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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’s Oil Meltdown Defies Belief

Oil rig

Venezuela might have to declare force majeure on its oil exports as production plunges and its ports are unable to ship enough crude. The ongoing meltdown in Venezuela’s oil sector could tighten the oil market more than expected.

Reuters reported Tuesday that Venezuela is considering declaring force majeure, a legal declaration made in extraordinary circumstances to basically get out of contractual obligations. In other words, Venezuela’s PDVSA is essentially prepared to say that it can’t supply the oil that it promised.

The utter collapse of the country’s oil production is obviously a big factor in PDVSA’s inability to ship enough oil. Output is down below 1.5 million barrels per day and falling fast.

But the tanker traffic at a handful of its ports has created unexpected bottlenecks, which have slowed loadings. Clogged ports are the direct result of the seizure of operations on several Caribbean islands by ConocoPhillips last month. The American oil major sought to enforce an arbitration award, laying claim to a series of storage facilities on the islands of Bonaire, Curacao and Aruba.

Those assets were crucial to PDVSA’s operations – in fact, they had become even more important as PDVSA’s facilities in Venezuela deteriorated. They had the ability to service very large crude carriers (VLCCs), and were important for storing and blending PDVSA’s oil, and preparing it for export.

Since ConocoPhillips tried to take over those facilities, PDVSA has tried to shift operations back to its ports in Venezuela. But those terminals are in very bad shape, and cannot make up for the loss of the Caribbean facilities. Reuters reported that there are more than 70 tankers sitting off the Venezuelan coast. Related: Will Saudi Arabia Listen To U.S. Demands For More Oil?

Reuters also says that PDVSA told customers that they need to send ships that are able to handle ship-to-ship loadings, since they can’t service enough ships at the ports. If customers fail to do that, or fail to accept those terms, PDVSA could declare force majeure. Reuters says most customers are balking at the demand since there is no third party supervision, plus the added cost of ship-to-ship transfers is also something customers are not willing to take on.

It is no surprise that Venezuela has fallen short on the shipments it has promised, but the figures are staggering. In April, Venezuela only shipped 1.49 million barrels per day of oil and fuels, or 665,000 bpd below what it had contracted, according to Reuters. That means that some customers are missing out on cargo. For instance, in April, PDVSA shorted its subsidiary Citgo nearly all of what it had promised – 273,000 bpd.

The problems for Venezuela continue to mount, and the news that it is considering force majeure points to a more catastrophic decline in production and exports. PDVSA "in the best case only has about 695,000 b/d of crude supply available for export in June," a marketing division executive within the company told Argus Media.

It seems unlikely that the sudden decline in exports will be resolved in any reasonable timeframe. It isn’t just a matter of easing bottlenecks at the ports. For one, it isn’t clear that PDVSA can handle the necessary volumes from its existing export terminals.

More importantly, upstream oil production continues to plummet, and refining and processing are also in freefall. Venezuela’s heavy oil needs to be upgraded before it can be exported, but at least three PDVSA upgraders are in terrible shape, and the Petropiar upgrader, which PDVSA runs jointly with Chevron, is offline for maintenance. That is also the site overseen by Chevron employees that were detained by Venezuelan security services a few months ago, putting a chill on operations.

“[PDVSA] has a critical structural problem that cannot be fixed in a few weeks or even a few months, because the core problem is that Venezuela's crude production has dropped far beneath the volumes we are contracted to deliver,” a company executive told Argus. “We simply aren't producing enough crude, and we don't have the cash flow to compensate by purchasing crude from third parties to meet our supply commitments. Our greatest operational concern right now is that production continues to fall and our export supply volumes also will continue to decline as a result.”

As a result, the force majeure on shipments seems unavoidable, unless that is, customers simply take a haircut and accept lower volumes. A PDVSA source told Argus Media that companies that don’t accept lower volumes could see all of their shipments suspended. That sounds like a threat, but it is PDVSA that is in the state of crisis, not buyers from China, India or the U.S. Related: Oil Kingdom In Crisis: Saudi Royal Family Rift Turns Violent

Customers are already reporting problems with shipments. A Japanese trading house told S&P Global Platts this week that it has been unable to load up on Venezuelan oil under a loan-for-oil deal. "There is no cargo made available to lift," said the source.

Several diplomats from China and India told Argus that refiners from their countries are looking elsewhere for oil shipments in the months ahead, on the expectation that cargoes from Venezuela continue to decline. Independent refiners from China are looking at heavy crude sources such as Mexico’s Maya, Colombia’s Castilla, and Canada’s Cold Lake Blend, according to S&P Global Platts.

PDVSA could cite U.S. sanctions as a justification for force majeure, and while that could potentially provide some legal basis for nixing shipments, from the oil market perspective, it makes no difference one way or another why exports are declining, or who is at fault. All that matters is that supply is falling fast, and to the extent that PDVSA can’t keep up with its obligations, it is a worrying sign that even the most pessimistic scenarios for Venezuelan output could turn out to be too hopeful.

By Nick Cunningham of Oilprice.com

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  • Vance on June 06 2018 said:
    Claiming force Majeure is laughable. The moment Corporal Chavez nationalized oil properties and replaced Harvard educated managers with his bus driver friends you knew oil production would collapse.
  • Jack Ma of the Lan on June 06 2018 said:
    This nation will remain a petro-dollars slave. This escapee has been recaptured and chained once again to the brutality of dollar hegemony. Not one bomb dropped on V - too close to home and non-mainstream reporters would get in and tell the truth about oil wars and then corporate media damage control would have to follow. One BRICS nations falls. Russia never will, so dollar hegemony has it's epitaph being written half way around the world regardless of V being recaptured. More QE and never for one moment will it break even one link of the chains that enslave the world as the dollar becomes worth less and less. Russia is your only hope to free you from your own tyrannical fiat money system that also enslaves you right here at home with usury. Jack Ma of the Land. The day is near as world reserve dollars diminish year after year.
  • Bobby Cullari on June 06 2018 said:
    All I have to say is...ahhhahahahahaha LOVE IT!
    Welcome to UTOPIA!
  • Vishwas on June 06 2018 said:
    Any excuse to increase oil prices. Is Venezuela issue a new one? China seems close to tap Iran oil supply through CPEC rail link for 4 million barrels a day at good discount. USA sanction to help China. Oil market will collapse.
  • Frank on June 07 2018 said:
    Meh. US stockpiles are still at record levels. China is rapidly eliminating diesel/gasoline vehicles. There is zero chance of the Venezuela/Iran "situations" overpowering the global oversupply.

    US frackers alone have already filled this gap and Russia/SA will soon be forced to pump normally if they want to bridge budget shortfalls before all these assets are stranded.
  • Madura on June 07 2018 said:
    Venezuela is a paradise compared to the rest of the world . The working man and bus drivers are in charge and running the country , shoeshine men & women is the biggest industrial output now . Who needs oil? Oil is a Enviromental disaster for the world and Venezuela will be the first country to stop this oily environmental disaster, all aboard on bikes , bike to your destination without oil pollution.
  • cowboybob on June 10 2018 said:
    The only thing surprising about this is that there are people that think it is surprising. The analysis is fine and outlines the logistical problems well, but ignores the real underlying issue...and it is not US sanctions. I'd love to see one article about Venezuela that doesn't invoke the Boogeyman from the US as the root of their problem. Even without sanctions, this system and government is doomed to fail. Maduro and his henchmen continue to plunder the resources of the Venezuelan people to maintain their lavish lifestyles. They are so far on the backside of the power curve in the death spiral at this stage, there is no recovery. The only thing that props this up is concessions from companies and governments that are essentially subsidizing Maduro Inc as there is no chance they will ever see that money returned. There will be no improvement until that ends. China and others really don't care whether the country lives or dies...they are positioning themselves to become a majority owner of the resources and facilities at cut-rate prices. All this goobledygook about off shore facilities and Conoco, ships lined up in ports, etc. is nothing more than rearranging the deck chairs on the Titanic....while the band played on.
  • Tim Hadfield on June 10 2018 said:
    To what extent has this collapse been engineered by the USA?
    It seems that the coup de grace has been delivered by ConocoPhillips (Houston,Texas), and
    I do remember various financial moves that made life very difficult for Venezuela.
    Those huge oil reserves are tempting - more so than shale, perhaps ...?
    Plus vengance for Hugo Chavez's refusal to be a lapdog, which just might be a factor.
  • Mosquedac on June 13 2018 said:
    The situation in Venezuela is serious, since there is a political crisis that generates an economic crisis, but as far as PDVSA is concerned, it faces a serious and alarming structural situation, fueled by a growing fall in production and a low cash availability, in these moments do not have the capacity to generate actions that lead to a positive change of direction, since the top positions are occupied by personnel close to the government and that express limited expertise and knowledge, this produces a bad management, together with those factors are the sanctions and the international financial blockade, the government must reach agreements with the western countries to reverse this situation and promote the entry of large investments in the area of oil and gas, and thus improve the income of foreign currency to the country, generating profit for the population.

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