Venezuela, teetering on the brink of utter economic collapse, is rushing through a tender for billions of dollars of drilling contracts to boost oil production in the Orinoco Belt.
Venezuela has seen its oil production fall slightly each year for more than a decade, but the declines have accelerated this year as scarce funds led to cutbacks by oilfield service companies. Venezuela's oil production is down about 250,000 barrels per day so far this year, dropping to 2.33 million barrels per day as of August. That is also about 330,000 barrels down from the 2015 average.
The combined effect of low oil prices and falling production has pushed Venezuela to the brink.
In an effort to staunch the bleeding, Venezuela's PDVSA said on Sept. 21 that it has awarded $3.2 billion in contracts to drill in the Orinoco Belt. The contracts, PDVSA says, will add 250,000 barrels per day within 30 months from about 480 wells to be drilled. The deal asks the drilling companies to pay for the cost of drilling and then receive compensation in future oil production. PDVSA described its drilling campaign as "one of the world's largest drilling projects."
"The project involves contracting integrated services for platform construction, drilling, completion and connection of wells for joint ventures Petrocarabobo, Petrovictoria and Petroindependencia located in the belt," PDVSA said.
However, Reuters reports that some of the foreign companies involved are uncomfortable with the way the tender was rushed, and they also question how viable the contracts will be. A few of the winners have political connections to the president, and also have very little experience in oilfield services, raising questions about favoritism. Also, the cost estimates appear to be too high, a source from one company told Reuters.
Moreover, some companies are wondering why PDVSA is choosing to invest in heavy oil when it can no longer afford to import sufficient volumes of lighter blending fuels to blend the heavy crude into a marketable product. PDVSA does not have enough cash to import the diluents, which will make heavy oil production difficult. Oil tankers with diluent have arrived at Venezuelan ports this year, but many have been forced to sit idle offshore awaiting payment. Some have given up and left. Related: The Natural Gas War Burning Under Syria
Schlumberger Ltd., Horizontal Well Drillers LLC, and Venezuela's Y&V Group won contracts for the new drilling campaign, and Halliburton and Baker Hughes will offer provide some services. Schlumberger was one company in particular that had reduced its activity in Venezuela after not receiving sufficient payment for its services. The oilfield services giant appears to be mollified, however, and is sticking around in the troubled South American nation.
Meanwhile, Venezuela and PDVSA are trying to convince creditors to accept a $7 billion bond swap to relieve the country of crippling debt payments falling due in the next two months. The proposal called for extending debt maturities out over the next few years, giving Venezuela some breathing space. Investors, according to Bloomberg, were not exactly warm to the idea, which offered nothing more than face value, plus PDVSA's U.S. refining arm Citgo as collateral. Related: Market Update: Oil Crumbles After Saudis Pull The Plug
The value of PDVSA's bonds sunk after the news. Bloomberg reported that the cost to insure PDVSA's bonds against default jumped this week, and the price implies a slightly better than 50-50 chance that the company will default within the next year. "We think it's fair for all those bondholders who have been with us and enjoyed excellent profits to keep that profit that is now even a bit better and with much better guarantees," Venezuela's oil minister Eulogio Del Pino said.
"PDVSA needed to get this right, and they didn't," Russ Dallen, managing partner at Caracas Capital, wrote in a note to investors, according to Bloomberg. "What this means for PDVSA is that default is ever more likely."
Conditions for both Venezuela and PDVSA continue to deteriorate, as The New York Times detailed this week. PDVSA has tried to convince the financial markets and its creditors that it will bounce back, but that appears to be wishful thinking. As things grow worse, a default could trigger faster production declines.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More