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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Venezuela Forced To Shut Down Production As Operations Fall Apart

Venezuela

Every week the crisis in Venezuela takes a turn for the worse.

There are now signs that its oil industry is entering a dangerous new phase. Argus Media reports that Venezuela has begun to “proactively shut in oil production to cope with nearly replete terminal storage, further accelerating an output decline and bringing the OPEC country closer to the psychological barrier of 1mn b/d.”

Venezuela’s oil production fell to an average of 1.392 million barrels per day in May, down another 42,000 bpd from a month earlier, according to OPEC’s secondary sources. However, with the crisis in Venezuela spiraling out of control at a horrific pace, the numbers from May might as well be a year ago.

The May numbers don’t reflect the full ramifications of having to deal with inadequate port capacity, after PDVSA diverted operations to Venezuela from its Caribbean island refineries and storage facilities following the attempt by ConocoPhillips to take control of them.

The problem of export capacity has become so acute that PDVSA is demanding customers send ships that can handle ship-to-ship loadings, since there is a backlog of ships trying to load up at the country’s decrepit ports. PDVSA is even considering declaring force majeure on contracts that it will be unable to fulfill. The upshot is that PDVSA might have only 694,000 bpd available for export in June, which is less than half of the 1.495 mb/d that it is contractually obligated to deliver this month. Related: Venezuela Won’t Have Enough Oil To Export By 2019

As such, the 1.392 mb/d figure for May, bad as it is, is woefully out of date. Sources told Argus Media that production plunged to just 1.1-1.2 mb/d in early June, heading down towards 1 mb/d.

To be sure, upstream operations are in crisis mode. But the bottlenecks at storage facilities and the ports have opened up a whole new crisis.

“Eastern division land-based storage of 11mn bl is at full capacity, and western division storage capacity of almost 48mn bl will be filled to its operational capacity in a question of days,” the western division executive told Argus. PDVSA’s terminals and facilities, equipped to handle 61 million barrels are “filled nearly to capacity,” an oil ministry official said.

The storage and exporting problem is having a ripple effect upstream. PDVSA and its partners have halted operations at two upgraders that process heavy oil, and two more facilities could be shutdown, according to Reuters, moves intended to ease the pressure on the storage facilities. But if upgraders are shut down, PDVSA won’t be able to process heavy oil, which means it will have to curtail or shut down operations at its oil fields.

Analysts have predicted that Venezuela’s oil situation would deteriorate over the course of 2018, but the descent is happening much faster than most people predicted. If OPEC said Venezuela produced 1.392 mb/d in May, and sources from within the Venezuelan oil ministry are now saying the country is producing between 1.1 and 1.2 mb/d, that could potentially mean output falls by a few hundred thousand barrels per day in June compared to a month earlier. Venezuela had been losing roughly 50,000 bpd each month this year, so the unraveling underway right now is a sign that production losses are spiraling out of control. Related: The Bullish And Bearish Case For Oil

In another sign of trouble, PDVSA announced that it will suspend oil shipments to about half of the Caribbean nations in the Petrocaribe program, according to the Antigua Observer. The program, inaugurated under the late Hugo Chavez, offered Caribbean nations oil and refined products on favorable terms, often including extended payback periods at extremely low interest rates.

PDVSA said it would cut shipments of refined products by about 38,000 bpd to eight of the 17 countries in the program. Amazingly, PDVSA has vowed to keep up some 45,000 bpd of shipments to the other nations. Meanwhile, PDVSA apparently does not have enough of the type of oil that it typically sends to Cuba, so, despite being essentially broke, it is reportedly trying to purchase light crude from third parties to send to Cuba in order not to disrupt shipments to its ally.

It is hard to see things turning around anytime soon. “For Venezuela, we assume no respite in the production collapse that has taken 1 mb/d off the market in the past two years,” the IEA said on Wednesday.

By Nick Cunningham of Oilprice.com

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  • Rod Gillis on June 18 2018 said:
    It was only a matter of time this would be the outcome. Seizing oil and mining interests of other countries as well as freezing prices are all wrong actions that gave short term gain but the pain was coming and now it is here. Their own farmers have no incentive to grow food due to price controls and now the country can afford to purchase food stuffs abroad. Their hospitals lack medicines and equipment, spending their bolivars is akin to littering. This is what happens when a socialist dictator seizes power, jails opposition or bars them from running against him. This is what happens when that same dictator installs people of his own choosing into the justice system, courts and appoints people in the military that support him. I feel sorry for the people of Venezuela struggling to survive.
  • NickSJ on June 18 2018 said:
    This is the future Bernie Sanders offers to America.
  • John Brown on June 18 2018 said:
    Its almost beyond imaging that a country that is in dire poverty right now after more than 15 years of socialist despite having the highest oil reserves in the world is seeing its current production crash. If there was any sector of the economy where investment expertise should have been maintained it was the oil industry which is what allowed Chavez and now Maduro to pretend their socialist paradise could work. Every time in history socialism has been tried you get this result. Socialism has destroyed the entire economy and even the Goose that Laid the Golden Egg, the oil industry. Socialist promise to equalize income and they usually succeed. But not as they promise by making everybody more wealthy. Nope they do it by making everybody dirt poor and hungry. Except of course for the socialist leaders of the Glorious Revolution. They've got billions socked away and they continue to live high while most Venezuelans don't get enough food to eat on a daily bases. Democrats should look at Venezuela and stop trying to do that to the USA.
  • Ron Rose on June 18 2018 said:
    Venezuela would probably have a much better government by now if the socialists had not taken the guns away from their own people. Without guns, the government has little to fear.
  • Brian Ghilliotti on June 19 2018 said:
    I suspect the United States and the neocon interests that are in opposition to Trump’s anti global policies would be happy to sieze Venezuela‘s oil assets. This could be done by installing a globalist friendly president in Venezuela. I suspect they may try to do that by means of Columbia. The Venezuelan people will quickly learn that the globalists don’t care about them, no matter what faction they support. Their only interest in initiating regime change in Venezuela is so they can empower themselves and take its oil. This will be needed in preparation for a future war with Iran. Brian Ghilliotti
  • Brian Ghilliotti on June 19 2018 said:
    Venezuelans will quickly learn that neocon interests do not care about them or what political faction they support. All they care about is if there is a regime in place that continues to support the petrol dollar. They probably seek to carry this out by means of Colombia, especially if Duque establishes power. However, this will be a messy affair, as the Colombian military has primarily been a counter insurgent force for the past forty years are so. Is that why NATO has invited in Colombia? They need Venezuelan oil in preparation for war with Iran. Trump will be quite against this, strongly advocating the Monroe Doctrine. Will really test US NATO relations. Brian Ghilliotti
  • Tammy on June 21 2018 said:
    Russia and Venezuela have the same business plan. The difference is Russians grow potatoes in the back yard.

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