Monaldi wrote in the Atlantic Council report.
Through all this mess, President Nicolas Maduro seems undeterred, and has announced elections for May. And while China and Russia are unlikely to throw the country a lifeline in a major way as they have in the past, because their state-owned oil companies are taking on a larger role in the country, they could market Venezuela’s oil exports as a way to ensure the oil continues to flow. Even in a pessimistic scenario in which western oil firms exit the country, and Venezuela’s oil production plunges to about 1.2 mb/d, “that may still be enough to sustain an internationally isolated authoritarian government,” Monaldi wrote in the Atlantic Council report.
By Nick Cunningham of Oilprice.com
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