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Venezuela's oil industry
nothing but decline 


Reuters

PDVSA expected to deteriorate further, refineries operating well below capacity

- Partners abandoning PDVSA
- Attempting to lure foreign capital

By Mery Mogollon/Platts

CARACAS
Petroleumworld 01 05 2021

Venezuela's oil industry will likely continue to deteriorate in 2021, with the country's roughly 300 billion barrels of crude in reserves left largely untapped even if oil prices move higher, according to industry sources.

Venezuelan President Nicolas Maduro expanded his power after his political allies won a majority of the National Assembly in a Dec. 6 election. The election has made regime change less likely, and has been condemned by several countries, most notably the U.S., which has imposed harsh sanctions against Venezuela, contributing to a near-crippling of its oil industry.

Fuel and electricity supply chains have broken down, while a scarcity of cash, parts and expertise has prevented Venezuela's deteriorating refinery infrastructure from recovering.

Venezuela's crude output during December averaged around 420,000 b/d. That was down from an average of 1.9 million b/d in 2017, when U.S. President Donald Trump took office, and down from over 3 million b/d in 2000.

S&P Global Platts Analytics sees Venezuela's production averaging below 300,000 b/d in 2021, before rebounding the following year.

If the incoming Joe Biden administration removes sanctions on PDVSA, production could recover by 300,000 b/d to 500,000 b/d within months, according to Platts Analytics. But additional output recovery would require "regime change, foreign investment and debt relief," said Platts Analytics analyst Nareeka Ahir.

Other analysts agree there are no signs indicating a near term increase in Venezuela's production. Rather, they see a continued deterioration in the offing.

"No changes in output or exports are foreseen that are any different from 2020," said analyst Einstein Millan, who is based in Caracas.

"For neglect or post-electoral problems, there has been a noticeable relaxation of US sanctions that has permitted some breathing space for the import of light crude and refined products since October," Millan said.

"However PDVSA is far from any substantial improvement. On one hand, there is not the required activity level in oil fields, given that the number of active drill rigs in October and November still remained at zero. On the other hand, infrastructure is abandoned and for the time being PDVSA does not possess the financial resources sufficient to recover it," Millan added.

Luring foreign capital

Venezuela's government, under pressure from declining oil revenues, is attempting to lure foreign capital to boost production.

"This year (2020) revenue from oil exports has fallen to $477 million from $2.5 billion in 2019 and from $4.826 billion in 2018," Maduro said in a Dec. 3 speech.

For Millan, PDVSA will have a greater need for oil revenue in 2021 due to the country's worsening scarcity of currency, the oil industry's growing operating expenses and the deepening deterioration of energy assets.

For 2021, the Maduro government is hoping that its new "Anti-blockade Law" will attract enough foreign capital to develop 70 oil fields, the majority of which have been inactive for lack of investment. The government is offering potential investors proprietary control in the joint ventures in which they invest, according to plans that have leaked unofficially.

That would be a shift in policy, which since the 1990s has focused on nationalizing the industry.

But the law faces challenges, not least of which is an oil industry dominated by low demand and prices because of the coronavirus pandemic, and a shift away from petroleum from investors. It is also unclear how much appetite is left from Venezuela's allies, specifically Russia, Iran and China.

"According to all judicial analysis, the Anti-blockade Law that the government plans to use as a lever to reactivate the oil sector from January has a weak legal basis, and likely will not generate confidence in a sector that requires urgent resources if it is to recover," said Dolores Dobarro, a Caracas-based attorney who specializes in energy issues.

"It's natural to expect the cost of producing a barrel of oil will be higher, which ends up significantly reducing margins and cash flow. If we add discounts and favorable conditions that investors demand for the political risk for exposing their capital in Venezuela in the middle of sanctions and political risk, the net profit that PDVSA will likely receive for its barrels will be non-existent," Millan said.

Partners pull out

Of the 46 joint ventures that PDVSA has signed with international companies since 2007, with PDVSA as the majority or controlling partner, only 8 survive, three of which are producing less than 10,000 b/d, according to PDVSA reports seen by S&P Global Platts. The other five located in the Orinoco Belt and western Zulia state are all producing at less than 50% of capacity.

PDVSA also directly operates 31 oil fields, although of those 15 are completely abandoned, seven are producing between 6,000 b/d to 10,000 b/d, the PDVSA reports show. Another seven are extracting petroleum in the Morichal, San Tome and El Furrial fields in eastern Venezuela, but with activity declining.

"Partners have progressively abandoned PDVSA due to high costs of production, judicial and personal insecurity and the lack of trained technicians, among other reasons. Simply put, oil fields and the refineries have been abandoned and there is no sign that they will be reactivated soon," said Iván Freites, a director of Venezuela's main oil workers union, and a supporter of opposition leader Juan Guaido.

"That will continue in 2021 and will be accentuated by the desertion of the labor force for low salaries, which are about $4-7 per month for a technician with 20 years' experience, and for the political persecution against workers and union leaders," Frietes added. "PDVSA will be left without qualified workers."

Analysts said they consider judicial insecurity, as well as good labor relations, to be indispensable to attract investment, partners and capital to a country sanctioned internationally.

Fuel shortages

Venezuela will also likely continue to face a shortage of gasoline, diesel and other refined products, due to the deterioration of local refineries and sanctions limiting fuel imports.

Venezuela 's 955,000 b/d Paraguana Refining Center was last seen operating at just 125,000 b/d, or 13.2% of its capacity, according to a technical report seen by S&P Global Platts.

"One could expect that the deterioration observed in recent years to continue and even worsen," said Edmundo Mirabal, an independent consultant and expert in Caribbean region refineries.

"A refinery is a complex synchronization of different processes that, to work adequately, need experienced personnel, reliable infrastructure, licenses, periodic maintenance, new equipment, spare parts, and industrial services. PDVSA is currently deficient in all these areas," he said.

"The efforts realized until now point to patchwork with foreign assistance used to cover certain, but not all, deficiencies," Mirabal added

In Mirabal's opinion, PDVSA in 2021 will be obliged to permanently reduce its refinery system's old capacity because of the high cost of investment required and because "markets have been already lost," he said.

______________


By Mery Mogollon from S&PGlobal/Platts

spglobal.com
01 04 2021

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