The Venezuelan government’s seizure of a GM factory, as reported by Reuters, signals that the deeply corrupt regime of President Nicolas Maduro is escalating its self-defeating actions. Ironically, for oil prices, this could prove bullish, as the operating environment is increasingly hostile and the few foreign firms still operating oil assets may flee the country.
Of course, with oil providing between 40 percent and 70 percent of government revenues (depending on the oil price), a seizure of foreign oil assets by Maduro’s regime would display a level of short-sightedness unrivaled by other oppressive government officials. But the GM seizure suggests that it is indeed a possibility, and Maduro’s regime is anything but rational.
In essence, the GM factory seizure represents a tipping point, putting Venezuela far closer to seeing its oil production shrink, rather than expanding it. Foreign firms, many of which have already packed their bags and left, must be increasingly wary about exposing itself to the aboveground risk created by Maduro stripping away the threads of confidence to which operators were clinging.
Skeptics may point to the GM factory closure as inconsequential in changing Venezuelan oil production: What oil companies are still there, anyway? While it is true that firms have reduced operations or fled, many international firms are still operating in Venezuela’s oil patch. Most notably, Chevron produced 19 million cubic feet of natural gas, 28,000 barrels of crude oil per day and 28,000 barrels of synthetic oil per day in 2016.
If Chevron’s 56,000 barrels of daily production in Venezuela were to be disrupted, then supply is likely to increase elsewhere. Coupling this possibility with the fact that Venezuela’s oil production already declined 253,000 barrels per day between 2010 and the end of 2015 due to “aging infrastructure” and operators stopping production, generates a reality in which Venezuela may be the source of unexpected additional boosts to OPEC’s efforts to curb global oil supply. Related: Gas Prices In North Korea Shoot Up 83% As China Mulls Oil Embargo
Oilfield services giant Schlumberger still maintains a strong foothold in Venezuela despite scaling back its operations after it didn’t receive promised payments from the government. In September, the company was awarded part of a $3.2 billion contract to develop the Orinoco Belt, pinning the future of Venezuelan oil production partially on Schlumberger’s operational expertise.
After all, Schlumberger is responsible for drilling 80 of 480 wells issued in the September well tender, the only publicly traded company awarded any responsibility. The other two companies awarded the remaining 400 wells lack operational expertise: Horizontal Well Drillers, an Oklahoma-based company awarded part of the contract, had no experience heavy crude drilling, and the other company, engineering firm Y&V, had no oil drilling experience at all.
Schlumberger’s history of reducing drilling activity if dues remain unpaid suggests that production could decline in this region if Maduro’s regime continues to fail delivering what it owes. According to Schlumberger’s annual report, it originally reduced its activity in the country “to align operations with cash collections as a result of insufficient payments.”
Even though Venezuelan operations attributed less than 5 percent to Schlumberger’s total revenue in 2016, it accounted for more than 10 percent of the company’s total accounts receivable, with a net receivable balance of $1.2 billion from Venezuela as of December 31, 2016. Related: The Bullish Case For Oil Is Fading Fast
All told, the GM asset seizure suggests that Venezuela is far more likely to be a source of decreasing global oil production than it will be in oversupplying the market with crude, two extremes I recently highlighted for OilPrice.com. Maduro’s regime neglects its own long-term interest repeatedly, which means further disrupting domestic oil operations could be the next erroneous step. Ironically, an unexpected production collapse in Venezuela could provide the boost to oil prices that many OPEC nations need to sustain their budgets.
What’s more is that Venezuela’s primary crude customer is not in desperate need of its product due to a domestic production boom and access to heavy crude from Canada. That is, the U.S. imported 23,227,000 barrels of crude oil and petroleum products from Venezuela in January 2017, the most recently published data. This represents 37 percent of the estimated 62.1 million barrels of oil the country produced in January, a number derived from secondary sources in OPEC’s March report.
The future of Venezuela and the international oil companies within the country remains unclear, with the international community now looking into taking action to restore democracy. As the Trump administration meets with Argentine President Mauricio Macri next week to discuss, among other things, “the deteriorating situation” in Venezuela, the world will be watching. Each move the Maduro regime takes against the private sector going forward can rock oil markets, spark tensions across the world, and deepen the country’s woes.
By Jacob Urban for Oilprice.com
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