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Iran sanctions add to Venezuela's oil industry collapse in a battering market

GettyImages/Robert Madden

Hundreds of oil derricks in Lake Maracaibo, Venezuela. Loss of two big producers means less cushion for future demand. South American country holds world's largest oil reserves.

By Alex Nussbaum and Lucia Kassai

Petroleumworld 05 09 2018

While the world ponders the fate of Iran's exports , the oil market is exposed more than ever to the effects of Venezuela's spectacular production collapse.

The South American nation, holder of the world's biggest oil reserves, has seen its output fall almost 40 percent since 2015, to 1.5 million barrels a day, amid political turmoil and an economic meltdown under President Nicolas Maduro. With global creditors circling Venezuelan oil assets and the U.S. considering more sanctions, production could drop further, to 1 million barrels daily by year's end, Societe Generale analysts said in a report last week.

The demise of OPEC's eighth largest producer has helped trim a global surplus, pushing prices to their highest in more than three years. But it's also left less of a cushion to deal with further declines, now that U.S. President Donald Trump is exiting the Iran nuclear-arms deal and reimposing sanctions .

“One of the most important deadlines for oil markets was today, with the announcement the U.S. is reinstating sanctions against Iran,” said Luisa Palacios, a director at Medley Global Advisors LLC, in a telephone interview Tuesday. “The second most important deadline is May 20, when Venezuela holds presidential elections.”

While Trump promised on Tuesday to levy tough economic penalties on Iran, it remains unclear whether European allies will comply and how oil supplies will be affected. Analysts surveyed by Bloomberg last month said the impact on Iran's exports could range between zero and 800,000 barrels.

By contrast, output from Venezuela's state-run oil company, Petroleos de Venezuela SA , is already down some 900,000 barrels a day from its recent high in December 2015.

Meanwhile, creditors and legal opponents are circling. Earlier this week, ConocoPhillips filed orders of attachment across the Caribbean in order to fulfill an arbitration award of $2.04 billion against PDVSA. The Houston-based company seeks to take over assets, including revenues due to PDVSA, and oil and petroleum products sitting in storage tanks in Bonaire, St. Eustatius and Curacao.

The Conoco case adds to billions of dollars of claims against Venezuela as PDVSA is due to make payments of about $2.55 billion on its bonds this year, according to data compiled by Bloomberg.

PDVSA's decline has come as hundreds of thousands of Venezuelans flee a societal collapse, crowding into cities and makeshift camps throughout the region in the largest mass emigration in modern Latin American history. Hyperinflation has made Venezuela's currency virtually worthless, malnutrition is endemic and medicines are in short supply -- hardships facing PDVSA workers along with the rest of the nation.

Management Purge

Maduro exacerbated matters with a purge of top management and career bureaucrats at the oil company, which was put under the oversight of a military general last year.

Rafael Ramirez, who ran PDVSA for a decade before fleeing Venezuela, told Bloomberg News last week that the company is on the brink of fiscal collapse . He predicted the conglomerate will lose 600,000 barrels a day of production per year because of a lack of investment.

The troubles have enveloped private oil companies working in the country as well. Last month, oilfield services giant Halliburton Co. wrote down the value of its entire investment in Venezuela, announcing a $312 million charge to first-quarter earnings. That came as Chevron Corp. was reportedly evacuating staff after two of its workers were arrested following a contract dispute with PDVSA.

While the Trump administration has Venezuela among its top priorities, Trump will think “long and hard” before imposing all-out oil sanctions because of the importance of Venezuelan oil to US refiners, according to Scott Modell, a managing director for Rapidan Energy.

“The U.S. will continue to put pressure on Venezuela, by sanctioning more people and trying to get other countries to do to the same,” Modell said by telephone. “Meanwhile, oil production in Venezuela should continue to decline below 1 million barrels a day in 2019,” he said in a phone interview from D.C.

Poorly-Oiled Machine

PDVSA's refineries process less oil amid slumping production of crude
Source: PDVSA, data compiled by Bloomberg

Fewer barrels mean the country has less oil to pay for loans with China and Russia and to run its refineries. Exports in April were down 20 percent from a year ago, while refineries in Venezuela are processing less oil. While American refineries are operating at over 90 percent of their capacity, Venezuela's are working at just one-third of capacity.

The national election scheduled for May 20 isn't expected to settle things. Maduro has jailed and banned opponents and launched a wave of arrests in the run-up to the vote, leading the U.S. and regional organizations to declare it illegitimate. The U.S., meanwhile, continues to weigh whether to ban imports of Venezuelan oil, which accounts for 95 percent of the nation's foreign-currency earnings.

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Story by Alex Nussbaum and Lucia Kassai from Bloomberg. 05 08 2018

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