At the start of 2021, Venezuela’s Oil Minister Tareck El Aissami announced that national oil company PDVSA was targeting petroleum production of 1.5 million barrels per day by the end of the year. When he made that statement in March 2021, Venezuela’s national oil company was pumping, according to OPEC, an average of 525,000 barrels of crude oil per day, or a third of that target. A week ago, PDVSA gave a clear indication of just how unrealistic that target was by reducing that daily average production target by roughly a third to one million barrels per day by the end of 2021. There are signs that even the reduced output is beyond the capability of Venezuela’s national oil company. If this ambitious new target were achieved, it would generate considerable income for Maduro’s near-bankrupt regime, as well as a capital-starved PDVSA. That cash could then be directed to urgently required maintenance and to the overhaul of Venezuela’s rapidly deteriorating energy infrastructure. Despite Maduro’s, El Aissami’s, and the PDVSA’s hype, the new numbers are still unrealistic and will not be achieved until critical geopolitical dilemmas are resolved. OPEC’s latest Monthly Oil Market Report for November 2021 shows, from secondary sources, that during October 2021 Venezuela only pumped on average 590,000 barrels of crude oil per day. This represents an impressive 10.7% increase compared to September and is a stunning 61% greater than for the same period a year earlier, although it is still well below both the formidable production target set by El Aissami earlier this year and PDVSA’s amended number.
Source: OPEC Monthly Oil Market Report November 2021 and U.S. EIA.
For the first nine months of 2021, Venezuela only pumped an average of 525,200 barrels of crude oil daily, compared to 500,000 barrels for 2020 and 796,000 barrels per day during 2019.
This represents a steep decline from the pre-Chavez peak of 3.1 million barrels per day attained in 1998. Those numbers indicate that Venezuela’s crude oil output stubbornly remains a third of El Aissami’s ambitious goal and half of PDVSA’s revised objective, despite Beijing bolstering investment and operations in Venezuela, indicating that PDVSA is struggling to grow its crude oil output to meet the desired target.
There is a range of reasons for this, the most prominent being the severely dilapidated state of Venezuela’s energy infrastructure, which will stay in that state for as long as strict U.S. sanctions remain in place. Washington’s measures aimed at triggering regime change prevent PDVSA and Maduro’s autocratic regime from accessing foreign energy and capital markets. This makes it extremely difficult, if not impossible, for PVDSA to sell the crude it produces internationally. This, in turn, prevents the oil giant from generating the capital needed to perform crucial maintenance and overhaul activities of Venezuela’s severely dilapidated energy infrastructure. It is western oil majors that are essentially the only energy companies with the necessary resources and expertise to rebuild Venezuela’s shattered petroleum industry. These companies, however, are unwilling to make the significant investment required to rebuild Venezuela’s hydrocarbon infrastructure.
Estimates regarding the amount of investment required to rebuild Venezuela’s shattered petroleum industry vary wildly. PDVSA claims that $58 billion is sufficient to return production to pre-Chavez levels of around three million barrels per day, but other sources outside of Venezuela believe that is insufficient. Baker Institute for Public Policy Fellow In in Latin American Energy, Francisco J Monaldi, in a February 2021 policy brief stated it will take $10 billion to $12 billion annually over a 10-year period to lift production to 2.5 to 3 million barrels daily. Venezuelan economist Francisco Rodríguez, a key opposition figure, believes it will take as much as $15 billion to $20 billion annually for up to 10-years, meaning as much as $200 billion is required. In Guaido’s plan (Spanish) to fix Venezuela, economist José Toro Hardy estimated it will take several years and an investment of $25 billion to $30 billion per year, a total of at least $175 billion, to restore crude oil production to 3 million barrels per day.
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The difficult conditions associated with operating in Venezuela, a country long associated with the nationalization and state control of energy assets, are not only deterring investment but causing major energy companies to abandon the country. The latest was Japan’s Inpex which chose to exit Venezuela by selling its interest in two operations with PDVSA. Inpex sold a 70% stake in the Gas Guarico partnership with PDVSA to Caracas-based Sucre Energy and its 30% holding in the Petroguarico venture to PDVSA, which held the controlling 70% interest. Before that TotalEnergies and Equinor exited their operations in Venezuela abandoning their 30.32% and 9.67% respective stakes with PDVSA in the Petrocedeño heavy oil operation. That divestment saw both companies incur a loss and leaves the Petrocedeño extra-heavy crude oil operations 100% owned by PDVSA. These events bode poorly for Venezuela being able to obtain the necessary capital, parts, and skilled labor to conduct overdue critical maintenance and overhauls on industry infrastructure.
Those developments are weighing heavily on Caracas’ fragile fiscal position, which is so dire that by March 2021 Maduro’s authoritarian regime had been in default for nearly three years. This was resolved by Caracas securing a restructuring deal in late March with individual creditors, which made the debt less onerous allowing Venezuela to move out of default. The financial pressure on Maduro’s regime because of the collapse of Venezuela’s economic backbone, its oil industry, and harsh U.S. sanctions is considerable. The OPEC member’s economy shrank by 30% during 2020, and the IMF expects it to contract by 5% this year along with another 3% decline during 2022.
PDVSA’s recently revised target, along with Venezuela’s crude oil output only averaging 525,200 barrels per day for the first 10 months of 2021, indicates that Caracas is incapable of lifting petroleum output to the level required to initiate an economic recovery. The looming arrival of peak oil demand and growing pressure to decarbonize the world economy means that time is fast running out for Caracas to exploit its vast petroleum reserves, which at 304 billion barrels are the world’s largest. This adds a sense of urgency to Venezuela’s quest to exploit its crude oil reserves, which is the only viable means of rebuilding the petrostate’s shattered economy and restoring both Caracas’ and PDVSA’s finances. That simply will not occur, despite Maduro’s overtures regarding reduced regulation and increased foreign control of petroleum assets, because Washington’s sanctions impact those energy companies which possess the capital and expertise required to rebuild Venezuela’s petroleum industry. For those reasons, it is difficult to see how PDVSA can expand crude oil production to one million barrels let alone be pumping 1.5 million barrels per day by the end of 2021.
By Matthew Smith for Oilprice.com
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