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Luis Colasante

Luis Colasante

Luis Colasante is the Group Energy Manager and Head of Economic Research at Sogefi Group. He is in charge of developing the Group energy strategies and policies; as…

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Is Doomsday Inevitable For Venezuela?

Venezuela Oil

Venezuela is facing the worst economic and humanitarian crisis in its history. Venezuela has been hit by the 24 months collapse in oil prices. Its economy is expected to shrink 10 percent at the end of 2016, the biggest contraction in the last 13 years, while inflation has reached more than 700 percent according to the International Monetary Fund (IMF). Other analysts say that inflation has already reach 1,000 percent.

Venezuelans are living day-by-day facing a very complicated situation with rising crime and corruption rates, daily electricity blackout, medicines and food shortage (more than 80 percent). Venezuelans can’t get even the most basic lifesaving medical supplies as antibiotics.

On Monday 22th August 2016 Brent oil traded around $49 a barrel, but two years before Brent was $102 a barrel, and even then Venezuela was already having economic problems. Even with a recovery in crude, higher prices are unlikely to solve the economic, humanitarian and political crisis.

In Venezuela 96 percent of foreign currency earnings come from oil industry and with the collapse of the oil prices the income has fallen more 50 percent. But in addition to declining revenues, oil production has also dropped, doubling the pain for Venezuela.

The problems could grow worse. Several oil service companies suspended or slowed operations in Venezuela this year due to difficulties in obtaining payment from the state-run oil company, Petróleos de Venezuela (PDVSA). Contractors have cut back on drilling in Venezuela amid rising unpaid debt, which threatens to take Venezuela’s output down even further.

On June 28th 2016, Baker Hughes reported that the number of oil rigs in Venezuela dropped from 69 to 59 in May of this year. The CEO of the Italian oil and gas contractor Saipem SpA said that in April the company had suspended 89 percent of its operation rigs in Venezuela (25 of its 28 rigs). Other companies as Schlumberger or Halliburton Co are reducing their activities in Venezuela because of unpaid services bills. Venezuela’s active rig count, a good indication of future production, fell from 71 to 49 in July according to Baker Hughes, the lowest since the end of 2011. Related: Oil Plunges After EIA Reports Builds Across The Board

Since 1998, oil production in Venezuela has been reduced by 750,000 barrels per day, with output falling by 250,000 barrels per day in the first half of 2016 alone, according to Dr. Francisco Monaldi, a fellow in Latin American Energy Policy at the Baker Institute at Rice University in Houston. Luisa Palacios, a senior managing director at Medley Global Advisors LLC, said that exports in Venezuelan crude has fallen by more than 300,000 barrels per day in June 2016, compared with 2015 average.

PDVSA is in talks with oil services companies to turn unpaid services into financial instruments, a process known as securitization. Venezuela’s oil minister Eulogio Del Pino last month said that PDVSA had signed financing agreements with Weatherford International Plc and Halliburton and was close to a deal that would allow Schlumberger to boost its presence in the OPEC nation. “This mechanism enables to trade commercial debt for financial debt, improving cash flow holding instruments with financial return, in order to manage the low oil price environment” said Del Pino. These mechanisms allow the contractors to continue local operations. The statement describes these operations as a “plan in development” that was supported by “important drilling and services companies,” without naming which ones were involved in the discussions.

In recent years PDVSA’s debt has increased from $3 billion to more than $43 billion, Dr. Monaldi said on César Miguel Rondón’s radio program from Union Radio, Caracas Venezuela in August 16th this year. Related: ‘’Like A Rollercoaster’’ Hyper-Volatile Oil Funds See Popularity Spike

Even if oil prices increase, the situation is very complicated for Venezuela’s economy. PDVSA has no cash, it is struggling to pay its debts and the oil industry needs huge investments to keep oil production from falling, leaving aside investments in new operations.

For the moment the Venezuelan government has prioritized meeting debt payments even if that means deteriorating conditions for its populace. It seems like an odd choice, but for a country that depends on oil exports for 95 percent of its revenue, the government is certainly concerned about exposing itself to legal actions by bondholders in international courts. Also, the cost of default could be higher than the payment of his obligations.

Furthermore, the non-payment will add a more negative image for the government bonds, which puts it in uncomfortable position to renegotiate any new lines of credit. Venezuela, so far, is still solvent. However, this issue is badly managed by the government with the erroneous policies. Venezuela must learn from past mistakes and needs massive reforms to put the country in the right direction.

See Luis' LinkedIn page for more stories on Venezuela's oil industry

By Luis Colasante for Oilprice.com

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Leave a comment
  • Mueller on August 25 2016 said:
    Is Doomsday Inevitable For Venezuela?

    Yes. At this point, a starving population, the decline is inevitable no matter how high the price of crude goes.
  • Robert on August 25 2016 said:
    "[Venezuela] is in talks with oil services companies to turn unpaid services into financial instruments, a process known as securitization." A process otherwise known as trying to pass horses*t off as whipped cream. Good luck with that. (Kids: do not try this at home.)
  • Don Westlund on August 25 2016 said:
    Another issue with defaulting on the bonds would be the difficulty in financing condensate purchases. If they can’t purchase condensate to mix with their heavy crude then exports stop.
  • GregSS on August 25 2016 said:
    Yes it is inevitable, just a matter of how long the Government can keep the juggling act up. It will not end well over there, as they owe so much to so many people and they've practically destroyed the oil industry that is the only thing keeping them afloat.
  • Regan on August 25 2016 said:
    Funny how the word socialism never appears once in the article.
  • gulag Pittsburgh on August 25 2016 said:
    Venezuela will take years and $$Billions to put back together after the inevitable fall of Chavism. The only question is how many people will die in the transition.
  • also on August 25 2016 said:
    As others have noted, it's funny how the word "socialism" doesn't appear anywhere in the article. Even in industry magazines the disasters created by centralized planning are white washed from the public debate. (Meanwhile, countries that are arguably more capitalist than the US - such as Denmark and Sweden - are constantly referred to as shining examples of socialism.)

    There are plenty of countries that depend on oil and who have seen their economies weaken because of the low oil prices. But only socialist Venezuela is facing 1000% inflation, food shortages, refugees fleeing, etc. Socialism is the essential problem here - not oil prices.

    And the government down there will respond the way that all left-wing governments respond to the social and economic disasters they create: More central planning by really smart people, more regulations, more price controls, more edicts - all of which will make the problems worse, which will be used as an excuse for even more regulations and controls, and so on.
  • Jim on August 25 2016 said:
    Oh, there's still billions petro-money from Venezuela... but it's all in Chavez' daughter's bank account in Switzerland. This is a tale of corruption and socialism, not oil price shocks.
  • Frank on August 28 2016 said:
    The western media has been predicting Venezuela's collapse since Hugo Chavez was elected president in 1999. The stories increase in frequency and breathlessness when the price of oil goes down but they never really cease.

    This time, though, it's for sure. Any day now.
  • CENTURION on August 29 2016 said:
    The PEOPLE of Venezuela should be proud. They are all equal now. No Capitalist Pigs. No Yankee running dogs. Equality. They share in the glory of the Soviet Peoples.

    Sure, they can live in America, where I do, and have grocery stores STUFFED with crap. Overpriced vegetable, fat laden meat. Milk, Cheese, Bread and Honey all made by Capitalist Pigs. Who wants that?

    It is better to starve under Socialism Equality than to feast under Capitalist Pigs. I know. i have to endure grocery stores stuffed with Capitalist Pig bread, cheese, meat, vegetables, Tampons, etc. It is disgusting. I wish I could join the peoples of Venezuela in true Soviet Equality...oh,......Football is coming on and I have to put the steaks on the grill and get the beers out of the fridge.....I'll bet back to you all soon, but I wish I lived in Venezuela so I can bond with the peoples................................
  • Rodrigo on August 30 2016 said:
    CENTURION: your sarcastic comment is of very bad taste. I guess people like you is worth less than Mr. Maduro (hope you know who he is) and his loyal friends.
    Anyway, I wish your desire of living in a place like Venezuela one day comes true.
  • Bob on August 30 2016 said:
    Is Doomsday Inevitable For Venezuela?...They are killing and eating the animals in the zoo in this Socialist paradise...What do you think?
  • Diego on September 02 2016 said:
    Believe it or not the answer is a big NO, because Venezuela needs that to happen! However, in this case the "Doomsday" will come in a different way of what we are used to. The Maduro's dictatorial goverment it's the one who will have the "D-day", unfortunatly with the venezuelan people in the middle taking the worst part in this misnamed-invented "economic war". I'm pretty sure Venezuela should go through this disaster in order to Wake Up and to reinvent itself, for a new economic, political and social beginning just like Japan did after the WWII...
    God bless the Brave People of Venezuela!!!
  • Carlos on September 14 2016 said:
    This country that has so many natural resources is living through the worst poverty.

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