While the oil market is understandably on edge about the potential supply outages in Iran, there are real outages going on in Venezuela, losses that could grow significantly worse in the near future.
ConocoPhillips’ decision to go after some assets owned by PDVSA could spell deeper trouble for the oil company and for Venezuela. In April, Conoco was awarded $2 billion in compensation by international arbitration related to the 2007 expropriation of oil projects by the Venezuelan government. Wasting no time, Conoco moved to take over a string of assets held by PDVSA in the Caribbean earlier this week.
Conoco has gone after a 10-million barrel storage and transshipment facility on the island of Bonaire and storage facilities on the islands of Curacao and Aruba, all of which are just off of Venezuela’s coast. As Argus Media notes, PDVSA’s oil facilities on the Caribbean islands have grown in importance as the rest of the company’s assets in Venezuela have fallen apart. But that dependence has heightened the risk for PDVSA because the Caribbean facilities are exposed to asset seizure.
PDVSA began recalling its tankers from the Dutch Caribbean in order to avoid having them seized too. But that could curtail the company’s ability to import refined fuels and diluent, and it could also cut into oil exports. The facilities on those islands have deepwater ports, and tanker berthing facilities to handle very large crude carriers (VLCCs). "We've lost those assets until this situation is resolved," a PDVSA source told Argus Media. Related: Permian Bottleneck Provides Huge Opportunity For Oil Traders
If PDVSA has to lower exports over fears of asset seizure, oil storage will fill up “in a matter of days,” a source told Argus Media on Monday. PDVSA cannot afford the cost of floating storage.
Attorneys told Argus Media that from Conoco’s point of view, the asset seizures are less about gaining compensation from the facilities themselves and much more about putting the squeeze on PDVSA in order to pressure the company into paying Conoco the money awarded from arbitration.
PDVSA is now trying to shift its operations back to Venezuela to avoid the reach of court-ordered liens, but doing so in an effective way will be “impossible,” a PDVSA official told Argus Media.
Argus reports that PDVSA will try to ramp up operations at its Jose upgrading and export terminal to compensate for the potential loss of its Caribbean facilities. But the Jose facility is in shambles, “because necessary maintenance and equipment replacement were not done.”
Worse, the workers at the complex are “too hungry and too sick” to handle the increased work load. It’s a recipe for disaster. “There will be more accidents and more equipment failures at the Jose terminal because the workers are in poor health, and PdV's exports will be affected as a result,” a union official told Argus.
As many as 80 tankers were idling around PDVSA’s four main terminals, Argus Media says, with dozens more at other refineries. Related: Bank Of America: Oil Prices Could Hit $100 Next Year
The move by ConocoPhillips to go after the Caribbean facilities could be pivotal for PDVSA and for Venezuela because it could have “a cascade effect” on PDVSA’s operations upstream. Why? Because without the ability to import diluent, PDVSA could struggle to process heavy oil from the Orinoco Belt.
The problems are set to only grow worse. Venezuela is scheduled to hold presidential elections in less than two weeks, an event that could spark harsher sanctions from the U.S. government. If the Trump administration cuts off the flow of U.S. diluent heading to Venezuela, that could curtail even more heavy oil exports.
All told, the onslaught from ConocoPhillips and the loss of the Caribbean facilities could result in oil production declines of as much as 500,000 bpd, according to the WSJ, plus even more from U.S. sanctions. The baseline assumption from most oil analysts is that PDVSA is already set to lose hundreds of thousands of barrels per day over the course of the rest of this year. But creditor actions and U.S. sanctions alone could make the production losses dramatically worse for Venezuela.
By Nick Cunningham of Oilprice.com
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