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PDVSA a mission impossible after brain drain, asset seizures

Venezuela oil no easy fix. In March, the country produced the least oil it has since 2003. Loss of engineers, service companies hinder any output boost

Petroleumworld 04 12 2017

A turnaround for Venezuela's oil industry, the lifeblood of the South American country's ailing economy, would take at least two years under the best of circumstances.

Under business as usual, it might be virtually impossible.

That's the message from analysts who say that government intervention at the state-controlled oil company,  Petroleos de Venezuela SA , has chased away much of the expertise needed to boost production that's fallen 16 percent since President Nicolas Maduro gained office four years ago.

While opposition to Maduro gains new momentum following a failed attempt to oust him last year, any hope of reversing Venezuela's decline as an oil supplier would take more than his political opponents eventually getting their way. The country would have to settle debts with oil-service providers, fix fraying infrastructure and, potentially, get foreign companies to operate some fields.

"You first have to stabilize production, which could take at least 12 months in the best of circumstances," Luisa Palacios, senior managing director at Medley Global Advisors LLC, said by telephone from New York. "I think it will take another year before you will start to see an increase in production."

Venezuela faces a major test this week, when the state-controlled oil company, known as PDVSA, is slated to repay more than $2 billion in debt obligations. While the oil producer has pledged to honor its debt, and said it's already transferring coupon payments for other bonds that mature in 2027 and 2037, the country is undergoing a severe cash crunch.

PDVSA declined to comment and the oil ministry didn't immediately reply to calls and an email seeking comment.

Growing Unrest

Maduro's opponents have taken to the streets in recent days after the country's top court tried to quash the opposition-controlled congress. They are calling for authorities to hold fresh elections and purge institutions of socialist party loyalists. A nationwide protest on April 19 “will be the mother of all mobilizations,” opposition leader Freddy Guevara said at a press conference.

One of the founding members of the Organization of Petroleum Exporting Countries, Venezuela nationalized its oil industry in 1976. Foreign companies were invited back to the country in the 1990s to help develop heavy crude deposits in the Orinoco Belt. But the government later increased PDVSA's share of joint ventures and eventually seized the fields of companies including Exxon Mobil Corp. and ConocoPhillips.

Crude output, which provides about 95 percent of the country's foreign currency earnings, has yet to fully recover from a general strike in 2002 and 2003 that was aimed at overthrowing late President Hugo Chavez. Chavez responded by firing more than half of the staff of PDVSA and ordered it to direct a greater share of its income to social programs.

Engineer Exodus

"The people with knowledge about the fields have left," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "A big question if there were a change in government would be how many engineers will come back. Most have settled elsewhere, so probably just a sprinkling would return."

If the service providers and at least some of the former workers were to return, they could provide an increase of perhaps 500,000 barrels a day in as little as three months, according to Lynch.

For any further improvement, he said, “they will need to get people to invest in the oil industry, which will take changes to the energy law and the replacement of some people at both the company and ministry. Such an effort could take three to five years before you would see any impact in output."

Production Decline

Venezuelan oil production should drop below 2 million barrels a day by the fourth quarter and average 1.9 million barrels in 2018, according to Michael Cohen, head of energy commodities research at Barclays Plc in New York. Apart from the temporary collapse in production during the 2002-2003 strike, that would be the least in almost three decades and compares with a peak of almost 3.5 million in the late 1990s.

Lack of investment and maintenance in the country's refineries, in addition to fires and equipment failure, has diminished PDVSA's ability to supply the domestic market, making an importer of a nation once awash with gasoline supplies. The units were running at less than 50 percent of capacity, Ivan Freites, an oil-union official, said last month.

The collapse of oil prices -- with a barrel of crude in New York worth less than half its $107 peak in mid-2014 -- just made everything worse. West Texas Intermediate crude was down 13 cents at $52.95 at 8:52 a.m. in New York. The Venezuelan oil basket price stood at $43.57 last week.

Schlumberger Ltd. said in a federal filing in January that it faces a total outstanding balance of $1.2 billion from PDVSA. Schlumberger and Halliburton Co. , the world's No. 1 and No. 2 service providers, announced plans last year to cut back activity in the country to better deal with missed payments. Phone and email messages to Schlumberger press officials weren't returned. Emily Mir, a Halliburton spokeswoman, had no comment when reached by phone.

Maduro has been in a bitter dispute with the National Assembly since opposition parties won a majority of seats in elections in late 2015. The institutional gridlock is taking place as the country, which has depended on loans from China and Russia in recent years for liquidity, is finding it harder and harder to obtain financing. As reserves shrink, debt service is becoming more burdensome. The economy fell into a depression, with runaway inflation and widespread consumer shortages.

"There's a lot we don't know," Chris Cote, an analyst at ESAI Energy in Wakefield, Massachusetts, said by telephone. "What we can see is that oil infrastructure is in a very poor state."

Story by Mark Shenk from Bloomberg.

bloomberg.com 04 11 2017

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