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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Venezuela Surprises Oil Markets With Large Production Increase

  • Venezuela has reported a significant increase in monthly oil output.
  • The spike in output can be attributed to a range of factors, including the technical assistance and diluent provided by Iran. 
  • Another key reason for significantly higher production was PDVSA’s ability to amortize and settle overdue debt with local oil service companies.

Despite decades of mismanagement, malfeasance and corruption, strict U.S. sanctions and crumbling energy infrastructure, Venezuela’s national oil company PDVSA has stunned observers by reporting a significant increase in crude oil output for November 2021. OPEC’s December 2021 Monthly Oil Market Report shows based on primary sources Venezuela pumped an average of 824,000 barrels daily for November 2021. This represents a notable 9% increase compared to a month earlier and is nearly double the 434,000 barrels per day produced for the same period a year earlier. That number is significantly greater than the 569,000 barrels produced per day during 2020 and just shy of the 1 million barrels pumped daily for 2019. The spike in output can be attributed to a range of factors, crucial being the technical assistance and diluent provided by Iran

By June 2019, the U.S. Treasury Department Office of Foreign Assets Control had blocked the supply of crucial diluents to Venezuela. Prior to former President Trump’s harsh sanctions enacted as part of his policy of maximum pressure on Venezuela and the autocratic government of Nicolas Maduro, the U.S. had been a key supplier of diluent to the OPEC member. Diluents are an essential element for PDVSA’s extra-heavy crude oil production in the Orinoco Belt. The extremely light hydrocarbon liquids are added to the extra-heavy crude, which has an API gravity of around 8 degrees, to make it flow so that it can be transported for processing and export. A chronic shortage of diluent forced PDVSA from early 2019 to mix locally produced higher-value light sweet crude with the extra-heavy oil, produced in the Orinoco Belt, to formulate export heavy crude oil grades such as Merey. That was impacting export earnings because Venezuela’s lighter crude oil grades sell at a premium to the OPEC member’s heavier crude oil grades. It also adversely affected refining operations in the crisis-riven country because light crude oil is the primary feedstock for Venezuela’s crumbling refineries which are not configured to process heavy crude oil grades. That has weighed heavily on gasoline and diesel production in a country beset by chronic fuel shortages.

The deal established by Caracas with Teheran to swap Venezuela’s heavy crude oil blends for diluent is crucial to boosting Venezuela’s crude oil output and the notable spike in November 2021 production. During that month PDVSA received its fourth cargo of diluent from Teheran since the start of the year. Venezuela’s national oil company is using the stable supply of Iranian condensate as an opportunity to ramp up extra-heavy crude oil production in the Orinoco Belt. PDVSA is receiving assistance from China’s largest oil producer, state-controlled China National Petroleum Corp, to bolster operations. During early September 2021, it was reported that CNPC was reviving its operations in Venezuela, where it participates in five heavy oil joint ventures with PDVSA, sending engineers and other resources to the crisis-riven country. A key project for CNPC is overhauling an all-important oil-blending plant it operates with PDVSA, which is vital for processing the extra-heavy crude oil produced from the Orinoco Belt. That points to further production growth if the supply of crucial diluent from Teheran can be maintained.

Another key reason for significantly higher production was PDVSA’s ability to amortize and settle overdue debt with local oil service companies. That generated a substantial increase in drilling, well workovers, and other development activities. According to a recent Reuters investigation, by December 2021 there were 47 rigs performing workovers and other development activities in the Orinoco Belt and 19 more operating in other hydrocarbon basins in Venezuela. If PDVSA can maintain production at or near November’s level, then Caracas is well on its way to generating urgently required additional export income that can be directed to performing critical maintenance on infrastructure as well development. That will allow PDVSA to invest additional funds in its capital-starved operations, pointing to further hikes in crude oil output.

For the first week of December 2021, PDVSA announced (Spanish) it had pumped an average of 930,000 barrels per day, just shy of the national oil company’s end of year target of one million barrels daily. This, coupled with November’s substantial increase in production indicates that Washington’s strict sanctions, which target Venezuela’s access to global energy and capital markets, forming part of the U.S. policy of maximum pressure have failed. Not only has Venezuela with the help of Iran, China and Russia, been able to rebuild its shattered hydrocarbon sector and keep exporting crude oil in breach of U.S. sanctions but its broken economy will grow this year for the first time since 2013. Estimates vary but a November 2021 Wall Street Journal article argued that Venezuela’s economy will expand by 5% to 10% during 2021. Swiss investment bank Credit Suisse, in early October 2021, revised its annual GDP forecast for Venezuela upgrading its estimate from 4% GDP growth to 5.5%. If that eventuates, 2021 will be the first year where Venezuela’s economy has grown since 2013.

While the substantial increase in crude oil output for November has caught global energy markets and analysts by surprise, it is important to note that Venezuela’s oil output is still significantly lower than the 1.5 million barrels per day target set by Venezuela's Oil Minister Tareck El Aissami at the start of 2021. The parlous state of Venezuela’s hydrocarbon infrastructure coupled with a lack of capital to invest in crucial workovers and development as well as maintenance activities, saw PDVSA slash that target to one million barrels per day during November 2021. There is evidence that, despite growing investment in workovers and maintenance activities, PDVSA’s operations are reaching production capacity. Director of the Latin American Energy Program at the Houston-based Baker Institute and respected Venezuela expert Francisco Monaldi stated in a recent Reuters’ article; “We are reaching that capacity now. To see an output increase during 2022, investment in new wells and upgrading infrastructure is needed”. Monaldi has previously stated that it will take an annual investment of $10 billion to $12 billion annually to rebuild Venezuela’s petroleum industry and return production to pre-Chavez levels of 3 million barrels or more per day.

Until U.S. sanctions ease Caracas is unable to attract the necessary capital and expertise from foreign energy companies, notably those from the U.S. and Europe, needed to develop oilfields and overhaul or replace heavily corroded industry infrastructure. For as long as Washington’s current sanction regime remains in place PDVSA’s position will remain fragile, meaning the slightest glitch could trigger a massive setback causing crude oil output to fall. Venezuela’s national oil company must continue paying local oils services companies and manage existing debts owed to those businesses if the current tempo of operations is to be maintained. That means additional U.S. sanctions or increased enforcement of existing requirements by Washington could impact PDVSA’s operations and oil exports causing revenue to fall, ultimately impacting production. 

By Matthew Smith for Oilprice.com

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  • Mamdouh Salameh on January 02 2022 said:
    All through 2021 the author of this article has been rebutting Venezuela’s oil minister Tareck El Aissami’s claim at the start of 2021 that Venezuela’s crude oil production will rise to 1.5 million barrels a day (mbd) before the end of the year and I have been telling him regularly that Venezuela’s production will rise as planned. In fact, production did achieve a target approaching 1.5 mbd of which 1.0 mbd was reportedly exported to China.

    Three countries China, Russia and Iran have been studiously helping Venezuela raise its production of crude and refined products. China and Russia who between them are owed more than $30 bn worth of investment have defied US sanctions and continued to do everything within their capacity to prevent a collapse of Venezuela’s economy. China has also been providing technical help while Russia has been helping with the selling of Venezuela’s crude oil around the world. Iran on the other hand, has been shipping diluents to Venezuela.

    Venezuela’s settlement of overdue debt with local oil service companies has generated a substantial increase in drilling, well workovers, and other development activities. As a result, a total of 66 rigs were operating in various hydrocarbon basins in Venezuela by December 2021 compared with one a year ago.

    The rising oil export revenue gave a strong push to the economy enabling it to expand by an estimated 5%-10% during 2021 for the first time since 2013.

    However, a rise of Venezuela’s crude oil production to pre-Chavez level of 3.0 mbd will need estimated annual investments of $10-$12 bn. Only a rapprochement with the United States will enable Venezuela to attract such investments.

    And despite their harshness, US sanctions have failed miserably to effect a regime change in Venezuela and to cripple the country’s economy and crude oil exports thanks to help from China, Russia and Iran.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • George Doolittle on January 02 2022 said:
    "ultimate in money pits" would be an understatement.

    Anyhow still starving to death there as is true in China and Tehran as well. "Anything for the oil-bucky God" nonetheless.

    Move along..

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