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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Can Maduro Meet His Wildly Ambitious Crude Oil Production Targets?

  • Venezuela is scrambling to ramp up its oil production to help tackle global supply constraints.
  • There is a growing concern that state-owned PDVSA is reaching its production capacity.
  • Some analysts are suggesting that PDVSA is overstating its oil production data, and true output levels may be significantly lower than what is claimed. 

A recurring theme when it comes to Venezuela’s oil industry and national oil company PDVSA are wildly ambitious crude oil production targets announced each year by President Nicolas Maduro. During early January 2021, after the worst of the COVID-19 pandemic had passed, Venezuela’s president announced that PDVSA would be pumping 1.5 million barrels per day by the end of the year. That objective proved impossible to meet with PDVSA announcing in November 2021 that it had slashed the target by a third to one million barrels per day. While Maduro announced during January 2022 that with exclusively local investment PDVSA had ratcheted-up production to 1 million barrels per day during December 2021, OPEC’s March 2022 Monthly Oil Market Report tells a different story. PDVSA data to OPEC; shows Venezuela only pumped an average of 871,000 barrels per day during December 2021 with production for January and February 2022 falling to 755,000 and 788,000 barrels per day respectively. OPEC’s numbers indicate that PDVSA is producing far less than the 1 million barrels daily claimed by Maduro. This along with a range of factors, including strict U.S. sanctions and crumbling industry infrastructure, indicates that this year’s target of 2 million barrels per day, announced by Maduro (Spanish) during March 2022, is unachievable. While Caracas points to PDVSA’s significant production growth at the end of 2021, where October output surged 16% month over month and eventually grew to 871,000 barrels daily for December, as evidence there are signs the company is operating at capacity. That impressive spike in crude oil production volumes can be attributed to Caracas securing a regular supply of condensate, a form of extremely light liquid hydrocarbons, from Iran. Condensate is crucial for upgrading the extra-heavy crude oil extracted from the Orinoco Belt, which is accounts for over a third of Venezuela’s petroleum output, to exportable grades. When Trump ratcheted up sanctions against the Maduro regime and PDVSA in 2019 it prevented Venezuela from importing condensate from the U.S., which until then was the key source of that vital hydrocarbon liquid. The loss of a reliable source of condensate was responsible for Venezuela’s crude oil output plunging. It forced PDVSA to mix domestically produced Santa Barbara light grade with extra-heavy crude oil thereby reducing the volume of lighter petroleum grades available for refining domestically into urgently needed gasoline and diesel worsening Venezuela’s fuel shortages.

Related: The World Desperately Needs To Get Energy Costs Under Control
Now that PDVSA has benefited from securing a reliable source of condensate it is highly unlikely that there will be any further substantial increases in petroleum production. Industry experts, including Francisco Monaldi, director of the Latin American Energy Program at Rice University’s Baker Institute in Houston, believe that PDVSA’s operations have reached productive capacity. In a December 2021 Reuters article he stated:

“Base production in 2021 was way below PDVSA’s production capacity,” and “We are reaching that capacity now. To see an output increase during 2022, investment in new wells and upgrading infrastructure is needed,” . . .

Then there is Venezuela’s ailing energy architecture, such as pipelines, storage tanks and refineries, is so badly deteriorated from a lack of critical maintenance that many facilities only operate intermittently. In many cases the abysmal condition of PDVSA’s infrastructure means most operational facilities are spewing oil and noxious fumes into the environment creating an environmental catastrophe of epic proportions. The abject condition of crucial oil infrastructure means most facilities are operating inefficiently, are highly unreliable and in some cases out of commission thereby weighing on PDVSA’s ability to further ramp-up production. For Venezuela’s national oil company to continue expanding its crude oil output it must make substantial investments in acquiring skilled employees, capital and technology to conduct urgent critical maintenance on dilapidated facilities and overhaul critical petroleum infrastructure. It is estimated that could take anywhere between $58 billion, from a PDVSA internal document, to as much as $200 billion, as per Juan Guaido’s economic recovery plan (Spanish). Monaldi previously estimated it will take an investment of up to $12 billion annually over at least several years to rebuild Venezuela’s shattered petroleum infrastructure and return production to something resembling pre-Chavez volumes. 

Related: Bearish News Is Mounting For Oil

For Caracas to attract such significant investment the U.S. must ease its strict sanctions which prevent foreign energy companies from operating profitably in Venezuela. Those restrictions also sharply increase the risk of Washington imposing financial and other penalties on companies conducting business with PDVSA and other Venezuelan entities. Washington’s threats to target individual companies doing business with Venezuela combined with the reluctance of banks to conduct transactions that could fall afoul of sanctions is creating considerable trepidation. This is driving a culture of over-compliance among energy companies making them extremely reluctant to conduct business with PDVSA and invest in Venezuela even for those activities which fall outside of U.S. restrictions. These fears are underscored by Russian energy company Rosneft, which had invested heavily in petroleum projects and joint ventures with PDVSA, selling its Venezuelan assets to a Kremlin owned entity during March 2020 to avoid U.S. sanctions on its businesses. That in turn is further impacting Caracas’ ability to attract the capital, technology and skilled labor that is urgent and necessary requirement for rebuilding Venezuela’s shattered oil infrastructure which is a prerequisite for growing production.

Another factor indicating that PDVSA is incapable of further significantly boosting petroleum output are signs that the national oil company is overstating production volumes. When reviewing the OPEC Monthly Oil Market Reports it becomes apparent that there is a significant difference between the numbers provided by PDVSA and the oil cartel’s secondary sources. For February 2022, Venezuela’s national oil company claims to have pumped an average of 788,000 barrels per day, yet OPEC secondary sources state that Venezuela’s total oil production for the month was 680,000 barrels daily, which is 14% less than the official number. That has emerged as a persistent trend, as the chart below shows, when reviewing OPEC’s Monthly Oil Market Reports since January 2019 when production started declining because of the Trump administration’s additional sanctions.

Source: OPEC Monthly Oil Market Report.

It is worth noting that despite a marked increase in production toward the end of 2021, there was no notable growth compared to 2020 when the pandemic and sharply weak oil prices caused output to plunge 44% year over year to 569,000 barrels per day. According to PDVSA the company pumped 636,000 barrels per day during 2021 which despite being 12% greater than 2020 was still 37% less than the 1 million barrels per day produced in 2019. That trend of PDVSA reporting production numbers greater than those obtained by OPEC from secondary sources is also apparent from annual production data as the chart below indicate.

Source: OPEC Annual Report.

For some time, industry analysts have been speculating that PDVSA is overstating production data. Inexperienced government aligned senior management, corruption and purges of politically unreliable employees are creating an environment where PDVSA reports numbers that align with the statements of Venezuela’s political leaders. That coupled with Venezuela’s national oil company no longer releasing audited operational data points and the considerable difference compared to OPEC secondary numbers to inaccurate and inflated production volumes being released. The heavily corroded condition of Venezuela’s petroleum industry infrastructure and lack of investment in critical maintenance as well as overhauls points to PDVSA being unable to successfully boost crude oil output once again. There is considerable evidence that Venezuela’s national oil company’s hydrocarbon production has reached capacity meaning Maduro’s overly ambitious 2022 production target of 2 million barrels per day is simply unachievable.

By Matthew Smith for Oilprice.com

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