Venezuela’s National Oil Company On Its Last Legs

On Sunday 9^th, 2017 Venezuela hit a hundred days of anti-dictatorial regime demonstrations. Hundreds of thousands of Venezuelans have taken over main streets and roads demanding a new presidential election, a humanitarian solution to counter food and medical supply shortages, the release of political prisoners and the reinstitution of the National Assembly’s functions.

Since the protests started, more than one hundred people have been killed, 3,500 arrested and thousands injured across the country.

Falling oil revenues due to low international oil prices, as well as institutionalized government corruption, caused a further backlash, leaving the government to respond once again with brute force. Tear gas, water cannons and pepper-spray were fired into crowds by the National Guard and its paramilitary force, the “colectivos”, a heavily armed civilian branch supporting the Venezuelan government.

This critical economic, political and social situation does not seem to have an easy solution. In Venezuela, 96 percent of foreign currency earnings come from oil industry, and with the collapse of oil prices, income has fallen more than 50 percent. But in addition to a decline in revenues, oil production has also dropped, adding insult to injury.

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Source: OPEC/EnergyMarketPrice/Luis Colasante

On July 7^th, the Venezuela oil basket was trading around $42.67 a barrel while Brent oil was trading at $46.71 a barrel.

Since 2014, Venezuela oil basket prices have dropped by over 50 percent. This crude oil is sold on the international market at a price lower than the Brent oil or WTI oil, due to the quality of crude being sold. The average spread price between Brent oil and Venezuela oil has been $9 a barrel since the beginning of 2017.

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Source: OPEC/Bloomberg/EnergyMarketPrice/Luis Colasante

On my model forecast, I calculated three scenarios for Venezuela oil basket prices for the next four years. Even in the best scenario (high) the oil basket price will not reach $100 a barrel, the price of oil when Nicolás Maduro was elected president of Venezuela in 2013. The worst scenario on my model reflects an oil price lower than the actual average cost of production of a barrel of oil ($28 per barrel).

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Source: Rystad Energy UCube/Luis Colasante

Additionally, Venezuela is suffering gasoline shortages despite having the world’s largest oil reserves. The proven oil reserve in Venezuela is recognized as the largest in the world, totaling 302 billion barrels. Related: The Only Way OPEC Can Kill U.S. Shale

Venezuelan refineries are operating significantly below operational capacity, a product of a lack of investment and maintenance, as well as a lack of technical knowledge (a lot of the highly qualified personnel from PDVSA who rebelled against Hugo Chavez’s regime in 2002 were fired and now work in various other countries, such as; Colombia, Mexico, Canada and the USA). Falling output at refineries means that Venezuela needs to import gasoline, further squeezing the national budget. Refineries are currently working at less than 40 percent of average 2016 levels as state-run oil company PDVSA is importing between 100 and 150 thousand barrels per day of gasoline and between 80 and 90 thousand barrels per day of diesel.

Venezuela’s daily demand for gasoline and diesel are 225 and 170 thousand barrels respectively. Several tankers are waiting off the coast of Venezuela to discharge cargoes as the PDVSA has difficulties in paying their shipping bills, resulting in a penalty of $26 000 per tanker per day. An almost surreal paradox in a country that owns twenty refineries; five in Venezuela and fifteen worldwide.

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Source: BP/OPEC/Luis Colasante

In the last ten years, Venezuela crude oil production has lost more than 500 thousand barrels per day. Since the beginning of 2017, the country has lost 92 thousand barrels per day. Between May and June 2017, Venezuela’s oil crude production has decreased from 1,951 to 1,938 million barrels per day, representing 13 thousand barrels lost in one month, based on the secondary sources used by OPEC.

Venezuela crude oil exports to the United States fell to 491,340 barrels per day in June, the lowest level in fourteen years. The number of cargoes shipped by PDVSA and its joint ventures to the United States has decreased in May from 42 to 29 crude cargoes, and compared with the Venezuelan exports to the United States in June 2016, the decrease was 25 percent.

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Source: EIA/Thomson Reuters/Luis Colasante

The United States is the primary market for Venezuela’s crude oil exports, with Venezuelan oil representing 9 percent of total U.S. imports. Only Canada, with 41 percent of U.S. imports, and Saudi Arabia, with 14 percent of U.S. imports, have a larger share of the U.S. market.

In June 2017, Valero Energy was the principal recipient of Venezuela crude oil and the sales to Citgo, which is the U.S subsidiary of PDVSA, declined 66 percent from May 2017 levels of 68,400 barrels per day.

Not only is the United States the main buyer of Venezuela crude oil, but companies such as Valero Energy Corp, Phillips 66, Chevron Corp and PBF Energy Inc were the major purchasers of Venezuelan oil in 2016. These four companies purchased 154.90 million barrels of Venezuelan oil in 2016. The U.S. represented more than one third of PDVSA revenues in 2016.

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Source: EIA/Bloomberg/Luis Colasante

The United States is not the only country that is seeing imports of Venezuelan crude oil dropping off. According to Reuters, Venezuela’s shipments of crude and refined products to Cuba decreased by roughly 21 percent compared to 2015. Cuba imported an average of 91,000 barrels per day from Venezuela in 2015, compared to an average of around 72,350 barrels per day in the first half of 2017.

Since Hugo Chávez won the presidential election in 1998, the relationship between Venezuela and the Cuban regime has grown increasingly strong; via several bilateral agreements where crude oil and refined products were exchanged for doctors, teachers and military services.

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Source: Thomson Reuters/Luis Colasante

The decrease in crude oil and refined product from PDVSA is now affecting Cuba’s economy, which is extremely dependent on Venezuelan oil, with gasoline shortages and electricity blackouts now hitting the small island. Cuba is negotiating for oil cargoes from other countries, including Russia, to counter the reductions from PDVSA, something that Cuba had not done since Hugo Chávez was elected. Related: Significant Draw In Crude Inventories Jolts Oil Prices

One of the issues that PDVSA and their joint venture partners have to overcome will be the result of the new “constituent assembly”. Hermann Escarrá, a constitutional lawyer, candidate to the constituent assembly and one of the key people participating in the new constitution, declared in front of hundreds of PDVSA workers that one aim of the new constituent will be to nationalize all oil joint ventures.

Venezuela produces 40 percent of its crude in joint ventures with foreign companies, where PDVSA has at least 51 percent of the shares. If Venezuela succeeds in nationalizing the joint ventures, Venezuelan oil production will likely decline at an even faster rate.

Until today, PDVSA has used the joint ventures for two purposes: firstly, to increase oil production and secondly, to maintain the low credit line that helped PDVSA pay its bond obligations. Now any foreign oil company will need to think twice if it wants to invest in the Venezuelan oil sector.

Day after day, PDVSA’s financial situation worsens. In 2006 the PDVSA’s financial debt was around $3 billon, eleven years later, its debt has reached $44 billion – with another $20 billion to be added for non-supplier and services payments.

A total default of PDVSA could potentially lead to a complete crash in oil production, a doom scenario for the country, but a potential boon for global oil prices.

By Luis Colasante for Oilprice.com

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