The last barrel
The civil war being waged between Venezuela’s strong man, Nicolas Maduro, and National Assembly leader Juan Guaido, is tearing the country apart and having a detrimental effect on oil output. To help the country transition, U.S. President Donald Trump has applied a mix of sanctions and ratcheting up of international pressure to bolster Guaido’s claim to the presidency. That’s helped lure more than 50 nations to agree that Maduro’s regime is a threat to the economy and the security of Latin America. “These Latin American governments are ideologically opposed to Maduro. And a massive refugee crisis in their respective countries has made them more forceful,” said Francisco Monaldi, a fellow at the Baker Institute, Houston. Authorities estimate that 3 million people have fled Venezuela since 2014.
Sanctions start to bite. As a result of Maduro’s propensity to cling to power rather than help his people, Venezuela’s oil industry has been in a tailspin, with the country’s crude production falling 49%, from 2.46 MMbpd in October 2014, to only 1.26 MMbpd in January 2019 (IEA). After years of mismanagement and under-investment, the freefall will most certainly carry through 2019. Forecasting agencies predict Venezuelan production will fall another 340,000 bopd, to just under 1 MMbpd by the end of 2019, and down to 890,000 bpd, in 2020. In a worst-case scenario, where U.S. sanctions continue and Venezuela is unable to secure new financing, the country could see crude output drop to 800,000 bpd this year, before sliding to 680,000 bpd in 2020.
Heavy oil issue. A key factor hampering Venezuela’s recovery is the reliance on imported diluents used to thin the sludgy crude produced from the Orinoco Belt, so it can flow through pipelines to the coast. The giant Orinoco field holds, according to best guesses, approximately 1,200 Bbbl of heavy oil deposits and is estimated to equal the world’s reserves of lighter oil. PDVSA has estimated that the field’s producible reserves are up to 235 Bbbl, making it one of the world’s largest petroleum reserves. To keep crude flowing from Orinoco, Venezuela imports 60,000 bpd of naphtha from the U.S., mainly from PDVSA’s U.S. refining subsidiary, Citgo. Without it, crude gets stuck in the field, unable to be upgraded into refinery-ready oil.
Russian lifeline. To help alleviate the shortfall, Moscow-based Rosneft will deliver 1 MMbbl of heavy naphtha to Venezuela, the first cargos delivered since the U.S. imposed harsher sanctions on PDVSA at the end of January. The Rosneft cargoes will replace imports from the U.S., which previously was the top supplier of the light hydrocarbon. The diluted crude from the Orinoco Belt will be fed into upgraders owned jointly by PDVSA and Rosneft, Chevron, Total and Equinor. The upgraders, which can process 630,000 bopd, had been operating at reduced rates, even before the sanctions, due to mechanical breakdowns and a shortage of chemicals. In any case, the new shipments will help Maduro, a long-time Putin ally, stave off further declines in oil production, which will help the embattled leader push back opposition to topple his autocratic regime.
Sanctioned oil sits offshore. The loss of large U.S. markets has forced Venezuela to store about 8.36 MMbbl of crude, worth $500 million, which is floating offshore. The backlog of ships, and the growing difficulty in keeping its oil upgraders running, underscore the impact that U.S. sanctions are having on PDVSA. Without access to the U.S. financial system, on which many refiners and trading houses rely to finance purchases, PDVSA is having trouble finding buyers outside of countries such as India and China, to whom it owes oil in payment for past loans. Once sold at a discount to easy-to-refine lighter grades, refiners are struggling to find heavy crude after Canada’s self-imposed oil curtailment and OPEC’s supply cuts. The tight market has translated into higher prices for Colombia’s heavy Castilla, which in March traded just $4/bbl below Brent. That compares with a discount of $9.80/bbl for cargoes that loaded in February.
Chevron undeterred. Chevron CEO Mike Wirth has pledged to work with the U.S. to remain in Venezuela, despite the spiraling crisis that led French major Total to retreat. “Our intent is to stay on the ground in Venezuela and be part of building a better future for the people of Venezuela. We have coordination underway with multiple agencies within the U.S. government.” Despite U.S. sanctions barring U.S. companies from dealing with any faction of the Venezuelan government or entities controlled by Maduro, Chevron and Schlumberger have been granted a license until July 27 on their respective operations within the country.
Although no hard deadline for withdrawal has been set, Wirth said, “We work closely with the U.S. government to understand how policy objectives are being manifest, to ensure we remain in full compliance with U.S. law.” If Chevron withdrew, it could hand the heavy crude upgrader venture to Maduro, which would go against the spirit of the U.S. sanctions. Total CEO Patrick Pouyanne said that his company may stay in its Venezuelan joint venture, with conditions, as it seeks to “understand what exactly” the U.S. sanctions are. Wirth concluded by saying Chevron remains “neutral” on who’s in charge.
Just another commodity? The gut-wrenching drama unfolding in Venezuela underscores how the demise of the country’s oil industry has harmed its economy, through loss of revenue and international prestige, and a reduction in high-paying jobs. Even if a regime change does occur in the near future, Venezuelan production will continue on a downward trajectory for several years to come. The big question is how inactivity, production decline and lack of maintenance will damage mature wells and infrastructure. The low-risk Orinoco Belt, with its well-defined geology, appears to be the country’s best bet to restore production, once the political climate is settled.
