Latin American Advisor/thedialogue.org :
Is Venezuela’s entire oil sector about to collapse?
“In reference to the industry’s collapse, there are some areas more affected than others. There’s crisis in some zones; in others, there’s chaos.
Q Venezuela’s crude production is at its lowest annual average in more than 30 years, as tightened U.S. sanctions continue to squeeze President Nicolás Maduro’s budget. State-run oil company PDVSA has reported its oil exports dropped 32 percent in the ﬁ rst half of June, as compared to May, as it struggles to afford equipment, retain employees and contain theft of its infrastructure as the country’s hyperinﬂ ation continues. Is PDVSA close to collapse? What would its collapse mean for the South American country and foreign oil companies operating there? What will it take to turn the company around, and are the new PDVSA board members and leadership named by Maduro in recent weeks up to the task?
A Francisco J. Monaldi, Baker Institute Fellow in Latin America energy policy at Rice University: “By almost any deﬁnition, PDVSA has already collapsed. Production has fallen by 1.2 million barrels per day (b/d) since January 2016 and by 2.1 million b/d from its peak in 1998 (a 62 percent decline). Of the 1.3 million b/d produced, more than 0.8 million b/d do not generate cash-ﬂow: they are committed to repay loans or sold at a massive loss in the domestic market. PDVSA has defaulted on most partners, suppliers and creditors. The recent fall in exports is partly the result of injunctions obtained by Conoco seeking to collect an arbitration award by seizing control of PDVSA’s facilities in some Caribbean islands, which are involved in more than 20 percent of its exports. The government has made things worse by giving control over the company to the military and appointing an inexperienced, politically-connected board. Looking forward, the regime and PDVSA face two dramatically divergent paths. The ﬁrst one requires a macroeconomic adjustment program; debt restructuring; support from the IMF; and massive foreign investment in the oil industry. It would require the cooperation of the U.S. and other Western countries, lifting sanctions in exchange for steps towards re-establishing democracy. The remaining path is one in which oil production continues to collapse; Venezuelan creditors corner the country, trying to seize assets, cargoes and revenue ﬂows; Western companies have a declining role in the oil sector; Russia and China increasingly manage Venezuela’s oil exports and reluctantly become the largest operators in the declining oil industry; the country becomes highly politically isolated; and the massive exodus of emigrants to the region continues.”
A David Voght, managing director, and Joel Guedes, corporate ﬁnance advisor, both at IPD Latin America: “IPD’s preliminary estimates put Venezuelan crude and condensate production at 1.54 million barrels per day in June 2018, a 30,000 b/d contraction from the previous month. Active rig count has fallen 50 percent since January, to a mere 28. Seven rigs were lost in May alone, foreshadowing further output decline. In just six months, extra heavy oil production has fallen by 130,000 b/d. Lack of diluent for blending and upgrader bottlenecks are to blame. Power outages are commonplace, negatively affecting production nationwide. IPD estimates that more than 30,000 employees have left the oil industry since 2016. Less than 25 percent of PDVSA’s current employees hold a university degree, and less than 40 percent have more than 10 years of experience. PDVSA’s new board is certainly not qualiﬁed to mend the broken industry. But even if it was, the government will not drive structural reforms to the oil sector, much less the overall economy. Barring unmitigated transformation, IPD expects production to fall to 1.2 million b/d by December 2018, a 490,000 b/d decline for the year. A similar 500,000 b/d drop in 2019 would leave the Maduro administration with just 700,000 b/d of production, and scarcely 450,000 b/d available for export. Much of that would go to repay Chinese and Russian loans. One would expect such a scenario to drive change—deep political and economic reform that would allow U.S. sanctions to be lifted, and massive foreign direct investment to ﬂow to the world’s largest crude reserves. Otherwise, collapse becomes inevitable, at which point private oil companies may ﬁnally have to give up.”
A Asdrúbal Oliveros, director, and Guillermo Arcay, economist, both at Ecoanalítica in Caracas: “It would be difﬁcult to overstate the consequences of PDVSA’s collapse. As of May, PDVSA’s average daily oil output has fallen to 1949 levels, and Venezuelan per capita oil output fell to 1927 levels. To contextualize, oil became Venezuela’s main export in 1928 when it surpassed coffee and cocoa, two products that now account for less than 1 percent of exports. Additionally, not all oil barrels generate a positive cash ﬂow for the government, because we estimate 338,000 b/d are used for domestic consumption and 395,000 b/d are transferred to China and Russia for debt service, leaving only 659,000 b/d for generating revenue. Although collapse has been substantially gruesome, it is far from over. Since October 2017, the average daily oil output has been shrinking 64,400 barrel every month, and 2008’s average output of 3.1 million b/d seems like an unrealistic standard to aim for if somehow the industry is properly reformed. If PDVSA wishes to turn around their situation, the company would need to invest in reopening several oil ﬁelds, but the corporation’s board was reshufﬂed twice in less than a month, and they have been unable to stop the number of active rigs from falling 44 percent, from 50 to 28 in the ﬁ rst 5 months of 2018. According to our estimates, the number of active rigs that were necessary to maintain May’s oil output was approximately 54, and if PDVSA keeps slashing the rig count, their output will follow the trend. If the status quo is maintained, we expect aggregate output to fall below 1 million b/d by the fourth quarter of this year or ﬁ rst quarter of 2019.”
A Antero Alvarado, Venezuela director at Gas Energy Latin America: “In reference to the industry’s collapse, there are some areas more affected than others. There’s crisis in some zones; in others, there’s chaos. Different problems exist. Undoubtedly, PDVSA’s operations alone—that is, without private partners—are the most affected. Fields in the Occidente region and the northern area of Monagas is where production has fallen the most. It is in these areas—where PDVSA operates on its own—that large companies are no longer providing well services. It makes one think that things as simple as a work over are not getting done. No one wants to sell anything to PDVSA, ﬁ rst and foremost because PDVSA makes purchases in local currency and takes several days to actually pay—if it does pay. The company’s debt to service businesses surpasses $25 billion. That’s why the decrease in production is so dramatic. But production in places where private partners operate has also suffered a lot. Only ﬁve of the 40-plus joint ventures have a positive cash ﬂow. It is in these projects that companies like Schlumberger provide their services. The solution will come by paying the pending debt and negotiating PDVSA’s majority ﬁeld operations with its partners. Something like that will come in the short term. Hyperinﬂation, PDVSA’s low wages and sanctions are some of the other difﬁculties that the energy minister should sort out. In the meantime, investors are waiting for the right moment to enter and buy assets at low prices, betting that this situation will soon end.”
A Gustavo Coronel, a founding board member of PDVSA: “Although the signiﬁcant decline of PDVSA’s oil production has been accelerated by U.S. sanctions, its primary causes have been corruption and gross managerial incompetence. During the recent OPEC meeting, PDVSA’s president, Manuel Quevedo, stated that the company would increase production by 1 million barrels per day during the rest of the year. This is an impossible task to accomplish and illustrates the ignorance and irresponsible behavior of the people running the company. PDVSA has already collapsed, as shown by all of its operational and ﬁnancial statistics and, in my view, is no longer recoverable. A new legal and operational model will be required to manage what is left of the Venezuelan oil industry, and this will only be possible with a change in government. Such a new model would not need to include a state-owned petroleum company since the nation could obtain optimum benefits by regulating and supervising the development of a Venezuelan oil industry operated by private companies. The PDVSA experience during the last 40 years has shown the progressive loss of efﬁciency of a state-owned petroleum company due to the fact that politicization is an inevitable process, at least in Venezuela. This has been a tragic lesson for the country and should not be repeated.”
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Editor's Note: This commentary was originally published by Latin American Advisor on June 29 , 2018. Petroleumworld reprint this article in the interest of our readers and does not necessarily reflect the opinion of Petroleumworld and its owners.
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